TMX Group Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 31, 2023

There are 11 speakers on the call.

Operator

Morning, ladies and gentlemen, and welcome to the TMX Group Limited Q3 2023 Financial Results Conference Call. At this time, all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on Tuesday, October 31, 2023. I would now like to turn the conference over to Mr.

Operator

Amin Masavian, Vice President, Investor Relations, Treasury and Administration of PMX Group. Please go ahead, sir.

Speaker 1

Thank you, Laura, and good morning, everyone. It is October 31, and I hope this Halloween brings you delightful moments and memorable experiences. Thanks for joining us today to discuss the 2023 Q3 results for TMX Group. As you know, we announced our results late yesterday and copies of our This morning, we have with us John Mackenzie, our Chief Executive Officer and David Arnold, our Chief Financial Officer. Following the opening remarks, we will have a question and answer session.

Speaker 1

Before we begin, I would like to remind you that certain statements made during this call may relate to future events and expectations and constitute forward looking information within the meanings of Canadian Securities Law. Actual results may differ materially from these expectations. Information concerning factors that could cause actual results to differ from forward looking information is contained in our press release and in periodic reports that we have filed with the regulatory authorities. And with that, I'll turn the call over to John. Thank you, Amin, and good morning, everyone.

Speaker 1

Thank you

Speaker 2

for dialing into the call this morning to discuss TMX's financial results for the Q3 and the 1st 9 months of 2023. My comments this morning will really focus on TMX's performance year to date through September 30 and the important progress we have made in executing the enterprise growth strategy and Advancing Our Key Initiatives. David is here as well with me in Montreal this morning, and he will take us through the Q3 results in detail in a few minutes. Now before I turn to business, I do want to address something that has been on all of our minds over the last few weeks, and that is the Middle East. TMX is actually part of the business community in Israel.

Speaker 2

We have one of the largest presences of any international market with 16 listed companies raising capital via our public market ecosystem. Team members, clients and people we work with closely are going through a profoundly difficult time and our hearts are with them. And so we are so grateful for the humanitarian efforts of groups working to treat and protect the lives of people in affected communities and providing essential relief services and resources. And we collectively pray for peace and a brighter tomorrow. Now turning to TMX's performance.

Speaker 2

We reported continued positive results for the 1st 9 months of 2023 with solid year over year revenue growth for 3 consecutive quarters Amidst prevailing challenges across much of our operating environment, our 2023 results through September reflect the depth of value in our business. The execution of TMX's long term strategy has strengthened our ability to deliver positive results even in difficult macroeconomic conditions. This has been a deliberate effort to build the amount of business that's driven through our data services and in run rate revenues So the business is more resilient in times of economic strife. More importantly, today's TMX is better positioned to serve clients across our markets Increasingly around the world and better positioned for growth. TMX reported revenue of 892,600,000 A 6% increase from the 1st 9 months of last year, driven by double digit growth in revenue from our Information Services Business or GSIA, which includes Trayport and TMX Datalinks as well as increased revenue from capital formation, derivatives trading and clearing excluding Box.

Speaker 2

These overall gains were partially offset by decreased revenue from equities and fixed income trading due to lower trading volumes on Toronto Stock Exchange, TSX Venture Exchange and Alpha and lower capital raising activities. Clearly, this has been a challenging capital markets period, And we want to just have a quick shout out to our clients as well who are suffering through some of those same challenges. On adjusted basis, diluted earnings per share for the 1st 9 months of the year was $1.10 a 2% increase from the same period in 2022. Total reported operating expenses increased 10% compared to the 1st 9 months of last year, and David will take a closer look at these expenses in his remarks to follow. Now moving now to each of our business areas.

Speaker 2

GSIA remained our fastest growing business area through 3 quarters of the year. Revenue from GSIA was $311,600,000 through the 1st 3 quarters of the year, which is a 17% increase from 2022, reflecting higher revenue from Trayport and TMX Datalinks, including colocation. Trayport's revenue grew 22% or 17% in common currency pound sterling year over year, driven by a 9% increase in trader subscribers, Annual Price Adjustments and the Impact of a Favorable FX rate. Trayport's core JUUL network plays a key role in serving world power and natural gas markets, Linking participants to execution venues and clearinghouses and delivering innovative products and services to a growing client base. And September marked the 30th anniversary for Trayport.

Speaker 2

The number of game changing achievements over the years as the company This network into new asset classes and geographies and added new cutting edge capabilities is impressive. Among other successes since Trayport joined TMX in 2017 includes enhancing the client offering with the acquisition of leading solution providers such as TradeSignal Launching initiative to aggregate the global environmental markets and adding over 400 net new clients. And world energy markets are rapidly evolving. Demand for data and analytics to support new quantitative and automated approaches continues to grow. And a proven ability to meet the needs of the marketplace and a committed strategic focus on seeking out new opportunities has positioned Trayport well for continued success.

Speaker 2

TMX Datalinks grew 13% in the 1st 9 months due to higher revenue from data feeds, colocation, benchmark indices and Enterprise Agreement renewals as well as the favorable FX impact from a stronger U. S. Dollar. Revenue for the 1st 3 quarters of the year Also included $5,300,000 from Boston based Wall Street Horizon acquired in November of last year. 2023 has been a landmark year for our information services business, marked by high performance and definitive steps forward in our strategy to boost our capabilities, Expand our datasets and deliver modern solutions to clients.

Speaker 2

Progress this year also includes our participation in the creation of the new TermCore benchmark and our investment in Vetify, a global provider of indices and ETF services. Importantly, information and more specifically what we can do with it It's not the focus of just this one division, but it is a crucial and common element in TMX's enterprise global growth strategy. Across the organization, we are focused on new ways to leverage our robust proprietary datasets to solve client challenges today and into the future. Earlier this month, we announced the launch of the new TMX ESG Data Hub. Working with leading global ESG data and analytics provider, the new Hub expands TMX Datalinks' offering in support of client demand for integrating ESG measures into the investment decision making process.

Speaker 2

This includes tracking company climate action plans, quantifying impact, screening and peer analysis. Now turning to derivatives. Excluding Box, revenue from derivatives trading and clearing was $121,100,000 in the 1st 9 months of 2023, A 13% increase from last year, driven by higher revenue from MEX and CDCC due to increased volumes traded and cleared. MX total volume grew 12% compared to the 1st 9 months of 2022 and the level of overall open interest At September 30, 2023, it was 16% higher than the same date last year, which is an important key measure of liquidity growth in some of MX's key products. Fixed Income and Equity Derivative Markets grew sequentially from Q2 to Q3 as higher volatility and an active central bank policy environment drew increased from institutional investors in Amex's short term interest rate products.

Speaker 2

Highlights from the 1st 9 months of the year Featured year over year growth in key product areas, including 10% higher volumes from equity options, 20% higher volumes from ETF options, Heavy trading in the Bakktora and the CGZ, MX's 2 year Government of Canada bond future contract, up 26% 88%, respectively. And overall, the interest rate product line also performed extremely well, with volumes up 19% compared to the 1st 9 months of 2022. Now moving to capital formation. Revenue for the 1st 9 months of 2023 was $205,000,000 a 3% increase from 2022 reflecting higher revenue from TSX Trust And partially offset by lower revenue from additional listing fees due to a decrease in the number of financing transactions and dollars raised on Toronto Stock Exchange and a decrease in the total financing dollars raised on TSX Venture Exchange. Though we are encouraged by the year over year increase in the number of junior financing transactions being completed.

Speaker 2

Revenue from other Services, which is largely consists of our TSX Trust business, including AST was 83,900,000 A 37% increase compared to the 1st 9 months of last year, driven by higher net interest income, slightly offset by lower transfer agent fees. Markets and capital raising activity here in Canada and economies around the world. And while the overall number of new listings on TSX And TSX Venture is down from the same period last year and the record highs of as recent as 2021, the pipeline of go public prospects we are connected to remain strong. Within the numbers, we're also seeing positive signs in traditional and non traditional sectors along with some recent competitive wins among our new listings. As companies continue to choose the TSX and the TSX Venture Ecosystem to gain access to the capital they need to grow.

Speaker 2

In September, we welcomed Allied Gold, a Canadian based gold producer with operations in Africa to Toronto Stock Exchange. The company raised approximately $364,000,000 in a reverse takeover transaction, representing our largest go public offering in the mining sector since 2017. This listing was a significant win for the TSX and the entire ecosystem that surrounds the Canadian mining sector and speaks to the strength of our global value proposition. Also in September, TSX listed DRI Healthcare Trust, a global leader in financing life sciences innovation, Completed 2 bought deal financings of around $100,000,000 And earlier this month, Strathcona Resources, one of North America's fastest growing energy companies, Began trading on TSX following an acquisition at a $6,000,000,000 valuation. And so we continue our business development efforts in targeted regions around the world.

Speaker 2

In September, we added a full time presence in Australia focused on the mining sector and the innovation sector. In 2021, we also undertook an important initiative to improve indigenous relationships at our organization. Over the past two and a half years, we have made some important progress on our company's reconciliation journey, always stressing the need to prioritize actions over words. And last week, we were proud to host the inaugural TSX Indigenous Investor Day at our market center in Toronto. For TMX, connecting entrepreneurs and growing businesses to potential investors is a fundamental core function of our marketplaces.

Speaker 2

And so this event marked an especially important milestone as we were able to bring a representative range of decision makers together to discuss strategies for growing indigenous led businesses. To the benefit of these businesses and the investors as well as the broader community and ultimately all Canadians, Canada's markets have an standing long term track record of helping visionary entrepreneurs and early stage businesses raise growth capital and enabling investors to participate in that growth. And TMX is committed to building on that track record, enabling more efficient access to underrepresented groups and emerging industries long into the future. Now I'd like to finish up my comments this morning by emphasizing our commitment to our growth strategy and our stakeholders. While our 2023 results today show impressive resilience, TMX is not sitting idly by waiting for things to swing our way.

Speaker 2

We are ever focused on the future on ways to adapt and accelerate our growth plans by invigorating our purpose to make markets better and empower bold ideas. We also have a strong balance sheet and flexibility to make future investments to continue to accelerate this growth, which David will take us through in more detail a little later on. And In closing, I would like to thank all of our employees across the organization for their exemplary efforts this year in a very challenging market. All of our business strategies are rooted in the responsibility we have to serve stakeholders across our markets with excellence and integrity, vision and purpose. TMX's people here in Montreal, across Canada and around the world share an unshakable commitment to fulfilling that responsibility.

Speaker 2

And together, we look forward to the challenges ahead. With that, let me pass the call over to David.

Speaker 3

Thank you. Thank you, John, and good morning, everyone. Our Q3 results continue to demonstrate the resiliency of our diversified business model. Overall, revenue grew by 8% compared to the Q3 of last year, driven by double digit revenue growth across a number of our business segments. We reported an increase of 7% in our diluted earnings per share and 3% in our adjusted diluted earnings per share, driven by higher revenue from our businesses and finance income on cash balances.

Speaker 3

Partially offsetting these increases We're higher operating expenses year over year and higher income tax expenses on an increase in the UK corporate income tax rate From 19% to 25%, which came into effect earlier this year. A little later, I will speak to our successful efforts to contain expense growth in the second half of the year, whereby we are holding ourselves to our first half of the year expense run rate. Turning now to our businesses. I will start with the segments that saw the largest year over year revenue increase. Revenue in our Global Solutions, Insights and Analytics segment grew by 19% this quarter with double digit growth from both Trayport and TMX Datalinks.

Speaker 3

Revenue from our Trayport segment was up 19% in pounds sterling, driven by a 7% increase in trader subscribers in addition to our annual price adjustments and incremental revenue from our premium product offerings, most notably data analytics and algorithmic trading. On the heels of a strong pound sterling this quarter, Trayport was up 31% in Canadian dollars. Revenue in our TMX DataLink business grew by 10%, driven by increases in 1st, subscription based services 2nd, revenue from Wall Street Horizon, which we acquired in November of last year. And finally, the impact of 2022 and 2023 price adjustments we have spoken of in prior quarters. In addition, TMX DataLink's revenue was up $400,000 due to a stronger U.

Speaker 3

S. Dollar, which accounts for approximately 1% of the 10% revenue increase this quarter. Derivatives Trading and Clearing revenue, excluding Box, was up 7% this quarter on a comparable basis. This was driven by a 12% increase in the Montreal Exchange and CDCC volumes and positive impact from pricing changes, which came into effect in January of this year, somewhat offset by an unfavorable product and client mix. Now as you'll recall, in the Q3 of last year, we had a one time reduction in revenue related to the termination fees on our 5 year Government of Canada Bond Futures Market Making Agreement and a retroactive client billing credit.

Speaker 3

As a result, this quarter's reported revenue in derivatives trading and clearing, excluding Box, rose by 23% compared to last year, Attributed to a 28% increase in revenue from the Montreal Exchange and a 15% increase in CDCC. Revenue from Box decreased 9% in U. S. Dollars, reflecting a lower rate per contract due to an unfavorable product mix, partially offset by a 5% increase in volumes. In addition, Box's revenue was up $800,000 Due to a stronger U.

Speaker 3

S. Dollar, which accounts for approximately a 3% increase, reducing the overall revenue decline to 6% in Canadian dollars for Box In our Equities and Fixed Income Trading and Clearing segment, revenue was up 1% in the quarter, driven by 13% increase in revenue from our CDS business, offset by a 9% decrease from equities and fixed income trading. The CDS revenue increase reflected higher interest income on clearing funds and higher fees due to increased activity across event management, Custodial and Eligibility Services and Standby Liquidity Facilities. This was somewhat offset by lower exchange trading volumes. The revenue decline in our equities and fixed income trading business was due to a 14% decrease in the overall volume of securities traded on our equities marketplaces as well as lower activity in Government of Canada Bonds and Swaps.

Speaker 3

Trading volumes were down across all of our marketplaces, Namely 17% on TSX, 4% on TSX Venture Exchange and 15% on Elfa Exchange. Now despite the decline in volumes, our market share held strong at 66%. Turning to capital formation. Revenue in the segment declined 4% in the quarter, primarily driven by lower initial and sustaining listing fees on the TSX, TSX Venture Exchange and a 22% decrease in the number of TSX additional listing transactions billed at the maximum fee of $250,000 This was partially offset by a 10% increase in the number of transactions billed below the maximum. Now despite the microeconomic factors challenging the capital raising activities, there were increases in the total financing dollars raised on TSX and total number of financings both on TSX and TSX Venture Exchange.

Speaker 3

Lastly, TSX Trust revenue increased by 12% in the 3rd quarter, driven by higher net interest income, partially offset by lower transfer agent fees. Turning now to our expenses for this quarter. There was a 12% increase in operating costs on a reported basis compared to last year, but more notably, a 9% increase on a comparable basis and a 3% sequential decrease on a comparable basis. So to enable a meaningful comparison of expenses on a year over year basis, I call out the following items of note. First, Box Markets estimates of $6,700,000 in increased expenses for services provided by Box Exchange, which is the National Securities Exchange responsible for regulating and monitoring activities of Box Market.

Speaker 3

For additional visibility, The $6,700,000 increase can be further broken down to $4,600,000 related to the first half of twenty twenty three, with the remaining $2,100,000 related to the 3rd quarter. 2nd, we incurred $2,100,000 in operating expenses this quarter related to running and operating Wall Street Horizon, which you recall we acquired in November of last year. So the comparable in Q3 of 2022 would have been 0. Finally, the comparable quarter last year included $3,500,000 related to the AST integration, which was successfully completed by the end of last year. Now in addition, when we analyze the expenses further by normalizing for inflationary increases and higher FX conversion rates, The 3rd quarter operating expenses are notably lower with only a 3% growth rate compared to last year.

Speaker 3

Consistent with the past quarters, Approximately half of our expense increase is driven by inflationary increases coupled with higher FX rates. Turning now to a comparison of our results sequentially. Operating expenses in Q3 were up $2,600,000 or 2% from the 2nd quarter, primarily due to the higher box expenses, which I discussed in detail earlier. Excluding the true up for Box, operating expenses decreased 3% sequentially, reflecting lower revenue related expenses, Director fees, employee performance incentive plan costs and marketing as well as sponsorship costs, partially offset by higher consulting and legal fees. We maintain our view that our second half expenses will be in line with our first half of the year's expense run rate.

Speaker 3

AfterOne adjusts for the higher estimated regulatory expenses at Box that I spoke of earlier, that is to say on a comparable basis. Revenue decreased by $18,900,000 sequentially from the second to the third quarter, and this was due to three factors. First, a decrease in TSX Trust revenue reflecting lower balances compared to the Q2 of this year, which included above average corporate actions activity. 2nd, lower listings fees primarily driven by lower number of additional listings transactions billed at the maximum fee on TSX. And finally, a decrease in equities and fixed income trading driven by a 3% decline in the overall volumes of securities traded on our equities marketplaces.

Speaker 3

And turning now to our balance sheet. In the 9 months leading up to September 2023, We spent $40,500,000 repurchasing just over $1,440,000 of our common shares under our normal course issuer bid program. Our debt to adjusted EBITDA ratio was in the middle of our targeted range at 2.1 times, and we also held close to 654,000,000 In cash and marketable securities, which was $479,000,000 in excess of $175,000,000 we target to retain for regulatory and credit facility purposes. On October 3, subsequent to the Q3 reporting period, we repaid our 250,000,000 Series B Debenture with a combination of commercial paper and cash. Now last night, our Board In the 3rd quarter, we will pay out 51% of our adjusted earnings per share, while our last 12 month payout ratio at 49% remains well within our target range of 40% to 50%.

Speaker 3

So that concludes my formal remarks. I'd now like to turn the call back to Amin for our Q and A period.

Speaker 1

Thank you, David. Lara, would you please outline the process for the Q and A session?

Operator

Your first question comes from the line of Ben Budish from Barclays. Please go ahead.

Speaker 4

Hi, good morning and thanks for taking the question. Maybe 2 upfront here on the GSIA business. First on Trayport, it looks like this is the 4th or 5th quarter in a row of I'm just curious what are your thoughts on sort of the sustainability of that trend? And then at the same time on the non Trayport side, We saw the professional and market subscribers for both TSX and MX. I think for TSX, they kind of The number declined quarter over quarter for MX.

Speaker 4

It was a bit more flat. And so it looked like the revenue you're still delivering positive revenue growth there. But if you could try some color The drivers of kind of the decline in number of subscribers and similarly your kind of outlook there. Thank you.

Speaker 2

No problem. Good morning. So let me start with Trayport first. So I'm going to anchor you into, 1st of all, the long term guidance in terms of kind of high single, low double digit growth rate over the long term. And We are continuing to outperform that and candidly outperformed it every year since we acquired the business.

Speaker 2

The piece of growth that's first of all, I'll call it kind of the Staying growth going forward, the 9% that we talked about in the comments in terms of actual subscriber growth this year. If you look back over a number of years, that's been a continued Performance trend for the business in terms of adding trader subscribers, we expect that to continue going forward. There certainly is a higher lift in 2023 With respect to CPI increases in our contracts, given the higher CPI rate in the UK market, now that's not going to be the same for 24, but it's still going to be elevated from prior periods. So you're still going to see strength related to that. And we are continuing on the initiatives to expand the franchise.

Speaker 2

So the build out in the U. S. Market, the build out in terms of refined oil, adding to data and analytics products across the board. So all those factors that have Led into that accelerated growth rate are continuing going forward. But over the long term, I still have to anchor you to the kind of long term guidance that we've given.

Speaker 2

Now when I switch that to the Datalinks business and you can ask again if I don't get to all these because I'm impressed, Ben, in terms of how much you packed into that question. The subscriber counts in general, this is fairly normal to see this Kind of flat or slight pullbacks when we've been kind of in a prolonged period of softness in the capital markets and when you've got Clients that are curtailing some of their staffs, some of their workforce, so it's not surprising to see that. It typically is something that lags Market activity and when you see the markets return and restore, it is often a lag on the other side in terms of seeing them step back up again. So it's not surprising to us, but at the same time, in the parts that are not subscriber base, we have enterprise Relationships with the majority of the large clients for the non pro. So these would be your retail advisors, individual retail users, things like that.

Speaker 2

We've actually been renewing this year all those agreements and are largely renewing those at an uptick. And so that's both a combination of Some flow through of pricing over time because they're multi year agreements, but also expanding the usage of that data set in their firms. And so That's one of the strategic values that we went into in terms of why we went into enterprise agreements in the Datalinks business is it actually creates a long term relationship with the clients. And as they use it and they start to use it throughout their firm in more ways, we can provide more value to both the clients and to us in terms of growing revenue. So I hope that helps with some of the color there.

Speaker 4

It does. And since I squeeze somebody in there, I'll jump back in the queue. Thanks so much, John.

Speaker 2

No problem. Thanks.

Operator

Your next question comes from the line of Nik Priebe from CIBC. Please go ahead.

Speaker 5

Okay. Thanks for the question. I was wondering if you could just remind us how that CPI contract price escalator works At Trayport, like does that reprice for all subscribers on January 1 irrespective of the timing of their annual renewal period? I just wanted to understand that dynamic a little bit better.

Speaker 3

Hey Nick, it's David. Yes, you've got it correct. So clients might have an anniversary of the agreement of March 31 or June 30, But built into all of those multi year agreements is the fact that we would price based on the Bank of England's cost of living adjustment Really is the benchmark and in and around November of each year, our Trayport team will do the math and then reach out to all of the clients Because they're all anticipating notification of what the annual price increase would be. And we tend try and get those out in the kind of November, December timeframe. So yes, they all kick in on January 1, regardless of the anniversary of the agreement.

Speaker 3

John, do you want to add? Yes. I'm just going

Speaker 2

to build on, the other piece that's the real driver there and it builds on the other discussion as well. While those pieces kick in Jan 1, as you indicated, all those Client agreements do actually renew at different times. As the client agreements renew throughout the year, those client agreements are often renewed for multi year periods and they're often also step ups In terms of the number of users and the overall fees generated, and so that's actually part of what drives the long term step up in the trader subscribers And the revenue beyond just the CPI piece. So we had actually in just this month as well, another large scale client Due to a new site license with us, they renewed a 5 year extension on it and a substantial uplift. So that's it goes to the nature of the strength of the business.

Speaker 2

It's not just CPI piece, it's when those client agreements come up, they're expanding the usage and expanding the investment with Trayport at the same time.

Speaker 5

Yes. Okay, that's good. Very helpful. And then just shifting over to OpEx at the enterprise wide level. How do you think about the budgeting process there with respect to constraining expense growth in an environment with continued wage pressure and just balancing that against the need to Invest for Growth, as we look out into 2024, is low single digit expense growth kind of a reasonable baseline expectation there?

Speaker 3

So Nick, I'll start and maybe John can add a little bit of strategic color, right? So the first and foremost Priority for us is really investing for growth. And so, yes, there are obviously inflationary pressures on cost of living for wage increases, Supplier cost increases that obviously get passed on to us. But underlying all of this are incremental investments So you would have seen that we've obviously recruited an individual in the U. S.

Speaker 3

To help us with some of our growth plans in the U. S, Trayport, as we mentioned on numerous occasions, are expanding into North America, So both the U. S. And Canada, and these are on the margin incremental increases. So when we look at the budgeting process, which is really a question, And I can't give you too much information, Nick, but I'll give you what I can.

Speaker 3

It starts primarily with, okay, rolling forward the annualization What we had in 2023, so really that's just to get us at the starting blocks. So people hired midway through the year, we need to account for the balance of the year. Then the next thing is obviously the inflationary pressures and then it's a targeted and strategic discussion, which is where I kind of introduced John now, where we focus on those growth factors of the franchise that really accelerate our strategy. And so all of those go into the hopper, culminating in us ending With whatever the expense growth rate will be. So absent any growth investments, you got the first two buckets.

Speaker 3

Anyone could look up what those inflationary increases might be, but it's the wildcard is Investments for growth.

Speaker 2

Yes. So I'll build on David's comments as well and right into the lens of how you asked it. When we think about it, we're actually thinking about the lens of what I'll call kind of run the business and build the business. And so run the business, the business we've got today, the Continued reinvestment in that business, things like even post trade modernization, the reinvestment in the Jewel Direct platform for Trayport, those are all part of Ryanair business for today and the future. And certainly our objective is to try to bring that into the low singles.

Speaker 2

It's a very difficult environment to do that right now. That is absolutely the objective, but it is a difficult environment to do that because it's not just the challenges around expectations for staff, But the 2nd largest piece of our expense base is our technology costs and the inflationary pressures on technology spend are substantial In terms of technology renewals, licenses, hardware, software, they are all facing the same pressures. So that's the objective we're working with. Where we're challenging our organization is where can you look for additional opportunities to save So that we actually can deliver additional savings to then use to reinvest in the future. There are areas that we know that are going to generate Savings from some of the larger investments we're making, but things like post trade modernization or the JUUL platform Our multi year initiative, so to get to the endpoint where you get to see the savings come off, it takes some time.

Speaker 2

And so that's less 2024 impact and more of a 'twenty five and beyond. The last piece that we're thinking about is in terms of kind of how do we give Kind of better guidance and better disclosure are for those larger kind of build the business initiatives. And David rightly We mentioned our efforts to start building out into the U. S. With our new U.

Speaker 2

S. Team we're building. That's not part of our And not part of our current revenue, but as part of our long term growth. So we're going to think about how do you give better guidance to you so you can understand what's the real cost for running the business And where are we making some strategic investments beyond that, that are quite discrete and transparent. So look for us to do more for that in the New Year on the back of This budget process as we get it done.

Speaker 5

Okay. That's great color. Thanks very much. I'll pass the line.

Operator

Your next question comes from the line of Etienne Ricard from BMO Capital Markets. Please go ahead.

Speaker 6

Thank you and good morning. On the launch of the 2 new order books at the Alpha Exchange, How do you expect this initiative to result in increased trading volumes, specifically for dark trading, Given the market share gains you've experienced in recent years?

Speaker 2

Yes, great question. So I mean, our market share gains are we are still in dark trading though, underweight compared to the rest of our franchise. So if you look at our market share of All of our listed trading activity were more like 2 thirds of the marketplace, where in the dark world, we're more in the 30%, 31% range. So we do see that there's room for us to grow. Well, we can glow too, but mostly we want to grow our market share within And we saw there was unique features and functions that we could add in to meet unique client needs to build that.

Speaker 2

And then the same thing with the actual execution venue. The nice thing with both these things are in addition to the opportunity to build incremental volume, these are also premium services in terms of premium revenue. So As volume builds in them, they have the ability to increase that kind of revenue per trade in the trading space. So those are the 2 key components to them Both of them are driven specifically from unmet client needs that we've identified through our interactions with The Street.

Speaker 6

Okay. And on the acquisition of EQM by VEDAFAI last month, What do you see as the potential to introduce new index solutions to your base of ETF issuers In Canada, it's all Rubis acquisition.

Speaker 2

I'm impressed with how much you're paying attention to pick up on that one. So That was an interesting acquisition. This is actually goes right into the kind of the genesis of why we liked Vetify, why we made the investment into it. The platform that the team at Venafi has built, the index factory, has got the ability to add new indices to it. So indices like EQM Can be acquired and integrated into that factory and run very efficiently and then expanded out to a broader network.

Speaker 2

So what you're seeing is an indication of the forward strategy of what we expect to do with that going forward. Now in addition to that, that's what Vetify can actually do On their own with their own capabilities, the partnership we are working on together is how do we use that factory to create net new indices Using data sets that we have, client relationships that we have, and so that's still early stage in terms of developing those. But if you think about some of the unique Canadian data sets we've got in terms of both equities, junior equities, fixed income, energy data through Trayport, clearing data at CDS, There's lots that are in there that we can build into future indices. And even the piece that we talked about earlier in the call, the ESG hub that we've launched, As you build up more ESG data, there's other types of indices you could build from that in terms of reference data, thematics, those types of things. So That's what our joint team is working on and I'm glad you picked up on EQB because it's actually a really good case study on what those capabilities allow you to do.

Speaker 6

Great. Thank you very much.

Operator

Your next question comes from the line of Brian Bedell from Deutsche Bank. Please go ahead.

Speaker 7

Great. Thanks. Good morning folks. Maybe just Just real quick on expenses on the second half getting to the first half. So just on a reported basis, I guess, would that imply about 100 $53,000,000 of expense in the 4th quarter, if you were to match that perfectly.

Speaker 7

And does that include The expenses you mentioned from BOGS or I guess how would the BOGS expense influence that?

Speaker 3

So Brian, let me handle the second part of your question First, yes, I mean, we don't have the visibility because of the shareholder structure that we have with Box. So as a result, we the wild card for me is, will the box exchange expense Spence pickup in box market be the same in Q4 as it is in Q3, right? That's to be determined. So when I mentioned that it's actually looking through that, so excluding anything that might be passed through from the exchange to the market. So That's the first one right off the bat is we don't have the visibility into that.

Speaker 3

So when I say the second half will be comparable to the first half that's excluding that. And then on the ability to look at the numbers, yes, you could just pick up the 2 Reported numbers for Q1 and Q2 times that by 2 deduct Q3 and you get A good indication as to kind of where the guardrails might be for Q4.

Speaker 7

Yes, perfect. Okay, great. Thanks. And then just on MX, Just in terms of the market share shift or the shift the product mix shift to Cora, Maybe if you could just comment on to what extent you would expect that to continue to influence the rate per contract Yield, I think it's come down a little bit. And then I guess what you're seeing from the trading community, I know there's always I think, John, you had mentioned in a prior call that when volatility settles down, it's actually good.

Speaker 7

If there's for more certainty of trading and that actually improves volumes, maybe if you can just contrast that scenario This is, I guess the volatility that we've seen in October so far.

Speaker 2

Well, sometimes I'd like to split hairs and talk about good volatility and bad volatility. That's sometimes the challenge particularly around the fixed income piece. So having unpredictable Bank of Canada rate moves It's challenging because that's challenging on short term product. And so since we've had some stability in the Central Bank Regime, that's actually been helpful, but you still want to see volatility around trading activity around it because that drives more usage of those products. And we have seen that improvement in strength.

Speaker 2

And so we're like when you translate that into kind of that transition from Bax to Cora, We're pretty happy with the uptake in Cora already given that it's actually not the mandated contract yet. We know that it's still backs until that transition next year. So seeing the lift in both those contract volumes and the recovery in the MAX volumes at the same time has been really positive and strong for liquidity in Those products. Now as we go into the actual transition period, certainly there's market making built into supporting the Cora agreement That isn't there in a very well established Baxa contract. And so there will be a short term RPC issue or step down when we have that transition, but like other new contracts that will be time limited and we'll work our way out of that.

Speaker 2

Now that being said, our expectation is that in both in combination, the Cora and the Bakkt and then actually in the Cora itself Has the potential for higher run rate volumes than what the BAX did beforehand, because it actually is it's a better product. It adds for more terms And more ways for the clients to use it. And so that's part of the analysis as well. So we need to look to a short term revenue per contract Impact for the really the launch and initiation of it, but with the potential for higher long term revenues and then that rebate piece Over time, winds off. I can't give you guidance as to when because those are, again, commercial agreements with the liquidity providers, But similar to what we would see in other contracts.

Speaker 7

Yes. Okay. That makes sense. That's great color. Thank you.

Operator

Your next question comes from the line of Geoff Kwan from RBC Capital Markets. Please go ahead.

Speaker 8

Hi, good morning. I just want to expand on, I guess, some of the topics that you've been asked so far this morning. The first one is just going back to the market data subscribers and Quarter over quarter changes we've seen over the past couple of quarters. Do you get much insight in the short Whether or not it's maybe on a 1 quarter basis, maybe even 2, of how that may trend and just wondering what you're seeing on that front? And then also, Is it still the same dynamic as I thought from previously, for example, if you had someone that may have lost Their job, you don't see that step down in the market data subs or the revenue impact for maybe a quarter, maybe 2 and also that, that Nuance happens on the opposite side when someone adds a market data subscription.

Speaker 2

Yes. And also the challenge of that, Jeff, is also we also can't just take job reductions in different clients or dealers Holistically, because it also tends to spend on what the rules are, where they're using it or how they're using data in their shops. So it's We don't get great forward looking information with respect to our ability to predict it other than that general market piece that when you've got industry step down in employment To your point, we will often see that impact on a bit of a lag as they actually reset and kind of recount their seats and make adjustments going forward and the same thing coming back. But unfortunately, no, we don't get a lot of insights to it until it's actually happening.

Speaker 8

Okay. And then just my other question was on Trayport. How much of the revenue Today is coming from, call it, outside the core European customer base. And can you kind of talk about I know you talked about a little bit some of the stuff, but just the outlook and Expectations in terms of how quickly you can drive that revenue outside of the kind of the core franchise base?

Speaker 2

Yes. Well, I mean, we've given guidance before that the piece is coming directly out of the kind of North American market is kind of £5,000,000 ish in terms of run rate now out of the overall mix. But it's actually difficult for us to delineate the way you've asked in terms of kind of outside The European client base, because a lot of those clients are global and they're doing global business on Trayport. And if you think about some of the exchanges that participate as well as playing clients like ICME, those are global franchise as well. And while they might be participating in the European market, they're participating also with North American data.

Speaker 2

So it's a bit more nuanced than that. The piece I can give you is actually the direct piece and from what we've actually been building out in the U. S. What it's contributing so far.

Speaker 8

Okay. Thank you.

Operator

Your next question comes from the line of Graham Ryding from TD. Please go ahead.

Speaker 9

Hi, good morning. There was a couple of comments Around building into the U. S, I'm just wondering if I could maybe dig into that a little bit. Can you remind us what you're looking to do there? Is it initially around An equity trading initiative?

Speaker 9

And then beyond that, is it sort of a phased project or I guess Exploratory process or do you have sort of have you defined what you exactly want to do and what you want to spend over the near term?

Speaker 2

Okay. So there's going to be a different game today in terms of what we're doing and how much I'm going to tell you today. So you have to bear with me on that. We actually do have a well defined strategy in terms of what we're trying to do in the U. S.

Speaker 2

We haven't had broad discussion in the public market yet. So I'm going to be a little bit more limited in terms of what we share today. But essentially, when you look to what we've built out in Canada in terms of the AlphaX, the Alpha Dark initiatives and really looking to provide better execution quality for clients. We see that similar opportunity in the U. S.

Speaker 2

As a way to start building our equity platform directly in the U. S. As opposed to just on a cross border basis. We've got substantial client bases with cross border activity. When you think about particularly even the Canadian banks and their presence within the U.

Speaker 2

S. Market. And we do believe that long term that the quality of our offerings can compete with any of the North American players In the home market, just the same way they compete in the Canadian market. So that being said, the initial strategy in terms of building is to look to what that unique opportunity is around Execution quality and the hiring of our new Head of U. S.

Speaker 2

Equities is working on building out the team to do that. So It is definitely more than what I would call experimentation. We do actually have a strategy to build. And in the New Year, we'll look to see How we can provide more guidance to you both in line with the investing community, but also in line with the client community that we've been engaged with

Speaker 9

Okay, perfect. That was good color. Sort of a 2 pronged question, but really on the interest income side of your business. So TSX Trust, It was a little bit lighter than last quarter for sure, but also I think it was below Q1 and Q4 Levels, I guess earlier in the year and late last year. So can you just expand on was that all about Lower transfer agency activity or how should we think about this quarter compared to previous quarters?

Speaker 9

Yes.

Speaker 3

So Graham, it's David. So I would say Q1 is a better indicator of kind of a normal run rate. But obviously, as you know that one of the triggers there on the net interest income side is A, rates, but B, also balances, right? And so To the extent that we see the capital markets environment like it is right now with some of the listings activity, IPOs not being as robust, There's a direct correlation obviously to our trust business because we participate in a lot of those corporate actions. And obviously, That's a little bit more of a dampener on Q3.

Speaker 3

But as we go into Q4 and as we look into Q1 of next Sure. We're anticipating hopefully some early signs of a little bit of a rebound. So that's the first piece. And then yes, I mean, obviously, the on the transfer agency, it was softer than we had hoped for in this quarter. Once again, hope that it kind of rebounds more in the kind of Q1 kind of run rate, if you will.

Speaker 9

Okay, that's helpful. If I could just kind of similar things through and just throw in another question on that. But with this move to T+1 In mid next year, will that have any impact on the interest income that you would capture through CVS?

Speaker 2

No, because we really don't capture much net interest income in CDS. It will have a meaningful impact on our clients Because the move for T2D1 will we expect to be a 40% to 50% savings in the collateral that they post with us. But unlike most of the European clearinghouses would have substantial net interest income associated with that, we largely pass it all back. So there's no material change there.

Operator

Your next question comes from the line of Jaeme Gloyn from National Bank Financial. Please go ahead.

Speaker 10

Yes, thanks. First, just wanted to get some clarity on the capture rates in the derivatives business, both MX and Box. Would you be able to give us a little bit of color on it? Like is this a clean quarter for your rebates? Maybe from a client and product perspective, is it roughly average?

Speaker 10

Like maybe a little bit of color in terms of the capture rates on both of those businesses, the MX and Box?

Speaker 2

Jaeme, they're all clean quarters.

Speaker 4

Yes, so

Speaker 2

I mean the MX1, this You can look to the product mix. It's a clean quarter in the sense that there's no client adjustments or anything like that. It's just the actual impacts On the revenues of the products that are traded, the piece that we talked earlier, as you shift some volume from Bax to Cora, That will have an RPC impact in the short term because it has a rebate regime help to build it. And I want to remind people that was a deliberate Choice we made to ensure that liquidity got built up in that new product and didn't end up missing the public market and ended up in the over the counter market. So, no, it is a clean quarter.

Speaker 2

There's no special one offs that are in there that is impacting it. It's just the mix of the business. And the same thing with Box. Box has been very steady when you look sequentially. I think actually Box is up actually substantially and sequentially both in terms of volume and share, but the actual RPC has been largely stable.

Speaker 2

So again, that's going to depend on the mix of what the clients are using Box for In terms of whether or not you have kind of more floor trading, more high volume trading, large contracts or more kind of open market trading. But again, it's a as you asked, it's a clean quarter. There's nothing special going on there that's impacting things.

Speaker 10

Okay. Yes, that's what I was getting at. Thank you. If I think about Vetify and the recent acquisitions, So one data point you put in the MD and A was $19,000,000,000 in ETFs or I guess it underpins $19,000,000,000 Is that the key total addressable market figure we should be thinking about for that business? And if you kind of go back to Free the robo and EQM transactions, like what was that value?

Speaker 10

And maybe even like let's talk like 3 years ago, 5 years ago, whatever Time frame you want to pick, like how is that $19,000,000,000 what has been the growth rate on that?

Speaker 2

Yes, I'd have to I wouldn't be able to help you with the growth rate over time because I don't have that handy and we can make sure we do that as a follow-up. Pre the Robo Global, that was about I think $2,000,000,000 in terms of additional AUM, so kind of $17,000,000 before that. And some of the other ones that we've brought on have been fairly Small because they've been kind of niche, but the idea is you bring them in small, bring them on the platform, then we can scale them up. And what Vetify does that's unique in this space is it has A burgeoning what I'll call digital distribution business that actually helps the ETF issuers that are using the index reach a larger addressable audience Retail Investors, Wealth Advisors, things like that. So it is intentional in terms of kind of bringing on Smaller new stage or early stage ones and having it grow versus time.

Speaker 2

Now we'll have to get back to you on kind of what the growth rate has been with respect to the AUM. But this is exactly the driver that we're looking to grow long term. In the index based revenues that are in Vetify, They are driven off of AUM and so it is a key indicator going forward and it will be something that we can think about how we give you more guidance on as we go.

Speaker 10

Yes. And just to follow-up on that, as I think about like the opportunity for Vetify, is this more about Creating your own market and growing that $19,000,000,000 or is where does Betafy sit with that $19,000,000,000 within the broader ETF ecosystem that would be like competitors or other players offering similar services?

Speaker 2

Yes. So it varies. I When you think of the overall ETF assets under management, this is a very small piece. There's a substantial growth opportunity. And it comes from adding new indices, but also doing switches where with their capabilities, we can switch out another Provider or a legacy one to something that's created by Vetify on behalf of the ETF client.

Speaker 2

So this is where Kind of when you think about the addressable market, the opportunity for upside is substantial. And even if you think about the way we think about ETFs for our market in general, I'll remind folks that we have almost 1,000 ETFs listed on TSX today. They are faster growing in terms of assets under management The underlying mutual fund market, but still only represent about 15% of those total assets even in the Canadian market, Growing at double digits versus what the mutual fund market is, which I believe has actually declined this year. There are multiple thousands of mutual funds. So the opportunity for continued add and creation of new ETFs It's still strong.

Speaker 2

The growth rates are strong. The additional AUM coming into them has high potential. I think this year alone, we've talked

Speaker 10

And last one on the Vetify, if you Ken, thinking about their M and A opportunity set in front of them, like what does their balance sheet look like today? Are they well capitalized Q4 M and A or is there is this something where you put your 22% in and maybe they were coming back to TMX for some more capital to go out and further consolidate that market?

Speaker 2

It would very much depend on the size of the acquisition opportunity. But you can understand our enthusiasm in the business and our willingness to support its growth.

Speaker 9

Okay, got it. Thanks guys.

Operator

We have a follow-up question coming from the line of Ben Budish from Barclays. Please go ahead.

Speaker 4

Thanks for taking the follow-up. I wanted to ask about the build out of the U. S. Business, but it sounded like you kind of gave your thoughts on that for now, John. So maybe just one other follow-up just on the Trust business.

Speaker 4

Where are you in terms of the sort of cross selling opportunity between the legacy business and AST? Just thinking about how this kind of should evolve over the next year or so just in terms of the in the context of your longer Growth objectives with the Trust business expected to be a high growth segment? Thanks.

Speaker 2

Yes, that cross selling piece is still early stage. So the AST brought us new tools like employee plan management. We've actually just hired an industry expert to help actually take that to the next level in terms of Where does that product need to evolve to and then to be able to sell it across a broader client base. So it's a product that is only lightly penetrated both in the AST client base, but also in Our TSX Trust client base that we've merged everybody into, so that's just one example of where we see those additional upside opportunities. We're also selling into clients With things like the registered plan management services, we can sell into some of our private company leads that are in our pipeline For things like plan management, trust services, etcetera, etcetera, we are winning more trust mandates.

Speaker 2

So these here will be on the transfer agency mandates, so the ability to do the actual trust mandate on top of that. And that's actually both with clients that we already had as But also clients that are transferring clients of someone else. And so in some case, we're winning trust mandates of other people's clients. So that ability to keep driving that higher order growth rate we've indicated is absolutely continuing. We expect that for the long term.

Speaker 2

And the other piece with that is, this has not been a strong IPO market in the past year, but as we see that recovery in the IPO market, Given the ability to interact and introduce TSX Trust early in the stage of relationship with an issuer client, we also expect to continue to win well above our share of new mandates coming to the marketplace, both for Transfer Agency and Trust.

Speaker 4

Great. Very helpful. Thanks so much.

Speaker 2

Thank you.

Operator

There are no further questions at this time. I'd now like to turn the call back over to Mr. Amin Masafian for any closing remarks.

Speaker 1

Thank you everyone for listening in today. If you have any further questions, contact information for Investor Relations as well as media is in our press release and we'd be happy to get back to you. Until next time, goodbye.

Operator

Thank you. Ladies and gentlemen, this concludes your conference

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Earnings Conference Call
TMX Group Q3 2023
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