A n n u a l R e p o r t 2 0 0 7
Beijing Denver Sydney Calgary Tel Aviv Montreal Houston Boston Johannesburg Perth Vancouver Toronto
P e r f o r m a n c e
P o s i t i o n
S t r a t e g y
P e r f o r m a n c e
R e v e n u e
D i l u t e d E P S
D i v i d e n d
r20 %*
r14 %*
r15 %*
3/26/2007
First of three China roadshows
3/28/2007
NGX/ICE form technology and
physical clearing alliance
4/11/2007
Nine-city U.S. Campaign launched in New York
6/01/2007
Equicom acquired
6/21/2007
TSX Datalinx joins SFTI®
9/06/2007
Option to acquire NetThruPut Inc. announced
11/07/2007
TSX breaks yearly trading records
12/10/2007
TSX Group and Montreal Exchange to join forces
12/14/2007
TSX Quantum™ trading platform
successfully launched
* Compared to 2006
TSX Group: global listing and trading destinations with
an international reputation for technology leadership
I s s u e r S e r v i c e s
TSX Group owns Toronto Stock Exchange, our senior equity market, and
TSX Venture Exchange, our public venture capital market. With a com-
bined 3,951 listings, together we form the second largest equity exchange
group in the world by number of listings. With $2.2 trillion in issuer
market capitalization, we are also seventh largest in the world and the
third largest exchange group in North America. Issuer services revenue
increased 23% in 2007 over 2006. In addition to a very active secondary
capital market and record graduations to TSX from TSXV, we are seeing
good results from our international business development activities.
r23%*
T r a d i n g
We offer trading in multiple asset classes – equities, fixed income
and energy – through TSX, TSXV, Shorcan and Natural Gas Exchange.
We will continue to ensure we provide the capacity and speed that our
customers need. 2007 trading revenue increased by 16% over last year,
and there were many key milestones as our customers set records for
volumes traded on our equity and energy exchanges. We again imple-
mented important changes in our equity trading fee model and, on
the technology front, we began the roll-out of TSX Quantum, our new
trading engine. NGX’s transformative alliance with IntercontinentalEx-
change Inc. was successfully launched on February 9, 2008.
r16%*
M a r k e t D a t a
TSX Group offers real-time, historical and index data as well as corporate
information, news, fixed income and foreign exchange data to help
investors make decisions on the Canadian capital markets. Market data
has been our fastest growing source of revenue and a key source of
growth in foreign markets, especially in the U.S. Average revenue growth
over the past five years in this area of our business has been solid at 15%
and growth has accelerated – it was up 27% compared to last year. As
well, we set a record with over 160,000 market data subscriptions at the
end of 2007.
r27%*
* Compared to 2006
1
1
P o s i t i o n
We intend to continue to build our brand and take
advantage of long-term market drivers.
Trend
Evidence
Our Position
Strong
demand for
resources
Increasing pace
of innovation
Strong
demand for
trading and data
There is a rapidly expanding demand for
resources, in large part driven by China
and India, the first and second fastest
growing economies in the world. Alberta
oil sands activity also continues to ramp
up and carbon credits are emerging as
a new commodity.
Canada, as one of the world’s richest resource nations,
should prosper from this demand and TSX and TSXV,
as the world’s leading resource exchanges, are well
positioned to participate in this growth. We also see
excellent opportunities for NGX, through our technol-
ogy and physical clearing alliance with ICE. Looking
ahead, our option to purchase NetThruPut will secure
a strong position for us on the oil side of the
energy business.
The rate of innovation continues to
accelerate, particularly in technology,
life sciences and cleantech. Just as there
will always be people and businesses
looking to reshape their industries,
there will always be people and
businesses looking to access funding
for their next breakthroughs.
The heavy and growing demand for
trading and market data is primarily
fueled by the growth in new trading
strategies – including algorithmic
trading – as well as by the growth in
derivatives. New entities are entering
the market in a bid to capitalize on
this demand.
There are global centres of entrepreneurship and
innovation, and we are actively pursuing small and
medium sized enterprises in these markets, both in
established sectors like mining and energy and
emerging sectors like cleantech. TSX Group’s
exchanges have developed a high level of expertise
in financing, supporting and mentoring these early-
stage businesses. And we have the flexibility to foster
their growth while maintaining strong standards and
market integrity.
TSX Group is the clear leader in equity trading in
Canada. We provide our customers with proprietary
trading products and we continually adjust our fee
structure and trading technology to remain competitive
with North American exchanges. Our new TSX Quantum
trading engine and our planned consolidated market
data feed of pre- and post-trade data for equity
marketplaces will serve to strengthen our leading
position in Canada.
Globalization and
consolidation of
exchanges
The transformation of the international
exchange landscape continues, with the
creation of national and cross-border
combinations. The emerging global
market model is not a specialized
market in one asset class. Instead, it
is a multi-asset model with integrated
cash and derivatives products
The exchange world is evolving at a very rapid pace,
and TSX Group plans to be very much a part of that
evolution. The ultimate objective of our combination
with Montreal Exchange is to ensure we can compete
on the global stage by offering a solid and fully-
integrated Canadian capital market – a market that
will allow us to continue to build on the strengths and
capabilities we have developed.
2
2
S t r a t e g y
Our current and continued success lies in anticipating
and meeting the needs of our customers.
Focus
Opportunity
Action
The accelerating demand for energy, the
growing strength of the energy sector,
and Canada’s position as a global energy
powerhouse all combine to present
significant opportunities for TSX Group
and for NGX. And we have taken steps to
fully capitalize on these opportunities.
In March 2007, we announced an arrangement to
combine NGX’s strengths in physical clearing
with the unique technology capabilities of Inter-
continentalExchange. In 2007, we also purchased an
option to acquire NetThruPut Inc., a leading Canadian
electronic platform for trading and clearing crude
oil. Recently, we moved to strengthen our position
in energy even further by increasing the NGX
clearing backstop fund to $100 million US from
$30 million Canadian.
With a variety of options for listing and
a clear and supported infrastructure
for growth, TSX Group’s exchanges are
unique among global equity markets.
TSX Group’s equity exchanges serve
companies from all over the world at
all stages of their growth.
We are seeing the benefits of promoting Canada as a
listing destination and entrenching TSX and TSXV’s
position as preeminent global resource and small to
medium enterprise exchanges. Our sales efforts are
focused on generating new listings from China,
Australia, Brazil, Israel, South Africa and the United
States. In 2007, we added a record 49 new inter-
national listings, including graduates.
Grow energy
trading
Expand
listings
Lead in
technology
We are witnessing a race to put in place
the fastest, cheapest and highest capac-
ity trading technologies to meet the
demands of a sector that is globalizing
rapidly and is in constant motion. We
intend to continue to be a world leader
in trading technology.
Expand into
derivatives
trading
We see tremendous opportunity in the
North American derivatives market. The
2007 Bank of International Settlement
study shows that activity in the global
derivatives market has increased 71%
since it was last measured in 2004. New
product opportunities are also vast.
TSX Quantum is TSX Group’s new unique proprietary
trading technology. It began its phased launch on
schedule in December 2007, and as we continue to
complete implementation, we move closer to
realizing our goal of significantly enhancing our
market’s performance and capacity. We are already
fast, but TSX Quantum will provide our customers
with even greater speed and more capacity, and we
believe it will enable us to attract higher volumes
and liquidity.
Announcing our combination with Montreal Exchange
in December 2007 marked an important milestone
in our history. This strategic deal is central to our
vision of creating an exchange group that will not only
continue to serve the needs of Canadian investors,
entrepreneurs and companies, but will strengthen our
impact on an increasingly borderless economy. We also
believe it will provide great benefits for our sharehold-
ers and the Canadian capital markets.
3
3
TSX Group is a global market leader. A leader because of our
strong financial and operational performance. A leader because
of our unique position to capitalize on key global trends. A
leader because of our robust strategy to meet our customer
needs and to achieve continued growth and success.
4
4
C o n t e n t s
6
7
9
11
11
11
12
19
24
27
29
30
30
31
31
35
42
43
44
45
46
47
61
63
64
65
Letter from the Chairman
Letter from the Interim Co-CEOs
Statement of Corporate Governance Practices
2007 Management’s Discussion and Analysis
Non-GAAP Financial Measures
Executive Summary of Vision, Strategies and Key Current initiatives
Overview of the Business
Year Ended December 31, 2007 Compared with Year Ended December 31, 2006
Liquidity and Capital Resources
Selected Annual Infomation
Quarterly Information
Critical Accounting Estimates
Change in Accounting Policy
Disclosure Controls and Procedures and Internal Controls over Financial Reporting
Strategies and Outlook
Forward-Looking Information, Risks and Uncertainties
Management Statement & Auditors’ Report to the Shareholders
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Changes in Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
Three-Year Review
Board of Directors
Senior Management
Shareholder Information
Forward-Looking Statements
This annual report contains forward-looking statements, which are not historical facts but are based on certain assumptions and reflect TSX Group’s current
expectations. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results or events to differ materially
from current expectations. Please see Forward-Looking Information, Risks and Uncertainties in the 2007 Management’s Discussion and Analysis for a descrip-
tion of some of the risk factors that could cause actual events or results to differ materially from current expectations.
Letter from the Chairman
It is my pleasure to once again report to you on behalf of TSX Group’s Board of Directors. This past year was marked by achievement and growth
for the company, punctuated with an important milestone in the evolution of Canadian capital markets. The Board of Directors continues
to work together with TSX Group’s senior management team to build on our track record of strong operating performance and execute on our
long-term strategy for growth.
It is a key responsibility of the Board to ensure that the company operates within appropriate governance policies and guidelines. TSX Group
has a history of leadership in corporate governance and has shown the ability to foster corporate growth while serving the best interests of
Canadian capital markets. Good governance is what we ask for from our listed issuers and what we demand of ourselves.
Consolidation within the exchange industry is a topic I have touched on in prior letters, as exchanges continue forging alliances worldwide –
across borders, time zones and oceans. In December, we announced our agreement to combine with la Bourse de Montréal to create the
new TMX Group Inc. We are very excited about the combination and believe it will enable us to better meet the needs of Canadian investors,
intermediaries, entrepreneurs and issuers, and will strengthen our global market position.
On behalf of all shareholders, I would like to thank Richard Nesbitt for his diligence and leadership over the past three years. We wish him all the
best in his new career. The Board is managing the succession process and we anticipate a smooth leadership transition in 2008. In the interim,
our Co-CEOs, Rik Parkhill and Michael Ptasznik, are providing the transitional leadership that will ensure that we continue to operate efficiently
and move forward to achieve our strategic objectives.
In closing, I would like to express gratitude to my fellow Directors for their contributions to the Board’s regular and special meetings last year
and also to TSX Group management and employees for their continuing hard work and dedicated efforts to lead the company into the future.
Wayne Fox
Chair, Board of Directors
TSX Group Inc.
6 TSX Group Annual Report | 2007
Letter from the Interim Co-CEOs
We are proud to report on an historic year for TSX Group. The 2007 financial results once again reflected impressive performance in our core
business of issuer services, trading and market data. Revenue increased 20%, net income increased by 13% and diluted earnings per share was
up 14% over 2006.
In 2007, we again broke records in terms of volumes traded on our equity and energy exchanges. Toronto Stock Exchange and TSX Venture
Exchange combined volumes were over 149 billion securities in 2007, up 25% over 2006. NGX traded or cleared a record 11.2 million terajoules in
natural gas and electricity contracts, a 14% increase over 2006. In market data, our fastest growing revenue stream, we set a new record with
over 160,000 subscriptions to our real-time data at the end of 2007. In our listings business, we added a record 49 new international listings,
including graduates, to our equity exchanges last year.
While some of the market conditions that drive activity are beyond our control, one of the ways in which we can directly impact that activity is
by enhancing our relationships with our customers.
Competition in today’s markets is without borders. Consolidating exchanges across the world are aggressively seeking out new listings
and sources of liquidity. We continue to work to strengthen our competitive position by anticipating market needs and providing flexible,
innovative products and solutions while reducing frictions to listing and trading on our exchanges.
For instance, buy-side institutions are demanding faster, cheaper, more complex trading. We have responded by continuously upgrading
our trading systems, investing more than $50 million in technology every year from 2002 to 2007. And in December 2007, we began the phased
roll-out of our new trading engine known as TSX Quantum. This new trading system will provide our customers with even greater speed and
more capacity. The roll-out will continue throughout 2008.
In market data, we announced in October that we will be launching a consolidated market data feed of pre- and post-trade data for equity
marketplaces in Canada. This will reduce the time-to-market and costs of moving to multiple feed formats for stakeholders, and will help
facilitate best execution for our customers.
Over the past five years, we have delivered on our commitment to reducing the overall cost of trading Canadian equities. In November 2007,
we again revised our trading fees to incent more trading in the central limit order book and increase order flow from global participants.
According to an Elkins/McSherry study conducted as at the second quarter of 2007, the cost of executing a trade on our exchanges was tied for
third lowest in the world at 0.20 basis points.
With our advances in technology, innovative product offerings and low trading fees, we are confident we will continue to meet the demands of
an evolving competitive landscape and attract even more liquidity.
In our energy business, we announced two important new initiatives in 2007. In March, we announced an arrangement to combine NGX’s strengths
in physical clearing with the advanced technology capabilities of IntercontinentalExchange Inc., or ICE, which was launched in February 2008.
We are excited about the opportunity that this represents for NGX to gain access to thousands of trading screens, technology expertise and a
global footprint for natural gas and electricity contracts. In September, we purchased an option from Enbridge Inc. and Circuit Technology Ltd. to
acquire all the shares of NetThruPut Inc., or NTP, a leading Canadian electronic platform for trading and clearing crude oil. NTP is a natural fit with
our NGX gas and electricity business and will further strengthen our presence in the North American energy space.
The competition for listings has taken our business development efforts world-wide. We have focused on entrenching our position as a preeminent
global resource exchange and a leading exchange for small to medium sized enterprises, or SMEs.
We are telling our story in the key mining markets of Australia, South Africa, and South America. We are actively pursuing listing opportunities
in the new economic powers such as China and Brazil. And we are present in Israel where there is a burgeoning demand for financing in the
high-tech sector.
In 2007 alone, 219 new resource companies listed on TSX Group exchanges, including 13 from the U.S., 9 from Australia, 2 from South America,
2 from China and 2 from the U.K.
Letter from the Interim Co-CEOs 7
We also enjoyed business development successes targeting SMEs in the United States. Our nine-city 2007 U.S. Campaign concluded at the end
of November. We added 23 new listings from U.S.-based companies in 2007, including 6 graduates from TSX Venture. Our 2008 U.S. campaign
began in April.
In an effort to expand our service offering to listed issuers, last June we acquired The Equicom Group Inc., a leading provider of investor relations
and related corporate communications services to public companies in Canada.
But, in a year of full of records and operational accomplishments for TSX Group, we think 2007 will be remembered most for an important
step we took to prepare for the future – our agreement to combine with Montréal Exchange Inc. to create the new TMX Group Inc., which we
announced on December 10, 2007. The combination is not only significant in terms of our company’s strategy, but will also be a benefit to the
future of Canada’s capital markets. Together we will not only better serve our stakeholders’ needs, but we will also strengthen our ability to
compete globally.
The creation of a combined cash equities and derivatives operation strengthens and diversifies our revenue base and will allow us to realize
both cost and revenue synergies.
We believe a fully integrated Canadian capital market will allow us to excel in the new exchange world and to build on our combined strengths
and the capabilities that we have developed over the years.
The past year has been an exciting and rewarding one for TSX Group. We look forward to the new opportunities that lie ahead.
Rik Parkhill
Interim Co-CEO
Michael Ptasznik
Interim Co-CEO and CFO
8 TSX Group Annual Report | 2007
Statement of Corporate Governance Practices
Overview
Our Board of Directors (Board) and management are committed to remaining at the forefront of good governance and to ensuring the highest
standard of corporate governance. TSX Group’s corporate governance policies and practices are designed to support the Board in discharging its
responsibilities and to enhance shareholder value. We regularly review these policies and practices with a view to enhancing our governance structure
and practices in an ever-evolving corporate governance environment.
TSX Group’s corporate governance system complies with National Policy 58-201—Corporate Governance Guidelines (NP 58-201), National Instrument
58-101—Disclosure of Corporate Governance Practices (NI 58-101) and National Instrument 52-110—Audit Committees (NI 52-110). In addition,
we continue to review our corporate governance practices with reference to corporate governance guidelines recommended by institutional and other
shareholder organizations.
Board Responsibilities
The Board is responsible for TSX Group’s governance and stewardship and overseeing its corporate strategy, operations and management. The Board
discharges its responsibilities, either directly or, where appropriate, through committees, and by selecting and holding management accountable for
TSX Group’s operations and for implementing its corporate strategy. The Board sets clear policies and direction for management’s responsibilities
and authority. Among its many specific duties, the Board annually monitors the performance of the Chief Executive Officer (CEO) against corporate
objectives (established by the Board with the CEO), and sets the CEO’s compensation. The Board also approves strategic plans and corporate
objectives that the CEO is responsible for meeting, provides advice and counsel to the CEO, oversees ethical and legal conduct of senior management,
and assesses the financial performance of TSX Group. In addition, the Board approves the adequacy and form of compensation paid to members of
the Board (Directors). The Board Charter that describes the Board’s responsibilities is available on our website.
At each regularly scheduled Board meeting, Directors and senior management examine, review and discuss a broad range of issues relevant to
TSX Group’s strategy, business interests and growth initiatives. In addition, management provides the Board with timely, periodic reports on
operational and financial performance. During fiscal 2007, the Board held ten regular meetings and ten special meetings. Attendance by Directors at
these meetings was more than 97%, either in person, by teleconference or by video conference. The Board plans to hold ten regular meetings in 2008.
At each of these meetings, the Board will meet without management and non-independent Directors to ensure it provides independent assessment
and oversight. Each of the Finance and Audit Committee, Governance Committee and the Human Resources Committee can, in its discretion, retain
an outside advisor or expert. An individual Director or any other committee of the Board can retain an outside advisor or expert with the approval of
the Governance Committee.
Board Independence and Composition
As at February 28, 2008, the Board has a non-executive Chair and knowledgeable and experienced Directors, and 12 out of 12 (100%) members of the
Board, including the Chair, are “independent” within the meaning of section 1.4 of NI 52-110 and our recognition order issued by the Ontario Securi-
ties Commission (Recognition Order). The Recognition Order requires at least 50% of Directors to be “independent”, within the meaning of section
1.4 of NI 52-110. Furthermore, pursuant to the Recognition Order, in 2005 the Board adopted more restrictive standards than those imposed by
NI 52-110 to determine whether individual members of the Board are independent from TSX Group. Those standards are available on our website.
The Board also derives strength from the background, qualities, skills and experience of its Directors. The Governance Committee recommends
candidates to the Board who are suitable for nomination to the Board on an annual basis. Nominees are selected for qualities such as integrity,
business judgment, financial acumen, independence, business, professional or board expertise and capital markets experience. The Board also takes
into consideration representation from geographic regions relevant to TSX Group’s strategic priorities.
Director Education and Access to Management
We provide new Directors with a Directors’ Manual, which serves as a corporate reference, as well as with orientation materials describing our
business, strategy, objectives and initiatives, so new Directors understand the nature and operations of our business and the role of the Board and
its committees, as well as the contribution individual Directors are expected to make. To assist in the integration and orientation of new Directors,
the Governance Committee assigns a member of the Board as a mentor to each new Director. Furthermore, Directors are invited to spend time at our
offices and also have timely, periodic one-on-one meetings with the CEO and members of the senior management team. The Chair sets the agenda
for Board meetings and Directors receive a comprehensive package of information prior to each Board and committee meeting. As well, each
committee delivers a report to the full Board on its work after each committee meeting. TSX Group also provides the Directors with a variety of other
materials and presentations on an ad hoc basis, to keep them informed about internal developments as well as developments in, or which affect,
our industry. All of these materials and other corporate materials are also accessible by Directors on a permanent, secure intranet.
Statement of Corporate Governance Practices 9
Evaluation
The Governance Committee annually evaluates the overall performance and effectiveness of the Board, its committees and all Directors.
This evaluation is conducted by written self-assessment and peer questionnaires and through formal interviews of each Director (other than the
Chair) by the Chair of the Board and of the Chair by the chair of the Governance Committee. The Chair of the Board reports summary findings to the
Governance Committee and to the full Board.
Code of Conduct
The Board’s Code of Conduct (Board Code) for Directors sets standards for ethical behaviour of the Board. The Board monitors compliance with the
Board Code and is responsible for considering and granting waivers from compliance with the Board Code, if any. No waivers have been granted nor
have there been any violations of the Board Code. A copy of the Board Code is available on our website.
Committees
The Board has four standing committees with specific areas of responsibility to effectively govern TSX Group: Finance and Audit Committee,
Governance Committee, Human Resources Committee and Public Venture Market Committee. All of the members of the Finance and Audit
Committee, Governance Committee, Human Resources Committee and Public Venture Market Committee are independent. All of the committees
also consist solely of non-management Directors. The Board believes that the composition of its committees ensures that they operate
independently from management to protect all shareholders’ interests. The Board also believes that the members of the Finance and Audit
Committee are financially literate, given their education and experience. Each standing Board committee has a formal written Charter, approved by
the Board. These Charters are reviewed at least annually and are available on our website.
Majority Voting
The Board has adopted a policy that provides that in an uncontested election of directors, any nominee of TSX Group who does not receive the support
of a majority of the votes cast at an annual meeting of the shareholders will tender his or her resignation to the Board, to be effective when accepted
by the Board. The Governance Committee will consider the resignation and recommend to the Board the action to be taken. The Board will have
90 days following the annual meeting to make its decision and announce it by way of press release.
Risk Management
TSX Group recognizes that risk management is integral to its business, operations and financial performance, and we follow a comprehensive
integrated risk management program to identify, assess and prioritize principal business risks, and consider the likelihood and potential impact of
each risk. We develop strategies to manage and mitigate each identified risk. In addition, we have a plan to mitigate the risk of interruptions to our
critical business functions. The plan integrates disaster recovery and business continuity for critical functions to protect personnel and resources and
to enable us to continue critical business functions if a disaster occurs. The Board provides oversight with respect to our risk management program
and our strategies to mitigate such risks. Also, we have an internal audit function, which reports to the Finance and Audit Committee, and which
independently assesses the adequacy and effectiveness of internal controls and, as required, recommends corrective action.
Communication
TSX Group and the Board are committed to open and proactive investor communication. Our investor relations staff provides information to current
and potential investors and responds to their inquiries. We broadcast quarterly earnings conference calls live and archive these calls on our website.
We also make recordings available via telephone to interested investors, the media and members of the public for three months after each call. Audio
webcasts of such recordings are also available on our website for six months after each call. We promptly make available presentations from investor
conferences on our website. We also make disclosure documents available via our website.
Additional Information
For a full report on our corporate governance practices, please refer to our Management Information Circular, which may be accessed through
www.sedar.com or through our website at www.tsx.com. The Circular also describes our corporate governance practices, information about Directors,
and the composition, responsibilities and activities of the Board’s standing committees. All information about corporate governance practices in our
Annual Report and in the Management Information Circular was adopted and approved by our Board.
10 TSX Group Annual Report | 2007
2007 Management’s Discussion and Analysis
This Management’s Discussion and Analysis (MD&A) of TSX Group Inc.’s (TSX Group) financial condition and results of operations is provided to
enable a reader to assess our financial condition, material changes in our financial condition and our results of operations, including our liquid-
ity and capital resources, for the financial year ended December 31, 2007, compared with the year ended December 31, 2006. This MD&A is dated
January 30, 2008 and should be read carefully together with our 2007 consolidated financial statements and related notes for the corresponding period.
Each of these documents is filed with Canadian securities regulators and can be accessed through www.sedar.com, or our website at www.tsx.com.
All amounts are in Canadian dollars unless otherwise indicated and are based on financial statements prepared in accordance with Canadian
generally accepted accounting principles (GAAP), unless otherwise specified.
Additional information about TSX Group, including our most recent Annual Information Form is available through www.sedar.com and
on our website www.tsx.com. We are not incorporating information contained on the website in this MD&A.
Non-GAAP Financial Measures
In April 2007, TSX Group began to bill Toronto Stock Exchange customers for initial and additional listing fees. Prior to this date, these fees were paid
upon the listing or reserving of securities which is still the practice on TSX Venture Exchange. With the adoption of a new system, there is now a
lag between when securities are issued or reserved and when these listing fees are paid for Toronto Stock Exchange listed issuers. In order to reflect
this change, we have adopted the terms issuer services fees billed, initial listing fees billed and additional listing fees billed. These terms replace
“listing fees received”, “initial listing fees received” and “additional listing fees received”, which have been used in previous financial reporting.
The composition of these measures, however, is unchanged.
Certain measures used in this MD&A, specifically issuer services fees billed, initial listing fees billed, additional listing fees billed and total revenue
based on initial and additional listing fees billed do not have standardized meanings prescribed by Canadian GAAP and therefore are unlikely to
be comparable to similar measures presented by other issuers. We present these measures as an indication of how initial and additional listing
activity and the fees billed for listing or reserving securities, impact the financial performance and cash flows of our business. Management uses
these measures to assess the effectiveness of our strategy to serve our listed issuers and grow the listings portion of our business.
We present earnings per share prior to a reduction in the value of the future tax asset as an indication of operating performance exclusive of tax
charges, which primarily relate to lower federal corporate income tax rates and other adjustments. This measure is unlikely to be comparable to
similar measures presented by other issuers. Management uses this measure to assess financial performance excluding non-cash items such as the
reduction of the future tax asset.
Executive Summary of Vision, Strategies and Key Current Initiatives 1
Our vision: To be a leading Canadian public company that is the best operator of electronic marketplaces on a global standard.
Our strategies:
•
To continue to focus on growth of our core business domestically in terms of superior technology, order flow and products
and services.
•
To achieve a leadership position in all asset classes inside Canada, with a particular focus on fixed income, energy and derivatives.
• To pursue aspirations beyond Canada based on our competitive advantages.
Key current initiatives:
•
•
Technology: In December 2007, we launched TSX Quantum™, our new trading engine which we expect to greatly increase capacity and
improve the performance of our equity markets next year. Phased roll-out is planned to continue throughout 2008.
Derivatives: On December 10, 2007, we announced, together with Montréal Exchange Inc. (MX), that we had agreed to combine TSX Group
and MX to create TMX Group Inc. (TMX Group) a leading, integrated, multi-asset class exchange group. The head office of TMX Group
will be located in Toronto, and the head office of MX and the derivatives trading and related product operations will remain in Montreal.
The combination is subject to approval of MX shareholders and regulatory approvals including approvals from Québec’s Autorité des
marchés financiers, the Competition Bureau, Toronto Stock Exchange and the United States Securities and Exchange Commission.
We currently expect the transaction to close in the first quarter of 2008. (See “Combination with MX” under the section “Strategies and
Outlook” for a discussion of the transaction.)
1
The “Executive Summary of Vision, Strategies and Key Current Initiatives” section above contains certain forward-looking statements. Please refer to “Forward-Looking Information,
Risks and Uncertainties” for a discussion of risks and uncertainties related to such statements.
Management’s Discussion and Analysis
11
•
•
Energy: On March 28, 2007, we announced an arrangement to combine Natural Gas Exchange Inc.’s (NGX) strengths in physical clearing
with the advanced technology capabilities of IntercontinentalExchange Inc. (ICE), scheduled to launch in the first quarter of 2008.
In September 2007, we purchased an option from Enbridge Inc. (Enbridge) and Circuit Technology Ltd. (Circuit Technology) to acquire all
the shares of NetThruPut Inc. (NTP), the leading Canadian electronic platform and clearing facility for crude oil. The option is exercisable
after March 15, 2009.
International business development: Leveraging our strengths in the natural resource sector and our Small-Medium Enterprise (SME)
expertise, we have been promoting Toronto Stock Exchange and TSX Venture Exchange as listing destinations. In 2007, we completed a
successful nine-city U.S. campaign with a particular focus on SMEs.
Overview of the Business
We own and operate equity, energy and fixed income markets in Canada.
•
•
•
Our equity markets, Toronto Stock Exchange and TSX Venture Exchange, are the primary venues for capital formation and liquidity
in Canada. The total market capitalization of the 3,951 issuers listed on our equity exchanges at December 31, 2007 was over $2.1 trillion,
making our combined equity exchanges the third largest in North America and the eighth largest in the world. The total volume of
securities traded on our two equity exchanges in 2007 was 149.2 billion. There were over 160,000 professional and equivalent subscriptions
to our real-time market data at the end of 2007.
Our energy market, NGX, is a Canadian-based exchange that provides customers with an electronic platform that trades and provides
clearing and settlement services for natural gas and electricity contracts. During 2007, 11.2 million terajoules in natural gas and electricity
contracts were traded or cleared on NGX. In October 2006, we added to our energy business when we acquired Oxen Inc. (Oxen) which owns
the Alberta Watt Exchange Limited (Watt-Ex), a provider of ancillary services to the Alberta Electric System Operator which is used to balance
supply and demand on the Alberta grid.
We acquired our fixed income market, Shorcan Brokers Limited (Shorcan), Canada’s first fixed income inter-dealer broker (IDB) in December
2006. We estimate that the IDB market represents about 34% of total fixed income trading in Canada and that Shorcan’s share of this
market is about 33%, or $782 billion in 2007. This complemented the October 2006 purchase of PC-Bond, comprising the leading Canadian
fixed income indices, PC-Bond analytics applications and related data assets.
•
We also own 47% of CanDeal.ca Inc. (CanDeal), an institutional fixed income trading system. During 2007, CanDeal traded $617.7 billion in
fixed income securities.
Core Business of TSX Group
We derive revenue from three principal sources – issuer services, trading and market data.
2007 revenue of $424.7 million
2006 revenue of $352.8 million
Business Services/Other $11.3M 3%
Business Services/Other $11.1M 3%
Market Data $110.2M 26%
Issuer Services $133.9M 31%
Market Data $86.9M 25%
Issuer Services $108.5M 31%
Trading and Related $169.3M 40%
Trading and Related $146.3M 41%
Canadian GAAP requires that we recognize initial and additional listing fees over an estimated service period related to the fees, which we have
determined to be ten years, even though we receive these fees upon completion of the transaction and they are non-refundable to customers.
We believe it is helpful to also show total revenue based on initial and additional listing fees billed* as this measure links these listing fees more
closely with the listing transactions and cash flows we generate from these transactions.
12 TSX Group Annual Report | 2007
The following is a reconciliation of total revenue based on initial and additional listing fees billed* to total revenue based on initial and additional
listing fees reported:
(in millions of dollars)
Total revenue based on initial and additional listing fees billed*
Initial and additional listing fees billed and deferred to future periods*
Recognition of initial and additional listing fees billed and previously included in deferred revenue
Total revenue based on initial and additional listing fee revenue reported
Excess of initial and additional listing fees billed* over initial and additional listing revenue reported
$
$
$
$
$
2007
503.3
(134.2)
55.6
424.7
78.6
$
$
$
$
$
2006
420.2
(112.9)
45.5
352.8
67.4
2007 revenue of $ 503.3 million*
(total revenue based on initial and additional listing fees billed*)
2006 revenue of $ 420.2 million*
(total revenue based on initial and additional listing fees billed*)
Business Services/Other $11.3M 2%
Business Services/Other $11.1M 3%
Market Data $110.2M 22%
Market Data $86.9M 20%
Issuer Services** $212.5M 42%
Issuer Services** $175.9M 42%
Trading and Related $169.3M 34%
Trading and Related $146.3M 35%
Issuer Services
Listings – Toronto Stock Exchange and TSX Venture Exchange
Our listings operations take place through Toronto Stock Exchange, our senior market, and TSX Venture Exchange, our junior market.TSX Venture
Exchange also offers a board called NEX2 for issuers that have fallen below TSX Venture Exchange’s ongoing listing standards.
•
•
•
•
At December 31, 2007, 1,613 issuers with an aggregate market capitalization of $2.1 trillion were listed on Toronto Stock Exchange.
At December 31, 2007, 2,338 issuers with an aggregate market capitalization of $58.5 billion were listed on TSX Venture Exchange.
In 2007, revenue from listing fees on the two exchanges was $125.8 million, or 30% of our revenue, of which 78% related to Toronto
Stock Exchange listings and 22% related to TSX Venture Exchange listings. Issuer services fees billed** to our issuers in 2007, excluding
The Equicom Group Inc. (Equicom), was $204.8 million, or 41% of our total revenue based on initial and additional listing fees billed*,
of which 71% related to Toronto Stock Exchange listings and 29% related to TSX Venture Exchange listings.
In 2006, revenue from listing fees on the two exchanges was $108.5 million, or 31% of our revenue, of which 80% related to Toronto
Stock Exchange listings and 20% related to TSX Venture Exchange listings. Issuer services fees billed** to our issuers in 2006 was
$175.9 million, or 42% of our total revenue based on initial and additional listing fees billed*, of which 71% related to Toronto Stock
Exchange listings and 29% related to TSX Venture Exchange listings.
In general, issuers initially list on Toronto Stock Exchange either in connection with their initial public offerings (IPOs), or by graduating from
TSX Venture Exchange. Junior companies generally list on TSX Venture Exchange either in connection with their IPOs or through alternative methods
such as TSX Venture Exchange’s Capital Pool Company® (CPC™) program or reverse takeovers.
Issuers list a number of different types of securities including conventional securities such as common shares, preferred shares, rights and warrants,
and an expanding variety of alternative types of securities such as exchangeable shares, convertible debt instruments, limited partnership units,
exchange-traded fund units, income trust units and structured products.
2
*
**
Unless otherwise indicated, market statistics and financial information for TSX Venture Exchange includes information for NEX.
See discussion under the heading Non-GAAP Financial Measures.
See discussion under the heading Non-GAAP Financial Measures. The composition of issuer services fees billed and a reconciliation to issuer services fees reported is available in our
Review of Operations – 2007 under the heading “Issuer Services Revenue”.
Management’s Discussion and Analysis
13
Other Issuer Services
Issuers that meet initial and ongoing listing requirements of Toronto Stock Exchange or TSX Venture Exchange receive a range of benefits, including
opportunities to efficiently access public capital, liquidity for existing investors, mentorship programs and the prestige and market exposure
associated with being listed on one of Canada’s national stock exchanges. We also offer issuers access to TSXconnect®, a web-based platform for
accessing investor relations management tools. On June 1, 2007, we further expanded our service offerings to issuers with the purchase of Equicom,
a leading provider of investor relations and related corporate communication services to public issuers in Canada. In 2007, Equicom generated
$7.7 million of revenue for the seven months that they were part of TSX Group.
We generate issuer services revenue primarily by charging issuers the following types of fees:
Initial Listing Fees
Toronto Stock Exchange and TSX Venture Exchange issuers pay initial fees based on the value of the securities to be listed or reserved, subject to
minimum and maximum fees. Initial listing fees fluctuate with the number of transactions and value of securities being listed or reserved in a given
period. For accounting purposes, we recognize revenue from initial listing fees on a straight-line basis over a ten year period. Unamortized balances
are recorded as part of “Deferred revenue – initial and additional listing fees” on the consolidated balance sheet.
Additional Listing Fees
Issuers already listed on one of our equity exchanges pay fees in connection with subsequent capital market transactions, such as the raising of new
capital through the sale of additional securities. Additional listing fees are based on the value of the securities to be listed or reserved, subject to
minimum and maximum fees. Additional listing fees fluctuate with the number of transactions and value of securities being listed or reserved in a
given period. For accounting purposes, we recognize additional listing fees on a straight-line basis over a ten year period. Unamortized balances are
recorded as part of “Deferred revenue – initial and additional listing fees” on the consolidated balance sheet.
Sustaining Listing Fees
Issuers listed on one of our equity exchanges pay annual fees to maintain their listing, based on their market capitalization at the end of the prior
calendar year, subject to minimum and maximum fees. Sustaining listing fees provide a relatively stable, recurring revenue stream. Sustaining listing
fees are billed during the first quarter of the year, recorded as deferred revenue and amortized over the year on a straight-line basis.
Changes to Listing Fees effective January 1, 2008 3
On October 31, 2007, we announced changes to the fee structure for issuers listed on Toronto Stock Exchange and TSX Venture Exchange. This decision
followed a review of listing fees on other major global exchanges. Based on recent market activity at that time, it was anticipated that total issuer
services revenue reported would have increased by about one to three percent and total issuer services fees billed* would have increased by about six
to eight percent on an annual basis as a result of these changes. For Toronto Stock Exchange listed issuers, the changes include adjustments to the
variable rates for initial and additional listing fees and increases to the maximum fee for security-based compensation arrangements. For TSX Venture
Exchange issuers, the changes include increases to the minimum and maximum sustaining and additional listing fees and to the initial CPC program
listing fee. Actual issuer services revenue reported and actual issuer services fees billed* will depend on future capital market activity.
Trading – TSX Markets, NGX and Shorcan
TSX Markets
Our trading operations for both Toronto Stock Exchange and TSX Venture Exchange are conducted by TSX Markets. Participating Organizations and
Member Firms (collectively, POs), acting as principals or agents for retail and institutional investors, place orders to buy or sell listed securities using
our fully electronic trading systems.
•
•
In 2007, trading and related fees paid by POs relating to both exchanges represented $134.6 million, or 32% of our revenue. Trading and
related revenue was $101.9 million on Toronto Stock Exchange and $32.7 million on TSX Venture Exchange.
In 2006, trading and related fees paid by POs relating to both exchanges represented $126.3 million, or 36% of our revenue. Trading and
related revenue was $98.3 million on Toronto Stock Exchange and $28.0 million on TSX Venture Exchange.
3
*
The “Changes to Listing Fees effective January 1, 2008” section above contains certain forward-looking statements. Please refer to “Forward-Looking Information, Risks and
Uncertainties” for a discussion of risks and uncertainties related to such statements.
See discussion under the heading Non-GAAP Financial Measures.
14 TSX Group Annual Report | 2007
Trading occurs on a continuous basis throughout the day but begins at market open in an auction format and ends with an extended trading session
in which trades occur at the closing price, referred to as a single price closing call market. Trading also occurs through crosses in which POs internally
match orders and report them through the exchanges. All trades are settled through The Canadian Depository for Securities Limited (CDS), a recognized
clearing agency in which we have an approximate 18% ownership interest. The other shareholders are the major Canadian chartered banks and the
Investment Dealers Association of Canada (IDA).
Trading activity is affected when listed issuers seek additional listings on foreign exchanges, principally in the United States (often referred to as
interlisting or dual listings). Interlistings generally raise the profile of issuers in the global market, and trading volumes for these issuers’ securities
often increase across all markets as well as on Toronto Stock Exchange. Whether a significant portion of trading of a particular issuer remains in
Canada following its interlisting depends on a number of factors, including the location of the issuer’s shareholder base and the location of research
analysts who cover the issuer.
TSX Markets has a dedicated sales team focused on U.S. accounts with the goal of attracting more participants and order flow by raising the level of
awareness regarding the benefits of trading on Toronto Stock Exchange and TSX Venture Exchange.
Our trading strategy is to meet market demands by offering superior technology, innovative products and competitive trading fees.
Superior Technology 4
In 1997, Toronto Stock Exchange was the first major exchange in North America (and one of the first globally) to move to a fully automated exchange
where trading takes place entirely through electronic systems, thereby increasing the speed of execution, accessibility to the exchange and the number
of transactions that can be processed. In May 2001, our original electronic trading systems were replaced with a more reliable, flexible and scalable
system. In 2003, the gateway systems were replaced with a more scalable and higher throughput system. The system hardware was upgraded in 2004.
Two hardware upgrades and two software performance releases were implemented in 2005 in response to increases in order message volumes and
transactions being generated within the marketplace.
In 2006, we worked on three TSXPress™ initiatives to meet increasing market demands: trading system performance enhancements to reduce
overall average response time on Toronto Stock Exchange and optimize execution speeds for algorithmic traders. In addition, we implemented
the FIX protocol, the global connectivity standard for customers to route orders. In June 2007 we replaced our core trading engine hardware with
the next generation of new HP Integrity NonStop servers that use the Intel Itanium 2 processor. In 2006, we also began development on our next
generation trading engine, TSX Quantum. TSX Quantum, which contains patented technology, began a phased roll-out in December 2007 that will
continue throughout 2008.
The key technology initiative of 2007 and 2008, TSX Quantum, will provide our customers with greater speed and capacity at a lower cost, and we
believe it will enable us to attract higher volumes and even more liquidity. Based on laboratory results, response times are in the single digit
millisecond range. These single digit response times have been validated in actual production trading with one symbol.
We have a business continuity plan designed to provide continuous operations in the event of a disruption to our main facility. As part of this plan,
we operate two data centres in separate locations, allowing for back-up recovery in the event that one of the centres experiences a failure.
Innovative Products 5
On December 1, 2001, regulatory changes (described below) were introduced, which among other things, permitted the creation of alternative trading
systems (ATSs) which could become our significant competitors in the future in addition to the competition we face from established North American
exchanges. For example, in 2007, a group of Canada’s leading banks and investment dealers announced their intention to form an ATS to trade Toronto
Stock Exchange listed securities, which is currently set to launch in the second half of 2008. Part of our strategy is to continually implement new
trading features and methodologies to meet diverse customer requirements for trade execution. The following products have been launched over the
last several years:
•
•
•
ATXTM, a high-speed TSX trading facility to match firm order flow against in-house liquidity as well as liquidity from other POs.
TSX Firm Order eXecution™, or FOX™, a system designed to assist POs to more effectively and efficiently manage capital risk, and to
consolidate order flow across trading desks within their own firm.
TSX Market On Close™ (MOC) facility (designed to increase liquidity and provide lower levels of volatility at the close of the trading
session), expanded in 2005 to include all symbols in the S&P/TSX Composite Index 6 .
• Multiple Broker Give-Up, designed to allow investors to distribute their trading relationships among multiple POs.
4
5
6
The “Superior Technology” section above contains certain forward-looking statements. Please refer to “Forward-Looking Information, Risks and Uncertainties” for a discussion of risks
and uncertainties related to such statements.
The “Innovative Products” section above contains certain forward-looking statements. Please refer to “Forward-Looking Information, Risks and Uncertainties” for a discussion of risks
and uncertainties related to such statements.
S&P is a trade-mark owned by The McGraw-Hill Companies, Inc. and is used under license.
Management’s Discussion and Analysis
15
•
•
TSX Compliance Automated Reporting SystemTM (CARSTM) provides POs with a suite of compliance-monitoring products.
Iceberg orders (large size orders may be entered while disclosing only a small portion of the total order size at any time).
• Voluntary attribution (allows traders to anonymously execute transactions).
In 2008 we plan to introduce a smart order router that should help domestic and international customers meet best execution obligations. In addition,
we also plan to offer co-location to customers in 2008.
Competitive Trading Fees 7
Effective July 1, 2006, we changed the fee model for most issues on Toronto Stock Exchange and TSX Venture Exchange from a value-based fee model
to a volume-based fee structure. The volume-based fee structure better aligned our trading fees with the prevailing model in various U.S. market-
places and replaced the value-based fee model for most issues. This model was structured so that market participants have an incentive to enter
orders in the central limit order book. When liquidity is added to the central limit order book, executed passive orders receive a credit on a per security
basis, and when liquidity is removed from the central limit order book, each executed active order is charged on a per security basis.
In advance of the roll-out of the TSX Quantum trading engine in December 2007 and continuing throughout 2008, effective November 1, 2007,
we implemented further changes to the trading fee structures on both Toronto Stock Exchange and TSX Venture Exchange. The fee changes are
targeted at taking advantage of this new technology by attracting more volume to the Toronto Stock Exchange central limit order book and incent-
ing liquidity from global participants. In addition, the pricing model for TSX Venture Exchange has been aligned more closely with that of Toronto
Stock Exchange. These changes were the next phase in the program we launched in 2006 and are consistent with our commitment to reduce the
overall cost of trading of Canadian equities.
Given that many of the changes have been structured to improve liquidity, it is expected that the impact of the proposed changes will be to improve
TSX Group’s competitive position in North America. Based on historical trading activity, patterns, and product mix, changes to the trading fee
structure could reduce trading and related revenue by approximately $7 to $10 million on an annual basis if offsetting benefits, including increased
volumes, are not realized. However, actual trading revenue will depend on future trading activity, patterns and product mix.
Regulation 8
Market integrity is an essential element of any marketplace. Historically, Toronto Stock Exchange and TSX Venture Exchange regulated the market
conduct of their POs directly. In order to separate this regulatory function from our business operations, in 2001, we proposed the creation of a
separate corporate entity, Market Regulation Services Inc. (RS), to administer a set of universal market integrity rules (UMIR) for marketplaces
trading equities in Canada. RS is owned 50% by TSX Inc., a wholly-owned subsidiary of TSX Group, and 50% by the IDA. RS is recognized by the
Ontario, Manitoba, Alberta and British Columbia securities commissions, as well as in Quebec, by the Autorité des marchés financiers, as a self-
regulatory organization (SRO) to act as a regulation services provider under National Instrument 21-101-Marketplace Operation and National
Instrument 23-101-Trading Rules (together, the ATS Rules). In March 2002, Toronto Stock Exchange and TSX Venture Exchange retained RS to pro-
vide regulation services to them under the ATS Rules as agent for each of them. RS monitors and enforces compliance with UMIR by the POs, their
directors, officers, employees and affiliates and performs other regulatory functions that our equity exchanges delegate to RS.
In April 2006, the Boards of Directors of the IDA and RS announced a proposal to create a new SRO to succeed the IDA and RS. A joint steering
committee was established by the IDA and RS to work with Canadian securities administrators (CSA) and capital markets stakeholders to develop a
detailed implementation plan. In May 2007, the Board of Directors of the IDA and the Board of Directors of RS each agreed, subject to the approval
of the members of the IDA (which was obtained on December 17, 2007), the shareholders of RS (the IDA and TSX Inc.) and the CSA to create a new
SRO, provisionally called New Regco. If these approvals are obtained, New Regco will be the SRO that will provide regulation services to each of
Toronto Stock Exchange and TSX Venture Exchange. New Regco will monitor and enforce compliance with UMIR and perform other regulatory
functions that our equity exchanges may delegate to New Regco.
NGX 9
In March 2004, we acquired NGX, a Canadian-based energy exchange that provides customers with an electronic platform that trades and pro-
vides clearing and settlement services for natural gas and electricity contracts. NGX generates trading and clearing revenue by applying fees to all
transactions based on the contract volume traded or centrally cleared through the exchange, and charges a monthly fixed subscription fee to each
trading customer who trades on NGX. In October 2006, we added to our energy business when we acquired Watt-Ex, a provider of ancillary services
to the Alberta Electric System Operator which is used to balance supply and demand on the Alberta grid.
7
8
9
The “Competitive Trading Fees” section above contains certain forward-looking statements. Please refer to “Forward-Looking Information, Risks and Uncertainties” for a discussion of
risks and uncertainties related to such statements.
The “Regulation” section above contains certain forward-looking statements. Please refer to “Forward-Looking Information, Risks and Uncertainties” for a discussion of risks and uncer-
tainties related to such statements.
The “NGX” section above contains certain forward-looking statements. Please refer to “Forward-Looking Information, Risks and Uncertainties” for a discussion of risks and uncertainties
related to such statements.
16 TSX Group Annual Report | 2007
•
•
NGX’s revenue from trading and clearing activities for the year ended December 31, 2007 was $21.6 million, or 5% of 2007 revenue.
NGX’s revenue from trading and clearing activities for the year ended December 31, 2006 was $19.1 million, or 5% of 2006 revenue.
On March 28, 2007, we announced the formation of a transformative technology and clearing alliance for the North American natural gas and Canadian
power markets between NGX and ICE. Scheduled for launch in the first quarter of 2008, the alliance brings together the respective strengths of NGX,
Canada’s leading energy exchange and North America’s leading physical clearing and settlement facility in energy, and ICE, a world leading electronic
energy and soft commodities marketplace. Under the arrangement, North American physical natural gas and Canadian electricity products will be
offered through ICE’s leading electronic commodities trading platform. NGX will serve as the clearinghouse for these products.
Shorcan
In December 2006, we acquired Shorcan, Canada’s first fixed income IDB. Shorcan provides a facility for matching orders for federal, provincial, corporate
and mortgage bonds and treasury bills for anonymous buyers and sellers in the secondary market. We estimate that the IDB market represents about
34% of total fixed income trading in Canada and that Shorcan’s share of this market is about 33%, or $782 billion in 2007.
Shorcan charges a commission on orders that are matched against an existing posted order. These fees are built into the settlement prices of trades
and revenues are generated on trade date.
• Shorcan’s revenue from trading for the year ended December 31, 2007 was $13.1 million, or 3% of 2007 revenue.
• Shorcan’s revenue from trading for the one month following the acquisition in December 2006 was $0.9 million.
Market Data – TSX Datalinx
Through TSX Datalinx, we sell our real-time equity quotation and trading data, historical data, as well as third party capital markets information
and corporate information to market participants on a global basis. Timely and comprehensive information about market activity and listed issuers
assists POs and investors in their decision-making processes and facilitates efficient markets.
•
•
In 2007, market data revenue represented $110.2 million or 26% of our revenue. Market data revenue was $77.6 million on Toronto
Stock Exchange, $23.2 million on TSX Venture Exchange, $8.8 million from PC-Bond and $0.6 million on NGX.
In 2006, market data revenue represented $86.9 million or 25% of our revenue. Market data revenue was $65.7 million on Toronto
Stock Exchange, $19.2 million on TSX Venture Exchange, $1.3 million from PC-Bond (following the acquisition in October 2006)
and $0.7 million on NGX.
Real-Time Market Data Products 10
Trading activity on our equity exchanges produces a stream of real-time data reflecting orders and executed transactions. This stream of data is
packaged by TSX Datalinx into real-time market data products and delivered, directly or indirectly, to end users via more than 100 Canadian and
global market data vendors that sell data feeds and desktop information services. As at December 31, 2007, there were over 160,000 professional and
equivalent real-time data subscriptions in both Canada and the United States, compared with over 139,000 at December 31, 2006. These information
services allow end users to view the real-time market activity of several marketplaces, as well as to view supporting reference data, corporate actions,
news and foreign exchange rates. These services also enable the end user to transfer the data to applications to manipulate and analyze the data and
facilitate automated trading. We also provide market data feeds directly to end users in order to address their requirements for reduced latency.
Our market data distribution platform offers a flexible and reliable environment over which we distribute a wide range of data simultaneously to a
large number of clients. We carry data from other sources including CanDeal and stocks traded on the Canadian Trading and Quotation System Inc.
(CNQ). In 2005, we added a number of new products including real time interbank foreign exchange rates, TSX/CP Equities News™, as well as data
from Perimeter Financial Corp. In 2006, we entered into an agreement with TriAct Canada Marketplace LP to distribute their data. This expanded
content set has enhanced our delivery of relevant and timely Canadian capital markets information to our global client base. In December 2007,
TSX Datalinx announced that it will distribute Instinet’s Chi-X Canada ATS order and trade data.
In October 2007, we announced that we will be launching a consolidated market data feed of pre and post trade data for equity marketplaces
in Canada. The Consolidated Data Feed (CDF™) will be independently operated and the feed will be distributed in a common standard format so
that market participants and technology intermediaries can easily and quickly integrate the data into their current applications. This TSX Datalinx
offering will reduce the time to market and costs of building to multiple feed formats for these stakeholders and will help facilitate best execution
and trade through obligations.
10
The “Real-Time Market Data Products” section above contains certain forward-looking statements. Please refer to “Forward-Looking Information, Risks and Uncertainties” for a discus-
sion of risks and uncertainties related to such statements.
Management’s Discussion and Analysis
17
Subscribers for TSX Datalinx data generally pay fixed monthly rates for access to real time streaming data, which differ depending on the number
of end users and the depth of information accessed. In addition to streaming data, many individual investors consume real time quote data, for
which we charge on a per quote basis. Real-time data fees are primarily driven by the number of data subscriptions and therefore are partly re-
lated to industry employment. We charge market data vendors and direct feed clients a fixed monthly fee for access to data feeds. The direct feed
business has been growing due to the increase in automated trading. Sales of real-time market data represented approximately 84% of our market
data revenue in 2007 and approximately 90% in 2006.
Customers currently access NGX data through a fully electronic, independent trading platform. NGX applies a monthly fixed viewing fee to firms who
wish to subscribe to market data services.
Historical Market Data Products and Corporate Information
Historical market data products include market information (such as historical pricing, index constituents and weightings) and corporate information
(such as dividends and corporate actions). This information is generally made available at the end of the trading day and is used in research, analysis
and trade clearing.
Generally, we sell historical data products for a fixed amount per product accessed. Fees vary depending on the type of end use. Data products to be
used for commercial purposes require an enterprise-wide license for internal redistribution. We produce two electronic reference data publications
for each exchange, a Daily Record and a Monthly Review, both of which are sold on a subscription and firm license basis.
Distribution
TSX Datalinx content is available directly to clients in a variety of ways:
• via a low latency data feed known as TSX Direct,
• via tsxdatalinx.com,
•
through a variety of market data vendors,
• by telecommunications providers and extranets, and
• via our tsx.com website.
Several direct data feed clients have also engaged us to provide managed services. Under this arrangement, we have co-located their data infrastructure
within our data centres to reduce latency and provide bandwidth efficiencies. In 2006, TSX Datalinx re-launched the tsx.com website which provides
delayed market data and listed issuer information as well as information about TSX Group and our business. We also introduced online advertising
which generates market data revenue.
In June 2007, TSX Datalinx announced its plan to expand the availability of market data information for its customers across North America
by becoming a market centre on the Secure Financial Transaction Infrastructure (SFTI). SFTI is the NYSE TransactTools communications network
dedicated to the financial industry. SFTI is specifically designed to meet the financial industry’s need for a highly resilient data communications
infrastructure while providing for low latency communications between entities. Through SFTI, customers will have more efficient access to real
time market information with extremely low latency.
Index Products – Equities
We have long supported indices to measure equity market performance. Toronto Stock Exchange introduced the first Canadian indices in 1934.
We introduced the Toronto 35 index in 1987, which was the basis for the world’s first exchange-traded fund, TIPS® (Toronto 35 Index Participation
Units). TSX Datalinx and Standard & Poor’s (S&P) collaborated in 1998 to bring global recognition to the Canadian markets.
Together, we introduced several indices, including the S&P/TSX 60 Index (the large capitalization index for the Canadian equity market), and in 2002,
we revised and rebranded the S&P/TSX Composite Index (the Index). The Index (formerly the TSE 300 Composite Index®) is the most quoted index
for the Canadian equity market, appearing frequently in business media which strengthens our brand profile. In December 2006, we launched the
S&P/TSX Global Gold Index in conjunction with S&P. It is an international benchmark that tracks the world’s leading gold companies.
In August 2007, we announced an agreement between TSX Inc. and S&P to secure exclusive use of S&P/TSX equity indices in connection with options,
futures and options on futures, beginning in 2009. Also in 2007, we launched four new indices in conjunction with S&P. The S&P/TSX Preferred Share
Index is comprised of preferred shares trading on Toronto Stock Exchange that meet criteria relating to minimum size, liquidity, issuer rating and
exchange listing. The S&P/TSX Global Mining Index is comprised of the world’s leading mining issuers with holdings and projects all over the globe.
The S&P/TSX Equity 60 Index is comprised of the S&P/TSX 60 Index constituents excluding income trusts. The S&P/TSX Canadian Dividend Aristocrats
Index is designed to measure the performance of S&P Citigroup Broad Market Index (BMI) Canada constituents that have followed a managed-
dividends policy of consistently increasing dividends every year for at least seven years. The S&P/TSX Canadian Dividend Aristocrats Index captures
both sustainable dividend income and capital appreciation potential which are both key factors in investors’ total return expectations.
18 TSX Group Annual Report | 2007
TSX Datalinx has an arrangement with S&P under which we share license fees received from organizations that create products, such as mutual funds
and exchange-traded funds (ETFs), based on the S&P/TSX indices. In general, these license fees are based on a percentage of funds under management
in respect of those products.
Index and Analytics Products – Fixed Income
In October 2006, we acquired PC-Bond comprising the leading Canadian fixed income indices, PC-Bond analytics applications and related data
assets. These indices, renamed DEX Fixed Income Indices in October 2007, are the most widely used fixed income performance benchmarks
in Canada. The best known of these indices is the Universe Bond Index (now the DEX Universe Bond Index), which tracks the broad Canadian bond
market. In addition to the DEX Universe Bond Index, we now publish a variety of sub-indices for different term and credit sectors, as well as indices
for tracking other segments of the market, including high yield bonds, Euro Canadian bonds, maple bonds (Canadian dollar bonds issued by a non-
Canadian issuer), yankee bonds, inflation-indexed real return bonds, treasury bills and residential and commercial mortgage-backed securities.
Since 1947, Scotia Capital Inc. had been the sole price provider for these indices, which measure the performance of the Canadian fixed income
market. Since acquisition of these fixed income indices, we have moved to multi-dealer pricing for the DEX Fixed Income Indices. As of October 1,
2007, ten dealer pricing sources have been added in providing input pricing for the DEX Universe Bond Index.
Changes to Market Data Pricing for 2008 11
In September 2007, we announced changes to the fee structure for market data products. This followed a review of market data fees on other major
global exchanges, over 100% growth in our quote message rates, and the significant appreciation of the Canadian dollar against the U.S. dollar
during 2007. Based on recent market activity at that time, it was anticipated that total market data revenue would have increased by about four
to six percent on an annual basis as a result of these changes. It was anticipated that market data sales in Canadian dollars would have increased
by about one to two percent and that market data sales in U.S. dollars would have increased by about eleven to twelve percent. Actual market data
revenue will depend on future sales activity and product mix.
Business Services and Other Revenue
We have assembled a team of exchange technology professionals with extensive industry experience in installing and operating trading and related
systems at other global exchanges. We currently provide RS technology and related services necessary for it to conduct its review and real-time moni-
toring of trading. RS pays us fees for these services, negotiated on an arm’s length basis, in accordance with an agreement which also details service
levels. We also have an agreement with CanDeal to provide technology services for a fee in support of its institutional fixed-income trading system.
•
•
In 2007, business services and other revenue represented $11.3 million, or 3% of our revenue.
In 2006, business services and other revenue represented $11.1 million, or 3% of our revenue.
Year Ended December 31, 2007 Compared with Year Ended December 31, 2006
Net income was $148.7 million, or $2.19 per common share ($2.17 on a diluted basis) in 2007, compared with net income of $131.5 million, or
$1.92 per common share ($1.91 on a diluted basis) for 2006, representing an increase of 13%, largely due to the higher revenue partially offset by
higher expenses and income taxes.
Earnings per share prior to a reduction in the value of the future tax asset* was $2.41 ($2.39 on a diluted basis) for 2007, a 16% increase (15% on a
diluted basis) over the 2006 earnings per share prior to a reduction in the value of the future tax asset* of $2.08 ($2.07 on a diluted basis). In 2007,
the future tax asset was reduced, and income tax expense increased by $15.1 million, primarily as a result of decreases in federal corporate income
tax rates which were enacted in June and December 2007. The adjustment resulted in a reduction in net income of $15.1 million, or 22 cents per
common share (on both a basic and diluted basis). In 2006, the future tax asset was reduced, and income tax expense increased primarily as a result
of decreases in federal corporate income tax rates enacted in June 2006. The adjustment resulted in a reduction in net income of $11.0 million, or
16 cents per common share (on both a basic and diluted basis).
11
The “Changes to Market Data Pricing for 2008” section above contains certain forward-looking statements. Please refer to “Forward-Looking Information, Risks and Uncertainties” for a
discussion of risks and uncertainties related to such statements.
Management’s Discussion and Analysis
19
The following is a reconciliation of earnings per share to earnings per share prior to a reduction in the value of the future tax asset*:
Reconciliation for 2007 and 2006
Earnings per share
Adjustment related to reduction of the future tax asset
Earnings per share prior to a reduction in the value of the
future tax asset*
$
$
$
Revenue
2007
Basic
2.19
0.22
$
$
Diluted
2.17
0.22
$
$
2006
Basic
1.92
0.16
$
$
Diluted
1.91
0.16
2.41
$
2.39
$
2.08
$
2.07
Revenue was $424.7 million for 2007, up $71.9 million, or 20% compared with $352.8 million for 2006, reflecting increased issuer services, trading
and market data revenue. Revenue in 2007 included $31.4 million from Shorcan, Watt-Ex, PC-Bond (acquired in Q4/06) and Equicom, acquired in
Q2/07 (the acquisitions) as compared with $2.6 million in 2006.
Issuer Services Revenue (previously Listing Revenue)
The following is a summary of issuer services revenue reported and issuer services fees billed* (reconciled below in this section) in 2007 and 2006.
Reported
Billed*
(in millions of dollars)
Initial listing fees
Additional listing fees
Sustaining listing fees**
Other issuer services
Total issuer services fees
2007
13.8
$
44.0
$
68.0
$
$
8.1
$ 133.9
$
$
$
2006
11.4
35.9
61.2
–
$ 108.5
$
$
$
$
$
2.4
8.1
6.8
8.1
25.4
2007
21% $
32.3
23% $ 104.1
68.0
11% $
$
8.1
23% $ 212.5
–
$
$
$
2006
28.4
86.3
61.2
–
$ 175.9
$ increase % increase
14%
21%
11%
–
21%
3.9
17.8
6.8
8.1
36.6
$
$
$
$
$
$ increase % increase
Initial and additional listing fees are non-refundable fees paid by listed issuers for the listing or reserving of securities. These fees are recorded
as “deferred revenue – initial and additional listing fees” and recognized on a straight-line basis over an estimated service period of ten years.
The estimated service period of ten years was determined by conducting an historical review of listing activity. We determined that the average
period of time that an issuer remained listed on Toronto Stock Exchange was approximately ten years. In addition, turnover rates were calculated for
a Toronto Stock Exchange listed issuer and for a TSX Venture Exchange listed issuer, and were determined to be in the range of ten to twelve years.
Examining historical data allowed us to consider the impact of economic cycles and other trends in capital markets over time. The service period
selected affects the rate at which deferred revenue is recognized, as well as the value of the future tax asset related to these fees.
In the case of Toronto Stock Exchange, effective April 2007, customers are billed for initial and additional listing fees. Prior to this date, these fees
were paid upon the listing or reserving of securities which is still the practice on TSX Venture Exchange. With the adoption of a new system, there is
now a lag between when securities are issued or reserved and when these listing fees are paid for Toronto Stock Exchange listed issuers.
The following is a reconciliation of initial and additional listing fees billed* to initial and additional listing fees reported:
Initial Listing Fees (in millions of dollars)
Initial listing fees billed*
Initial listing fees billed* and deferred to future periods
Recognition of initial listing fees billed* and previously included in deferred revenue
Initial listing fees revenue reported
Additional Listing Fees (in millions of dollars)
Additional listing fees billed*
Additional listing fees billed* and deferred to future periods
Recognition of additional listing fees billed* and previously included in deferred revenue
Additional listing fees revenue reported
$
$
$
$
$
$
$
$
2007
32.3
( 31.8)
13.3
13.8
$
$
$
$
2007
104.1
(102.4)
42.3
44.0
$
$
$
$
2006
28.4
(28.0)
11.0
11.4
2006
86.3
(84.9)
34.5
35.9
*
**
See discussion under the heading Non-GAAP Financial Measures.
Sustaining listing fees billed, as shown in this table, represents the amount recognized for accounting purposes during the period. Sustaining listing fees are billed during the first quar-
ter of the year, recorded as deferred revenue and amortized over the year on a straight line basis.
20 TSX Group Annual Report | 2007
•
Initial and additional listing fees reported increased due to capital market activity and listing fees increases during the period from April 1,
1997 to December 31, 2007 compared with the period from April 1, 1996 to December 31, 2006. Initial and additional listing fees billed* in
2007, as compared with 2006, reflect changes in the number and value of securities listed and reserved in the respective periods, as well as
changes to the pricing model for each equity exchange that were effective January 1, 2007.
•
The increase in Sustaining listing fees reflected the overall higher market capitalization of listed issuers at the end of 2006 compared with
the end of 2005. Issuers listed on Toronto Stock Exchange and TSX Venture Exchange pay annual fees primarily based on their market
capitalization at the end of the prior calendar year, subject to minimum and maximum fees. In addition, revenue from sustaining listing fees
increased due to fee increases on each equity exchange that were effective January 1, 2007.
•
Other issuer services includes revenue of $7.7 million from Equicom, acquired in June 2007.
Trading and Related Revenue
(in millions of dollars)
Capital markets:
Toronto Stock Exchange
TSX Venture Exchange
Shorcan
Capital markets revenue
Energy markets revenue
Total trading and related revenue
Capital Markets
2007
101.9
32.7
13.1
147.7
21.6
169.3
$
$
$
$
$
$
$
$
$
$
$
$
2006
$ increase
% increase
98.3
28.0
0.9
127.2
19.1
146.3
$
$
$
$
$
$
3.6
4.7
12.2
20.5
2.5
23.0
4%
17%
1,356%
16%
13%
16%
•
•
The increase was primarily attributable to the inclusion of revenue of $13.1 million from Shorcan, acquired in December 2006.
The volume of securities traded in 2007 on Toronto Stock Exchange increased by 17% over 2006 (96.1 billion securities in 2007 versus
82.0 billion securities in 2006) and the volume of securities traded in 2007 on TSX Venture Exchange increased by 41% over 2006
(53.2 billion securities in 2007 versus 37.7 billion securities in 2006). The total volume of securities traded in 2007 on both exchanges
increased by 25% over 2006 (149.3 billion securities in 2007 versus 119.7 billion securities in 2006).
•
The impact from the growth in the volume of securities traded was partially offset by the impact from converting to a volume-based fee
structure from a value-based fee model effective July 1, 2006 and from pricing changes which were effective November 1, 2007.
Energy Markets
•
•
The increase was partially due to the inclusion of revenue of $1.6 million from Watt-Ex in 2007 compared with $0.3 million in 2006, following
the acquisition in October, 2006.
In 2007, the volumes traded or cleared in natural gas and electricity contracts on NGX, excluding Watt-Ex which operates a procurement
system, increased by 14% over 2006 (11.2 million terajoules in 2007 versus 9.8 million terajoules in 2006). In 2007, NGX deferred more
revenue related to longer-term contracts than in 2006, which somewhat offset the increase in revenue.
Market Data Revenue
(in millions of dollars)
$
2007
110.2
$
2006
86.9
$
$ increase
23.3
% increase
27%
•
•
Market data revenue increased due to a 16% increase in the average number of professional and equivalent real-time market data
subscriptions in 2007 versus 2006. There were over 160,000 professional and equivalent real-time market data subscriptions at December 31,
2007. This increase reflects higher sales to U.S. customers, additional subscriptions for TSX Venture Exchange data and increased sales of
premium products.
The increase was also due to the inclusion of $8.8 million in revenue from PC-Bond, compared with $1.3 million in 2006 (following the
acquisition in October 2006), and revenue from on-line delivery of data to retail investors and direct-to-client low latency data feeds for
algorithmic traders.
• The increase was also attributable to fee changes that were effective January 1, 2007.
Management’s Discussion and Analysis 21
•
The increase was partially offset by lower revenue recoveries related to under-reported usage of real-time quotes which were
$3.7 million in 2007 as compared with $5.6 million in 2006.
•
The increase was also partially reduced by the negative impact of the appreciation of the Canadian dollar against the U.S. dollar since 2006.
Business Services and Other Revenue
(in millions of dollars)
$
2007
11.3
$
2006
11.2
$ increase
0.1
% increase
1%
• Business services revenue increased due to providing additional services to existing and new customers.
• We billed RS $7.2 million in 2007 for technology related services, unchanged from 2006.
Expenses
Expenses were $181.6 million in 2007, an increase of $33.3 million, or 22%, compared with $148.3 million in 2006. There were $28.3 million of
expenses (including our amortization of intangible assets) related to the business operations of the acquisitions as compared with $2.2 million in
2006. The increase in expenses was partially offset by the impact of capitalizing $5.1 million of Compensation and benefits costs and $0.6 million of
General and administration costs related to the internal development of the TSX Quantum trading engine.
Compensation and Benefits
(in millions of dollars)
$
2007
96.3
$
2006
79.0
$
$ increase
17.3
% increase
22%
•
•
•
•
Compensation and benefits costs increased by $13.4 million due to costs related to the business operations of the acquisitions.
There were higher expenses associated with annual salary increases, higher overall performance incentive accruals and benefit costs.
In addition to the costs associated with the acquisitions, there was also an increase of $2.7 million in organizational transition costs in our
core business compared with 2006.
The increase in 2007 compared with 2006 was partially offset by the impact of capitalizing $5.1 million of internal development costs related
to the TSX Quantum trading engine.
There were 603 employees at December 31, 2007 versus 548 at December 31, 2006. On June 1, 2007, we acquired Equicom, which has
58 employees. In addition, in Q2/07, 13 employees that perform investigative research, previously employed by Market Regulation
Services Inc., were transferred to TSX Inc. The insourcing of the investigative research function has resulted in a reduction of General and
administration costs. These increases were partially offset by a net reduction of 16 employees in our core businesses.
Information and Trading Systems
(in millions of dollars)
$
2007
26.5
$
2006
22.0
$
$ increase
4.5
% increase
20%
•
•
Information and trading systems costs increased by $2.0 million due to expenses related to the business operations of the acquisitions.
There were also higher maintenance costs.
The increase was also due to higher expenses associated with providing TSXconnect, an investor relations product that delivers market data,
analytic and competitive information, to our listed issuers.
*
See discussion under the heading Non-GAAP Financial Measures.
22 TSX Group Annual Report | 2007
General and Administration
(in millions of dollars)
$
2007
43.0
$
2006
34.2
$
$ increase
8.8
% increase
26%
•
•
General and administration costs increased by $6.6 million due to expenses related to the business operations of the acquisitions.
The increase was also attributable to higher fees paid to external advisors primarily relating to the initiatives that were announced in Q1/07,
as well as higher directors’ fees and increased capital tax.
•
General and administration costs do not include $3.1 million of fees paid to external advisors relating to the proposed combination of
TSX Group with MX, announced on December 10, 2007. These costs were capitalized and are included in Other Assets.
•
•
The increase was partially offset by lower costs resulting from the insourcing of the investigative research function. In addition, $0.6 million
of internal development costs related to the TSX Quantum trading engine were capitalized.
RS billed us $3.5 million for regulation services in 2007, as compared with $3.9 million in 2006. The decrease reflects lower costs from the
insourcing mentioned above.
Amortization
(in millions of dollars)
$
2007
15.8
$
2006
13.0
$
$ increase
2.8
% increase
22%
•
Amortization costs increased by $4.1 million reflecting higher amortization associated with the acquisitions, partially offset by reduced
depreciation of tangible assets.
Income (Loss) from Investment in Affiliate
(in millions of dollars)
•
Income (loss) from investment in affiliate represents our share of CanDeal’s income for 2007 based on our 47% interest in CanDeal.
The improvement in earnings is due to CanDeal’s continued progress in adding buy-side institutional investors, the introduction of
transaction fees and continued cost containment measures.
$
2007
0.4
$
2006
( 0.1)
$
$ increase
0.5
Investment Income
(in millions of dollars)
$
2007
13.9
$
2006
14.4
($ decrease)
(0.5)
$
(% decrease)
(3%)
•
Investment income decreased due to lower returns on short term bond and mortgage fund investments, partially offset by improved returns
from money market investments.
Income Taxes
(in millions of dollars)
$
2007
108.7
$
2006
87.4
$
$ increase
21.3
2007
42%
2006
40%
Effective tax rate (%)
•
•
The effective tax rate in both 2006 and 2007 was higher than our effective statutory tax rate of approximately 35% primarily due to a
reduction in the value of the future tax asset in both years.
In 2007, there was an increase of $15.1 million in income tax expense due to a reduction in the value of the future tax asset. In June 2007,
the federal government enacted changes in corporate income tax rates for 2011 and beyond. As well, in December 2007, the federal
government enacted further changes in corporate income tax rates for 2008 to 2012 and beyond.
Management’s Discussion and Analysis 23
•
In 2006, there was an increase of $11.0 million in income tax expense, primarily due to a reduction in the value of the future tax asset.
In June 2006, the federal government enacted legislation to reduce corporate income tax rates for 2008 to 2010 and beyond, which was the
primary reason for the reduction in the value of the future tax asset.
Liquidity and Capital Resources
Cash and Marketable Securities
(in millions of dollars)
$
2007
302.8
$
2006
322.1
($ decrease)
( 19.3)
$
•
The decrease was primarily due to the payment of four dividends of $0.38 per common share, or $103.5 million in aggregate and by
payments totalling $107.6 million relating to the repurchase of 2,399,862 common shares under a normal course issuer bid (NCIB)
in 2007. In addition, we invested $31.1 million of cash in acquisitions (including intangible assets) and capital expenditures during 2007.
These decreases were offset by $221.7 million in cash generated from operations in 2007.
Total Assets
(in millions of dollars)
$
2007
1,523.9
$
2006
1,572.8
($ decrease)
(48.9)
$
•
•
Total assets decreased primarily due to lower energy contracts receivable of $745.4 million at December 31, 2007 related to the clearing
operations of NGX, compared with $889.4 million at the end of 2006. The reduced level of receivables reflected lower natural gas prices
at the end of December 2007 compared with the end of December 2006. As the clearing counterparty to every trade, NGX also carries offsetting
liabilities in the form of energy contracts payable, which were $745.4 million at December 31, 2007 compared with $889.4 million at the
end of 2006.
The overall decrease was partially offset by an increase to current assets following a change in accounting policy adopted effective January
1, 2007. We recorded $74.9 million related to the fair value of open energy contracts as at December 31, 2007. NGX also carried offsetting
liabilities related to the fair value of open energy contracts which were $74.9 million at December 31, 2007.
Shareholders’ Equity
(in millions of dollars)
$
2007
171.9
$
2006
227.0
($ decrease)
(55.1)
$
•
•
•
Shareholders’ equity decreased primarily due to dividend payments totaling $103.5 million and the repurchase during 2007 of 2,399,862
common shares at a cost of $107.6 million under our NCIB. The decrease was partially offset by net income of $148.7 million in 2007,
including net income from NGX of $4.3 million in 2007, as compared with net income from NGX of $4.7 million in 2006. NGX’s net income
decreased reflecting increased General and administration costs associated with our arrangement with ICE, which was somewhat offset by
higher revenue.
Under the NCIB, we announced that we intend to repurchase up to 6,841,051 of our common shares of which 2,399,862 were repurchased
in 2007. These purchases, carried out through the facilities of Toronto Stock Exchange and made in accordance with its requirements,
will terminate on August 6, 2008 or such earlier date as we complete our purchases. Effective December 10, 2007, we terminated our
pre-defined plan with our appointed broker that permitted us to repurchase our common shares at times when we would not ordinarily be
active in the market.
At December 31, 2007 there were 66,278,370 common shares issued and outstanding. In 2007, 256,968 common shares were issued on the
exercise of share options. At December 31, 2007, 4,421,950 common shares were reserved for issuance upon the exercise of options granted
under the share option plan. At December 31, 2007, there were 973,522 options outstanding.
24 TSX Group Annual Report | 2007
•
•
We have obtained approval from Toronto Stock Exchange to issue up to 1.5 million common shares in connection with the purchase price
payable for NTP if we exercise our right to acquire NTP from Enbridge and Circuit Technology. In addition, we have obtained conditional
approval from Toronto Stock Exchange to issue up to 15.5 million common shares in connection with the amalgamation with MX.
At January 29, 2008, there were 66,283,370 common shares issued and outstanding and 967,818 options outstanding under the share
option plan.
Cash Flows from Operating Activities
(in millions of dollars)
Cash Flows from Operating Activities
$
2007
221.7
$
2006
189.5
Increase in cash
32.2
$
Cash Flows from Operating Activities were $32.2 million higher in 2007 compared with 2006 due to:
(in millions of dollars)
Net income
Amortization
Increase/(decrease) in future tax asset
Increase in accounts receivable and prepaid expenses
Net increase in accounts payable and accrued liabilities
Increase in deferred revenue that results from not recognizing a portion of listing
fees billed in the year
(Decrease) in income taxes payable
Net increase in other items
Cash Flows from Operating Activities
$
$
$
$
$
$
$
$
$
2007
148.7
15.8
(3.1)
(15.2)
7.0
78.0
(11.5)
2.0
221.7
$
$
$
$
$
$
$
$
$
2006
131.5
13.0
(12.6)
(6.1)
0.6
Increase/(decrease)
in cash
17.2
2.8
9.5
(9.1)
6.4
$
$
$
$
$
67.3
(7.4)
3.2
189.5
$
$
$
$
10.7
(4.1)
(1.2)
32.2
Cash Flows from (used in) Financing Activities
(in millions of dollars)
Cash Flows from (used in) Financing Activities
$
2007
(207.4)
$
2006
(85.8)
Increase/(decrease)
in cash
(121.6)
$
Cash Flows from (used in) Financing Activities were $121.6 million higher in 2007 compared with 2006 due to:
(in millions of dollars)
(Decrease) in obligation under capital lease
Proceeds from exercised options
Dividends paid on common shares
Repurchase of common shares under NCIB
Cash Flows from (used in) Financing Activities
$
$
$
$
$
2007
(0.7)
4.4
(103.5)
(107.6)
(207.4)
$
$
$
$
Increase/(decrease)
in cash
0.2
(0.9)
(13.3)
(107.6)
(121.6)
$
$
$
$
$
2006
(0.9)
5.3
(90.2)
–
(85.8)
Management’s Discussion and Analysis 25
Cash Flows from (used in) Investing Activities
(in millions of dollars)
Cash Flows from (used in) Investing Activities
$
2007
2.1
$
2006
(95.2)
Increase in cash
97.3
$
Cash Flows from Investing Activities were $97.3 million higher in 2007 compared with 2006 due to:
(in millions of dollars)
Capital Expenditures (net proceeds on disposal) primarily related to technology
investments and leasehold improvements
Payments related to option to purchase NetThruPut Inc. shares
Acquisitions (net of cash acquired)
Additions to intangible assets including TSX Quantum internal development costs
Net sale (purchase) of marketable securities
Cash Flows from (used in) Investing Activities
$
$
$
$
$
$
200 7
(6.5)
(10.3)
(8.2)
(6.2)
33.3
2.1
$
$
$
$
Increase/(decrease)
in cash
$
$
$
$
$
$
(2.3)
(10.3)
45.5
(6.2)
70.6
97.3
2006
(4.2)
–
(53.7)
–
(37.3)
(95.2)
Other Matters 12
The recognition order of TSX Group and TSX Inc. contains certain financial viability tests that must be met. If TSX Inc. fails to meet any of these
tests for a period of more than three months, TSX Inc. will not, without the prior approval of the Director of the Ontario Securities Commission, pay
dividends (among other things) until the deficiencies have been eliminated for at least six months or a shorter period of time as agreed by Ontario
Securities Commission staff.
We currently have no external borrowings. Based on our current business operations and model, including our plans to combine our operations with
those of MX to create TMX Group, we believe that we have sufficient resources to operate and continue to grow our business (See “Combination
with MX” under the section “Strategies and Outlook” for a discussion of the transaction and related financing of $430.0 million. We have also
entered into a three-year, $50.0 million revolving credit facility). Future investments opportunities that may require debt financing could be limited
by the financial viability tests mentioned above.
Financial Instruments
Cash and Marketable Securities
Our financial instruments include cash and investments in marketable securities. This primarily includes units in a money market fund and a short-
term bond and mortgage fund. These investments are recorded at fair value. The primary risks related to these financial instruments are variation in
interest rates and counterparty default. Short-term interest rate risk is managed by maintaining a mix between amounts invested in the money market
fund and the short-term bond and mortgage fund. We manage credit risk by restricting investments to counterparties with a credit rating of BBB or
higher as determined by DBRS Limited. Please refer to “Change in Accounting Policy – Financial Instruments and Comprehensive Income”.
Derivative Financial Instruments
Total Return Swaps
We have entered into total return swaps which synthetically replicate the economics of TSX Inc. purchasing our shares as a partial economic hedge
to the share appreciation rights of deferred share units (DSUs) and restricted share units (RSUs) that are awarded to our directors and employee.
The contracts are settled in cash upon maturity. The obligation to unit holders is reflected on the balance sheet. To manage counterparty risk, we
entered into these total return swaps with a Schedule I Canadian chartered bank. Please refer to “Change in Accounting Policy – Financial Instrments
and Comprehensive Income”.
12
The “Other Matters” section above contains certain forward-looking statements. Please refer to “Forward-Looking Information, Risks and Uncertainties” for a discussion of risks and
uncertainties related to such statements.
26 TSX Group Annual Report | 2007
NGX – Fair Value of Open Energy Contracts
As part of its clearing operations, NGX becomes the central counterparty to each transaction. We record NGX’s energy contract receivables and offset-
ting payables for all contracts where physical delivery has occurred or financial settlement amounts have been determined prior to the period end
but payments have not been made. The fair value at the balance sheet date of the undelivered physically settled trading contracts and the forward
financially settled trading contracts is recognized in the consolidated assets and liabilities as open energy contracts. There is no impact on the con-
solidated statement of income. To manage counterparty risk, NGX requires each counterparty (the Contracting Party) to provide collateral in the form
of cash or letters of credit based on the margins required for its unsettled contractual obligations, which may be accessed in the event of a default
by such Contracting Party. Please refer to Change in Accounting Policy – NGX – Fair Vale of Open Energy Contracts and NGX Collateral Arrangements
and Clearing Backstop Fund.
NGX Collateral Arrangements and Clearing Backstop Fund 13
As part of its clearing operations, NGX becomes the counterparty to each transaction conducted through its electronic trading platform. To backstop
its clearing operations, NGX currently has a credit agreement in place with a Canadian chartered bank. We are NGX’s guarantor for this credit agree-
ment up to a maximum of US$100 million. Effective November 1, 2007, to accommodate the anticipated growth in transaction activity, the previously
secured guarantee of $30 million was replaced by the unsecured guarantee of US$100 million. In addition, NGX has covenanted under the agreement
to maintain a minimum of $9 million of tangible net worth. If NGX suffers a loss on its clearing operations, it could lose its entire tangible net worth.
The bank could also realize up to a maximum of US$100 million on our unsecured guarantee, to the extent required to cover the loss.
NGX requires each Contracting Party to provide collateral in the form of cash or letters of credit based on the margins required for its unsettled
contractual obligations, which may be accessed by NGX in the event of a default by such Contracting Party.
The collateral provided in the form of cash (the cash collateral deposits) is segregated in individually designated bank accounts held by NGX at a
major Canadian chartered bank. The cash collateral deposits, together with letters of credit provided by the Contracting Parties, exceed all of the
outstanding credit exposure, as determined by NGX in accordance with its margining methodology, for all its unsettled contractual obligations at any
point in time.
Contractual Obligations
(in thousands of dollars)
Capital Lease Obligations
Operating Leases
Other Obligations
Total
$
$
Total
223
78,560
72,196
150,979
Selected Annual Information
$
Less than 1 year
152
16,004
17,572
33,728
$
1 – 3 years
71
32,778
27,884
60,733
$
$
4+ years
–
29,778
26,740
56,518
$
$
(in thousands of dollars, except per share amounts)
Revenue
Net income
Total assets
Long-term liabilities
Deferred revenue – initial and additional listing fees (current and long-term)
Earnings per share:
Basic
Diluted
Cash dividends declared per common share
2007
424,724
148,697
1,523,919
42,515
424,674
2.19
2.17
1.52
$
$
$
$
$
$
$
$
2006
352,847
131,524
1,572,838
43,450
346,133
1.92
1.91
1.32
$
$
$
$
$
$
$
$
2005
289,964
103,353
1,557,225
30,508
278,775
1.52
1.51
0.90
$
$
$
$
$
$
$
$
13
The “NGX Collateral Arrangements and Clearing Backstop Fund” section above contains certain forward-looking statements. Please refer to “Forward-Looking Information, Risks and
Uncertainties” for a discussion of risks and uncertainties related to such statements.
Management’s Discussion and Analysis 27
Revenue, Net Income and Earnings per Share
2007
2006
•
•
•
•
For the year ended December 31, 2007, net income was $148.7 million, or $2.19 per common share ($2.17 on a diluted basis) on total
revenue of $424.7 million, representing an increase of $17.2 million, or 13%, compared with $131.5 million, or $1.92 per common
share ($1.91 on a diluted basis) for the year ended December 31, 2006.
The 2007 results reflect significantly higher revenue across all of the primary revenue streams in our core business and also include
$31.4 million of revenue from the acquisitions compared with $2.6 million in 2006. This increase in revenue was partially offset by an
increase in overall expenses including $28.3 million relating to the acquisitions, compared with $2.2 million in 2006. In 2007, there was
a higher income tax expense primarily due to a larger decrease in the value of our future tax asset compared with 2006.
For the year ended December 31, 2006, net income was $131.5 million, or $1.92 per common share ($1.91 on a diluted basis) on total
revenue of $352.8 million, representing an increase of $28.1 million, or 27%, compared with $103.4 million, or $1.52 per common
share ($1.51 on a diluted basis) for the year ended December 31, 2005.
The 2006 results reflect significantly higher revenue across all of the primary revenue streams. The increase in revenue was partially
offset by an increase in compensation and benefits expenses and information and technology costs as well as higher income tax
expense primarily related to a decrease in the value of our future tax asset. Net income in 2006 also reflects higher investment
income due to increased cash and marketable securities in 2006 as well as gains on short-term bond and mortgage fund investments
in 2006.
Total Assets
2007
•
Total assets decreased primarily due to lower energy contracts receivable of $745.4 million at December 31, 2007 related to the clearing
operations of NGX, compared with $889.4 million at the end of 2006. The reduced level of receivables reflected lower natural gas prices at
the end of December 2007 compared with the end of December 2006. As the clearing counterparty to every trade, NGX also carries offset-
ting liabilities in the form of energy contracts payable, which were $745.4 million at December 31, 2007 compared with $889.4 million at
the end of 2006.
•
The overall decrease was partially offset by an increase to current assets following a change in accounting policy adopted effective January
1, 2007. We recorded $74.9 million related to the fair value of open energy contracts as at December 31, 2007. NGX also carried offsetting
liabilities related to the fair value of open energy contracts which were $74.9 million at December 31, 2007.
2006
•
During 2006, total assets of $1,572.8 million increased by $15.6 million over $1,557.2 million in 2005 due to an increase in cash and
marketable securities of $45.9 million, net of $53.7 million (net of cash acquired) of payments related to the purchase of Watt-Ex,
Shorcan and Scotia Capital Inc.’s Fixed Income Indices, PC-Bond and related assets. In addition, $69.4 million was recorded in 2006 to
reflect goodwill and the intangible assets associated with these 2006 acquisitions. The increase was largely offset by lower energy
contracts receivable of $889.4 million at December 31, 2006 related to the clearing operations of NGX, compared with $1,004.3 million
at the end of 2005. The reduced level of receivables reflected lower natural gas prices in December 2006 compared with December 2005.
(As the clearing counterparty to every trade, NGX also carries offsetting liabilities in the form of energy contracts payable, which were
$889.4 million at December 31, 2006 compared with $1,004.3 million at the end of 2005).
Deferred Revenue – Initial and Additional Listing Fees
•
Deferred revenue-initial and additional listing fees increased from 2005 through 2007 as the fees received from initial and additional
listings during this period were higher than the amount of revenue recognized for these fees related to prior periods.
28 TSX Group Annual Report | 2007
Quarterly Information
(in thousands of dollars except per share amounts)
Revenue
Net Income
Earnings per share:
Basic
Diluted
$
Dec. 31/07
111,191
30,439
Sept. 30/07
106,127
$
42,682
$
June 30/07
106,230
39,128
$
Mar. 31 /07
101,176
36,448
$
Dec. 31/06
91,025
35,116
$
Sept.30/06
81,197
33,217
$
June 30/06
92,612
28,464
$
Mar. 31 /06
88,013
34,727
0.46
0.45
0.63
0.62
0.57
0.57
0.53
0.53
0.51
0.51
0.49
0.48
0.42
0.41
0.51
0.50
2006
•
Revenue in Q2/06 improved over revenue in Q1/06 primarily due to higher market data, issuer services and trading revenue. However,
net income for Q2/06 decreased over net income for Q1/06, primarily due to higher income taxes. In Q2/06, the federal government
enacted legislation to reduce corporate tax rates for 2008-2010 and beyond. The future tax asset was reduced, and income tax expense
increased by $9.6 million, largely as a result of these changes in federal corporate tax rates.
2007
•
•
•
•
•
•
Revenue in Q3/06 declined over revenue in Q2/06 largely due to lower trading revenue, reflecting lower trading volumes and follow-
ing the introduction of a volume-based fee structure for most issuers listed on Toronto Stock Exchange and TSX Venture Exchange,
effective July 1, 2006. Net income for Q3/06 increased over Q2/06 primarily due to higher investment income as well as lower income
taxes. The increase was partially offset by the decreased revenue and higher overall expenses.
Revenue in Q4/06 improved over revenue in Q3/06 primarily due to higher trading, market data and issuer services revenue.
Net income for Q4/06 increased over Q3/06 primarily due to the increased revenue partially offset by higher overall expenses.
Revenue in Q1/07 improved over revenue in Q4/06 primarily due to higher market data and issuer services revenue. Net income for
Q1/07 increased over Q4/06 primarily due to the increased revenue partially offset by higher overall expenses.
Revenue in Q2/07 improved over revenue in Q1/07 primarily due to higher issuer services, trading and market data revenue.
Net income for Q2/07 increased over Q1/07 primarily due to the increased revenue and lower overall expenses, somewhat offset by
lower investment income.
Revenue in Q3/07 declined slightly over revenue in Q2/07. Increased revenue from issuer services was more than offset by decreases
in other sources of revenue. Net income for Q3/07 increased over Q2/07 primarily due to higher investment income and lower
income taxes.
Revenue in Q4/07 increased over revenue in Q3/07 primarily due to higher issuer services, trading and market data revenue.
Net income for Q4/07 decreased over Q3/07 primarily due to increased income taxes and expenses which more than offset the higher
revenue.
Review of Fourth Quarter Results
Compared with Q4/06
•
Revenue in Q4/07 improved over revenue in Q4/06 primarily due to higher issuer services, trading and market data revenue.
Net income for Q4/07 decreased over Q4/06 primarily due to higher expenses and income taxes, which more than offset the increased
revenue. Cash flows from operating activities in Q4/07 increased compared with Q4/06 largely due to an increase in accounts payable
and accrued liabilities and a decrease in the value of the future tax asset that was partially offset by a decrease in net income and an
increase in accounts receivable and prepaid expenses. Cash flows used in financing activities were higher in Q4/07 compared with
Q4/06 primarily due to the repurchase of our common shares under the NCIB.
Compared with Q3/07
•
Revenue in Q4/07 increased over revenue in Q3/07 primarily due to higher issuer services, trading and market data revenue.
Net income for Q4/07 decreased over Q3/07 primarily due to increased income taxes and expenses which more than offset
the higher revenue. Cash flows from operating activities in Q4/07 decreased compared with Q3/07 primarily due to a decrease in net
income and an increase in accounts receivable and prepaid expenses that were partially offset by an increase in accounts payable and
accrued liabilities and an increase in the value of the future tax asset. Cash flows used in financing activities were lower in Q4/07
compared with Q3/07 primarily due to a reduction in the amount of our common shares repurchased under the NCIB.
Management’s Discussion and Analysis 29
Critical Accounting Estimates
.
Revenue from Initial and Additional listing fees
We recognize revenue generated from initial and additional listing fees on a straight line basis over an estimated service period of ten years.
The estimated service period of ten years was determined by conducting an historical review of listing activity. We determined that the average
period of time that an issuer remained listed on Toronto Stock Exchange was approximately ten years. In addition, turnover rates were calculated for
a Toronto Stock Exchange listed issuer and for a TSX Venture Exchange listed issuer and were determined to be in the range of ten to twelve years.
Examining historical data allowed us to consider the impact of economic cycles and other trends in capital markets over time. The service period
selected affects the rate at which deferred revenue is recognized, as well as the value of the future tax asset related to these fees.
Long-term Incentive Plan
We have a long-term incentive plan under which we may grant restricted share units (RSUs). RSUs vest on December 31 of the second calendar year
following the year in which the RSUs were granted and the cash award payable is determined by the total shareholder return (appreciation in share
price plus dividends paid or TSR) at the end of that period. We accrue our obligations and include them in accounts payable and accrued liabilities
and other liabilities. In prior years, these obligations were estimated and recorded at a targeted payout amount which was not necessarily based on
the maximum amount that might be paid. The maximum amount to be paid is not known until the RSUs have vested and will be based on TSR at the
time of payout. Effective January 1, 2007, we changed our estimate of these obligations. Our accrual is based on actual dividends paid, continuation
of the most recent quarterly dividend and the closing share price of our common shares for the period. Having monitored fluctuations in our share
price, we concluded that accruing our obligations in this manner provided a better estimate of the payout compared with an estimate based on a
target. The impact of this change in methodology for making the estimate was to increase these obligations and compensation and benefits costs
by $1.1 million for 2007. We have purchased derivative financial instruments that partially hedge the impact of our share price appreciation.
Change in Accounting Policy
Financial Instruments and Comprehensive Income
The Canadian Institute of Chartered Accountants (CICA) issued new accounting rules in 2006 regarding the recognition, measurement, presentation
and disclosure of financial instruments and accounting for hedges, and established standards for reporting comprehensive income. We adopted these
rules effective January 1, 2007. These rules require us to account for all of our financial assets and financial liabilities at fair value. The adoption of these
new rules resulted in transitional adjustments which reduced the opening deficit on January 1, 2007 by $0.6 million, increased marketable securities by
$0.7 million, and reduced the future tax asset by $0.1 million. We had no other comprehensive income or loss transactions during 2007 and no opening
or closing balances for accumulated other comprehensive income or loss. Financial assets and financial liabilities include the following:
Marketable Securities
Marketable securities are held to earn investment income. We designated our marketable securities as being held-for-trading in accordance with the
new accounting rules issued by the CICA. If we had not made this designation our marketable securities would have been considered available for sale,
which would have resulted in the same valuation of the marketable securities, but would have resulted in recording accumulated other comprehensive
income of $0.6 million as of January 1, 2007. As financial assets, these investments were recorded at fair value and unrealized losses of $3.1 million
were recorded in investment income in 2007.
Total Return Swaps
We have entered into total return swaps which synthetically replicate the economics of TSX Inc. purchasing our shares as a partial fair value hedge
to the share appreciation rights of deferred share units (DSUs) and RSUs that are awarded to our directors and employees. We mark to market the
value of the hedged units as an adjustment to income, and simultaneously mark to market the liability to unit holders as an adjustment to income.
The fair values of the total return swaps were $4.1 million at December 31, 2007 and $0.8 million at December 31, 2006. During 2007, unrealized gains
of $3.0 million were reflected as a decrease in compensation and benefits costs and general and administration costs. During 2006, unrealized gains
of $0.4 million were reflected as a decrease in compensation and benefits costs and general and administration costs.
30 TSX Group Annual Report | 2007
NGX – Fair Value of Open Energy Contracts
As part of its clearing operations, NGX becomes the central counterparty to each transaction. We record NGX’s energy contract receivables and off-
setting payables for all contracts where physical delivery has occurred or financial settlement amounts have been determined prior to the period end
but payments have not been made. With the adoption of the new accounting rules issued by the CICA, the fair value at the balance sheet date of the
undelivered physically settled trading contracts and the forward financially settled trading contracts is recognized in the consolidated assets and
liabilities as open energy contracts. At December 31, 2007, we recorded a receivable of $74.9 million related to the fair value of open energy contracts
and an offsetting payable of $74.9 million. We did not record the fair value of open energy contracts, or offsetting payables, at December 31, 2006
because the change in accounting policy was adopted effective January 1, 2007. There is no impact on the consolidated statement of income.
Future Change in Accounting Policy
Capital Disclosures
In December 2006, the CICA issued Section 1535 “Capital Disclosures”, which establishes standards for disclosing an entity’s objectives, policies
and processes for managing capital, Section 3862 “Financial Instruments – Disclosure” and Section 3863 “Financial Instruments – Presentation”.
These new standards are effective for the Company beginning January 1, 2008. We are determining the impact that these changes will have on our
consolidated financial statements.
Disclosure Controls and Procedures and Internal Controls over Financial Reporting
Disclosure Controls and Procedures
The Interim Co-Chief Executive Officer (Interim Co-CEO) and Interim Co-Chief Executive Officer and Chief Financial Officer (Interim Co-CEO and CFO) are
responsible for establishing and maintaining adequate disclosure controls and procedures. Disclosure controls and procedures are designed to ensure
that information required to be disclosed in our filings under securities legislation is accumulated and communicated to management, including
the Interim Co-CEO and Interim Co-CEO and CFO as appropriate, to allow timely decisions regarding public disclosure. They are designed to provide
reasonable assurance that all information required to be disclosed in these filings is recorded, processed, summarized and reported within the time
periods specified in securities legislation. We regularly review our disclosure controls and procedures; however, they cannot provide an absolute level
of assurance because of the inherent limitations in control systems to prevent or detect all misstatements due to error or fraud.
Our management, including the Interim Co-CEO and Interim Co-CEO and CFO, conducted an evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures as of December 31, 2007. Based on this evaluation, the Interim Co-CEO and Interim Co-CEO
and CFO have concluded that our disclosure controls and procedures are effective.
Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Internal
control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of the assets of TSX Group, (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of TSX
Group are being made only in accordance with authorizations of management and directors of TSX Group, and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use or disposition of TSX Group’s assets that could have a material effect on
the financial statements.
There have been no changes to the design of our internal control over financial reporting during the quarter ended December 31, 2007 that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Strategies and Outlook 14
In our view, Canada needs a strong integrated marketplace that offers trading in equities, fixed income and energy as well as derivatives to compete
globally in the consolidating world of exchanges. Our corporate strategy has evolved through our assessment of the exchange sector and of our
business. We plan to capitalize on our competitive advantages by pursuing the strategies described below, organically and through acquisitions,
strategic alliances and investments to achieve profitable growth and maximize shareholder returns.
14
The “Strategies and Outlook” section above contains certain forward-looking statements. Please refer to “Forward-Looking Information, Risks and Uncertainties” for a discussion of risks
and uncertainties related to such statements.
Management’s Discussion and Analysis 31
Strategies:
•
•
•
To continue to focus on growth of our core business domestically in terms of superior technology, order flow and products and services.
To achieve a leadership position in all asset classes inside Canada, with a particular focus on fixed income, energy and derivatives.
To pursue aspirations beyond Canada based on our competitive advantages.
Competitive Advantages
Domestic:
• Brand and reputation
• Pre-eminent domestic position
International:
• Mining listings and expertise
• Oil & Gas listings and expertise
• Trading and data technology capability
• SME expertise
• Marketplace operations capability
• Data platform and capability
Continue to focus on growth of our core business domestically in terms of superior
technology, order flow and products and services
Issuer Services
•
The listings operations of Toronto Stock Exchange and TSX Venture Exchange are focused on business development. It is expected that
an increased number of listings will lead to more trading through increased order flow.
Toronto Stock Exchange, specifically, will:
•
•
Continue to focus on listing structured equity products, such as ETFs, which expand our reach into the investment marketplace.
Offer value-added products and services to our listed issuers by collaborating with industry leaders, such as our 2007 purchase
of Equicom.
TSX Venture, specifically, will:
•
•
•
•
Focus on pursuing initiatives that drive new listings, such as expanding its Capital Pool Company® program and executing
its Public Venture Capital Campaign.
Offer mentoring programs designed to enhance existing issuers’ probability of success as public companies.
Pursue growth in Central and Eastern Canada, where public venture capital markets are relatively less developed.
Pursue growth in untapped non-resource sectors.
Equity Trading
There are three key drivers to increased trading:
Superior Technology
•
Speed of execution is a necessity due to the rapid growth of algorithmic trading and we have taken steps to enhance capacity and
performance. Our TSX Quantum trading engine will enhance the reliability, scalability, low cost and high speed of execution, which
underpins us as a world leading electronic marketplace. We launched the TSX Quantum trading engine in December 2007 and will
continue its roll-out throughout 2008.
Innovative Products
•
We will continue to develop and offer new customized trading products and services, such as TSX MOCTM, Multiple Broker Give Up,
FOX™ and ATXTM, designed to meet the distinct needs of various investors and intermediaries and bring more liquidity and efficiency
to the marketplace. In 2008 we plan to introduce a smart order router that should help domestic and international customers meet
best execution obligations. In addition, we also plan to offer co-location to customers in 2008.
Competitive Trading Fees
•
In both 2006 and 2007, we implemented changes to the trading fee structure on Toronto Stock Exchange and TSX Venture Exchange
targeted at taking advantage of our leading edge technology by attracting more volume and incenting liquidity from global players.
32 TSX Group Annual Report | 2007
Market Data
TSX Datalinx will focus on:
•
Increasing penetration of existing customers and up-selling them to premium content products.
• Continuing to work with market data vendors to upgrade their data delivery capabilities.
• Continuing to provide direct distribution to clients (TSX Direct) to meet their needs for reduced data latency.
•
•
•
•
Expanding the availability of market data information for our customers across North America by becoming a market centre on SFTI,
allowing customers access to real-time market information with extremely low latency.
Leveraging existing data capabilities and infrastructure (LinxPointOne™) to add new content, such as Over-the-Counter (OTC),
fixed income, foreign exchange, and other premium data.
Providing customers with the opportunity to co-locate their data infrastructure within our data centre.
Building on our agreement with The Canadian Press to provide fact-based, non-biased journalist generated news.
Achieve leadership position in all asset classes inside Canada, with particular
focus on fixed income, energy and derivatives
Fixed Income Trading
•
•
•
We are a leading participant in the Canadian fixed income market following the acquisitions of Shorcan and PC-Bond (including the
DEX Fixed Income Indices) in 2006. Shorcan is an IDB offering clients trading in federal, provincial, corporate and mortgage bonds and
treasury bills and PC-Bond (DEX Fixed Income Indices) is the leading provider of fixed income indices in Canada.
Through our 47% stake in CanDeal, we also provide dealer to client fixed income trading. CanDeal has achieved significant growth
since its inception and reported a profit of $0.4 million in 2007.
CanDeal continues to focus on expanding its product and service offering, adding more liquidity providers and attracting more
0institutional customers. CanDeal also provides access beyond Canada through its technology and co-marketing agreement with
Thomson TradeWeb®.
Energy Trading
•
•
•
We entered the energy trading and clearing business in March 2004 when we purchased NGX. NGX will continue to focus on growing
its business. In October 2006, we added to our energy business when we acquired Watt-Ex, a platform for providing ancillary services
to the Alberta Electric System Operator which is used to balance supply and demand on the Alberta grid.
On March 28, 2007, we announced the formation of a transformative technology and clearing alliance for the North American natural
gas and Canadian power markets between NGX and ICE. Scheduled for launch in the first quarter of 2008, the alliance brings together
the respective strengths of NGX, Canada’s leading energy exchange and North America’s leading physical clearing and settlement
facility in energy, and ICE, a world leading electronic energy and soft commodities marketplace. Under the arrangement, North
American physical natural gas and Canadian electricity products will be offered through ICE’s leading electronic commodities trading
platform. NGX will serve as the clearinghouse for these products.
In September 2007, we entered into an agreement with Enbridge and Circuit Technology to acquire all of the shares of NTP after
March 15, 2009. NTP is the leading Canadian electronic platform and clearing facility for crude oil. We have a right to aquire NTP from
its shareholders, Enbridge and Circuit Technology, at a price between $40.0 million and $95.0 million depending on NTP’s 2008 net
earnings. The purchase price payable to Circuit Technology will be satisfied by the issuance of TSX Group shares.
Derivatives
Combination with MX 15, 16
On December 10, 2007, we entered into a combination agreement (the Agreement) with MX pursuant to which TSX Group will indirectly acquire all
of MX’s outstanding common shares for total consideration of up to approximately 15.3 million of our common shares and up to $428.2 million in
cash. Under the terms of the Agreement, MX shareholders will ultimately receive, at the election of each holder:
15
The “Combination with MX” section above contains certain forward-looking statements. Please refer to “Forward-Looking Information, Risks and Uncertainties” for a discussion of risks
and uncertainties related to such statements.
16
Subject to regulatory approval.
Management’s Discussion and Analysis 33
•
0.7784 of a common share of TSX Group (the equivalent of $39.00 as the market close on November 28, 2007, being the last business
day prior to the confirmation of combination discussions by both companies), or
•
$39.00 in cash,
for each common share of MX, subject in each case, to proration.
After the effect of full proration, each MX shareholder will be entitled to receive 0.5 of a common share of TSX Group and $13.95 in cash.
We intend to finance the cash consideration with a three-year term facility of $430.0 million underwritten by two Canadian chartered banks. We have
also entered into a three-year, $50.0 million revolving credit facility with these banks.
This combination will be effected by way of an amalgamation of MX with an indirect, wholly-owned subsidiary of TSX Group, which requires approval
by the shareholders of MX at a shareholders’ meeting scheduled for February 13, 2008 and regulatory approvals including approvals from Québec’s
Autorité des marchés financiers, the Competition Bureau, Toronto Stock Exchange and the United States Securities and Exchange Commission.
MX has agreed to pay TSX Group a termination fee of $45.7 million if the amalgamation is not completed for certain reasons. Assuming the
amalgamation closes in the first quarter of 2008, we will incur costs and fees of approximately $15.2 million in connection with the Agreement and
the amalgamation, including, without limitation, external advisory fees, bank fees, filing fees and employment costs, which will be included in the
purchase price. In addition, we may incur contract termination fees (see Arrangement with ISE) and employment costs of approximately $17.0 million
which, if required, would be expensed in the period they are incurred.
For further details on the proposed amalgamation with the MX, please refer to the MX Management Information Circular filed with Canadian securities
regulators on January 14, 2008 and available on SEDAR at www.sedar.com including unaudited pro forma condensed combined financial information
of TSX Group, giving effect to the amalgamation as at September 30, 2007, for the year ended December 31, 2006 and the nine month period ended
September 30, 2007. The following strategic factors were considered in connection with our proposed business combination with MX:
•
•
Improved positioning in light of global exchange consolidation trends. Substantial consolidation in the exchange sector has occurred
and continues to occur around the world. The combination will create a substantially larger entity that will be better positioned to
compete and benefit from this consolidation trend.
Greater product offering. TSX Group and MX have limited product overlap. As an integrated exchange group bringing together our
operational, financial and technical resources with those of MX, the combined entity will offer its customers access to diversified
products and services. The combination of TSX Group and MX will create a leading North American exchange group encompassing
multiple asset classes and comprising a broad range of cash and derivatives products, including products based on interest rates,
equities, equity indices, foreign exchange, energy and environmental financial products. The combined entity will be well positioned
to compete against other U.S. and foreign exchanges and the over-the-counter market in a rapidly evolving industry.
•
Increased size and financial strength. On a pro forma basis after giving effect to the amalgamation, the combined entity would have
had combined revenue and net income of $432.0 million and $132.6 million, respectively, for the year ended December 31, 2006 and
$376.9 million and $122.2 million, respectively, for the nine-month period ended September 30, 2007.
On a pro forma basis after giving effect to the amalgamation, the combined entity would have a strong balance sheet and the potential
to generate cash flow to finance future expansion, investment in new or improved technology, and development of new products and
services for its customers.
•
•
•
More diversified revenue base. The combination will allow us to further diversify our revenue base by including revenue from trading
and clearing derivatives as well as by distributing market data.
Combination creates opportunity to achieve meaningful synergies. The combination is anticipated to create significant value for our
shareholders through the combined entity’s enhanced growth profile and opportunity to realize meaningful synergies. TSX Group and
MX are currently targeting annual cost synergies of $25.0 million, expected to be achieved by rationalizing premises and data centres,
reducing corporate costs and optimizing technology. Depending on when the amalgamation occurs, synergies will be partially phased
in during 2008, with most of the $25.0 million in synergies expected to be realized in 2009. In addition, the combined entity will target
revenue synergies by developing new trading, clearing and market data products, leveraging a broader platform across multiple asset
classes, targeting cross-selling opportunities over the combined TSX Group – MX customer base, optimizing clearing models, and
expanding the combined customer base globally.
Combination creates opportunities to accelerate growth strategies. By bringing together the strong markets, teams and expertise of
MX and TSX Group, the combined entity will be well positioned to grow trading volumes, including by developing and launching new
products, and will have the resources and scale to develop new high-value data services and offer an integrated clearing solution
to an enlarged and international customer base. Furthermore, the combination allows the combined entity to generate growth
prospects and strategies, including growth strategies outside of Canada, particularly in the U.S. via MX’s interest in the Boston
Options Exchange Group LLC (BOX).
34 TSX Group Annual Report | 2007
Arrangement with ISE
On August 14, 2007, we announced the completion of the shareholders’ agreement for CDEX Inc. (CDEX), which would operate DEX, our new Canadian
derivatives exchange. CDEX is owned 52% by TSX Group and 48% by a wholly-owned subsidiary of International Securities Exchange. DEX was
scheduled to begin operations in March 2009. CDEX was funded with $26.0 million, representing the estimated cost of setting up the exchange, which
was split between the two shareholders according to their share ownership in CDEX. If we complete the transaction to create TMX Group, we will not be
moving forward with our plans to launch DEX in March 2009; however, we continue to explore alternative business opportunities with ISE.
In connection with the announcement of the agreement to combine with MX, we provided ISE with a notice of a competing transaction as required
under the terms of the CDEX shareholders’ agreement. If the parties are unable to agree to an alternative business arrangement, originally by January
10, 2008 and subsequently extended to March 31, 2008 through an amending agreement, we will be required to pay ISE $15.2 million plus interest.
If the payment is required, it will be expensed in the period incurred.
Pursue aspirations beyond Canada based on our competitive advantages
Leading Global Resource Exchange Group
We will create a unique platform and differentiate ourselves globally by leveraging our strengths in natural resources. Implementation of this
strategy will include providing listings, trading and clearing of resource equities, fixed income, options and futures for natural resource companies
and the underlying commodity products. Resource companies and investors will value our comprehensive integrated resource offerings, deep
liquidity, and attractive economics. This strategy will capitalize on the rapid global growth of the resource sector and on Canada’s evolving
position as a leading energy supplier. Our current base of resource listings, together with our ownership of NGX, provides us with a strong base
upon which to build.
Leading North American Exchange for Small-Medium Enterprises (SMEs)
We are a leading exchange for SMEs, and we intend to expand this platform to attract North American and International listings. The SME market
globally, and especially in the United States, is large and potentially underserved.
In 2007, our international business development efforts were focused on listing opportunities from China, Australia, Israel and the U.S. We complet-
ed a nine-city U.S. Campaign in 2007 focused on attracting SMEs in our strongest key sectors: mining, oil and gas, and technology. We added 23 new
U.S. listings for the year and initiated new business opportunities across the largest capital market in the world.
Forward-Looking Information, Risks and Uncertainties
Forward-Looking Information
This MD&A contains “forward looking information” (as defined in applicable Canadian securities legislation) that is based on expectations, estimates
and projections as of the date of this MD&A. Often, but not always, such forward looking information can be identified by the use of forward looking
words such as “plans”, “expects”, “is expected”, “budget”, “scheduled”, “targeted”, “estimates”, “forecasts”, “intends”, “anticipates”, “believes”, or
variations or the negatives of such words and phrases or statements that certain actions, events or results “may”, “could”, “would”, “might” or “will”
be taken, occur or be achieved or not be taken, occur or be achieved. Forward looking information involves known and unknown risks, uncertainties
and other factors which may cause the actual results, performance or achievements of TSX Group to be materially different from any future results,
performance or achievements expressed or implied by the forward looking information in this MD&A.
Examples of such forward looking information in this MD&A include, but are not limited to, (A) factors relating to the amalgamation with MX and
the results expected to be achieved from the successful completion of the amalgamation, including: (1) the enhanced ability of TMX Group, as a
combined entity, to compete globally; (2) the strengthened and more diversified revenue base of TSX Group; (3) the creation of opportunities to
achieve cost and revenue synergies; (4) the acceleration of growth strategies; and (5) the potential for further expansion; all of which are subject
to significant risks and uncertainties including those related to the successful completion of the transactions contemplated by the Agreement and
the amalgamation agreement with MX including (i) the ability to obtain the regulatory approvals on the proposed terms and schedule; (ii) the risk
that the businesses of MX and TSX Group will not be integrated successfully; (iii) the risk that the cost savings, growth prospects and any other
synergies expected to result from the amalgamation may not be fully realized or may take longer to realize than expected; and (iv) the possibility
that the Agreement or amalgamation agreement may be terminated and/or that the amalgamation may not proceed as expected or at all; and (B)
factors relating to stock and derivatives exchanges and the business, financial position, operations and prospects of TSX Group, including changes
to listing fees, trading fees, market data fees, the launch of NGX alliance with ICE, our strategies and outlook which are subject to significant risks
and uncertainties, including competition from other exchanges or marketplaces, including alternative trading systems, new technologies and other
sources, on a national or international basis; dependence on the economy of Canada; failure to retain and attract qualified personnel; geopolitical
factors which could cause business interruption; dependence on information technology; failure to implement our strategies; changes in regulation;
risks of litigation; failure to develop or gain acceptance of new products; adverse effect of new business activities; dependence of trading operations
on a small number of clients; the risks associated with NGX’s clearing operations; the risks associated with the credit of customers; cost structures
being largely fixed; and dependence on market activity that cannot be controlled. Actual results and developments are likely to differ, and may
differ materially, from those expressed or implied by the forward looking information contained in this MD&A.
Management’s Discussion and Analysis 35
Such forward looking information is based on a number of assumptions which may prove to be incorrect, including, but not limited to, assumptions
in connection with the amalgamation or otherwise about the ability of MX and TSX Group to successfully compete against global exchanges by creat-
ing through such an amalgamation an enterprise of increased scale; the accuracy, timing and ability to realize the projected synergies in respect of
expected cash flows, cost savings and profitability, which will be dependent on, but not limited to, such factors as optimizing technology and data
centres, reducing corporate costs and rationalizing premises (cost synergies are presented in this MD&A to provide one strategic rationale to support
the benefits of a combination with MX and these estimated cost synergies should not be relied on for any other purpose); the timely completion
of the steps required to be taken for the amalgamation of MX and TSX Group pursuant to the terms of the Agreement; the approvals or clearances
required to be obtained by MX from its shareholders, the regulatory approvals being successfully obtained; business and economic conditions
generally; exchange rates (including estimates of the U.S. dollar — Canadian dollar exchange rate), the level of trading and activity on markets, and
particularly the level of trading in MX and TSX Group’s key products; the continued availability of financing on appropriate terms for future projects;
productivity at MX or TSX Group, as well as that of MX’s or TSX Group’s competitors; market competition; research & development activities; the
successful introduction of new derivatives and equity products; tax benefits/charges; the impact on MX and TSX Group of various regulations and
initiatives; MX’s or TSX Group’s ongoing relations with their employees; and the extent of any labour, equipment or other disruptions at any of their
operations of any significance other than any planned maintenance or similar shutdowns.
While we anticipate that subsequent events and developments may cause our views to change, we have no intention to update this forward looking
information, except as required by applicable securities law. This forward looking information should not be relied upon as representing our views
as of any date subsequent to the date of this MD&A. We have attempted to identify important factors that could cause actual actions, events or
results to differ materially from those current expectations described in forward looking information. However, there may be other factors that
cause actions, events or results not to be as anticipated, estimated or intended and that could cause actual actions, events or results to differ ma-
terially from current expectations. There can be no assurance that forward looking information will prove to be accurate, as actual results and
future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on forward
looking information. These factors are not intended to represent a complete list of the factors that could affect us or the amalgamation of MX and
TSX Group. See “Risks and Uncertainties” below and risk factors outlined in materials filed with the securities regulatory authorities in Canada from
time to time, including our most recent annual information form and the impact upon them of subsequently reported items.
Risks and Uncertainties
We have in place an integrated risk management process in which the Board assumes overall stewardship responsibility for risk; the Finance & Audit
Committee of the Board assesses the adequacy of risk management policies and procedures; and Senior Management oversees implementation of
risk management policies and processes. The management framework supporting the risk management objectives includes regular assessments of
principal risks, and implementation of risk management tactics, which are monitored and adjusted as required.
We Depend on the Economy of Canada
Our financial results are affected by the Canadian economy. If the profit growth of Canadian-based companies is generally lower than the profit
growth of companies based in other countries, the markets on which those other issuers are listed may be more attractive to investors than our
equity exchanges. The threat of a prolonged economic downturn may also have a negative impact on investment performance, which could materially
adversely affect the number of new listed issuers, the market capitalization of our listed issuers, additional securities being listed or reserved, trading
volumes and market data sales.
We Face Competition from Other Exchanges, ATSs, OTC Markets and Other Sources and New Technologies
We face competition from other exchanges as well as from ATSs, ECNs and the OTC markets. This competition may intensify in the near future, especially
as technological advances create pressure to develop more efficient and less costly trading in global or regional markets. If we cannot maintain and
enhance our ability to compete or respond to competitive threats, this will have an adverse impact on our operating results.
We Face Increased Competition from Exchanges
We face increased competition for business from other exchanges, especially those in the United States as they consolidate and become public
companies, and investing becomes more global. We face competition from foreign exchanges for listings of Canadian-based issuers and trading in their
securities. If we are unable to continue to provide competitive trade execution, the volume traded in Canadian-based interlisted issuers on our equity
exchanges could decrease in the future and adversely affect our operating results.
The trend for exchanges to form alliances or consolidate and become for-profit and publicly traded is increasing and will result in our competitors
becoming stronger. If we are not included in any alliances, these developments could materially adversely affect our business and operating results.
36 TSX Group Annual Report | 2007
Technological Advances Have Facilitated the Establishment of New Marketplaces and Trading Mechanisms
Technological advances have lowered barriers to entry and have facilitated the establishment of new marketplaces and trading mechanisms, such as
ATSs and ECNs, to electronically trade securities and other financial instruments outside traditional exchanges. ATSs have a framework to operate in
Canada under the ATS Rules and may become our significant competitors in the future. For example, in 2007, a group of Canada’s leading banks and
investment dealers announced their intention to form an ATS to trade Toronto Stock Exchange listed securities which is currently set to launch in the
second half of 2008. Other ATSs currently provide, or have announced their intention to provide, platforms that trade Toronto Stock Exchange listed
securities. If these ATSs are successful in attracting significant order flow, our trading revenue could be materially adversely affected.
NGX, CanDeal and Shorcan Face Competition from OTCs and Other Sources
NGX’s business of trading and clearing energy contracts faces primary competition in energy markets in Canada and the United States from other
marketplaces, electronic trading and clearing platforms and from the OTC or bilateral markets (with support from voice brokers). Voice brokers continue
to provide efficient contract matching services for both standardized and structured products and are expanding their product offerings to include
access to clearing facilities for trading parties who may have credit constraints. If NGX is unable to compete with these platforms and markets including
voice brokers, NGX may not be able to expand, which could materially affect its business and operating results.
CanDeal faces competition primarily from the telephonic OTC market. If CanDeal fails to attract institutional order flow from this market, it would
adversely affect its operating results.
Shorcan has several competitors in the fixed income IDB market. If Shorcan fails to attract institutional order flow from this market, it would adversely
affect its operating results.
New Technologies Make It Easier to Disseminate Our Information
Technological advances, and in particular the Internet, have made it easier to download and disseminate electronic information. This may cause the
value of our information to deteriorate since it is difficult to enforce restrictions on the use of information that is transmitted electronically. We may
not be able to maintain or increase market data revenue if we cannot enforce our proprietary rights in the future.
Our Trading Operations Depend Primarily on a Small Number of Clients
During 2007, approximately 59% of our trading revenue on Toronto Stock Exchange and approximately 50% of our trading revenue on TSX Venture
Exchange were accounted for by the top ten POs on each exchange. During 2007, approximately 36% of our trading revenue on Toronto Stock Exchange
and approximately 34% of our trading revenue on TSX Venture Exchange was accounted for by the six largest Canadian banks and investment dealers.
Our business, financial condition or operating results could be materially adversely affected if any one of these POs significantly reduced or stopped
trading on our exchanges, or if two or more POs consolidated.
During 2007, approximately 9% of our trading operations revenue was derived from trading in the securities of the ten most actively traded listed
issuers on our equity exchanges. If we lost one or more of these issuers, we would not only suffer a decrease in revenue from listing operations, but
we would also suffer an even more significant decrease in revenue from trading operations.
We Need to Retain and Attract Qualified Personnel
Our success depends to a significant extent upon the continued employment and performance of a number of key management personnel whose
compensation is partially tied to vested share options and long-term incentive plans that mature over time. The value of this compensation
is dependent upon total shareholder return performance factors, which includes appreciation in our share price. The loss of the services of key
personnel could materially adversely affect our business and operating results. We also believe that our future success will depend in large part on
our ability to attract and retain highly skilled technical, managerial and marketing personnel. There can be no assurance that we will be successful
in retaining and attracting the personnel we require.
Geopolitical Factors Could Interrupt Our Critical Business Functions
The continuity of our critical business functions could be interrupted by geopolitical upheaval, including terrorist, criminal, political and cyber, or by
other types of external disruptions, including human error, natural disasters, power loss, sabotage and vandalism.
We have a series of integrated disaster recovery and business continuity plans for critical business functions to mitigate the risk of an interruption.
We currently maintain a duplicate facility within the Greater Toronto Area to provide redundancy and back-up to reduce the risk and recovery time
of system disruptions for key systems. However, not all systems are duplicated, and any major disruption in the Greater Toronto Area may affect our
existing and back-up facilities. Any interruption in our services could impair our reputation, damage our brand name, and negatively impact our
financial condition and operating results.
Management’s Discussion and Analysis 37
We May Not Be Successful in Implementing Our Strategy
We invest significant resources in the development and execution of our corporate strategy to grow profitability and maximize shareholder returns.
We may not succeed in implementing our strategies. We have limited experience pursuing new business opportunities or growth opportunities
in new geographic markets. We may have difficulty executing our strategies because of, among other things, increased global competition, difficulty
developing and introducing new products, barriers to entry in other geographic markets, and changes in regulatory requirements. Any of these
factors could materially adversely affect the success of our strategies.
As part of our strategy to sustain growth, we expect to continue to pursue appropriate acquisitions of other companies and technologies.
An acquisition will only be successful if we can integrate the acquired businesses’ operations, products and personnel; retain key personnel; and
expand our financial and management controls and our reporting systems and procedures to accommodate the acquired businesses. If an invest-
ment, acquisition or other transaction (including the proposed business combination with MX) does not fulfill expectations, we may have to write
down its value in the future or sell at a loss.
New Business Activities May Adversely Affect Income
We may enter new business activities that could have an adverse effect on our existing profitability. While we would expect to realize new revenue
from these new activities, there is a risk that this new revenue would not be greater than the associated costs or any related decline in existing
revenue sources.
We Are Subject to Significant Regulatory Constraints
The provincial securities regulators regulate us and our exchanges and regulators in other jurisdictions may regulate our future operations.
This regulation may impose barriers or constraints which limit our ability to build an efficient, competitive organization and may also limit our ability
to expand foreign and global access. Securities regulators also impose financial and corporate governance restrictions on us and our equity and, after
the amalgamation with MX closes, derivatives exchanges. Some of the provincial securities regulators must approve or review our exchanges’ listing
rules, trading rules, fee structures and features and operations of, or changes to our systems. These approvals or reviews may increase our costs and
delay our plans for implementation. There could also be regulatory changes that impact our customers and that could materially adversely affect our
business and operating results.
We Are Subject to Litigation Risks
Some aspects of our business involve risks of litigation. Dissatisfied customers, among others, may make claims with respect to the manner in which
we operate. Although we benefit from certain contractual indemnities and limitations on liabilities, these rights may not be sufficient. In addition,
with the introduction of civil liability for misrepresentations in our continuous disclosure documents and statements and the failure to make timely
disclosures of material changes in Ontario and certain other jurisdictions, dissatisfied shareholders can more easily make claims against us. If a
lawsuit or claim is resolved against us, it could materially adversely affect our reputation, business, financial condition and operating results.
We Depend on Market Activity that is Outside of Our Control
Our revenue is highly dependent upon the level of activity on our exchanges, including: the volume of securities traded; the number and market
capitalization of listed issuers; the number of new listings; the number of active traders and brokerage firms in the market; and the number of
subscribers to market data.
We do not have direct control over these variables. Among other things, these variables depend upon the relative attractiveness of securities traded on
our exchanges and the relative attractiveness of our exchanges as a place to trade those securities as compared to other exchanges and other trading
mechanisms. Those variables are in turn influenced by:
•
•
•
•
•
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the overall economic conditions in Canada and the United States in particular, and in the world in general (especially growth levels and
political stability);
the condition of the resource sector;
the interest rate environment and resulting attractiveness of alternative asset classes;
the regulatory environment for investment in securities;
the relative activity and performance of global capital markets;
investor confidence in the prospects and integrity of our listed issuers, and the prospects of Canadian-based listed issuers in general;
pricing volatility of global commodities and energy markets; and
changes in tax legislation that would impact the relative attractiveness of certain types of securities.
38 TSX Group Annual Report | 2007
We may be able to indirectly influence the volume of trading by providing efficient, reliable and low-cost trading; maximizing the availability of timely,
reliable information upon which research, advice and investment decisions can be based; and maximizing the ease of access to trading facilities.
However, those activities may not have a positive effect on, or effectively counteract, the factors that are outside of our control.
Our Exchanges Depend on the Development and Acceptance of New Products
We are dependent to a great extent on developing and introducing new investment products and trading products and their acceptance by the
investment community. While we continue to review and develop new products that respond to the needs of the marketplace, we may not continue
to develop successful new products. Our current product offerings may become outdated or lose market favour before we can develop adequate
enhancements or replacements. Other exchanges or ATSs may introduce new products or product enhancements that make our products less
attractive. Even if we develop an attractive new product, we could lose trading activity to another marketplace that introduces a similar or identical
product which offers greater liquidity or lower cost. We also may not receive regulatory approval (in a timely manner or at all) for our new products.
Any of these events could materially adversely affect our business and operating results.
We Could Suffer Losses as a Result of NGX’s Clearing Activities
NGX is the central counterparty to each transaction conducted through its electronic platform. By providing a clearing and settlement facility,
NGX is subject to the risk of a counterparty defaulting simultaneously with an extreme market price movement. NGX manages this risk by
applying standard rules and regulations, and using a conservative margining regime based on globally-accepted margin concepts. This margining
regime involves valuing the market stress of client portfolios in real-time and requiring participants to deposit liquid collateral in excess of those
valuations. NGX conducts market stress scenarios regularly to test the ongoing integrity of its clearing operation. NGX also relies on established
policies, instructions, rules and regulations as well as procedures specifically designed to actively manage and mitigate risks.
To backstop its clearing operations, NGX has a credit agreement in place with a Canadian chartered bank. We are NGX’s guarantor for this credit
agreement up to a maximum of US$100 million. In addition, NGX has covenanted under the agreement to maintain a minimum of $9 million
of tangible net assets. If NGX suffers a loss on its clearing operations, it could lose its entire net worth. The bank could also realize up to a maximum
of US$100 million on our unsecured guarantee, to the extent required to cover the loss.
NGX faces operational and other risks associated with the clearing business, which, if realized, could materially affect its business and
operating results.
We Depend Heavily on Information Technology, Which Could Fail or Malfunction
We are extremely dependent on our information technology systems. Our trading is conducted exclusively on an electronic basis. We have disaster
recovery and contingency plans as well as back-up procedures to manage, mitigate and minimize the risk of an interruption or failure. We also test and
exercise our disaster recovery plans for trading on Toronto Stock Exchange and TSX Venture Exchange, and include customers in that process. However,
depending on an actual failure, those plans may not be adequate as it is difficult to foresee every possible scenario and therefore we cannot entirely
eliminate the risk of a system failure or interruption. We have experienced occasional IT Operations failures and delays in the past, and we could experi-
ence future IT Operations failures and delays.
Our current technological architecture may not effectively or efficiently support our changing business requirements. The system hardware was
upgraded in 2004. Two hardware upgrades and two software performance releases were implemented in 2005 in response to increases in order
message volumes and transactions. During 2006 we completed much of the work on TSXPress, which included three major trading system enhance-
ments to reduce overall average response time and optimize executed speeds. In June 2007, we replaced core trading engine hardware with the next
generation of new HP Integrity NonStop servers that use the Intel Itanium 2 processor.
We will continue to make additional expenditures to further enhance and upgrade our systems. We will need to continuously improve our information
technology systems so that we can handle increases and changes in trading activity and to respond to customer demand for improved performance.
This will require ongoing expenditures which may require us to expend significant amounts in the future. In 2006, we began development of the next
generation of our trading engine, TSX Quantum. The key technology initiative of 2007 and 2008, TSX Quantum is expected to provide our customers
with greater speed and capacity which we believe will enable us to attract higher volumes and even more liquidity. TSX Quantum began a phased roll
out in December 2007 which will continue throughout 2008. If TSX Quantum fails to perform in accordance with expectations, cannot be rolled out
on schedule or does not result in the expected higher trading volumes and liquidity, our business, financial condition and operating results may be
materially adversely affected.
If our systems are significantly compromised or disrupted or if we suffer repeated failures, this could interrupt our trading services; cause delays
in settlement; cause us to lose data; corrupt our trading operations, data and records; or disrupt our business operations. This could undermine
confidence in our exchanges and materially adversely affect our reputation or operating results, and may lead to customer claims, litigation and
regulatory sanctions.
Management’s Discussion and Analysis 39
Our Cost Structure is Largely Fixed
Most of our expenses are fixed and cannot be easily lowered if our revenue decreases, which could have an adverse effect on our operating results and
financial condition.
We Depend on Third Party Suppliers
We depend on a number of third parties, such as CDS, RS, data processors, software and hardware suppliers, communication and network suppliers
and suppliers of electricity for elements of our trading, data and other systems. These providers may not be able to provide these services without
interruption and in an efficient, cost-effective manner. They also may not be able to adequately expand their services to meet our needs. If a service
provider suffers an interruption in or stops providing services and we cannot make suitable alternative arrangements, it could materially adversely
affect our business, financial condition and operating results.
We Depend on Adequate Numbers of Customers
If we determine that there is not a fair market, the markets will be shut down. There will not be a fair market if too few POs are able to access our equity
exchanges or if too few contracting parties are able to access NGX’s market. If trading on our exchanges is interrupted or ceases, it could materially
adversely affect our equity or energy operations, respectively, our financial condition and our operating results.
We Depend on and Are Restricted by Our Licence Agreements and Other Arrangements
Some of our products, including our trading and data systems and our index products, are based on licence agreements with third parties, which in
some cases expire within the next few years. We may not be able to renew these agreements on favourable terms or at all. Any future licence agree-
ment may provide opportunities for us, but it may also impose restrictions on us. If we fail to renew licence agreements on favourable terms or at all,
it may materially adversely affect our business.
We are also party to agreements with RS and CanDeal under which we provide services for fees. If those agreements terminate or are not renewed, it
may have an adverse effect on our operations.
We May Be Unable to Protect Our Intellectual Property
To protect our intellectual property rights, we rely on a combination of trade-mark laws, copyright laws, patent laws, trade secret protection, confi-
dentiality agreements, and other contractual arrangements with our affiliates, customers, strategic partners, and others. This protection may not be
adequate to deter others from misappropriating our proprietary information. We may not be able to detect the unauthorized use of, or take adequate
steps to enforce, our intellectual property rights. We have registered, or applied to register, our trade-marks in Canada and in some other jurisdictions.
If we fail to protect our intellectual property adequately, it could harm our brand and affect our ability to compete effectively. It could also take signifi-
cant time and money to defend our intellectual property rights, which could adversely affect our business, financial condition, and operating results.
We license a variety of intellectual property from third parties. Others may bring infringement claims against us or our customers in the future because
of an alleged breach of such a licence. If someone successfully asserts an infringement claim, we may be required to spend significant time and money
to develop or license intellectual property that does not infringe upon the rights of that other person or to obtain a licence for the intellectual property
from the owner. We may not succeed in developing or obtaining a licence on commercially acceptable terms, if at all. In addition, any litigation could
be lengthy and costly and could adversely affect us even if it is successful.
We May Not be Able to Meet Cash Requirements because of Our Holding Company Structure and Restrictions
on Paying Dividends
As a holding company, our ability to meet our cash requirements and pay dividends on our shares depends in large part upon our subsidiaries paying
dividends and other amounts to us. Our subsidiaries must comply with corporate and securities laws and with their agreements before they can pay
dividends to us. In particular, the recognition order of TSX Group and TSX Inc. provides that if TSX Inc. fails to maintain any of its financial viability
tests for more than three months, TSX Inc. will not, without the prior approval of the Director of the Ontario Securities Commission, pay dividends
(among other things) until the deficiencies have been eliminated for at least six months or a shorter period of time as agreed by Ontario Securities
Commission staff.
40 TSX Group Annual Report | 2007
Restrictions on Ownership of TSX Group Shares May Restrict Trading and Transactions
Under the Securities Act (Ontario) and related regulations and orders, no person or company may own or exercise control or direction over more
than 10% of any class or series of our voting shares, without obtaining the prior approval of the Ontario Securities Commission and, after the
amalgamation with MX closes, the Autorité des marchés financiers. Each of the Ontario Securities Commission and, after the amalgamation with
MX closes, the Autorité des marchés financiers will have complete discretion to grant its approval and may also change the 10% threshold in the
future. A shareholder (or shareholders acting together) who contravenes these provisions may have its shares redeemed and have dividend and
voting entitlements on its shares suspended. These restrictions may discourage trading in and may limit the market for our shares, may discour-
age potential acquisition and strategic alliance proposals, and may prevent transactions in which our shareholders could receive a premium for
their shares.
TSX Group and MX previously announced that they have agreed to combine their organizations to create TMX Group, a leading integrated
exchange group, by means of an amalgamation. This MD&A does not constitute an offer to sell or the solicitation of an offer to buy any securities
of TSX Group. Such an offer may only be made pursuant to a management information circular filed with the securities regulatory authorities
in Canada and the United States in connection with the proposed amalgamation. MX filed a management information circular with Canadian
provincial securities regulators on January 14, 2008 and TSX Group filed a registration statement with the United States Securities and Exchange
Commission (“SEC”) on January 14, 2008 which included the management information circular. Investors and security holders are urged to read
the management information circular regarding the proposed business combination because it contains important information in respect of the
proposed transaction. Investors may obtain a free copy of the management information circular on SEDAR at www.sedar.com and a free copy of
the registration statement including the management information circular on the SEC’s website at www.sec.gov. The management information
circular may also be obtained for free on MX’s website www.m-x.ca or by directing a request to MX.
January 30, 2008
Management’s Discussion and Analysis 41
Management Statement
Management is responsible for the preparation, integrity and fair presentation of the consolidated financial statements, management’s discussion
and analysis, and other information in this annual report. The consolidated financial statements were prepared in accordance with Canadian gener-
ally accepted accounting principles and, in the opinion of management, fairly reflect the financial position, results of operations and changes in
the financial position of TSX Group Inc. Financial information contained throughout this annual report is consistent with the consolidated financial
statements.
Acting through the Finance and Audit Committee, comprised of non-management directors, all of whom are independent directors within the mean-
ing of Multilateral Instrument 52-110-Audit Committees, the Board of Directors oversees management’s responsibility for financial reporting and
internal control systems. The Finance and Audit Committee is responsible for reviewing the consolidated financial statements and management’s
discussion and analysis and recommending them to the Board of Directors for approval. To discharge its duties the Committee meets with manage-
ment and external auditors to discuss audit plans, internal controls over accounting and financial reporting processes, auditing matters and financial
reporting issues.
TSX Group’s external auditors appointed by the shareholders, KPMG LLP, are responsible for auditing the consolidated financial statements and
expressing an opinion thereon. The external auditors have full and free access to, and meet periodically with, management and the Finance and Audit
Committee to discuss the audit.
Rik Parkhill
Interim Co-Chief Executive Officer
TSX Group and
President, TSX Markets
January 30, 2008
Michael Ptasznik
Interim Co-Chief Executive Officer
and Chief Financial Officer
TSX Group
Auditors’ Report to the Shareholders
We have audited the consolidated balance sheets of TSX Group Inc. as at December 31, 2007 and 2006 and the consolidated statements of income,
changes in shareholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s manage-
ment. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an
audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at Decem-
ber 31, 2007 and 2006 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted
accounting principles.
Chartered Accountants, Licensed Public Accountants
Toronto, Canada
January 30, 2008
42 TSX Group Annual Report | 2007
Consolidated Balance Sheets
December 31, 2007 and 2006 (In thousands of dollars)
Assets
Current assets:
Cash
Marketable securities (note 19)
Accounts receivable
Energy contracts receivable (note 6)
Fair value of open energy contracts (notes 6 and 19)
Prepaid expenses
Future tax asset (note 17)
Premises and equipment (note 2)
Future tax asset (note 17)
Other assets (note 3)
Investment in affiliate (note 5)
Intangible assets (note 7)
Goodwill (note 7)
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable and accrued liabilities
Energy contracts payable (note 6)
Fair value of open energy contracts (notes 6 and 19)
Deferred revenue
Deferred revenue – initial and additional listing fees (note 11)
Obligation under capital lease
Income taxes payable
Accrued employee benefits liabilities (note 4)
Obligation under capital lease
Other liabilities (note 10)
Deferred revenue – initial and additional listing fees (note 11)
Shareholders’ equity (note 12):
Share capital
Share option plan (note 14)
Deficit
Commitments and contingent liabilities (notes 8 and 22)
See accompanying notes to consolidated financial statements.
On behalf of the Board:
Wayne Fox
Chair
J. Spencer Lanthier
Director
$
$
$
2007
2006
$
$
$
53,398
249,399
48,438
745,378
74,907
6,561
22,840
1,200,921
21,324
131,613
25,869
11,731
66,578
65,883
1,523,919
48,175
745,378
74,907
6,484
61,820
152
9,724
946,640
12,113
71
30,331
362,854
1,352,009
379,370
5,060
(212,520)
171,910
37,018
285,055
34,298
889,395
–
2,914
25,095
1,273,775
25,344
127,362
12,482
11,357
62,652
59,866
1,572,838
39,194
889,395
–
6,468
50,410
778
20,465
1,006,710
10,425
145
32,880
295,723
1,345,883
387,501
3,942
(164,488)
226,955
$
1,523,919
$
1,572,838
Consolidated Financial Statements 43
Consolidated Statements of Income
Years ended December 31, 2007 and 2006 (In thousands of dollars, except per share amounts)
Revenue:
2007
2006
Issuer services
Trading and related
Market data
Business services and other (note 18)
Expenses:
Compensation and benefits
Information and trading systems
General and administration
Amortization
Income from operations
Income (loss) from investment in affiliate
Investment income
Income before income taxes
Income taxes (note 17)
Net income
Earnings per share (note 16):
Basic
Diluted
See accompanying notes to consolidated financial statements.
$
$
$
$
133,939
169,237
110,241
11,307
424,724
96,251
26,505
43,006
15,838
181,600
243,124
374
13,899
257,397
108,700
148,697
$
$
108,483
146,253
86,941
11,170
352,847
79,006
22,014
34,228
13,048
148,296
204,551
(82)
14,425
218,894
87,370
131,524
2.19
2.17
$
$
1.92
1.91
44 TSX Group Annual Report | 2007
Consolidated Statements of Changes
in Shareholders’ Equity
Years ended December 31, 2007 and 2006 (In thousands of dollars)
Common shares:
Balance, beginning of year
Proceeds on options exercised
Cost of exercised options
Purchased under normal course issuer bid (note 12)
Balance, end of year
Share option plan:
Balance, beginning of year
Cost of exercised options
Cost of share option plan
Balance, end of year
Deficit:
Balance, beginning of year
Transitional adjustment (note 1)
Net income
Dividends on common shares
Purchased under normal course issuer bid (note 12)
Balance, end of year
Shareholders’ equity, end of year
See accompanying notes to consolidated financial statements.
2007
2006
$
$
387,501
4,416
1,165
(13,712)
379,370
3,942
(1,165)
2,283
5,060
(164,488)
621
148,697
(103,465)
(93,885)
(212,520)
171,910
$
$
380,925
5,296
1,280
–
387,501
2,669
(1,280)
2,553
3,942
(205,799)
–
131,524
(90,213)
–
(164,488)
226,955
Consolidated Financial Statements 45
Consolidated Statements of Cash Flows
Years ended December 31, 2007 and 2006 (In thousands of dollars)
Cash flows from (used in) operating activities:
Net income
Adjustments to determine net cash flows:
2007
2006
$
148,697
$
131,524
15,838
3,142
(374)
2,283
(3,060)
144,017
(15,173)
(3,122)
7,878
(144,017)
(907)
78,027
(11,549)
221,680
(786)
4,416
(103,465)
(107,597)
(207,432)
(6,504)
(8,142)
33,268
(6,225)
(10,265)
2,132
16,380
37,018
53,398
$
13,048
–
82
2,553
(12,608)
114,925
(6,095)
544
(11,144)
(114,925)
11,709
67,346
(7,431)
189,528
(838)
5,296
(90,213)
–
(85,755)
(4,228)
(53,704)
(37,308)
–
–
(95,240)
8,533
28,485
37,018
979
16,090
124,601
$
$
$
741
15,026
108,112
$
$
$
$
Amortization
Unrealized loss on marketable securities
(Income) loss from investment in affiliate
Cost of share option plan
Future tax asset
Energy contracts receivable
Accounts receivable and prepaid expenses
Other assets
Accounts payable and accrued liabilities
Energy contracts payable
Long-term accrued and other liabilities
Deferred revenue
Income taxes payable
Cash flows from (used in) financing activities:
Reduction in obligation under capital lease
Proceeds on options exercised
Dividends on common shares
Purchased under normal course issuer bid
Cash flows from (used in) investing activities:
Additions to premises and equipment
Acquisitions, net of cash acquired
Marketable securities
Additions to intangible assets
Purchase of option to acquire NetThruPut Inc.
Increase in cash
Cash, beginning of year
Cash, end of year
Supplemental cash flow information:
Interest paid
Interest received
Income taxes paid
See accompanying notes to consolidated financial statements.
46 TSX Group Annual Report | 2007
Notes to the Consolidated Financial Statements
Years ended December 31, 2007 and 2006 (In thousands of dollars, except per share amounts)
TSX Group Inc. (the “Company”) owns and operates two national stock exchanges, Toronto Stock Exchange, serving the senior equity market and TSX
Venture Exchange, serving the public venture equity market, Natural Gas Exchange Inc. (“NGX”), an exchange for the trading and clearing of natural
gas and electricity contracts in North America, Shorcan Brokers Limited (“Shorcan”), a fixed income inter-dealer broker, and The Equicom Group Inc.
(“Equicom”), providing investor relations and related corporate communications services.
1. Significant accounting policies:
(a) Basis of presentation:
The consolidated financial statements include the accounts of the Company’s wholly-owned subsidiaries, TSX Inc. (“TSX”), NGX, Shorcan,
Equicom and the wholly-owned subsidiaries TSX, TSX Venture Exchange Inc. and NGX.
On August 14, 2007, the Company and International Securities Exchange, Inc. (“ISE”) announced the execution of a shareholders agreement
for CDEX Inc. (“CDEX”), which was created to operate DEX™, a new derivatives exchange scheduled to begin operations in March, 2009. CDEX is
owned 52 per cent by the Company and 48 per cent by ISE Ventures LLC, a wholly-owned subsidiary of ISE. At December 31, 2007, CDEX’s only
significant assets and liabilities were cash from financing activities and investment income in the amount of $26,420 and accrued liabilities of
$990. CDEX is accounted for using proportionate consolidation (note 20).
Intercompany balances and transactions have been eliminated upon consolidation.
(b)
Financial instruments:
Effective January 1, 2007, the Company adopted the new recommendations of the Canadian Institute of Chartered Accountants Handbook
Section 1530, Comprehensive Income; Section 3855, Financial Instruments – Recognition and Measurement; Section 3861, Financial Instruments
– Disclosure and Presentation and Section 3865, Hedges. The new sections provide guidance regarding the recognition and measurement of
financial instruments and accounting for hedges and establish standards for reporting comprehensive income.
The comparative consolidated financial statements have not been restated and the adoption of Section 3855 by the Company resulted in a
transitional adjustment which decreased the opening deficit by $621 due to the increase in the fair value of marketable securities less the tax
impact in respect thereof (note 19). The Company had no other comprehensive income or loss transactions during the year ended December 31,
2007 and no opening or closing balances for accumulated other comprehensive income or loss.
The new standards require all derivative financial instruments to be recognized on the Company’s consolidated balance sheet at fair value.
Accordingly, the fair value of all open energy contracts outstanding at December 31, 2007 has been recognized. As described in note 6, each
open energy contract with a counterparty has an equal and offsetting contract with another counterparty, resulting in an equivalent asset and
liability of $74,907.
(c) Amortization:
Amortization is provided over the following useful lives of the assets:
Asset
Premises under capital lease
Computers and electronic trading equipment
Furniture, fixtures and other equipment
Leasehold improvements
Intangible assets comprising:
Customer bases
Data licence
Capitalized software
Basis
Straight line
Straight line
Straight line
Straight line
Rate
25 years
3 – 5 years
5 years
Over terms of various
leases to a maximum of 15 years
Declining balance
Straight line
Straight line
2.0 – 8.0%
10 years
5 years
Notes to Consolidated Financial Statements 47
Notes to the Consolidated Financial Statements
Years ended December 31, 2007 and 2006 (In thousands of dollars, except per share amounts)
(d) Revenue recognition:
Revenue for goods and services is recognized when the services are provided or the goods are sold.
Trading and related revenues for capital markets are recorded and recognized as revenue in the month in which the trades are executed or when
the related services are provided.
Fees relating to NGX trading, clearing and settlement are recognized over the period the services are provided. Revenues and expenses related
to the value of energy products traded or swap differential payments made during the year, and unrealized gains and losses on open energy
contracts, are not recognized in these consolidated financial statements as NGX does not function as principal in these trading activities.
Issuer service revenues are derived primarily from recurring annual sustaining fees and transaction-based fees for initial and additional listings.
Sustaining fees for existing issuers are billed during the first quarter of the year and the amount is recorded as deferred revenue and amortized
over the year on a straight-line basis. Initial and additional listing fees are recorded as deferred revenue – initial and additional listing fees and are
recognized on a straight-line basis over an estimated service period of ten years.
Real time market data revenue is recognized based on usage as reported by customers and vendors. The Company conducts periodic audits of
the information provided and records additional revenues, if any, at that time. Fixed income indices revenue is recognized over the period the
service is provided. Other market data revenue and business services and other revenue is recorded and recognized as revenue in the month in
which the services are provided.
(e)
Income taxes:
Future income taxes are provided in recognition of temporary differences between the carrying amount of assets and liabilities and their
respective tax bases, operating losses and tax credit carryforwards made for financial reporting and income tax purposes. Future tax assets
and liabilities are measured using enacted or substantively enacted tax rates expected to apply to taxable income in the periods in which those
temporary differences are expected to be recovered or settled. The effect on future tax assets and liabilities of a change in tax rates is recognized
in income in the period in which the enacted or substantive enactments occur.
(f) Employee future benefits:
TSX, TSX Venture Exchange Inc. and NGX have registered pension plans with a defined benefits tier and a defined contributions tier covering
substantially all of their employees, as well as a retirement compensation arrangement (“RCA”) for senior management. Benefits are based on
years of service and the employee’s compensation. The costs of these programs are being funded currently. In addition, the Company provides
other employee future benefits, such as supplementary medical and dental coverage, to defined eligible employees (“other benefit plans”).
The cost of the other benefit plans is not being funded; however, a provision for this has been made in the accounts.
The Company accrues its obligations under employee defined benefit plans as the employees render the services necessary to earn pension and
other employee future benefits.
The Company has adopted the following policies for its benefit plans:
(i)
(ii)
(iii)
(iv)
The cost of defined benefit pensions and other retirement benefits earned by employees is actuarially determined using the
projected benefit method prorated on service and management’s best estimate of salary escalation, retirement ages and
expected health care cost.
For the purpose of calculating expected return on plan assets, those assets are valued at fair value.
Past service costs from plan amendments are amortized on a straight-line basis over the expected average remaining service
period of employees active at the time of the amendment.
Actuarial gains (losses) on plan assets arise from the difference between the actual return on plan assets for a period and the
expected return on plan assets for that period. Actuarial gains (losses) on the accrued benefit obligation arise from differences
between actual and expected experience and from changes in the actuarial assumptions used to determine the accrued benefit
obligation. The excess of the net accumulated actuarial gain (loss) over 10% of the greater of the accrued benefit obligations
and the fair value of plan assets is amortized over the expected average remaining service period of active employees.
(v)
When a restructuring of a benefit plan gives rise to both a curtailment and a settlement of obligations, the curtailment is
accounted for prior to the settlement.
48 TSX Group Annual Report | 2007
(g)
Intangible assets:
Intangible assets consisting of customer bases, a long-term data licence and capitalized software are reviewed at least annually. When the
carrying amount of the intangible asset exceeds the implied fair value of the intangible asset, an impairment loss is recognized as an amount
equal to the excess and is identified separately on the statement of income.
(h) Goodwill:
Goodwill is the residual amount that results when the purchase price of an acquired business exceeds the sum of the amounts allocated to the
assets acquired, less liabilities assumed, based on their fair values. Goodwill is allocated as of the effective date of the transaction.
Goodwill is not amortized and is tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset
might be impaired. The impairment test is carried out in two steps. In the first step, the carrying amount of the reporting unit is compared with
its fair value. When the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not to be impaired
and the second step of the impairment test is unnecessary.
The second step is carried out when the carrying amount of a reporting unit exceeds its fair value, in which case the implied fair value of the
reporting unit’s goodwill is compared with its carrying amount to measure the amount of the impairment loss, if any. The implied fair value of
goodwill is determined in the same manner as the value of goodwill is initially determined as described in the preceding paragraph, using the
fair value of the reporting unit as if it was the purchase price. When the carrying amount of the reporting unit goodwill exceeds the implied fair
value of the goodwill, an impairment loss is recognized in an amount equal to the excess and is recorded in the statement of income before
extraordinary items and discontinued operations.
(i) Use of estimates:
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities; including deferred revenue, intangible assets, pension plan assets
and liabilities, long term incentive plan liabilities and the fair value of open energy contracts. Management also makes estimates that affect
the reported amounts and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the year. Actual results could differ from those estimates.
(j) Earnings per share:
Basic earnings per share are computed by dividing net income by the weighted average number of shares outstanding during the
reporting period.
Diluted earnings per share are computed similar to basic earnings per share except that the weighted average shares outstanding are increased
to include additional shares from the assumed exercise of share options, if dilutive. The number of additional shares is calculated using the
treasury stock method which assumes that outstanding share options were exercised and that the proceeds from such exercises were used to
acquire common shares at the average market price during the reporting period.
(k) Related party transactions:
Any transactions entered into between the Company and related parties are on terms and conditions that are at least as favourable to the
Company as market terms and conditions and are recorded at the agreed upon exchange amount.
(l) Share-based compensation:
The Company has share-based compensation plans, which are described in notes 14 and 15. The Company accounts for all share-based payments
to eligible employees that call for settlement by the issuance of equity instruments, granted on or after January 1, 2003, using the fair value based
method. Under the fair value based method, compensation cost attributable to options to employees is measured at fair value at the grant date
and amortized over the vesting period. Compensation cost attributable to awards to such employees that call for settlement in cash is measured
at intrinsic value and amortized over the vesting period. Changes in intrinsic value between the grant date and the measurement date result in a
change in the measure of compensation cost.
For options that vest at the end of the vesting period, compensation cost is recognized on a straight-line basis over the vesting period. No compen-
sation cost is recognized for options that employees forfeit if they fail to satisfy the service requirement for vesting.
(m) Capital disclosures and Financial Instruments:
In December 2006, the CICA issued Section 1535, “Capital Disclosures,” which establishes standards for disclosing an entity’s objectives, policies
and processes for managing capital, Section 3862, “Financial Instruments – Disclosure” and Section 3863, “Financial Instruments – Presentation”.
The new standards are effective for the Company beginning January 1, 2008. The Company is determining the impact that these changes will
have on its consolidated financial statements once adopted.
Notes to Consolidated Financial Statements 49
Notes to the Consolidated Financial Statements
Years ended December 31, 2007 and 2006 (In thousands of dollars, except per share amounts)
2. Premises and equipment:
As at December 31, 2007
Premises under capital lease
Computers and electronic trading equipment
Furniture, fixtures and other equipment
Leasehold improvements
As at December 31, 2006
Premises under capital lease
Computers and electronic trading equipment
Furniture, fixtures and other equipment
Leasehold improvements
Amortization charged for the year was $11,102 (2006 – $10,565).
3. Other assets:
As at December 31
Option to acquire NetThruPut Inc.
Accrued benefit assets (note 4)
Other assets
$
$
$
Cost
12,317
65,262
17,722
40,599
135,900
Cost
12,317
61,149
16,859
37,734
$
$
$
Accumulated
amortization
12,129
54,117
16,346
31,984
114,576
Accumulated
amortization
11,473
47,952
15,611
27,679
$
$
$
Net book
value
188
11,145
1,376
8,615
21,324
Net book
value
844
13,197
1,248
10,055
$
128,059
$
102,715
$
25,344
2007
10,265
9,600
6,004
25,869
$
$
2006
–
9,300
3,182
12,482
$
$
On September 6, 2007, the Company entered into an agreement with Enbridge Inc. (“Enbridge”) and Circuit Technology Limited (“Circuit”) granting
it the option to acquire NetThruPut Inc. (“NTP”) at a time after March 15, 2009. The Company paid $9,500 plus acquisition costs of $765 for the right
to acquire all the shares of NTP from its shareholders at a price between $40,000 and $95,000. A portion of the purchase price will be satisfied by the
issuance of the Company’s shares, subject to Toronto Stock Exchange regulatory approval. This agreement also provides Enbridge and Circuit with the
right to sell all the shares of NTP under the same terms to the Company. Exercise of the option by either the Company or NTP’s shareholders is subject
to certain closing conditions (note 22).
50 TSX Group Annual Report | 2007
4. Employee future benefits:
Information about the Company’s benefit plans is as follows:
Total cash amounts recognized as paid or payable for employee future benefits in 2007, consisting of employer contributions to the defined benefit
pension plans, employer contributions to the other benefit plans, and employer contributions to the defined contribution plans, was $5,366
(2006 – $5,198).
Defined benefit plans:
Commencing January 1, 2004, the Company measures its accrued benefit obligations and the fair value of plan assets for accounting purposes as at
September 30 of each year. The most recent actuarial valuation of the registered pension plan for funding purposes was as at December 31, 2005,
and the next required valuation will be as at December 31, 2008. For the RCA plan, the most recent actuarial valuation for funding purposes was as at
December 31, 2006, and the next required valuation will be as at December 31, 2007.
As at December 31
Accrued benefit obligation:
Balance, beginning of year
Current service cost
Interest cost
Benefits paid
Employee contributions
Actuarial losses (gains)
Plan amendments
Net transfers in (out)
Balance, end of year
As at December 31
Plan assets:
Fair value, beginning of year
Actual return on plan assets
Employer contributions
Employee contributions
Benefits paid
Net transfers in (out)
Fair value, end of year
Funded status-plan surplus (deficit)
Unamortized net actuarial loss
Employer contributions after measurement date
Unamortized transitional obligation
Unamortized past service costs
Accrued benefit asset (liability)
Pension and RCA plans
Other benefit plans
2007
54,119
2,003
2,944
(1,962)
290
(1,854)
–
174
55,714
$
$
2006
52,421
2,174
2,728
(2,797)
311
37
(755)
–
54,119
$
$
2007
12,954
1,200
692
(163)
–
(535)
(4,933)
–
9,215
$
$
2006
11,572
1,287
671
(148)
–
(428)
–
–
12,954
Pension and RCA plans
Other benefit plans
2007
2006
2007
2006
52,777
3,284
3,424
290
(1,962)
135
57,948
2,234
6,669
416
27
254
9,600
$
$
$
$
49,478
2,969
2,816
311
(2,797)
–
52,777
(1,342)
9,628
619
42
353
9,300
$
$
$
–
–
163
–
(163)
–
–
(9,215)
1,778
41
–
(4,717)
(12,113)
$
$
$
–
–
148
–
(148)
–
–
(12,954)
2,368
39
–
122
(10,425)
$
$
$
$
$
$
The accrued benefit assets and accrued benefit obligations are included in the Company’s consolidated balance sheet as follows:
As at December 31
Other assets
Long-term liabilities
Total
Pension and RCA plans
Other benefit plans
$
$
2007
9,600
–
9,600
$
$
2006
9,300
–
9,300
$
$
2007
–
(12,113)
(12,113)
$
$
2006
–
(10,425)
(10,425)
Notes to Consolidated Financial Statements 51
Notes to the Consolidated Financial Statements
Years ended December 31, 2007 and 2006 (In thousands of dollars, except per share amounts)
Plan assets consist of:
Asset category
Equity securities
Debt securities
Canada Revenue Agency refundable tax account
Percentage of plan assets
2006
48%
38%
14%
100%
2007
52%
34%
14%
100%
The elements of the Company’s defined benefit plan costs recognized in the year are as follows:
Pension and RCA plans
Other benefit plans
As at December 31
Current service cost, net of employees’ contributions
Interest cost
Actual return on plan assets
Plan amendments
Actuarial losses (gains)
$
$
2007
2,003
2,944
(3,284)
–
(1,854)
(191)
$
2006
2,174
2,728
(2,969)
(755)
2,007
3,185
$
2007
1,200
692
–
(4,933)
(535)
(3,576)
Elements of employee future benefit costs before
adjustments to recognize the long- term nature of
employee future benefit costs:
Difference between expected return and actual return on
plan assets for the year (a)
Difference between actuarial (gains) losses recognized for
the year and actual actuarial (gains) losses on accrued
benefit obligations for the year (b)
Difference between amortization of past service costs for
the year and actual plan amendments for the year (c)
Difference between costs arising in the period and costs
recognized In the year in respect of transitional obligation
(asset)
Net benefit plan expense
628
334
–
2,209
99
(1,691)
854
590
4,839
$
15
2,760
$
16
2,698
$
–
1,853
$
–
2,056
(a) Expected return on plan assets of $2,656 (2006 – $2,635) less the actual return on plan assets of $3,284 (2006 – $2,969).
(b) Actuarial (gain) loss recognized for the year of $355 (2006 – $316) less the actual actuarial (gain) loss on accrued benefit obligation of
$(1,854) (2006 – $2,007).
(c) Amortization of past service costs for the year of $99 (2006 – $99) less the actual plan amendments for the year of $Nil (2006 – ($755)).
The significant actuarial assumptions adopted in measuring the obligation are as follows (weighted average):
As at December 31 2007
Discount rate
Rate of compensation increase
Expected long-term rate of return on plan assets
Pension and RCA plans
Other benefit plans
2007
5.65%
4.00%
5.60%
2006
5.25%
4.00%
6.00%
2007
5.65%
n/a
n/a
2006
5.40%
n/a
n/a
The assumed health care cost trend rate at December 31, 2007 was 8.5% (2006 – 7.0 %), decreasing to 4.9% (2006 – 4.6%) over eight years
(six years in 2006).
52 TSX Group Annual Report | 2007
2006
1,287
671
–
–
(428)
1,530
–
519
7
Increasing or decreasing the assumed health care cost trend rates by one percentage point would have the following effects for 2007:
Total of service and interest cost
Accrued benefit obligation
Increase
546
1,932
$
$
Decrease
(443)
(1,490)
$
$
In 2007, the Company contributed and expensed $1,980 (2006 – $1,884) to the defined contribution tier, which amounts are not included in the
recognized defined benefit costs above.
The average remaining service period of the active employees covered by the pension plans is 13 years (2006 – 14 years). The average remaining service
period of the active employees covered by the other retirement benefits plans is 18 years (2006 – 19 years).
5. Investment in affiliate:
The Company owns a 47% equity interest in CanDeal.ca Inc. (“CanDeal”), an electronic trading system for the institutional debt market. The investment
is accounted for using the equity method. As part of the investment, the Company and CanDeal entered into an agreement under which the Company
would provide technological services in support of CanDeal’s electronic trading system. In 2007, the Company charged CanDeal $185 (2006 – $228)
for technology services and remitted to CanDeal $680 (2006 – $642) as part of a revenue sharing arrangement and for the supply of
technology development.
6. NGX clearing risk and backstop fund:
As an electronic exchange and clearing house for physical and financial natural gas and electricity contracts, NGX is the central counterparty for all
transactions traded on the exchange between participants (“Contracting Party”). Physical contracts have fixed prices determined by the electronic
matching of bids and offers from Contracting Parties at the time the trades are initiated. Financial contracts, generally swaps, require the payment
of a differential between fixed prices, as agreed through the bid and offer process, and specified market indices at future dates. The terms of energy
contracts outstanding at December 31, 2007 range from one day to five years.
NGX does not take physical delivery of energy products traded on the exchange. In the event of non–performance by a Contracting Party in a physical
transaction, NGX has arranged for third party physical backstopping with the hub operator or other third parties, with all related costs payable by the
non-performing Contracting Party.
As a clearing house, NGX is exposed to credit risk in the event that a Contracting Party fails to pay amounts owing to NGX (recorded on the balance
sheet as energy contracts receivable). NGX is exposed to market price risk if a Contracting Party fails to take or deliver energy products which have been
contracted at prices less favourable than current market prices. To mitigate these risks, NGX maintains comprehensive credit policies and practices.
NGX requires each Contracting Party to provide sufficient collateral, in the form of cash or letters of credit, to exceed all outstanding credit exposure
as determined by NGX in accordance with its margining methodology. This collateral may be accessed by NGX in the event of default by a Contracting
Party. NGX measures total potential exposure for each Contracting Party on a real-time basis as the aggregate of:
(i)
Outstanding energy contracts receivable;
(ii)
“Variation Margin”, comprised of the aggregate “mark-to-market” exposure for all forward purchase and sale contracts with an adverse
value from the perspective of the customer; and
(iii)
“Initial Margin”, an amount that estimates the worst expected loss that a contract might incur under normal market conditions during
a liquidation period.
As a result of these calculations of Contracting Party exposure at December 31, 2007, NGX held cash collateral deposits of $273,612 (2006 – $296,957)
and letters of credit of $2,230,928 (2006 – $2,087,175). Cash collateral deposits are segregated in individually designated bank accounts held by NGX
at a major Canadian chartered bank. NGX also maintains a clearing backstop fund, which was increased on November 1, 2007 from secured $30,000
Canadian to unsecured U.S. $100,000. The Company is the guarantor of this fund.
In addition to continuous monitoring of margin requirements, NGX requires the use of a Contracting Party agreement, a standardized agreement that
allows for netting of positive and negative exposures associated with a single Contracting Party. NGX also monitors the financial condition of Contract-
ing Parties (and their support providers, if any). In the event of a default by a Contracting Party, including a failure to take delivery of product, a failure
to deliver product, failure to pay, failure to deposit collateral, or insolvency, NGX has the right to liquidate that Contracting Party’s open positions, draw
down their collateral and terminate them from transacting on the exchange.
Notes to Consolidated Financial Statements 53
Notes to the Consolidated Financial Statements
Years ended December 31, 2007 and 2006 (In thousands of dollars, except per share amounts)
7. Goodwill and intangible assets:
Goodwill is tested for impairment at least annually. The tests were performed in the fourth quarter. The Company found that the fair values of its
reporting units were not impaired. Therefore, the second step of the impairment test was not required.
At the time of the respective purchases, the Company recorded intangible assets related to the customer bases of TSX Venture Exchange Inc., NGX,
Oxen, Shorcan, and Equicom and, in connection with the acquisition of PC Bond®, the customer base and a long-term data licence under which Scotia
Capital Inc. provides fixed income pricing data.
During 2007, the Company capitalized $5,725 of software development costs incurred to build the TSX Quantum trading engine.
Intangible assets, beginning of year
Acquisition of intangible assets
Other additions – TSX Quantum
Less amortization of intangible assets
Intangible assets, end of year
8. Commitments:
$
$
2007
62,652
2,936
5,725
(4,735)
66,578
$
$
2006
30,700
34,435
–
(2,483)
62,652
The Company is committed under long-term leases as follows:
(a) The rental of office space, under various long-term operating leases with remaining terms of up to 12 years and a capital lease
for an initial term of 25 years with an additional 10-year renewal option.
(b) The rental of computer hardware and software for terms of one to three years.
Current lease obligations over the remaining terms of the operating leases are as follows:
Years ending December 31:
2008
2009
2010
2011
2012
Thereafter
$
$
16,004
14,731
11,616
6,431
5,226
24,552
78,560
9. Segmented information:
The Company operates in two reportable segments. In the Capital Markets segment, the Company owns and operates Canada’s two national stock
exchanges, Toronto Stock Exchange and TSX Venture Exchange and Shorcan, a fixed income inter-dealer broker and Equicom, an investor relations and
corporate communications services provider. The Energy Markets segment is engaged in trading and clearing natural gas and electricity contracts
through NGX.
2007
Total Revenue
Net Income
Goodwill
Total Assets
2006
Total Revenue
Net Income
Goodwill
Total Assets
* Includes results from dates of acquisition in the year.
54 TSX Group Annual Report | 2007
$
Capital Markets*
402,756
144,395
44,604
647,291
Energy Markets*
21,968
$
4,302
21,279
876,628
$
$
$
332,764
126,817
38,587
625,715
$
20,083
4,707
21,279
947,123
Total
424,724
148,697
65,883
1,523,919
352,847
131,524
59,866
1,572,838
10. Other liabilities:
Other liabilities include amounts payable under the long-term incentive plan (note 15), liabilities due to the contraction of office space and amounts
due on acquisitions made during the previous years.
11. Deferred revenue – initial and additional listing fees:
Deferred revenue – initial and additional listing fees represents non-refundable fees received from listed issuers. This deferred revenue is recognized on
a straight-line basis over an estimated service period of ten years.
12. Shareholders’ equity:
The authorized capital of the Company consists of an unlimited number of common shares and an unlimited number of preference shares, issuable in
series. No preference shares have been issued.
Each common share of the Company entitles its holder to one vote at all meetings of shareholders subject to certain restrictions with respect to the
voting rights and the transferability of the shares. No person or combination of persons acting jointly or in concert is permitted to beneficially own
or exercise control or direction over more than 10% of any class or series of voting shares of the Company without the prior approval of the Ontario
Securities Commission.
Each common share of the Company is also entitled to receive dividends if, as and when declared by the Board of Directors of the Company.
All dividends that the Board of Directors of the Company may declare and pay will be declared and paid in equal amounts per share on all common
shares, subject to the rights of holders of the preference shares. Holders of common shares will participate in any distribution of the net assets of the
Company upon liquidation, dissolution or winding-up on an equal basis per share, but subject to the rights of the holders of the preference shares.
There are no pre-emptive, redemption, purchase or conversion rights attaching to the common shares, except for the compulsory sale of shares
or redemption provision described in connection with enforcing the restriction on ownership of voting shares of the Company.
Details of capital transactions are as follows:
Balance, December 31, 2005
Net income
Dividends
Exercised options
Share option costs
Balance, December 31, 2006
Net income
Dividends
Exercised options
Share option costs
Transitional adjustment (note 1)
Normal course issuer bid
Balance, December 31, 2007
Number
of common
shares
68,093,018
–
–
328,246
–
68,421,264
–
–
256,968
–
–
(2,399,862)
66,278,370
$
$
Share
capital
380,925
–
–
6,576
–
387,501
–
–
5,581
–
–
(13,712)
379,370
$
$
Deficit
(205,799)
131,524
(90,213)
–
–
(164,488)
148,697
(103,465)
–
–
621
(93,885)
(212,520)
$
$
Share
option plan
2,669
–
–
–
1,273
3,942
$
Total
shareholders’
equity
177,795
131,524
(90,213)
6,576
1,273
226,955
–
–
–
1,118
–
–
5,060
$
148,697
(103,465)
5,581
1,118
621
(107,597)
171,910
On August 1, 2007, the Company received approval from Toronto Stock Exchange to repurchase up to 6,841,051 of its common shares under a normal
course issuer bid (“NCIB”). Purchases may be made over a one year period to end on August 6, 2008. Common shares purchased under the NCIB are
cancelled. From August 7, 2007 to December 31, 2007, the Company purchased 2,399,862 common shares at an aggregate cost of $107,597 of which
$13,712 was charged to share capital and the excess of the cost of the NCIB over the stated value of the common shares of $93,885 was charged to the
deficit. On December 10, 2007, the Company announced termination of the pre-defined plan with its appointed broker to automatically repurchase
its common shares.
Notes to Consolidated Financial Statements 55
Notes to the Consolidated Financial Statements
Years ended December 31, 2007 and 2006 (In thousands of dollars, except per share amounts)
13. Employee share purchase plan:
The Company offers an employee share purchase plan for eligible employees of the Company and of its designated subsidiaries. Under the employee
share purchase plan, contributions by the Company and by eligible employees will be used by the plan administrator, CIBC Mellon Trust Company, to
make purchases of common shares of the Company on the open market. Each eligible employee may contribute up to 10% of the employee’s salary
to the employee share purchase plan. The Company will contribute to the plan administrator the funds required to purchase one common share of
the Company for each two common shares purchased on behalf of the eligible employee, up to a maximum annual contribution of $2.5. Shareholder
approval is not required for this plan or any amendments to the plan.
The Company accounts for its contributions as compensation expense when the amounts are contributed to the plan. Compensation expense related
to this plan was $914 for the year ended December 31, 2007 (2006 – $881).
14. Share option plan:
The Company established a share option plan in 2002, the year of its initial public offering. All employees or officers of the Company and those of its
designated subsidiaries at or above the director level are eligible to be granted share options under the option plan. According to the terms of the plan,
under no circumstances may any one person’s share options and all other share compensation arrangements exceed 5% of the outstanding common
shares of the Company. 4,421,950 common shares of the Company remain reserved for issuance upon exercise of share options granted under this
plan, representing approximately 7% of the outstanding common shares of the Company.
The fair value of each share option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following
assumptions used for grants in 2007: dividend yield of 2.52%; expected volatility of 25%; risk-free interest rate of 4% and expected life of 7 years.
The fair value of each share option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following
assumptions used for grants in 2006: dividend yield of 2.75%; expected volatility of 25%; risk-free interest rate of 4% and expected life of 7 years.
Share options granted in 2007 have strike prices in the range of $42.80 to $53.04. Share options granted in 2006 had strike prices in the range of $47.30
to $49.64.
Share options granted will expire in 2011, 2012, 2013 and 2014.
Share options:
2007
2006
Outstanding, beginning of year
Granted
Forfeited
Exercised
Outstanding, end of year
Number
of share
options
1,096,650
219,948
(86,108)
(256,968)
973,522
Weighted
average
exercise price
25.17
52.48
45.59
17.19
31.64
$
$
Number
of share
options
1,248,462
194,262
(17,828)
(328,246)
1,096,650
Weighted
average
exercise price
18.98
49.49
23.63
16.13
25.17
$
$
517,271 share options were fully vested and exercisable at strike prices in the range of $10.53 to $49.64 at December 31, 2007. During 2007, the Company
recognized compensation cost of $2,283 (2006 – $2,553) in respect of its share option plan.
56 TSX Group Annual Report | 2007
15. Interim bonus and long-term incentive plan:
Effective January 1, 2001, TSX introduced an interim bonus plan (in lieu of a long-term incentive plan) for employees or officers at or above the
director-level of TSX and its designated subsidiaries. The interim bonus plan provided eligible employees with a deferred award based on the
annual financial performance of the Company. Amounts earned in 2001 were converted into deferred share units for executive officers and restricted
share units for other participants based on the price of one common share of the Company in conjunction with the public offering of the Company.
Amounts earned in 2002 were converted into deferred share units or restricted share units based on the value of one common share of the Company
on December 31, 2002.
Deferred share units vested over a three year period ended December 31, 2005, but can only be redeemed upon termination of employment or
retirement by cash payment. Restricted share units vested and were redeemed in cash by December 31, 2005.
In January 2004, the Board approved a long-term incentive plan for employees or officers at or above the director-level of the Company and its
designated subsidiaries or employees below the director-level designated by the CEO of the Company, which provides for the granting of restricted
share units (“RSUs”). The amount of the award payable at the end of three years will be determined by the total shareholder return at the end of the
three year period. Total shareholder return represents the appreciation in share price of the Company plus dividends paid on a common share of the
Company, measured at the time RSUs vest.
The Company records its obligation under the long-term incentive plan, if any, in the period in which the award is earned. The Company has purchased
swaps to economically hedge against the impact of its share price fluctuations on the non-performance based portion of the long-term incentive plan
(note 19). As at December 31, 2007, the total accrual for the RSUs is $7,420 (December 31, 2006 – $11,330) and is included in accounts payable and
accrued liabilities and other liabilities. In prior years, the RSUs obligation was estimated and recorded at a targeted payout amount which was not
necessarily based on the maximum amount that might be paid.
The maximum amount to be paid is not known until the awards have vested and will be based on total shareholder return to the time of payout.
Effective January 1, 2007, the Company changed its method of estimating the RSUs obligation. The accrual is based on actual dividends paid,
continuation of the most recent quarterly dividend and the closing price of the Company’s common shares for the period. Having monitored
fluctuations in the Company’s share price, the Company concluded that accruing its obligation in this manner provided a better estimate of the RSUs
payout compared with an estimate based on target. The impact of this change in methodology for making the estimate was to increase the RSUs
obligation and compensation and benefits costs by $1,118 for the year ended December 31, 2007.
16. Earnings per share:
Net income
Basic weighted average number of common shares outstanding
Basic earnings per share
Diluted weighted average number of common shares outstanding
Diluted earnings per share
2007
148,697
67,970,365
2.19
68,464,095
2.17
$
$
$
2006
131,524
68,329,758
1.92
68,998,718
1.91
$
$
$
Notes to Consolidated Financial Statements 57
Notes to the Consolidated Financial Statements
Years ended December 31, 2007 and 2006 (In thousands of dollars, except per share amounts)
17. Income taxes:
Income tax expense attributable to income differs from the amounts computed by applying the combined federal and provincial income tax rate
of 35.03% (2006 – 35.06%) to pre-tax income from operations as a result of the following:
Income before income taxes
Computed expected income tax expense
Non-deductible expenses
Share of affiliate loss (income)
Deferred revenue not affecting income tax expense
Impact of changes in substantively enacted income tax rates
Other
The income tax provisions for the years ended December 31, 2007 and 2006 are as follows:
Current income tax expense
Future income tax benefit
$
$
$
$
$
2007
257,397
90,166
1,076
(132)
(1,846)
15,091
4,345
108,700
$
$
$
2006
218,894
76,744
948
29
(2,668)
11,047
1,270
87,370
2007
111,770
(3,070)
108,700
$
$
2006
99,978
(12,608)
87,370
The tax effects of temporary differences that give rise to significant portions of the future tax asset at December 31, 2007 and 2006 are presented below:
Non-capital loss carryforwards
Premises and equipment
Cumulative eligible capital
Financing costs
Deferred listing revenue
Other temporary differences
Future tax asset:
Current
Long-term
$
$
$
$
2007
325
4,445
28,720
–
125,341
(4,378)
154,453
22,840
131,613
154,453
$
$
$
$
2006
742
5,309
35,139
277
110,754
236
152,457
25,095
127,362
152,457
18. Regulatory services:
Since 2002, the Securities Commissions of Alberta, British Columbia, Manitoba, Ontario and Quebec (the commissions) have recognized Market
Regulation Services Inc. (“RS”) as a self-regulatory organization and approved the retention of RS to perform certain market regulation functions
formerly performed by TSX. RS is a private corporation jointly owned by TSX and the Investment Dealers Association of Canada and operated on a not-
for-profit basis in accordance with its articles. RS provides regulatory services to Canadian marketplaces (i.e., exchanges, alternative trading systems
and quotation and trade reporting systems) that contract with it, in consideration of fees to be paid by such marketplaces and their participants.
TSX and TSX Venture Exchange Inc. have retained RS to perform certain market regulation functions.
For the year ended December 31, 2007, $7,184 (2006 – $7,189) of business services revenue was earned for technology services provided to RS
and $3,538 (2006 – $3,889) was paid to RS for services provided by RS.
58 TSX Group Annual Report | 2007
19. Financial instruments:
In accordance with the new standards referenced in note 1, the Company has classified the significant impacts of its financial instruments as follows:
(a)
Marketable securities:
The investment portfolio includes pooled fund investments managed by an external investment fund manager. Market values for securities held
by the pooled funds are determined by reference to quoted market prices. There is no contractual maturity date for the investments.
The Company has designated its marketable securities as held-for-trading. At December 31, 2007, these investments have been measured
at fair value and unrealized net losses of $3,142 have been reflected in net income in the consolidated financial statements for the year ended
December 31, 2007.
The carrying and fair values of the investment portfolio are as follows:
As at December 31
2007
2006
Money market fund
Short-term bond and mortgage fund
(b) Swaps:
Carrying Value
166,457
82,942
249,399
$
$
$
$
Fair value
166,457
82,942
249,399
Carrying value
184,019
101,036
285,055
$
$
$
$
Fair value
184,019
101,790
285,809
TSX has entered into total return swaps (“TRSs”) which synthetically replicate the economics of TSX purchasing the Company’s shares as a partial
fair value hedge to the share appreciation rights of RSUs and deferred share units that are awarded to directors and employees of the Company
and its designated subsidiaries (note 15). TSX marks to market the fair value of the TRSs as an adjustment to income, and simultaneously marks
to market the liability to holders of the RSUs and deferred share units as an adjustment to income. The fair values of the TRSs and the obligation
to unit holders are reflected on the balance sheet. The TRSs are settled in cash upon maturity.
The following tables represent the TRSs which are outstanding at December 31.
As at December 31, 2007:
Equity Swap Contract #5
Equity Swap Contract #10
Equity Swap Contract #13
Equity Swap Contract #14
Equity Swap Contract #15
Equity Swap Contract #16
As at December 31, 2006:
Equity Swap Contract #5
Equity Swap Contract #7
Equity Swap Contract #8
Equity Swap Contract #10
Equity Swap Contract #11
Equity Swap Contract #12
$
Remaining term to maturity (notional amount)
Total
1 to 3 years
Under 1 year
695
–
$
695
$
664
–
664
854
854
–
5,310
–
5,310
2,453
–
2,453
10,548
–
10,548
20,524
854
19,670
$
$
$
$
$
Remaining term to maturity (notional amount)
Total
1 to 3 years
Under 1 year
695
–
695
$
12,388
–
12,388
621
–
621
664
664
–
4,268
–
4,268
620
–
620
19,256
664
18,592
$
$
$
Fair value
Loss
–
–
–
–
–
–
–
$
$
Fair value
Loss
–
–
(11)
(13)
(333)
(22)
(379)
$
$
$
$
$
$
Gain
627
82
10
422
563
2,422
4,126
Gain
457
736
–
–
–
–
1,193
Net
627
82
10
422
563
2,422
4,126
Net
457
736
(11)
(13)
(333)
(22)
814
$
$
$
$
The unrealized gains reflected in net income during the twelve month period ended December 31, 2007 were $3,008 (2006 – $405).
Notes to Consolidated Financial Statements 59
Notes to the Consolidated Financial Statements
Years ended December 31, 2007 and 2006 (In thousands of dollars, except per share amounts)
(c) NGX energy contracts:
NGX energy contract receivable and payable positions are recognized for all contracts where physical delivery has occurred or financial
settlement amounts have been determined prior to the period end but payments have not yet been made.
The fair value at the balance sheet date of the undelivered physically settled trading contracts and the forward financially settled trading
contracts is recognized in the consolidated assets and liabilities as open energy contracts. There is no impact on the consolidated statement
of income.
(d)
Foreign currency risk:
Accounts receivable include U.S. $8,579 (2006 – U.S. $5,246), which are exposed to changes in the U.S. – Canadian dollar exchange rate.
20. Acquisition:
On December 10, 2007, the Company and Montreal Exchange Inc. (“MX”) entered into a combination agreement pursuant to which the Company will
indirectly acquire all of MX’s outstanding common shares for a total consideration consisting of up to 15,346,000 common shares of the Company
and up to $428,200 in cash. The total purchase price, based on preliminary estimates, has been estimated at $1.25 billion. The Company intends to
finance the cash consideration with a three year term facility of $430,000. All MX outstanding share options will be cancelled under the terms of the
combination agreement and will be exchanged for approximately 175,305 of the Company’s share options. The transaction is expected to close in the
first quarter of 2008, subject to the approval of MX shareholders and receipt of all necessary regulatory approvals.
In connection with the announcement of the agreement to combine the Company with MX, the Company provided ISE with a notice of a com-
peting transaction as required under the terms of the CDEX shareholders’ agreement. If the parties are unable to agree to an alternative business
arrangement, originally by January 10, 2008 and subsequently extended to March 31, 2008 through an amending agreement, the Company will be
required to pay ISE $15,000, plus interest. If this payment is required, it will be expensed in the period incurred.
21. Comparative figures:
Certain comparative figures have been reclassified to conform with the financial presentation adopted in the current year.
22. Contingent liabilities:
The Company may make additional payments of up to a maximum $19,200 contingent on the results of acquisition operations within the next three
years and payments ranging from $40,000 to $95,000 in connection with the acquisition of NTP (note 3).
From time to time in connection with its operations, the Company or its subsidiaries are named as a defendant in actions for damages and
costs sustained by plaintiffs, or as a respondent in court proceedings challenging the Company’s or its subsidiaries’ regulatory actions, decisions or
jurisdiction. In 2005, TSX Venture Exchange was named as a defendant in an action for unspecified damages. The Company believes this claim is with-
out merit and intends to vigorously defend the action. Accordingly, no provision has been set up in the accounts.
60 TSX Group Annual Report | 2007
Three-Year Review – Financial Information*
(in thousands of dollars)
Revenue:
Issuer Services
Trading and related
Market data
Business services and other
Expenses
Income from operations
Income (loss) from investment in affiliate
Investment income
Income taxes
Net Income
Operating cash flow
Working capital
Total Assets
Shareholders’ Equity
$
$
$
$
$
20071
20062
2005
133,939
169,237
110,241
11,307
424,724
$
$
108,483
146,253
86,941
11,170
352,847
$
$
87,724
125,532
67,430
9,278
289,964
181,600
148,296
139,192
$
$
$
243,124
374
13,899
108,700
148,697
221,680
254,281
1,523,919
171,910
$
$
$
204,551
(82)
14,425
87,370
131,524
189,528
267,065
1,572,838
226,955
150,772
(693)
6,876
53,602
103,353
167,126
212,901
1,557,225
177,795
*
1
2
Certain comparative figures have been reclassified to conform with the financial presentation adopted in the current year.
The financial results of The Equicom Group Inc. acquired June 1, 2007 have been included in these results from and after acquisition.
The financial results of Oxen Inc., which owns Alberta Watt Exchange Limited (acquired October 2, 2006), Scotia Capital Inc.’s Fixed Income Indices, PC-Bond®
and related assets (acquired October 25, 2006) and Shorcan (acquired December 1, 2006), have been included in these results from and after acquisition.
Three-Year Review 61
Three-Year Review – Market Statistics*
(Unaudited)
Toronto Stock Exchange:
Volume (millions)
Value ($ billions)
Transactions (000s)
Issuers Listed
New Issuers Listed:
Number of Initial Public Offerings
Number of graduates from TSX Venture/NEX
New Equity Financing: ($ millions)
Initial Public Offering Financing ($ millions)
Secondary Offering Financings1 ($ millions)
Supplementary Financings ($ millions)
Market Cap of Listed Issuers ($ billions)
S&P/TSX Composite Index Close
TSX Venture Exchange 2:
Volume (millions)
Value ($ millions)
Transactions (000s)
Issuers Listed
New Issuers Listed:
New Equity Financing: ($ millions)
Initial Public Offering Financing ($ millions)
Secondary Offering Financings1 ($ millions)
Market Cap of Listed Issuers ($ billions)
S&P/TSX Venture Composite Index Close
2007
2006
2005
96,109.0
1,697.2
118,578.2
1,613
207
99
72
47,613.9
7,321.3
23,157.6
17,134.9
2,095.3
13,833.1
53,147.4
44,970.4
8,675.1
2,338
273
11,652.4
532.7
11,119.7
58.5
2,839.7
82,049.9
1,416.1
85,651.9
1,598
197
108
67
41,793.4
9,927.2
19,513.4
12,352.8
2,061.3
12,908.4
37,674.5
33,277.9
6,487.2
2,244
186
8,047.8
369.7
7,678.1
55.3
2,987.1
64,167.3
1,075.2
55,158.3
1,537
223
137
46
46,162.8
15,226.0
14,956.6
15,980.2
1,830.7
11,272.3
21,545.7
15,696.3
3,477.0
2,221
165
6,163.9
257.5
5,906.4
34.0
2,236.6
*
1
2
Certain comparative figures have been restated.
Secondary Offering Financings includes prospectus offerings on both a treasury and secondary basis.
TSX Venture Exchange market statistics do not include data for debt securities. ‘New Issuers Listed’ and ‘S&P/TSX Venture Composite Index Close’ statistics exclude
data for issuers on NEX. All other TSX Venture Exchange market statistics include data for issuers on NEX, which is a board that was established on August 18, 2003
for issuers that have fallen below TSX Venture’s listing standards (162 issuers at December 31, 2007, 164 issuers at December 31, 2006).
62 TSX Group Annual Report | 2007
OWEN McCREERY
Consultant and Corporate Director
Committees: Finance and Audit
Director since: 2002
JOHN P. MULVIHILL
Chairman
Mulvihill Capital Management Inc.
Committees: Governance (Chair)
Director since: 1996
KATHLEEN M. O’NEILL
Corporate Director
Committees: Finance and Audit, Governance
Director since: 2005
GERRI B. SINCLAIR
Strategic Consultant
Committees: Human Resources, Public Venture Market
Director since: 2005
Board of Directors
As of March 31, 2008
WAYNE C. FOX (CHAIR)
Corporate Director
Committees: Governance, Human Resources
Director since: 1997
TULLIO CEDRASCHI
Former President and Chief Executive Officer
CN Investment Division
Committees: Governance, Human Resources (Chair)
Director since: 2001
RAYMOND CHAN
Chief Executive Officer
Baytex Energy Trust
Committees: Finance and Audit
Director since: 2006
RAYMOND GARNEAU
Corporate Director
Committees: Governance, Human Resources
Director since: 2003
JOHN A. HAGG
Corporate Director
Committees: Human Resources, Public Venture Market
Director since: 2001
HARRY A. JAAKO
President and Principal
Discovery Capital Corporation
Committees: Finance and Audit, Public Venture Market (Chair)
Director since: 2001
J. SPENCER LANTHIER
Corporate Director
Committees: Finance and Audit (Chair), Governance
Director since: 2000
JEAN MARTEL
Senior Partner
Lavery, de Billy
Committees: Finance and Audit, Public Venture Market
Director since: 1999
Board of Directors 63
JOHN MCKENZIE
Vice President
Corporate Strategy and Development
TSX Group
RICHARD NADEAU*
Senior Vice President
Toronto Stock Exchange
SHARON C. PEL*
Senior Vice President, Legal and Business Affairs
TSX Group
ERIC SINCLAIR*
Senior Vice President
TSX Datalinx
JOHN WASHBURN
Vice President, Business Operations
TSX Markets
Senior Management
As of March 31, 2008
RIK PARKHILL*
Interim Co-Chief Executive Officer
TSX Group
President
TSX Markets
MICHAEL PTASZNIK*
Interim Co-Chief Executive Officer and
Chief Financial Officer
TSX Group
JOSEPH CAVASIN
Vice President, Application
Services Delivery
TSX Technologies
DAVID COLES
Vice President, Operations and
Technology Services Delivery
TSX Technologies
KEVAN B. COWAN*
President
TSX Venture Exchange
Senior Vice President, Business Development
Toronto Stock Exchange
CHRISTINE ELLISON
Vice President, Human Resources
TSX Group
ROBERT FOTHERINGHAM
Senior Vice President, Trading
TSX Markets
BRENDA L. HOFFMAN*
Senior Vice President and Chief Information Officer
TSX Technologies
PETER KRENKEL*
President
NGX
JAMES P. MAGEE*
President and Chief Executive Officer
Shorcan
*
Member of the Senior Management Team
64 TSX Group Annual Report | 2007
Shareholder Information
STOCK LISTING
Toronto Stock Exchange
Share Symbol “X”
AUDITOR
KPMG LLP
Toronto, ON
REGISTERED OFFICE AND HEAD OFFICE OF TSX GROUP
The Exchange Tower
130 King Street West
Toronto, ON
M5X 1J2
HEAD OFFICE OF TSX VENTURE EXCHANGE
300 – 5th Avenue SW
10th Floor
Calgary, AB
T2P 3C4
HEAD OFFICE OF NGX
140 – 4th Avenue SW
Suite 2330
Calgary, AB
T2P 3N3
HEAD OFFICE OF SHORCAN
20 Adelaide Street East
Suite 1000
Toronto, ON
M5C 2T6
HEAD OFFICE OF EQUICOM
20 Toronto Street
Suite 500
Toronto, ON
M5C 2B8
REGIONAL OFFICES
MONTREAL
1000 Sherbrooke Street West
Suite 1100
Montreal, QC
H3A 3G4
VANCOUVER
650 West Georgia Street
Suite 2700
Vancouver, BC
V6B 4N9
SHARE TRANSFER AGENT
Requests for information regarding share transfers
should be directed to the Transfer Agent:
CIBC Mellon Trust Company
PO Box 7010
Adelaide Street Postal Station
Toronto, ON
M5C 2W9
Tel: (416) 643-5500 (Toronto Area)
1-800-387-0825 (North America)
Fax: (416) 643-5501
E-mail: inquiries@cibcmellon.com
INVESTOR CONTACT INFORMATION
Investor Relations may be contacted at:
Tel: (416) 947-4277 (Toronto Area)
1-888-873-8392 (North America)
Fax: (416) 947-4727
E-mail: shareholder@tsx.com
ANNUAL AND SPECIAL MEETING
The Annual and Special Meeting of shareholders
will be held at 10:00 a.m. (Eastern Daylight Time)
on June 11, 2008 at:
MaRS Collaboration Centre
Auditorium
101 College Street
Toronto, Ontario
NEX, NGX, Toronto Stock Exchange, TSX, TSX Group
and TSX Venture Exchange are registered trade-marks
of TSX Inc.
Equicom, Natural Gas Exchange, TMX, TMX Group and
TSX Quantum are trade-marks of TSX Inc.
S&P, as part of the composite mark S&P/TSX, refers to a
trade-mark of The McGraw-Hill Companies, Inc. and is
used under license.
Design and production by Equicom, a TSX Group Company.
Shareholder Information 65
F a c t s
TSX Group is a global market leader
1st
in Mining
Home to over 55% of the world’s public mining companies
in Mining equity
Most dollars raised by public mining companies
in Energy
Home to 44% of the world’s public energy companies
in Trading technology
Leading edge trading technology (1 st exchange to go fully
electronic in 1997)
2nd
in Listings
2nd in the world by number of listed companies
in Technology
2nd in the world by number of listed technology companies
7th
in Equity
7th in the world for public equity raised
55
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