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TMX Group Inc .
2011 annual report
the tMX Factors
Four key factors contribute to tMX Group’s success. together they enable
the company to deliver strong results, drive innovation and create growth.
1Critical Economic Infrastructure
exchanges and clearing houses play unique and central
roles in the economy: exchanges facilitate capital
formation, enhance market efficiency and provide
vital risk management tools; clearinghouses provide
an important infrastructure that mitigates risk and
strengthens the market. tMX Group operates exchanges
in equities, derivatives and energy, and provides clearing
services in derivatives and energy – all are essential to
the efficiency of the Canadian capital markets.
2
Commitment to Innovation
the market demands that our company remain
technologically innovative as well as proactive with
our product and service offerings. tMX Group teams
work continuously to ensure that we anticipate, meet
and exceed our clients’ needs for speed, functionality,
global connectivity and investment choice.
4
3SME and Resources Specialization
Canada’s economy, while broadly diversified, has
particular strengths in natural resources and small-
to-medium sized enterprises (SMes). toronto Stock
exchange and tSX Venture exchange are global leaders
in mining, energy and clean technology and have
significant expertise in supporting the growth of
SMes. natural Gas exchange also provides a platform
for trading and clearing underlying commodities,
including natural gas and crude oil.
Canada’s Strength
Canada has a strong and well-developed economy
with a top-tier credit rating, the lowest net debt-to-
GDp ratio in the G7, well-regulated financial markets
and a sound banking system. our country’s strong
economic fundamentals make our market attractive
to international investors. tMX Group travels the globe
to promote Canada as an investment opportunity and
our exchanges as listing and trading venues.
Delivering results
the tMX Factors provide a foundation for our past, present and future operational success.
Diversified for strength
2011 key perForMAnce M eASureS
$674M
revenue 2011
$3.17
DI luTeD ep S
$3.57
ADjuSTeD DI luTeD ep S
$304M
cASh FlowS F roM o perATInG Ac TIvITIeS
$490M
cASh on hA nD
$263M
TrADInG , c leArI nG , An D rel ATeD
• Cash Markets (equities & fixed income)
• Derivatives Markets
• Energy Markets
$231M
ISSuer ServI ceS
• Initial Listing Fees
• Sustaining Listing Fees
• Additional Listing Fees
• Other Issuer Services
$165M
InForMATIon ServI ceS
• Real-Time (equities)
• Real-TIme (derivatives)
• Online/historical/3rd party data/other
• Fixed income
• Data Delivery Solutions/co-location
$15M
TechnoloGy ServIceS A nD oT her
Driving innovation
tMX Group is focused on anticipating our clients evolving needs and on creating products
and services to meet them. In 2011, all areas of tMX Group delivered on our commitment
to deliver innovative solutions.
Customer needs
Product and Service Solutions
• Increase capacity
• Decrease latency
• enhance functionality
• risk management
• Global networking
• Investment choices
• enterprise expansion phase II completed
• Dark order types introduced
• tMX Select launched
• S&p/tSX 60 Mini Futures contract launched
• london and Beijing offices opened
• 10 new nGX hubs added in the uS
• Co-location services expanded
• tMXnet na implemented
• tSX InfoSuite launched
Creating growth
tMX Group’s overall strategy is to enhance our core business domestically and to expand
horizontally, vertically and geographically by offering innovative products and services
across asset classes.
Enhance multi-asset class trading to secure the foundation
of our core business:
•
Maintain superior technology, identify new means and sources of order
flow, and develop and sell innovative new products and services;
Continue to enhance relationships with market participants and
other stakeholders.
•
Diversify revenue base, both organically and through
corporate development:
•
expand horizontally to achieve a leadership position in all exchange
tradable asset classes and product types in Canada, especially in
derivatives and commodities;
expand vertically into additional issuer services, new clearing services,
risk management services, execution and information services, and
software solutions.
•
Leverage our competitive advantages to become the leading
global exchange group for small to medium sized enterprises
and resource issuers:
• attract issuers, investors and intermediaries to Canada;
• Sell data, technology and other services.
2012 In ITIATIveS
•
•
Work toward implementation of
tMX Quantum Xa, our new equities
trading system
leverage our derivatives over-the-counter
clearing services
• enhance our energy clearing capabilities
expand our fixed income trading network
•
Introduce innovative product and services
•
across the company
promote the strengths of our markets
internationally
•
Contents
Letter from the Chair
Letter from the CEO
Statement of Corporate Governance Practices
2011 Management’s Discussion and Analysis
Management Statement
Auditors’ Report to the Shareholders
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
Board of Directors
TMX Group Executive Committee
Shareholder Information
6
7
9
12
62
63
64
69
114
115
116
Forward-Looking Information
This annual report contains forward-looking statements, which are not historical facts but are based on certain assumptions and reflect TMX 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. We have no intention to update this forward
looking information, except as required by applicable securities law.
Letter from the Chair
I am pleased to report to you on behalf of TMX Group’s Board of Directors as we look back on an eventful 2011.
In a year of global economic unrest and modest growth, we were able to achieve solid operating results.
The support agreement with Maple Group Acquisition Corporation, signed at the end of October 2011, represents a promising step forward for
TMX Group and the Board unanimously supports the transaction. We continue to work closely with Maple as part of the process to obtain the
required regulatory approvals.
It was a particularly busy year in terms of the number of Board meetings. I would like to thank my fellow TMX Group Directors for their valuable
contributions during our deliberations last year, as well as for their ongoing dedication and insight.
Working together with the executive management committee, we remain dedicated to enhancing Canada’s premier integrated exchange
group in order to better serve Canadian capital markets.
On behalf of the Board of Directors, I would also like to thank Laurent Verreault and Jean Turmel who stepped down in 2011 for their years of
diligent service to TMX Group.
In closing, I would like to acknowledge the committed efforts of TMX Group management and employees throughout 2011 and beyond. The
company continues to evolve and deepen its excellent worldwide reputation through the hard work of its team.
Wayne Fox
Chair, Board of Directors
TMX Group Inc.
March 1, 2012
6 TMX Group Annual Report | 2011
Letter from the CEO
I am pleased to report on an exceptionally active year for TMX Group. Corporate development activity, technology initiatives, regulatory
changes, international expansion, new products and services and much more made not only for a very interesting year in 2011, but also marked
an important stage in our company’s evolution.
2011 in Review
In terms of our performance, we are pleased that we were able to achieve top and bottom line growth with revenue up 8% and adjusted
earnings per share up 11% over 2010.
Although there were signs of economic strength in Canada as advanced economies around the world worked to regain balance and restore
investor faith, we were not immune to the effects of global uncertainty. Capital markets activity, including equities financings and volumes,
slowed in the latter part of the year. However, TMX Group’s 2011 results were fortified by our long-term diversification strategy. In particular,
our derivatives markets were up sharply in terms of volumes and open interest compared with 2010.
Macroeconomic factors continue to impact our revenue drivers and the exchange industry remains highly competitive. We compete internationally
for investment capital and order flow, and continue to face significant domestic competition in a fragmented equities marketplace. As the
number of Alternative Trading Systems (ATSs) increases, our competitive response remains focused on enhancing our products and services and
bringing technological innovation to our markets. In 2011, we delivered new on-book Dark Order types to our markets and launched our own
ATS called TMX Select. These important initiatives are designed to provide additional execution opportunities and increase the efficiency of our
markets. We also implemented multiple changes to our equity trading fee schedule in 2011 to reduce costs for all market participants.
In terms of financings, according to the most recent data from the World Federation of Exchanges, we ranked sixth in the world in total
financings amongst our exchange peers, up from eighth in 2010. In 2011, for the third year in a row, we listed more new issuers than any other
exchange group in the world. We were also pleased to see that the number of graduates from TSX Venture Exchange to Toronto Stock Exchange
was up 18% in 2011 compared to 2010. This is an important measure of success for our unique listing structure.
With increased volatility in global capital markets, we experienced increased volumes in our derivatives business, as market participants took
advantage of our risk management products. Montréal Exchange (MX) established several new records in 2011 and total volume was up 40%
over 2010, reflecting a surge in trading across all major products. In 2011, MX re-launched the Two-Year and Five-Year Government of Canada
Bond futures contracts, as well as “Red” (two years to expiration) and “Green” (three years to expiration) Three-Month Canadian Bankers'
Acceptance Futures contracts. MX also introduced a new S&P/TSX 60 Mini Futures Contract (SXM).
Volume traded on MX’s U.S. subsidiary, BOX, was up 52% compared with 2010 and BOX’s overall market share in the ultra competitive U.S.
equity options market increased from 2.5% in 2010 to 3.3% in 2011.
Market conditions impacted our energy business in 2011 as lower natural gas prices and lower price volatility in the market resulted in lower
volumes for NGX in 2011 compared with 2010. NGX continues to expand its presence in the U.S., having added thirteen additional hubs in 2011
and to date this year. We have also faced challenges in gaining traction following the launch of crude oil products in March 2011 under the
NGX/ICE alliance and are focused on developing this business. Revenue from Shorcan Energy Brokers, our inter-participant brokerage, was up
in 2011 versus 2010 reflecting higher volumes.
Building for Our Future
Our team had a very active second half of 2011 as we invested in some interesting new business opportunities and announced exciting next
steps in terms of our technology.
At the end of November, we made a bid to acquire Razor Risk Technologies Limited (Razor), a Sydney-based provider of credit risk software to
clearinghouses, stock exchanges, financial institutions and brokerages around the world. The bid was supported by Razor’s Board of Directors
and management. In February we were pleased to announce that we received the required acceptance for our bid. The acquisition of Razor
provides us with a point of entry into the attractive risk management technology sector.
In December, TMX Group announced the purchase of a 16% stake in the Bermuda Stock Exchange and that I had joined its board of directors.
This investment is a small one, but it provides interesting geographical and product development opportunities.
Letter from the CEO 7
Our technology team works continually to anticipate and meet evolving market needs. In November, we announced the successful completion
of the second phase of our Enterprise Expansion project. Importantly, in February, we announced the timing for implementation of our next
generation equity trading technology. TMX Quantum XA, as we have called it, will provide our trading clients with dramatically enhanced
speed and capacity. We expect that it will be 20 times faster than our current engine is today. We intend to launch it on TMX Select in the first
half of 2013, with implementation on Toronto Stock Exchange and TSX Venture Exchange to follow beginning at the end of 2013.
TMX Datalinx continues to diversify its customer offerings. In July 2011, we acquired Atrium Networks (rebranded TMX Atrium), a leading
provider of low-latency infrastructure solutions for the North American and European financial communities. The acquisition accelerates the
expansion of TMX Group’s data network into Europe and the U.S. In February 2012, we announced that due to strong customer demand, we
advanced implementation of the fourth phase of our co-location facility to the second quarter of 2012. Interest in co-locating with us has
expanded beyond the initial participants to include a wide range of clients who seek the benefits of close proximity access to Toronto Stock
Exchange, TSX Venture Exchange, Montréal Exchange, and TMX Select trading engines and market data feeds.
We also took some major steps to enhance TMX Group’s international profile and presence in 2011, as we opened offices in London in January
and Beijing in November. The new offices are focused on advancing Canada's capital markets and the business of TMX Group's equities
and derivatives exchanges, while providing a local presence to better serve our new and existing clients in these regions. In early 2012, MX
expanded its sales and customer service team into the New York market, to better serve and grow the existing and future client base there.
In December 2009, CDCC was awarded the mandate to develop the infrastructure for central-counterparty services for the Canadian fixed income
market by the Investment Industry Association of Canada. After extensive work with industry participants throughout 2011, on February 21, 2012,
we were proud to launch our fixed income central counterparty services and clearing of repurchase (repo) agreements. We are confident that we
have delivered a repo clearing solution that both meets the needs of clearing participants and strengthens the Canadian market.
Corporate Activity
As you know, TMX Group was in the headlines throughout much of 2011. In the first half of the year, the interest focused on our merger
agreement with London Stock Exchange Group, which was announced on February 9, 2011. On June 29, 2011, we determined that, despite the
fact that the majority of shareholder votes cast were in support of the merger, the two-thirds threshold required to approve the merger would
not be achieved, and we terminated the agreement.
In July 2011, our Board of Directors authorized our management team and advisors to hold discussions with Maple Group Acquisition
Corporation (Maple) which had initially made an unsolicited non-binding written proposal to acquire TMX Group in May 2011, and on June 13,
2011, made a formal offer to acquire TMX Group (which was subsequently varied on June 24, 2011 to increase the consideration payable to TMX
Group shareholders). At the end of October 2011, following careful examination of the Maple offer, its value to shareholders and its potential
benefits to the company and the Canadian capital markets, TMX Group signed a support agreement with Maple, and announced that our
Board of Directors unanimously recommends that TMX Group shareholders accept the Maple offer.
In the course of negotiations regarding the support agreement, Maple agreed to make several changes and enhancements to the original
Maple offer addressing concerns we had previously identified. Included in these changes, Maple has agreed to pay TMX Group a reverse
termination fee of $39 million if the Maple transaction is not completed because required regulatory approvals are not obtained. In addition,
a number of changes to the corporate governance structure that will be implemented following completion of the Maple transaction were
also negotiated.
Since the end of October 2011, we have been working closely with Maple to secure the necessary regulatory approvals in accordance with the
support agreement. While there can be no assurance that the required regulatory approvals will be obtained, we continue to believe that the
Maple transaction is the right path forward for TMX Group and provides important potential benefits for Canada’s capital markets and capital
market participants. Our Board of Directors continues to unanimously recommend that TMX Group shareholders accept and tender their
shares under the Maple offer.
Looking back on the year, I think it is fair to say that 2011 was a very productive year for the company. As we continue to evolve as a public
company, I am optimistic about TMX Group’s future prospects. Management and our entire employee team will continue to focus on the
successful execution of our business plan, and will explore all growth opportunities within the context of our broad strategic plan.
I look forward to updating you on our next steps.
Thomas A. Kloet
CEO
TMX Group Inc.
March 1, 2012
8 TMX Group Annual Report | 2011
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. TMX 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.
TMX 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 TMX 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 TMX 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 executive
management, and assesses the financial performance of TMX 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 executive management examine, review and discuss a broad range of issues relevant
to TMX 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 2011 the Board held nine regular meetings and 25 special meetings and held 34 in camera
sessions without management and non-independent directors present. Attendance by Directors at these meetings was 97%1, either in person,
by teleconference or by video conference. The Board plans to hold nine regular meetings in 2012. 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 March 1, 2012, the Board has a non-executive Chair and knowledgeable and experienced Directors, 11 out of 12 (92%) of whom, including the
Chair, are “independent” within the meaning of section 1.4 of NI 52-110 and our recognition order issued by the Ontario Securities 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 the Board adopted more restrictive standards than those imposed by NI 52-110 to determine
whether individual members of the Board are independent from TMX 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, on an annual
basis, recommends candidates to the Board who are suitable for nomination to the Board. In identifying suitable candidates, the Governance
Committee will consider independence, professional or board expertise, capital markets experience, public venture market experience, derivatives
market experience, energy market experience, clearing experience, technology expertise and regulated company experience. As well, representation
from geographic regions relevant to TMX Group’s strategic priorities and Quebec residency requirements are taken into consideration. Qualities
such as integrity, good character and high regard in his or her community or professional field will always be basic criteria for Board members.
1
Jean Turmel was a member of the TMX Group Board and is also a member of the board of Ontario Teachers’ Pension Plan Board, which is an investor in Maple Group Acquisition Corporation
(“Maple”) and, as such, recused himself from the deliberations regarding Maple and therefore did not participate in any Board meetings where Maple matters were discussed. As a result his
meeting attendance for those meetings was not taken into account when calculating the Directors attendance at all meetings.
Statement of Corporate Governance Practices 9
Director Education, Access to Management, and Board/Committee Meetings
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 executive management.
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. TMX 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 extranet.
Directors, with the approval of the Chair, may seek additional professional development education at the expense of TMX Group. As well, all
Directors are members, at our expense, of the Institute of Corporate Directors (“ICD”) where Directors have access to ICD events and publications
which provide additional sources of relevant information.
Board and Director 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, including for managing conflicts of interest.
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 TMX 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 under both NI 52-110
and the Recognition Order. 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
In 2007, the Board adopted a policy that provides that in an uncontested election of directors, any nominee of TMX 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
TMX Group recognizes that risk management is integral to its business, operations and financial performance, and we follow an 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. One of these mitigating strategies includes 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.
10 TMX Group Annual Report | 2011
Say on Pay and Executive Compensation
At its annual meeting, TMX Group provides shareholders the opportunity to vote on executive compensation, on a non-binding advisory basis.
In 2011, Towers Watson was retained by the Human Resources Committee to conduct a formal assessment of the features of TMX Group’s
compensation programs to determine whether any material risks could result from the design of any of these programs. The assessment concluded
that TMX Group has adopted a number of compensation practices to impose appropriate limits and avoid excessive or inappropriate risk-taking.
For more information on TMX Group’s executive compensation practices, please refer to our Management Information Circular.
TMX Group is committed to demonstrating leadership in evolving governance issues including in the area of executive compensation.
Investor Communication
TMX 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.
Shareholders who would like to communicate with the Board should contact us using email at shareholder@tmx.com. Your communication will be
provided to the Board for its consideration and response, if required.
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.tmx.com. The Circular also describes our corporate governance practices, and provides 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.
Statement of Corporate Governance Practices
11
2011 Management's Discussion and Analysis
February 8, 2012
This MD&A of TMX Group Inc.’s (TMX 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 liquidity and capital resources, for the year
ended December 31, 2011, compared with the year ended December 31, 2010. This MD&A is dated February 8, 2012 and should be read carefully
together with our 2011 audited annual financial statements, including notes, which are prepared in accordance with International Financial
Reporting Standards (IFRS). Each of these documents is filed with Canadian securities regulators and can be accessed through www.sedar.com or
our website at www.tmx.com. The financial measures included in this MD&A are based on financial statements prepared in accordance with IFRS,
unless otherwise specified. All amounts are in Canadian dollars unless otherwise indicated.
Additional information about TMX Group, including our most recent Annual Information Form, is available through www.sedar.com and on our
website, www.tmx.com. We are not incorporating information contained on the website in this MD&A.
International Financial Reporting Standards (IFRS)
The Canadian Accounting Standards Board requires publicly accountable enterprises such as TMX Group to adopt IFRS for fiscal years beginning on
or after January 1, 2011. Accordingly, the TMX Group audited consolidated financial statements for the year ended December 31, 2011 have been
prepared in accordance with IFRS as published by the International Accounting Standards Board.
For each reporting period in 2011, we presented comparative information for 2010, both for interim and annual financial statements, as applicable,
on an IFRS basis. Our consolidated financial statements for the year ended December 31, 2011 are our first annual financial statements prepared in
accordance with IFRS. As this is our first year of reporting under IFRS, First-time Adoption of IFRS (IFRS 1) is applicable.
In accordance with IFRS 1, we have applied IFRS retrospectively as of January 1, 2010 (the Transition Date) for comparative purposes. In preparing
our opening balance sheet in accordance with IFRS, we have adjusted amounts reported previously in our financial statements prepared in
accordance with pre-conversion Canadian generally accepted accounting principles (pre-conversion Canadian GAAP). We have included
supplementary reconciliations of the impact of the conversion to IFRS on our net income attributable to TMX Group shareholders for the year
ended December 31, 2010 in this MD&A (see Changes in Accounting Policies) (for a more detailed discussion and reconciliations of each quarter
of 2010, see our unaudited condensed consolidated financial statements and MD&A for the quarter ended March 31, 2011).
Our MD&A is organized into the following key sections:
• Overview of the Business – a discussion of our business segments and key revenue drivers;
• Vision, Corporate Strategy, Initiatives and Accomplishments – our vision, strategic initiatives for future growth and recent accomplishments;
• Market Conditions – a discussion of our current business environment;
• Our Business – a detailed description of each of our operations and our products and services;
• Results of Operations – a year over year comparison of our results, both on a consolidated and segmented basis;
• Selected Annual and Quarterly Information;
• Liquidity and Capital Resources – a discussion of changes in our cash flow, our outstanding debt and the resources available to finance
existing and future commitments;
• Accounting and Control Matters – a discussion of our critical accounting estimates and changes to our current accounting policies and future
accounting changes, including the 2011 conversion to IFRS and an evaluation of our disclosure controls and procedures, internal control over
financial reporting and changes to internal control over financial reporting; and
• Risks and Uncertainties – a discussion of the risks to our business as identified through our risk management process.
12 TMX Group Annual Report | 2011
Overview of the Business
We own and operate cash, derivatives and energy markets and clearing houses in Canada and the U.S. We list, trade and clear securities as well as
physical commodities. In addition, we provide information services to customers around the world.
Toronto Stock Exchange (TSX) is Canada’s senior equities market, providing domestic and international
investors with access to the Canadian marketplace. At December 31, 2011, 1,587 issuers with an aggregate
market capitalization of $2.0 trillion were listed on Toronto Stock Exchange. Volume traded on Toronto Stock
Exchange was 103.59 billion securities in 2011.
TSX Venture Exchange (TSXV) is Canada’s premier junior listings market, providing companies at the early
stages of growth the opportunity to raise capital. At December 31, 2011, 2,444 issuers with an aggregate
market capitalization of $49.0 billion were listed on TSX Venture Exchange. Volume traded on TSX Venture
Exchange was 64.98 billion securities in 2011.
TMX Select is our new Canadian alternative trading system (ATS) trading TSX and TSXV listed securities.
TMX Select offers additional execution options to the industry through differentiated features and pricing.
The Equicom Group Inc. (Equicom), our investor relations subsidiary, is a leading provider of investor
relations and corporate communications services.
Shorcan Brokers Inc. (Shorcan) is Canada’s first inter-dealer broker (IDB), providing facilities for matching
orders for Canadian federal, provincial, corporate and mortgage bonds and treasury bills and derivatives for
anonymous or name-give-up buyers and sellers in the secondary market.
(47% Ownership)
Candeal.ca Inc. (CanDeal) is a dealer to client electronic fixed income platform of which we own 47%.
CanDeal provides online access to a large pool of liquidity for Canadian government bonds and money
market instruments.
Montréal Exchange Inc. (MX or Montréal Exchange) is Canada’s standardized financial derivatives exchange.
Headquartered in Montréal, MX offers trading in interest rate, index and equity derivatives. In 2011, a record
61.98 million contracts were traded on MX.
Canadian Derivatives Clearing Corporation (CDCC) offers clearing and settlement services for all MX
transactions and certain OTC derivatives. It is the only clearinghouse in North America to offer clearing
services on equity options, futures, and options on futures products. CDCC has a long-term rating of AA and
a short-term rating of A1 from Standard and Poor’s.
(53.8% Ownership)
MX has a 53.8% ownership interest in Boston Options Exchange Group, LLC, (BOX), a U.S. equity options
market for which MX is also the technical operator and technology developer. In 2011, 139.7 million
contracts were traded on BOX.
Natural Gas Exchange Inc. (NGX) is a Canadian-based exchange through which customers can trade, clear
and settle natural gas, crude oil and electricity contracts across North America. In 2011, total energy
volumes# of 15.47 million terajoules were traded or cleared on NGX.
Shorcan Energy Brokers Inc. (Shorcan Energy Brokers), is an inter-participant brokerage facility for matching
buyers and sellers of energy products, including crude oil.
TMX Datalinx, our information services division, sells real time data, data delivery services and other
market information to a global customer base. Toronto Stock Exchange and TSX Venture Exchange data was
distributed through an average of 160,4362+ professional and equivalent real-time subscriptions in 2011.
The average number of subscriptions to MX derivatives data in 2011 was 25,770+.
# NGX Total Energy Volume includes trading and clearing in natural gas, crude oil and electricity.
+
Includes a base number of subscriptions for customers that have entered into enterprise agreements.
Management’s Discussion and Analysis
13
PC-Bond offers the leading Canadian fixed income indices and PC-Bond analytics applications.
TMX Atrium, which was acquired by TMX Group in July 2011, is our financial network, a leading provider
of low-latency infrastructure solutions for the Global financial community. The network currently offers
25 points of presence in 11 countries, 24 trading venues and 300 data sources.
Our revenue from the aforementioned business areas is categorized as follows:
2011 Revenue $673.5 M
TSX
TSXV
TMX
Select
Issuer Services
Trading & Clearing
Information Services
Technology Services
$ 230.5
$ 262.6
$ 165.1
& Other
$ 15.3
√
√
√
√
√
√
√
√
√
Cash
Equicom
√
Shorcan
Fixed
Income
√
Derivatives
Energy
PC
Bond
TMX
Atrium
MX
BOX
CDCC
NGX
√
√
√
√
√
√
√
√
√
√
Shorcan
Energy
Brokers
√
Vision, Corporate Strategy, Initiatives and Accomplishments1
Our Vision: To become the leading provider of capital markets infrastructure services in Canada and select capital market services to global
market participants.
Corporate Strategy: To enhance our core business domestically and to expand horizontally, vertically and geographically by offering innovative
products and services across asset classes.
1.
Enhance core multi-asset class trading to secure the foundation of our core business:
• Maintain superior technology, identify new means and sources of order flow, and develop and sell innovative new products
and services.
• Continue to enhance relationships with Participating Organizations (POs) and other stakeholders.
2.
Diversify revenue base, both organically and through corporate development:
• Horizontal expansion: to achieve a leadership position in all exchange tradable asset classes and product types in Canada (especially
in derivatives and commodities).
• Vertical expansion: into additional issuer services, new clearing services, risk management services, execution and information
services, and software solutions.
3.
Leverage our competitive advantages to become the leading global exchange group for small to medium sized enterprises (SMEs) and
resource issuers:
• Attract issuers, investors and intermediaries to Canada.
• Sell data, technology and other services.
1
The “Vision, Corporate Strategy, Initiatives and Accomplishments” section above contains certain forward-looking statements. Please refer to “Caution Regarding Forward-Looking Information” for
a discussion of risks and uncertainties related to such statements.
14 TMX Group Annual Report | 2011
TMX Group Business Strategies, Initiatives and Accomplishments2
Business Strategies
Issuer Services
• Continue to enhance our leading brand, develop deeper customer relationships and build loyalty.
• Expand product and service offerings to listed issuers.
•
Increase international growth by attracting SMEs and resource companies.
Equity Trading
• Further our leadership position with continued innovation in our operations, processes and trading technology.
• Expand our customer base and our superior product and service offerings, while maintaining competitive pricing.
Fixed Income Trading
Implement initiatives to increase liquidity for both cash and futures markets and develop linkages between asset classes.
•
• Grow product base (including Repo, Swaps and Overnight Index Swaps) and diversify revenue both organically and through acquisitions.
• Extend network, enabling further expansion of market connectivity.
Derivatives Trading and Clearing
• Promote the strengths of our growing Canadian derivatives market: price transparency, liquidity and central counter party clearing – both
domestically and internationally.
• Leverage our over-the-counter (OTC) clearing service offering to capitalize on new opportunities arising due to industry reform.
• Grow the retail and high net worth derivatives trading community in Canada.
Energy Trading and Clearing
• Enhance our clearing system with technological upgrades.
• Grow our core businesses by increasing trading and clearing at Canadian and U.S. locations.
• Develop new products and expand/enter into new markets by adding additional points of distribution.
• Position NGX to be able to capitalize on proposed regulatory changes.
Information Services
• Enhance our core product offerings, acquire global content and add value across asset classes.
• Continue to pursue opportunities within our multi-market environment to provide low latency consolidated datafeeds, co-location and
data delivery solutions.
• Expand international sales capabilities and efforts to further diversify our revenue and customer base.
Technology Services
• Execute our continually evolving technology roadmap in order to maximize enterprise performance and increase enterprise functionality.
• Expand and focus our technology services business to leverage our increasing portfolio of globally competitive technology assets
and services.
Initiatives and Accomplishments
In 2011 and to date in 2012, we successfully advanced our strategy by executing on a number of initiatives across our business:
Issuer Services
In 2011, we ranked first in the world for the number of new listings, with 533 entities going public or graduating on our two equity exchanges#
(including New Listings, Initial public offerings (IPOs), Capital Pool Companies® (CPCs), Qualifying Transactions (QTs), Reverse Takeovers (RTOs) and
Direct Listings). This is the third straight year that TMX Group's equity exchanges have led global exchanges in the number of new listings. As of
December 31, 2011, TMX Group equity exchanges were second in the world by number of listings, seventh by market capitalization and eighth by
equity capital raised°.
2
The “TMX Group’s Business Strategies, Initiatives and Accomplishments” section above contains certain forward-looking statements. Please refer to “Caution Regarding Forward-Looking
Information, Risks and Uncertainties” for a discussion of risks and uncertainties related to such statements.
# As at December 31, 2011, 533 new listings, including 45 graduates from TSX Venture Exchange to Toronto Stock Exchange.
°
Rankings based on World Federation of Exchanges statistics.
Management’s Discussion and Analysis
15
In May 2011, TMX Group and QuoteMedia, Inc. launched TSX InfoSuite, a new market data and shareholder solution designed to enhance the suite
of services for Toronto Stock Exchange and TSX Venture Exchange listed issuers. TSX InfoSuite’s offerings include stock quotes and key company
information, in-depth market data on issuers, shareholder information and sector data.
Cash Equities Trading
TMX Select
In July 2011, we launched trading on TMX Select, an alternative equities trading system. TMX Select was created in response to our customers'
evolving trading strategies, TMX Select features a customer-focused pricing model, which extends significant savings to liquidity takers. TMX
Select's “symmetrical pricing” model, in which both liquidity seekers and providers are charged the same fee, is significantly different from the
standard maker-taker model currently in place in other Canadian marketplaces. TMX Select also features expanded trading hours, a simplified
market structure, and strict price/time priority. In Q4/11, TMX Select captured more than 1% of equity trading volume in Canada.
Dark Order Types
In March 2011, in keeping with our efforts to offer our customers additional trade execution choices, we introduced new on-book Dark Order types
on both Toronto Stock Exchange and TSX Venture Exchange. These new non-displayed order types called Dark Mid-Point and Dark Limit Orders are
among the important features of our integrated market model, designed to maximize execution opportunities and reduce costs for all participants,
including retail investors, fund managers and liquidity providers while maintaining the integrity of the central limit order book.
In June 2011, the Dark Mid-Point and the Dark Limit order types were made available for all equity securities on both Toronto Stock Exchange and
TSX Venture Exchange. Since their introduction, trading of dark orders on Toronto Stock Exchange and TSX Venture Exchange has grown considerably,
reaching a peak of approximately 12.0 million securities traded on December 21, 2011. The benefits of integrating the dark order types with the
visible book has been well received by our clients where over 60% of POs are posting dark orders and over 100 POs have received price improvement
at a substantially reduced transaction cost when their orders interact with dark liquidity.
Pricing
In 2011, we implemented the following changes to our equity trading fee schedule:
• Effective March 1, 2011, we reduced the fees for large contributors to our Market on Open (MOO) facility through the introduction of a fee
cap, and introduced net credit payments for trading in our continuous limit order book and additional changes.
• Effective April 1, 2011, we made changes which provided cost savings to participants that trade equities where the trade price per-security
is lower than $1.00.
• Effective June 6, 2011, we introduced the fee schedule associated with our Dark Order Types, providing participants opportunities to
significantly reduce their transaction fees while benefiting from price improvement and efficiencies when trading against dark liquidity.
• Effective July 1, 2011, we made changes to our Smart Order Router fees, allowing users to route orders free of charge in order to meet
regulatory obligations.
• Effective October 1, 2011, we made changes to our market making fee schedule for Toronto Stock Exchange, including introducing
monthly credits.
Technology
In November 2011, we successfully completed the second phase of our equity Enterprise Expansion project. This initiative was designed to provide
customers with significantly improved trading technology and performance across the TSX Quantum trading enterprise. The second phase of the
Enterprise Expansion project accommodates higher throughput and capacity at 55,000 order messages per second, more than doubling existing
capabilities with the introduction of a second trading engine partition. In 2011, we incurred annual operating expenses, including amortization, of
approximately $8.0 million to support this initiative.
In February 2012, we announced the planned production implementation of our next generation equity trading technology called TMX Quantum
XA, which is based on hardware acceleration. Hardware acceleration is a general term that refers to the off-loading of processing work from server
CPUs onto specialized hardware.
TMX Quantum XA will provide TMX Group equity trading participants with dramatically enhanced speed and capacity as well as more efficient
order processing. It is expected that there will be a twenty-fold reduction in median latency to sub-100 microseconds on order executions. The new
trading system is designed to be capable of handling 200,000 orders per second. TMX Quantum XA will initially be implemented on TMX Select
in Q1/13. Implementation on Toronto Stock Exchange and TSX Venture Exchange will follow, beginning at the end of 2013. We expect to incur
incremental annual operating expenses of approximately $4.0 million to support this initiative.
16 TMX Group Annual Report | 2011
Derivatives Trading and Clearing
Trading
MX established several new records for activity in 2011, including:
• Record total volume of 61.98 million contracts traded, surpassing the previous record of 44.30 million contracts traded set in 2010.
• Daily record of 285,500 contracts traded on the Three-Month Canadian Bankers' Acceptance Futures (BAX) on August 4, 2011, surpassing
the previous record of 223,041 contracts traded set on February 27, 2007.
• Record open interest on BAX on August 4, 2011, reaching 796,862 contracts. The previous record was set on May 26, 2011 with open
interest of 699,569 contracts.
• Daily record of 5,248,720 contracts in overall open interest on December 15, 2011.
In 2011, we re-launched our Two-Year and Five-Year Government of Canada Bond futures contracts, as well as Red (second year) and Green (third
year) Three-Month Canadian Bankers' Acceptance Futures contracts, with committed market makers providing continuous posted markets. We also
introduced a new S&P/TSX 60 Mini Futures Contract (SXM), launched user-defined strategies with implied pricing on our equity and ETF options
markets and added new risk management tools for participants. In an effort to capitalise on the upcoming Basel III regulatory reforms, and to
become only the third country to develop a full sovereign futures curve, the Montreal Exchange invested in marketing and the recruitment of
market makers during 2011.
Also in 2011, BOX announced the receipt of a patent specifically related to price improvement auctions for electronic trading of financial
instruments. BOX launched its innovative price improvement auction, the Price Improvement Period (PIP), designed to provide customers with the
best possible price in the electronic marketplace, in 2004.
Clearing
CDCC continues to work with the dealer and user community to develop the infrastructure for central-counterparty services for the Canadian fixed
income market. The planned go-live date for the clearing of OTC fixed income repurchase agreements (repos) is currently scheduled for Q1/12 to
allow for additional industry testing of the system and controls.
Energy Trading
In 2011, NGX expanded its U.S. clearing operations by offering physical natural gas clearing at the following hubs:
•
•
•
•
In February 2011, two additional hubs in Texas: Houston Ship Channel located east of Houston, and Oasis – Waha Pool, a broad region in
west Texas.
In April 2011, three hubs were added including the Opal Plant Tailgate at Opal, Wyoming. Tennessee Zone 0 (South) in south Texas and
ANR SW in Kansas.
In July 2011, two more hubs were added: the Oneok Gas Transportation (OGT) hub in Oklahoma and at Tennessee Zone 0 (North) in
northern Texas.
In October 2011, three additions were made: Trunkline Z1A, Trunkline East La. and Trunkline West La.
As of December 31, 2011, NGX offers physical clearing of natural gas at 40 U.S. locations.
Information Services
In June 2011, TMX Datalinx implemented its ultra-low latency network, TMXnet North America (NA), between Toronto, New York and Chicago.
TMXnet NA is used to deliver TMX and other Canadian capital markets data to clients in New York and Chicago, as well as U.S. financial data to
clients in TMX's co-location facility and the Toronto core. The network will also be used to offer dedicated telecommunications links for TMX Group's
co-location clients.
TMX Datalinx also entered into a bilateral agreement with NASDAQ OMX® Global Data Products to make each marketplace's market data available
in their respective co-location facilities. Using TMXnet NA, TMX’s co-location clients and NASDAQ OMX's co-location clients can receive low latency,
reliable and cost efficient access to NASDAQ OMX and TMX market data.
In July 2011, we acquired Atrium Networks (rebranded TMX Atrium), a leading provider of low-latency infrastructure solutions for the North
American and European financial communities. The acquisition accelerates the expansion of TMX Group’s data network into Europe and the U.S. The
network currently offers 25 points of presence in 11 countries, 24 trading venues and 300 data sources.
In November 2011, PC-Bond launched an arrangement with NASDAQ OMX to offer a new family of U.S. Treasury Fixed Income indexes, the RBC
Insight Total Return U.S. Treasury (TRUST) indexes.
Management’s Discussion and Analysis
17
Technology Services
In May 2011, we announced that London Stock Exchange Group plc (LSEG)'s pan-European derivatives market, Turquoise Derivatives, had
successfully migrated to the SOLA trading system. SOLA, which was created by Montréal Exchange, is also the trading technology platform for
Borsa Italiana's IDEM market and the Oslo Bors. The SOLA technology is designed for scalability and to efficiently meet ever expanding capacity and
performance requirements.
In November 2011, TMX Group and Razor Risk Technologies Limited (Razor) announced a Takeover Bid Implementation Agreement under which
a subsidiary of TMX Group has made a takeover bid for all of the issued shares in Razor. As of February 3, 2012, approximately 88% of total Razor
shares had been tendered.
The acquisition of Razor will provide us with a point of entry into the risk management technology sector. Headquartered in Sydney, Razor provides
credit risk software to clearing houses, stock exchanges, financial institutions and brokerages around the world. It develops and integrates
economic capital, market, credit and liquidity risk management requirements across multiple asset classes.
Other
As part of our overall objective to enhance TMX Group’s international profile and presence, we opened international offices in London, U.K. in
January 2011 and Beijing, China in November 2011. The U.K. office is primarily focused on the derivatives and information services parts of our
business. The China office is focused primarily on advancing Canada's capital markets and the business of TMX Group's equity exchanges while
providing a local presence to better serve our new and existing clients in the region. In early 2012, Montréal Exchange expanded its sales and
customer service team into the New York market.
The Maple Offer
On October 30, 2011, TMX Group and Maple Group Acquisition Corporation (Maple) announced that they had entered into a support agreement
in respect of Maple’s proposed acquisition of all of the outstanding TMX Group shares pursuant to an integrated two-step transaction valued at
approximately $3.8 billion. Maple has also proposed to acquire Alpha Trading Systems Limited Partnership, together with Alpha Trading Systems Inc.
(the Alpha Transaction) and The Canadian Depository for Securities Limited (CDSL) (the CDSL Transaction and, together with the Alpha Transaction,
the Related Transactions).
The first step is Maple’s offer to acquire between 70% and 80% of the TMX Group shares for $50.00 in cash per share, on a pro rated basis,
to be followed by a second step court approved plan of arrangement that will provide TMX Group shareholders (other than Maple) with Maple
shares in exchange for their remaining TMX Group shares, on a one-for-one basis. The Maple offer remains subject to a non-waivable minimum
tender condition that at least 70% of the TMX Group shares must be tendered to the Maple offer on or before its final expiry, in addition to other
conditions (including regulatory approvals required in respect of the Maple offer and the Related Transactions, and other conditions as described
in TMX Group’s Notice of Change to Directors’ Circular dated November 8, 2011 (the Notice of Change). Assuming the minimum of 70% of the TMX
Group shares are acquired for cash under the Maple offer, former TMX Group shareholders would own 41.7% of Maple following the second step
plan of arrangement. Assuming the maximum of 80% of the TMX Group shares are acquired for cash under the first step offer, former TMX Group
shareholders would own 27.8% of Maple following the second step plan of arrangement.
As set out in the Notice of Change, the TMX Group Board is unanimously recommending that TMX Group shareholders accept and tender their
shares to the Maple offer, and vote in favour of the second-step arrangement transaction. In making its determinations, the TMX Group Board took
into account a number of factors, including the value of the transaction to TMX Group shareholders as well as the expected benefits of the Maple
transaction to TMX Group and Canadian capital markets participants and other stakeholders. In addition to other changes and enhancements since
Maple’s original offer of June 13, 2011, Maple has agreed to pay TMX Group a reverse termination fee of $39.0 million if the Maple transaction is
not completed because required regulatory approvals are not obtained. We are liable for the payment of success fees to our financial advisors of
approximately $21.0 million which are contingent upon the successful completion of the Maple transaction. TMX Group has not accrued this fee.
In connection with entering into the support agreement, Maple agreed to extend its offer until February 29, 2012. Based on information provided to
TMX Group by Maple, on January 30, 2012, a total of 12,844,353 TMX Group shares had been deposited under the Maple offer. If by February 28, 2012
all conditions to completion of the Maple offer have been satisfied or waived (other than the receipt of the necessary regulatory approvals and those
conditions that by their terms are to be satisfied immediately prior to expiry of the Maple offer), the outside date of February 29, 2012 may be
extended by either TMX Group or Maple to April 30, 2012 if necessary in order to obtain the required regulatory approvals, including approval under
the Competition Act (Canada) and from applicable provincial securities regulatory authorities. However, Maple would not be required to extend its
offer beyond February 29, 2012 if the regulatory approvals would not be obtained by April 30, 2012.
If any of the regulatory approvals from regulatory authorities other than the OSC and the AMF have yet to be obtained and the Maple offer will
otherwise expire within 21 days, Maple will extend the Maple offer to a date that is at least 21 days after the OSC and the AMF have each made their
respective decisions (and without limiting Maple’s obligations to further extend the Maple offer if required pursuant to the support agreement,
18 TMX Group Annual Report | 2011
but provided that Maple is not required to extend the Maple offer beyond April 30, 2012), subject to those decisions being satisfactory to Maple in
accordance with the support agreement. This extension will give each other relevant regulatory authority additional time to take the OSC and AMF
decisions into account for the purposes of its own independent review, if it chooses to take the additional time.
Under the support agreement, TMX Group and Maple have agreed to proceed diligently and in a coordinated fashion to obtain the applicable
regulatory approvals, including from securities regulatory authorities and the Commissioner of Competition. Maple has further agreed to use
commercially reasonable efforts to pursue and obtain the applicable regulatory approvals and to negotiate, commit to and effect regulatory
commitments that may be required by federal or provincial regulatory authorities in order to do so, provided they do not result in a “Material
Detriment”, as defined in the support agreement.
On October 7, 2011, the OSC and the AMF issued public notices outlining certain issues related to the Maple offer and requested comments from
interested parties in respect of the Maple offer and the Related Transactions. The BCSC and ASC also issued a joint notice requesting comments
regarding the proposed transactions. Public hearings were held by the AMF on November 24 and 25, 2011 and by the OSC on December 1 and 2,
2011 to allow interested parties to make additional submissions regarding the Maple offer and the Related Transactions and the issues raised by
the OSC and the AMF. In addition, in numerous meetings with Maple and TMX Group, securities regulatory authorities have provided additional
clarification of the issues and concerns that they consider to be raised by the Maple offer and the Related Transactions.
On November 29, 2011, the Commissioner of Competition provided Maple and TMX Group with her views with respect to the Maple offer and
the Related Transactions. The Commissioner expressed serious concerns about the likely competitive effects of the proposed transactions in the
current environment, primarily in connection with equities trading and clearing and settlement services in Canada. The Commissioner indicated
that she had not reached a final conclusion and that her views may be affected by further factual information and developments, which may
include changes in the applicable securities regulatory regime, and any commitments or other remedial measures that Maple may be prepared to
take to address her concerns.
Maple has continued to engage in ongoing discussions with, answered questions from, and made numerous submissions to, securities regulatory
authorities and the Competition Bureau on the issues and concerns raised by them in respect of the Maple offer and the Related Transactions,
including recently submitting a proposed CDSL pricing model and proposing remedies to address concerns regarding equities trading.
Maple is continuing to seek to resolve outstanding issues and concerns raised by the securities regulatory authorities and the Competition Bureau.
However, there can be no assurance that remedies short of a Material Detriment, as defined in the support agreement, will address the issues and
concerns raised by the securities regulatory authorities and the Commissioner or that the regulatory approvals will be obtained. If the Maple offer is
not completed because of a failure to obtain the regulatory approvals, TMX Group’s recourse in that circumstance is likely to be limited to receipt of
the reverse termination fee. See “Summary of Agreements Relating to the Maple Offer – Support Agreement – Maple Termination Fee” in the Notice
of Change.
Additional information regarding the status of the Maple offer and the support agreement is available in the Notice of Change, including the TMX
Group Board’s reasons for its recommendation of the Maple offer, and Maple’s Notice of Variation and Extension dated October 31, 2011, as well as
Maple’s Notice of Extension dated January 31, 2012, each of which has been mailed to TMX Group shareholders.
Further details are also available in joint TMX Group-Maple press releases dated October 30, 2011, November 29, 2011 and January 31, 2012. The full
text of the support agreement is also available on SEDAR under TMX Group’s corporate profile at www.sedar.com.
TMX Group and LSEG Terminate Merger Agreement
On June 29, 2011, TMX Group agreed with LSEG to terminate our merger agreement which was announced on February 9, 2011.
TMX Group shareholders were scheduled to vote on the merger on June 30, 2011. A majority of shareholder votes cast by proxy prior to the June 28,
2011 proxy deadline supported the merger resolution; however, it was determined that the two-thirds threshold required to approve the merger
would not have been achieved.
In terminating the merger agreement, TMX Group agreed to pay a $10.0 million expense fee to LSEG. This $10.0 million expense fee would
have become payable by TMX Group under the merger agreement if TMX Group shareholder approval of the merger had not been obtained.
The $10.0 million expense fee has been included in LSEG and Maple Related Costs for 2011. TMX Group also agreed to pay a $29.0 million fee to
LSEG if Maple’s proposed acquisition is consummated as contemplated in the support agreement with Maple. TMX Group has not accrued this
$29.0 million fee.
Management’s Discussion and Analysis
19
Market Conditions3
From a macro perspective, the relative strength of the Canadian and global economies impacts our key revenue drivers. In a growing economy,
we would typically expect an increase in the levels and nature of market activity on our exchanges; an increase in new public offerings and higher
financing activity; the growth of capital may in turn drive more investing and trading activity across all asset classes and venues. While it is not
possible to quantify the potential changes in some of these drivers, future economic and market conditions will continue to affect these revenue
drivers and impact future revenue and net income given our largely fixed cost structure. In 2011, the European debt situation, U.S. economy and
Canadian interest rate environment have negatively impacted various areas of our business. In addition, an increase in the North American supply
of natural gas has led to lower natural gas prices and less price volatility which contributed to lower volumes. Following the credit crisis in 2008,
regulators in Canada, the U.S. and in Europe have and are proposing and evaluating numerous changes to the financial system, including higher
capital reserves, greater transparency, and increased utilization of regulated exchanges and central counterparties for over the counter derivatives.
Based on the results of these deliberations and the markets reaction to them, volumes and activity may be enhanced or reduced.
We operate in the highly competitive exchange industry, both domestically and internationally. In addition to competing with North American
exchanges and ATSs directly for trading of interlisted issuers, we also compete internationally with global marketplaces for investment capital and
order flow. Domestically, since entering the Canadian equities market, ATSs have fragmented trading volumes. In 2010, Toronto Stock Exchange and
TSX Venture Exchange held, on a combined basis, an average share of 73% of equities volume traded in Canada. In 2011, our combined monthly
average share of volume (including trading on our new ATS, TMX Select, launched in July, 2011) declined to 67% overall. Our market share was 71%
in December 2011, although that share changes on a daily basis. We continue to face significant competitive pressure in this multi-marketplace
domestic environment. In August, 2011, another new ATS began trading and in October, 2011, a number of global financial institutions invested in
one of our competitors. There are currently 13 Canadian equity marketplaces. We compete for listings both in North America and internationally,
particularly for SMEs as well as resource companies. In Canada, we currently compete for junior listings with Canadian National Stock Exchange
(CNSX). Alpha ATS L.P. (Alpha ATS), an alternative trading system formed by a group of Canada’s banks and investment dealers, has become a
significant competitor in our cash equities markets. Alpha ATS currently trades Toronto Stock Exchange and TSX Venture Exchange listed issuer
securities. In December, 2011, the OSC approved the recognition of Alpha LP and Alpha Exchange as an exchange giving them the ability to also list
issuers effective in 2012. As of the date of this MD&A, they not received the same recognition from the British Columbia Securities Commission
(BCSC) or the Alberta Securities Commission (ASC).
NGX’s business of trading and clearing physical natural gas, electricity and crude oil contracts and Shorcan Energy Brokers business face primary
competition in energy markets in Canada and the United States from OTC bilateral markets (supported by voice brokers other than Shorcan) and
competing exchanges listing and clearing similar energy products. Other exchanges and electronic trading platforms are now starting to list physical
products designed to compete more directly with the NGX contracts. Our alliance with IntercontinentalExchange, Inc. (ICE) positions NGX to efficiently
deliver products to the trader desktops while providing the tools to deliver clearing for exchange-traded as well as OTC bilateral contracts.
In addition to competition from foreign derivatives exchanges that offer comparable derivatives products, MX faces domestic competition from
OTC derivatives trading that occurs bilaterally between institutions. We may in the future also face competition from other Canadian derivatives
marketplaces. In the United States, MX competes for market share of trading single stock options based on Canadian-based interlistings, or dual
listings. However, options traded in the U.S. are not fungible with those traded in Canada.
MX’s subsidiary, BOX, operates in the intensely competitive U.S. equity options market.
Our Business
We derive revenue primarily from issuer services, trading and clearing and information services.
2011 revenue of $673.5 million
2010 revenue of $625.6 million
Information
Services 24%
Issuer Services 34%
Information
Services 25%
Issuer Services 34%
Technology Services
& Other 2%
Energy Trading
& Clearing 7%
Technology Services
& Other 3%
Energy Trading
& Clearing 7%
Derivatives Markets
Trading & Clearing 17%
Equity and Fixed Income
Cash Markets Trading &
Related 16%
Derivatives Markets
Trading & Clearing 13%
Equity and Fixed Income
Cash Markets Trading &
Related 18%
3
The “Market Conditions and Outlook” section above contains certain forward-looking statements. Please refer to “Caution Regarding Forward-Looking Information” for a discussion of risks and
uncertainties related to such statements.
20 TMX Group Annual Report | 2011
Issuer Services
Revenue Composition
2011 issuer services revenue of $230.5 million
TSX Venture
Exchange 29%
2010 issuer services revenue of $213.1 million
TSX Venture
Exchange 28%
Toronto Stock
Exchange 66%
Toronto Stock
Exchange 66%
Equicom 5%
Equicom 6%
Overview and Description of Products and Services
We carry out our listings operations through Toronto Stock Exchange, our senior market, and TSX Venture Exchange, our junior market. TSX Venture
Exchange also provides a market called NEX4 for issuers that have fallen below TSX Venture Exchange’s ongoing listing standards.
In general, issuers initially list on Toronto Stock Exchange either in connection with their 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 CPC program or RTOs.
The CPC program, which celebrated its 25th Anniversary in November 2011, provides an alternative, two-step introduction to listing on TSX Venture
Exchange. Through the program, CPC founders with financial markets experience raise a pool of capital that is listed on the Exchange as a CPC.
The CPC founders then seek out entrepreneurs with growth and development stage companies. Once a fit is found between the two, they complete
a business combination known as a QT.
Since its inception in 1986, 2282 CPCs have listed on TSX Venture Exchange (and its predecessor exchanges) as of December 31, 2011. Over the past
10 years, 560 companies that originally listed as CPCs have graduated from TSX Venture Exchange to Toronto Stock Exchange.
Issuers list a number of different types of securities including conventional securities such as common shares, exchange traded funds (ETFs) and
structured products, preferred shares, rights and warrants, and a variety of alternative types of structures such as exchangeable shares, convertible
debt instruments and limited partnership units. In 2011, Toronto Stock Exchange reached over 240 exchange traded products (ETPs) comprised
of 228 ETFs and 14 exchange traded notes (ETNs). The number of ETPs has more than doubled in the past two years bringing the total market
capitalization of listed ETPs to approximately $52.2 billion at December 31, 2011.
Listed 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, provide liquidity for existing investors, access to mentorship programs and the prestige
and market exposure associated with being listed on one of Canada’s premier national stock exchanges. While we list issuers from a wide range of
industries, we are a global leader in listing issuers in the resource sectors, including mining and oil and gas companies. In addition, we are a leader
in listing SMEs, as well as issuers in the Clean Technology sector.
In 2011, we ranked first in the world for the number of new listings, with 533 entities going public or graduating on our two equity exchanges#
(including New Listings, Initial public offerings (IPOs), Capital Pool Companies® (CPCs), Qualifying Transactions (QTs), Reverse Takeovers (RTOs) and
Direct Listings). This is the third straight year that TMX Group's equity exchanges have led global exchanges in the number of new listings. As of
December 31, 2011, TMX Group equity exchanges were second in the world by number of listings, seventh by market capitalization and eighth by
equity capital raised°.
4 Unless otherwise indicated, market statistics and financial information for TSX Venture Exchange includes information for NEX.
# As at December 31, 2011, 533 new listings, including 45 graduates from TSX Venture Exchange to Toronto Stock Exchange.
°
Ranking based on World Federation of Exchanges statistics.
Management’s Discussion and Analysis 21
Key Statistics
• At December 31, 2011, 1,587 issuers with an aggregate market capitalization of $2.0 trillion were listed on Toronto Stock Exchange,
compared with 1,516 issuers at December 31, 2010 with an aggregate market capitalization of $2.2 trillion. The S&P/TSX Composite Index≠
level was 11,955.09 on December 31, 2011, an 11% decrease from 13,443.22 on December 31, 2010.
• At December 31, 2011, 2,444 issuers with an aggregate market capitalization of $49.0 billion were listed on TSX Venture Exchange,
compared with 2,376 issuers at December 31, 2010 with an aggregate market capitalization of $72.1 billion. The S&P/TSX Venture
Composite Index≠ level was at 1,484.66 on December 31, 2011, a 35% decrease from 2,287.85 on December 31, 2010.
Pricing
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 listing 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. Issuers who graduate from TSX Venture Exchange to Toronto Stock Exchange are considered initial listings, but pay no application fee
and may receive a discount in certain circumstances up to a maximum of 25% of the initial listing fee.
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.
Sustaining Listing Fees5
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 for existing issuers are billed during the first quarter of the year,
recorded as deferred revenue and amortized over the year on a straight-line basis. Sustaining listing fees for new issuers are billed in the quarter
that the new listing takes place and are amortized over the remainder of the year on a straight-line basis.
Because sustaining fees are tied to the market capitalization of our issuers and typically rise in positive markets and decline in negative markets,
Toronto Stock Exchange and TSX Venture Exchange expect a decrease in sustaining fees in 2012, due to lower market capitalization at the end of
2011 when compared with the end 2010. This will also be somewhat dependent on new listings and delistings in 2012, as new issuers are subject to
a prorated sustaining listing fee and issuers that delist may receive a partial refund of sustaining listing fees paid in 2012. We benchmark our listing
fees against those of our peers in the global exchange industry.
Prior to becoming effective, changes to Toronto Stock Exchange listing fees are filed with the OSC. Any changes to TSX Venture Exchange listing
fees are posted for a 60-day notice period before taking effect. It is possible within this period that the BCSC and/or the ASC may object, or require
revisions to, the proposed fee changes.
2012 Pricing
To date, there have been no major price changes announced for Toronto Stock Exchange and TSX Venture Exchange for 2012.
Competition
We compete for listings both in North America and internationally, particularly for SMEs and resource companies. Domestically, we currently
compete for junior listings with CNSX. Alpha ATS currently trades Toronto Stock Exchange and TSX Venture Exchange listed issuer securities.
In December 2011, the OSC approved the recognition of Alpha LP and Alpha Exchange as an exchange giving them the ability to also list issuers
effective in 2012. As of the date of this MD&A, they not received the same recognition from the BCSC or the ASC.
While some Canadian issuers seek a listing on another major North American or international exchange, historically, the vast majority of these issuers
tend to list on Toronto Stock Exchange or TSX Venture Exchange and do not bypass our markets. At December 31, 2011 there were 339 issuers interlisted
on other exchanges, including 100 on NYSE, 74 on NYSE Amex, 46 on NASDAQ, 39 on ASX and 38 on AIM. There were also 176 issuers quoted on OTCQX,
a U.S. OTC marketplace. As at December 31 2011, only 13 Canadian issuers bypassed our markets and were listed solely outside of Canada.
We also compete with institutions and various market participants that offer alternative forms of financing that are not necessarily traded in public
markets including private venture capital and various forms of debt financing.
5
≠
The “Sustaining Listing Fees” section above contains certain forward-looking statements. Please refer to “Caution Regarding Forward-Looking Information” for a discussion of risks and
uncertainties related to such statements.
“S&P” is the trademark of Standard & Poor’s and “TSX” is the trademark of TSX Inc.
22 TMX Group Annual Report | 2011
Trading and Clearing
Toronto Stock Exchange, TSX Venture Exchange, TMX Select, MX, NGX, Shorcan and Shorcan Energy Brokers
2011 trading, clearing and related revenue of $262.6 million
2010 trading, clearing and related revenue of $242.2 million
Derivatives –
MX & BOX 43%
Derivatives –
MX & BOX 35%
Energy 17%
Energy**** 19%
Cash Markets 40%
Cash Markets 46%
Cash equities trading – Toronto Stock Exchange, TSX Venture Exchange and TMX Select
Overview and Description of Products and Services
Trading on Toronto Stock Exchange, TSX Venture Exchange and TMX Select occurs on a continuous basis on our fully electronic trading systems
throughout the day. Retail, institutional and other proprietary investors place orders to buy or sell securities through POs who act as principals or
agents. Trading sessions begin with the market open in an auction format. Toronto Stock Exchange sessions end 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 cleared and settled through CDSL, a recognized clearing agency in which
we have an 18% ownership interest. The other owners of CDSL are the major Canadian chartered banks and the Investment Industry Regulatory
Organization of Canada (IIROC).
Technology
As part of our continuing effort to provide customers with the most advanced trading technology and performance, we are continuing to invest
in, and are implementing a multi-phased initiative to expand the infrastructure across our trading and data enterprise. The first expansion phase
was completed in Q1/10. In November 2011, we successfully completed the second phase of our equity Enterprise Expansion project. This initiative
was designed to provide customers with significantly improved trading technology and performance across the TSX Quantum trading enterprise.
The second phase of the Enterprise Expansion project accommodates higher throughput and capacity at 55,000 order messages per second, more
than doubling existing capabilities with the introduction of a second trading engine partition.
Key Statistics
• Volume traded on Toronto Stock Exchange was 103.59 billion securities in 2011, a 1% decrease from 104.56 billion securities traded in 2010.
• Volume traded on TSX Venture Exchange was 64.98 billion securities in 2011, a 4% decrease from 67.89 billion securities in 2010.
• The combined volume traded on our cash equities markets, including TMX Select, was 169.77 billion securities in 2011, a 2% decrease
compared with 172.45 billion securities in 2010.
Pricing
We have a volume-based fee structure for issues traded on Toronto Stock Exchange and TSX Venture Exchange. This model is structured so that
market participants have an incentive to enter passive orders into 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.
This trading revenue is recognized in the month in which the trade is executed.
In 2011, we implemented the following changes to our equity trading fee schedule:
• Effective March 1, 2011, we reduced the fees for large contributors to our MOO facility through the introduction of a fee cap, and
introduced net credit payments for trading in our continuous limit order book and additional changes.
• Effective April 1, 2011, we made changes which provided cost savings to participants that trade equities where the trade price per-security
is lower than $1.00.
• Effective June 6, 2011, we introduced the fee schedule associated with our Dark Order Types, providing participants opportunities to
significantly reduce their transaction fees while benefiting from price improvement and efficiencies when trading against dark liquidity.
**** Includes revenue from Shorcan Energy from February 1, 2010.
Management’s Discussion and Analysis 23
• Effective July 1, 2011, we made changes to our Smart Order Router fees, allowing users to route orders free of charge in order to meet
regulatory obligations.
• Effective October 1, 2011, we made changes to our market making fee schedule for Toronto Stock Exchange, including introducing
monthly credits.
Prior to becoming effective, changes to Toronto Stock Exchange, TSX Venture Exchange and TMX Select trading fees are filed with the OSC, BCSC and
ASC for a 45-day period before becoming effective. It is possible that the regulators may object, or require revisions to, the proposed fee changes.
2012 Pricing
To date, there have been no major changes announced to our equity trading fee schedule for 2012.
Competition and Market Share
There are currently 13 Canadian equity marketplaces which trade or intend to trade Toronto Stock Exchange and TSX Venture Exchange listed
securities, including dark and visible trading venues and mechanisms to internalize order flow within a PO. The largest competitive impact
thus far has been from Alpha ATS, which was launched in November 2008 by a group of Canada’s leading banks and investment dealers with
multiple interests.
In 2011, our combined monthly average share of volume (including trading on our new ATS, TMX Select, launched in July, 2011) declined to 67%
overall. Our market share was 71% in December 2011, although that share changes on a daily basis. We continue to face significant competitive
pressure in this multi-marketplace domestic environment. In August, 2011, another new ATS began trading and in October, 2011, a number of
global financial institutions invested in one of our competitors.
The competitive landscape in Canada has changed significantly as competitors pursue aggressive tactics while leveraging their liquidity relationships
in order to procure market share from our equity exchanges. Our international and domestic business development efforts, core technology
initiatives and the development of responsive new products are fundamental to growing overall trading volumes on our equity exchanges.
We also compete for trading activity in the United States for those issuers that seek additional listings on other exchanges, referred to as
interlistings, 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 including 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. Our cash equities sales team is focused on the goal of attracting more foreign participants and order flow by raising
the level of awareness regarding the benefits of trading on Toronto Stock Exchange and TSX Venture Exchange.
Derivatives Trading and Clearing – MX and BOX
Overview and Description of Products and Services
Our domestic financial derivatives trading is conducted through MX. Our U.S. derivatives trading is conducted through our controlled subsidiary,
BOX, an equity options market located in the U.S. Our derivatives markets derive revenue from MX’s trading, clearing, information services and
technology services activities as well as from trading and information services on BOX.
Products and Services
Derivatives-Trading
MX
MX offers interest rate, index, equity and exchange-rate derivatives to Canadian and international market participants. MX connects participants
to its derivatives markets, builds business relationships with them and works with them to ensure that the derivatives offerings meet investor
needs. Slightly more than half of the 2011 volume on MX is represented by three futures contracts – the Three-Month Canadian Bankers’ Acceptance
Futures contract (BAX®), the Ten-Year Government of Canada Bond Futures contract (CGB®) and the S&P/TSX 60 Standard Futures contract (SXF) –
with the balance represented by our equity and ETF options market. Viewed from an asset-class perspective, equity derivatives represent slightly
more than half the activity on the MX.
BOX
BOX is an all-electronic equity derivatives market and was created as a simpler, faster, more transparent and less costly alternative to the other U.S.
market models. BOX was established in February 2002 by the Boston Stock Exchange, Inc. (BSE), MX and Interactive Brokers Group LLC, with MX as
the principal shareholder. BOX is one of several equity options markets in the U.S., offering an electronic equity derivatives market on almost 1,500
options classes. All BOX trade volume is cleared through the Options Clearing Corporation.
24 TMX Group Annual Report | 2011
Derivatives-Clearing
Through CDCC, MX’s wholly-owned subsidiary, we generate revenue from clearing and settlement, as well as from options and futures exercise
activities. CDCC offers central counterparty and clearing and settlement services for all transactions carried out on MX’s markets and on some OTC
products. In addition, CDCC is the issuer of options traded on MX markets and the clearing house for options and futures contracts traded on MX
markets and for some products on the OTC market. CDCC has a long-term rating of AA and a short-term rating of A1 from Standard and Poor’s,
based on CDCC’s prudent and standardized risk management policies and operational procedures.
Derivatives-Regulatory Division
MX is a self-regulatory organization (SRO) that has a major responsibility for maintaining the transparency, credibility and integrity of the exchange-
traded derivatives market in Canada. MX’s Regulatory Division, which is operated independently of its other operations, is responsible for the
regulation of its markets and its trading participants. The Regulatory Division is subject to the sole internal oversight of MX’s Special Committee –
Regulatory Division. The Special Committee – Regulatory Division, which is appointed by the Board of Directors of MX, is composed of a majority
of independent members, none of whom is a member of the Board of Directors of MX or CDCC. The Regulatory Division operates on a non-profit/
cost-recovery basis.
Revenues generated by the Regulatory Division are from two sources: (1) regulatory fees, which are principally comprised of market surveillance
fees collected by MX on behalf of its Regulatory Division, and (2) regulatory fine revenues, which are generated from fines levied by the Regulatory
Division. Market regulation fees are recognized in the month in which the services are provided.
Any surplus in the Regulatory Division must be, subject to the approval of the Special Committee – Regulatory Division, redistributed to MX’s
approved participants (excluding regulatory fine revenues, which cannot be redistributed) and any shortfall must be made up by a special
assessment by MX’s participants or by MX upon recommendation of the Special Committee – Regulatory Division. Regulatory fine revenues
are accounted for separately from regulatory fees revenues and can be used only for specifically approved purposes, such as charitable or
educational donations.
Key Statistics
•
In 2011, MX set a second consecutive annual volume record with 61.98 million contracts traded, an increase of 40% from 44.30 million
contracts traded in 2010 and total open interest was up 26% at the end of 2011 versus the end of 2010.
• BOX volumes increased by 52% (139.68 million contracts traded in 2011 versus 91.75 million contracts traded in 2010).
Pricing
MX participants are charged fees for buying and selling derivatives products on a per transaction basis, determined principally by contract type
and participant status. Since MX trading fee rates are charged on each transaction based on the number of contracts included in each transaction.
MX trading revenue is directly correlated to the volume of contracts traded on the derivatives market. Derivatives trading revenue is recognized in
the month in which the trade is executed.
CDCC clearing members are charged fees for clearing and settlement on a per contract basis. These fees are charged at various rates based
on the type of customer or member. Clearing and settlement revenues are correlated to the trading volume of such products and therefore
fluctuate based on the same factors that affect our derivatives trading volume. Derivatives clearing revenue is recognized on the settlement
date of the related transaction.
BOX participants are charged fees on a per transaction basis. Trading fees are directly correlated to the volume of contracts traded. Options
Regulatory Fees are fees based on the number of customer contracts executed by participant firms. In Q3/10, BOX adjusted its fee schedule for
trades executed inside the PIP and began charging public customers for trades executed outside the PIP. In Q3/11, BOX adjusted its fee schedule
for broker dealer trades executed outside the PIP and adjusted its liquidity fees and credits. In Q4/11, BOX introduced fees for trades executed as a
professional customer.
Prior to becoming effective, changes to MX trading fees are filed with the Autorité des marchés financiers (AMF) for a 45-day period before becoming
effective. It is possible that the AMF may object, or require revisions to, the proposed fee changes. Changes to BOX trading fees are filed with the
U.S. Securities and Exchange Commission (SEC).
2012 Pricing
To date, there have been no significant price changes announced for MX and BOX for 2012.
Management’s Discussion and Analysis 25
Competition
In Canada, our competition in derivatives is the OTC market and internationally we compete for a share of trading in derivatives of interlisted equities.
While MX and CDCC are the only standardized financial derivatives exchange and clearing house in Canada, their various component activities are
exposed, in varying degrees, to competition. We compete by offering market participants a state-of-the-art electronic trading platform, an efficient,
cost-effective and liquid marketplace for trade execution and transparent market and quotation data. Additionally, we are continually enhancing
our product offering and providing additional efficiencies to our customers. We are committed to improving the technology, services, market
integrity and liquidity of our markets. In addition to competition from foreign derivatives exchanges, the majority of derivatives trading occurs OTC
or bilaterally between institutions. We may in the future also face competition from other Canadian marketplaces.
With respect to providing clearing services for certain OTC-traded contracts, CDCC is targeting markets that already are or could easily be the focus
of foreign clearing houses. The nature of these markets makes them attractive targets for all clearing houses in good standing throughout the
world. Once such services are in place in a given clearing house, the main criterion for attracting such business is merely that both counterparties to
a transaction clear through members of the clearing house.
In the U.S., MX competes for market share of trading single stock options based on Canadian-based interlistings, or dual listings. However, options
traded in the U.S. are not fungible with those traded in Canada.
BOX operates in the highly competitive U.S. equity options market. BOX’s overall equity options market share increased from 2.5% in 2010 to 3.3%
in 2011. BOX competes for market share with NYSE Amex Options, NYSE Arca Options, CBOE, International Securities Exchange (ISE), The NASDAQ
Options Market, NASDAQ OMX PHLX and BATS Options among others.
NGX
Overview and Description of Products and Services
NGX is a Canadian-based energy exchange with an electronic platform that trades and provides clearing and settlement services for natural gas,
crude oil and electricity contracts. In 2008, we formed a technology and clearing alliance for the North American natural gas and Canadian power
with ICE. Under the arrangement, North American physical natural gas and Canadian electricity products are offered through ICE’s leading electronic
commodities trading platform. NGX serves as the clearinghouse for these products. In Q1/11, NGX added Canadian and U.S. physical crude oil
products and ICE added Canadian financial crude oil products to the existing clearing and technology alliance.
NGX also owns The Alberta Watt Exchange (Watt-Ex), a provider of ancillary services to the Alberta Electric System Operator which uses Watt-Ex to
procure its operating reserve electricity for the Alberta grid.
Key Statistics
•
In 2011, NGX total energy volume# was 15.47 million terajoules traded or cleared, compared with 16.72 million terajoules in 2010,
representing an overall decrease of 7%.
• As of December 31, 2011, NGX listed over 41 crude oil grades at 13 locations in Canada and the U.S.
Pricing
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. Energy trading and clearing revenue is
recognized over the period the relevant services are provided.
Fee changes are self certified with the U.S. Commodity Futures Trading Commission (CFTC) and filed with the ASC.
2012 Pricing
To date, there have been no major price changes announced for 2012.
Competition
The NGX business faces competition in Canada and the U.S. from other exchanges, electronic trading and clearing platforms and from the OTC or
bilateral markets (with support from voice brokers) and competing exchanges listing and clearing energy products. In 2011, NGX faced increased
competition from voice brokers, including Shorcan Energy Brokers, a wholly-owned subsidiary of Shorcan.
Our alliance with ICE positions us to compete in the OTC markets for trading while providing clearing for OTC bilateral contracts. NGX is working
with the energy voice brokers to provide OTC clearing services for standard off-exchange bilateral energy transactions.
# NGX Total Energy Volume includes trading and clearing in natural gas, crude oil and electricity.
26 TMX Group Annual Report | 2011
Shorcan – Fixed Income & Energy Trading
Overview and Description of Products and Services
Shorcan’s fixed income operations primarily provide a facility for matching orders for Canadian federal, provincial, corporate and mortgage bonds
and treasury bills and derivatives for anonymous or name-give-up buyers and sellers in the secondary market. Shorcan Energy Brokers provide an
inter-participant brokerage facility for matching buyers and sellers of energy products, including crude oil.
Key Statistics
•
In 2011, we estimate that the IDB market represented about 35% of total fixed income trading in Canada and that Shorcan’s share of this
market was about 40%.
• We estimate Shorcan Energy Brokers’ inter-participant brokered market share is approximately 60%.
Pricing
Shorcan and Shorcan Energy Brokers charge a commission on orders that are matched against an existing communicated order.
2012 Pricing
To date, there have been no price changes announced for 2012.
Competition
Shorcan, and Shorcan Energy Brokers have several competitors in the fixed income IDB and energy markets in Canada. Shorcan continues to work
towards increasing market share as well as diversifying revenue and increasing utilization of electronic trading within the fixed income IDB market.
Information Services – TMX Datalinx, MX and BOX
2011 information services revenue of $165.1 million
2010 information services revenue of $154.4 million
Fixed Income
Non-Canadian
Subscriptions
Top of Book (CEG)
Data Delivery
Solutions
Derivatives
TSX Top
of Book
(Level 1)
3rd Party Data
Online/Historical/Other
Non-pro Usage
TSXV Top of Book
(Level 1)
TSX Depth of Book (Level 2)
TSXV
Depth of Book
(Level 2)
Overview and Description of Products and Services
Real-Time Market Data Products – CEG, Level 1 and Level 2
Fixed Income
Data Delivery
Solutions
Derivatives
3rd Party Data
Non-Canadian
Subscriptions
Top of Book (CEG)
TSX Top
of Book
(Level 1)
Online/Historical/Other
Non-pro Usage
TSXV Top of Book
(Level 1)
TSXV Depth
of Book
(Level 2)
TSX Depth
of Book
(Level 2)
Trading activity on our equity exchanges produces a stream of real-time data reflecting orders and executed transactions. This stream of data is
supplemented with value added content (e.g. dividends, earnings) and packaged by TMX Datalinx into real-time market data products and delivered
to end users directly or via more than 100 Canadian and global redistributors that sell data feeds and desktop market data.
For our cash equities markets, we offer our subscribers Level 1 real-time services for Toronto Stock Exchange and TSX Venture Exchange, including
NEX and Level 2 real-time services for Toronto Stock Exchange, TSX Venture Exchange and TMX Select. Level 1 provides trades, quotes, corporate
actions and index level information. Level 2 provides a more in-depth look at the order book and allows distributors to obtain Market Book® for
Toronto Stock Exchange, TSX Venture Exchange and TMX Select. Market Book is an end user display service which includes MarketDepth by Price,
MarketDepth by Order and MarketDepth by Broker for all committed orders and trades. We offer direct data feeds to clients with trading strategies
that require lower latency. Our Quantum Binary Feed provides clients with predictable latency for Level 1 and Level 2 binary data translated to a
standard, high frequency format for Toronto Stock Exchange and TSX Venture Exchange.
Management’s Discussion and Analysis 27
We also provide market participants with low-latency access to real-time Level 1 and Level 2 market data consolidated to include all domestic
equities marketplaces, by way of our TMX Information Processor Consolidated Data Feed (CDF™), Canadian Best Bid and Offer (CBBO®), Consolidated
Last Sale (CLS™) and Consolidated Depth of Book (CDB™) services.
TMX Datalinx market data is available globally through TMX Atrium, our low latency financial network, through connectivity to NYSE Technologies’
Secure Financial Transaction Infrastructure® (SFTI®) locations across the United States and Europe, through NASDAQ OMX Global Data Products
distribution services and through a host of network carriers and extranets.
Online, Historical, Other Market Data Products
Historical market data products include market information (such as historical pricing, index constituents and weightings) and corporate
information (such as dividends and corporate actions) used in research, analysis and trade clearing.
Third Party Data
In addition to providing consolidated Canadian equities data, we also redistribute exchange data from other markets in North America. We also
provide live inter-bank foreign exchange rates, fixed income rates from CanDeal and offer a TSX/CP Equities News service in partnership with The
Canadian Press.
Real-Time Derivative Market Data Products
TMX Datalinx distributes MX real-time trading and historical data to market participants on a global basis.
The SOLA High Speed Vendor Feed (HSVF) is a real-time service for MX’s real-time trading and statistical information (comprised of trades, quotes,
market depth, strategies, bulletins, summaries and other statistics). The MX Data Feed provides access to both Level 1 and Level 2 real-time data.
Information services revenue is also generated by the sale of data to resellers of information as well as the sale of individual data delivery real-time
subscriber products delivered through browser-based and mobile services.
BOX distributes its market data, like the other U.S. options markets, through a marketplace service known as OPRA (Options Price Reporting
Authority), which collects data from the options exchanges and disseminates it to entities which then resell it.
Data Delivery Solutions – Co-location, TMXnet and TMX Atrium6
TMX Datalinx provides co-location services to a broad range of domestic and international market participants. TMX co-location services clients
benefit from stable, low latency access to the Toronto Stock Exchange, TSX Venture Exchange, TMX Select and MX trading engines and market data
feeds, as well as a broad range of other market data sources and technology providers.
TMX co-location services offering was introduced in 2008 and has expanded since then. In 2012, we expect to incur capital expenditures of
approximately $4.0 million associated with building Co-location Services Phase 4 bringing the total number of co-location spaces to 190, and expect
to generate incremental revenues commencing in Q2/12.
Index Products – Equities and Derivatives
TMX Datalinx has an arrangement with Standard & Poor’s Financial Services LLC (S&P) under which we share license fees received from organizations
that create products, such as mutual funds and 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.
Together with S&P, we launched new indices in 2011 to complement our core S&P/TSX suite of indices, including the benchmark S&P/TSX Composite
Equal Weight. Also new to the mix were two S&P/TSX Venture indices, S&P/TSX Venture Select Index and S&P/TSX Venture 30, upon which ETFs were
launched in 2011, allowing both Canadian and US investors to track the performance of smaller-cap Canadian stocks trading on TSX Venture Exchange.
Fixed Income – Index and Analytics Products
Our PC-Bond fixed income indices are widely used fixed income performance benchmarks in Canada. The best known of these indices is the
Universe Bond Index, which tracks the broad Canadian bond market. In addition to this 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.
In November 2011, PC-Bond launched an arrangement with NASDAQ OMX® to offer a new family of U.S. Treasury Fixed Income indexes, the RBC
Insight Total Return U.S. Treasury (TRUST) indexes.
6
≠
The “Data Delivery Solutions” section above contains certain forward-looking statements. Please refer to “Caution Regarding Forward-Looking Information” for a discussion of risks and
uncertainties related to such statements.
“S&P” is the trademark of Standard & Poor’s and “TSX” is the trademark of TSX Inc.
28 TMX Group Annual Report | 2011
Key Statistics
• Overall, there was a 1% decrease in the number of professional and equivalent real-time market data subscriptions to Toronto Stock
Exchange and TSX Venture Exchange products (157,255+ professional and equivalent real-time market data subscriptions at December 31,
2011 compared with 159,572+ at December 31, 2010).
• There was a 19% increase in the number of MX market data subscriptions (28,238+ MX market data subscriptions at December 31, 2011
compared with 23,718+ at December 31, 2010).
Pricing
Subscribers to TMX 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 market data subscriptions and therefore are partly related
to industry employment. We charge market data vendors and direct feed clients a fixed monthly fee for access to data feeds.
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 and external redistribution. We produce two electronic reference data
publications for each equity exchange, a Daily Record and a Monthly Review, both of which are sold on a subscription and firm license basis.
Real-time market data revenue is recognized based on usage as reported by customers and vendors, less a provision for sales allowances from
the same customers. Fixed income indices revenue is recognized over the period the service is provided. Other information services revenue is
recognized when the services are provided.
In 2011, approximately 34% of our information services revenue was billed in U.S. dollars. We do not currently hedge this revenue and are therefore
subject to foreign exchange fluctuations.
We benchmark our market data fees against those of our peers in the global exchange industry.
Prior to becoming effective, changes to certain TMX Datalinx market data fees related to Toronto Stock Exchange, TSX Venture Exchange, TMX Select
and MX market data are filed with the OSC, BCSC, ASC and the AMF, as required, for a 45-day notice period before becoming effective. It is possible
that the regulators may object, or require revisions to, the proposed fee changes.
2011 and 2012 Pricing
In May 2011, TMX Datalinx announced both a fee reduction and unbundling of its TSX Level 1 product, reducing the professional subscription fee
from $38.00 to $32.00, which came into effect October 1, 2011. The index level data will be removed from the TSX Level 1 product and the fee will
be reduced further, to $30.00 effective April 1, 2012, giving users the flexibility to subscribe to only the data they require. Users will subsequently be
able to subscribe to S&P/TSX index level data for $1.50 per month.
Competition
With the advent of a multi-marketplace environment in Canada, we face competition in market data, from these trading venues. Market data is
generated from trading activity and the success of certain data products is linked to maintaining order flow.
We have continued to diversify and target new data customers with recent initiatives such as the consolidation of our equities and derivatives data
centres and the expansion of our co-location services.
Technology Services and Other Revenue
We provide technology solutions to exchanges and other industry participants in circumstances where there is a financial or strategic interest.
Our team of exchange technology professionals have extensive industry experience in designing, building, installing and operating trading and
related systems at our exchanges as well as other global exchanges. Technology services and other revenue is recognized when the license is sold or
when the service is provided.
In keeping with our strategy to diversify revenue, offer our customers leading technology services and support our internal platforms, in November 2011,
TMX Group and Razor announced a Takeover Bid Implementation Agreement under which a subsidiary of TMX Group has made a takeover bid for all of the
issued shares in Razor.
Cash Markets Technology Services
We currently provide technology and related services to IIROC for the purposes of its review and real-time monitoring of trading on equity
marketplaces. IIROC pays us fees for these services, negotiated on an arm’s length basis, in accordance with a five-year agreement dated
June 1, 2008, which also details service levels. Most services under this arrangement are expected to terminate on March 31, 2012.
+
Includes a base number of subscriptions for customers that have entered into enterprise agreements.
Management’s Discussion and Analysis 29
Derivatives Markets Technology Services
In May, 2011, we announced that LSEG's pan-European derivatives market, Turquoise Derivatives, had successfully migrated to the SOLA trading
system. SOLA, which was created by Montréal Exchange, is also the trading technology platform for Borsa Italiana's IDEM market and the Oslo Bors.
The SOLA technology is designed for scalability to efficiently meet ever expanding capacity and performance requirements.
Year Ended December 31, 2011 Compared with Year Ended December 31, 2010
Net income attributable to TMX Group shareholders of $237.5 million, or $3.18 per common share ($3.17 on a diluted basis) for 2011 decreased
slightly compared with $237.7 million, or $3.20 per common share ($3.19 on a diluted basis) for 2010. The decrease in net income attributable to
TMX Group shareholders was largely due to increased expenses due to $37.2 million (pre-tax) in LSEG and Maple related costs, a commodity tax
adjustment*, lower cash markets trading revenue, and higher compensation and benefits expenses. This was partially offset by higher revenue from
issuer services, derivatives markets trading and clearing and information services as well as lower income tax expense in 2011 compared with 2010.
Adjusted Earnings per Share Reconciliation for 2011 and 2010 **
The following is a reconciliation of earnings per share to adjusted earnings per share**:
Earnings per share
Adjustment:
Adjustment related to LSEG and Maple related costs,
net of income tax
Adjustment related to commodity tax adjustment*,
net of income tax
Adjustment related to a write-down of our 19.9% interest in
EDX London Limited (EDX) to its estimated fair value,
net of income tax
Adjusted earnings per share**
$
$
$
$
Basic
3.18
$
2011
Diluted
3.17
$
Basic
3.20
$
2010
Diluted
3.19
0.37
$
0.03
$
0.37
0.03
–
–
–
3.58
$
–
3.57
$
$
0.02
3.22
$
$
–
–
0.02
3.21
Adjusted earnings per share** of $3.58 per common share ($3.57 on a diluted basis), was higher than adjusted earnings per share of $3.22 per
common share ($3.21 on a diluted basis) for 2010. The increase in adjusted earnings per share** was largely due to higher revenue from issuer
services, derivatives markets trading and clearing, issuer services and information services, including TMX Atrium, acquired July 29, 2011, somewhat
offset by lower cash markets trading revenue. There were higher compensation and benefits expenses in 2011 compared with 2010, partially offset
by reduced income tax expense.
Revenue
Revenue was $673.5 million in 2011, up $47.9 million, or 8% compared with $625.6 million in 2010, reflecting higher revenue from derivatives
markets trading and clearing, issuer services and information services, including revenue from TMX Atrium, acquired July 29, 2011, somewhat offset
by lower cash markets trading revenue.
Issuer services revenue
(in millions of dollars)
Initial listing fees
Additional listing fees
Sustaining listing fees
Other issuer services
Total
$
$
$
$
$
2011
29.4
110.8
76.8
13.5
230.5
$
$
$
$
$
2010
28.7
106.1
65.0
13.3
213.1
$
$
$
$
$
$ increase
0.7
4.7
11.8
0.2
17.4
% increase
2%
4%
18%
2%
8%
•
Initial listing fees in 2011 increased over 2010 primarily due to an increase in the number of issuers who converted from income trusts to
corporate entities, partially offset by a decrease in the value of initial financings on Toronto Stock Exchange and TSX Venture Exchange in 2011
compared with 2010.
*
**
See "General and Administration" section.
The terms adjusted earnings per share and adjusted diluted earnings per share do not have standardized meanings prescribed by IFRS and are therefore unlikely to be comparable to
similar measures presented by other companies. We present adjusted earnings per share and adjusted diluted earnings per share to indicate operating performance exclusive of LSEG and
Maple-related costs incurred in 2011, a commodity tax adjustment in 2011 and the adjustment related to the write-down of our 19.9% interest in EDX to its estimated fair value in 2010.
Management uses these measures to assess our financial performance exclusive of these costs and to enable comparability across periods.
30 TMX Group Annual Report | 2011
• Additional listing fees increased over 2010 due to an increase in the value of additional financings on Toronto Stock Exchange and TSX
Venture Exchange, and fee changes which were effective January 1, 2011.
• The increase in sustaining listing fees was due to the overall higher market capitalization of listed issuers on both exchanges at the end of
2010 compared with the end of 2009, and fee changes on TSX Venture Exchange which were effective January 1, 2011.
Trading, clearing and related revenue
(in millions of dollars)
Cash markets revenue
Derivatives markets revenue
Energy markets revenue
Total
Cash Markets
$
$
$
$
2011
105.5
112.7
44.4
262.6
$
$
$
$
2010
113.1
83.7
45.4
242.2
$
$
$
$
$ increase/
(decrease)
(7.6)
29.0
(1.0)
20.4
% increase/
(decrease)
(7%)
35%
(2%)
8%
• The decrease in cash markets equity trading revenue was primarily due to changes to our equity trading fee schedule:
Effective date
March 1, 2010
April 1, 2010
March 1, 2011
April 1, 2011
October 1, 2011
Description of the fee change
Active trading fees on securities trading at less than $1.00 in the post-open continuous market were reduced;
Trading fees for securities trading at $1.00 and higher were reduced;
Trading fees for significant usage of our MOO facility were reduced
Net credit payments for trading in our continuous limit order book were introduced
Additional changes were made that provided cost savings to participants that trade equities where the trade price
per-share is lower than $1.00
Changes were introduced to our market making fee schedule for Toronto Stock Exchange, including introducing
monthly credits.
• The decrease in revenue was also due to a 4% decrease in the volume of securities traded on TSX Venture Exchange in 2011 compared with
2010 (64.98 billion securities in 2011 versus 67.89 billion securities in 2010). Cash markets equity trading revenue also decreased from
Toronto Stock Exchange due to a 1% decrease in the volume of securities traded on Toronto Stock Exchange in 2011 compared with 2010
(103.59 billion securities in 2011 versus 104.56 billion securities in 2010), partially offset by a favourable change in product mix. Cash
markets revenue included revenue from TMX Select, which was launched in July 2011, with 1.19 billion securities traded in the period.
• Revenue from Shorcan fixed income trading in 2011 decreased from 2010, due to lower volumes.
Derivatives Markets
• The increase in derivatives markets revenue reflects an increase in trading and clearing revenue from MX and CDCC. Volumes increased
by 40% (61.98 million contracts traded in 2011 versus 44.30 million contracts traded in 2010) reflecting increased trading across all
major products. The increase in revenue was partially offset by a change in customer and product mix. Open interest was up 26% at
December 31, 2011 compared with December 31, 2010.
• The increase in derivatives markets revenue also reflects an increase in BOX revenues. There was a 52% increase in BOX volumes
(139.68 million contracts in 2011 versus 91.75 million contracts traded in 2010). The increase in revenue was also due to price increases
which were effective in Q3/10, Q3/11 and Q4/11, as well as increased revenue from option regulatory fees charged in the U.S. in respect of
BOX in 2011, partially offset by the impact of the depreciation of the U.S. dollar against the Canadian dollar in 2011 compared with 2010.
Energy Markets
• The decrease in energy markets revenue reflects a 7% decrease in total energy volume# on NGX in 2011 compared with 2010 (15.47
million terajoules in 2011 compared to 16.72 million terajoules in 2010). The lower volumes were largely as a result of lower natural gas
prices and less price volatility in the market during 2011 compared with 2010. NGX crude oil revenues were also lower. There has been
limited traction following the launch of crude oil products in March 2011 under the NGX/ICE alliance and increased competition from
voice brokers, including Shorcan Energy Brokers.
• The lower revenue was also as a result of the impact of depreciation of the U.S. dollar against the Canadian dollar in 2011 compared
with 2010.
• The decreased revenue was partly offset by higher revenue from Shorcan Energy Brokers due to higher volumes in 2011 compared
with 2010.
# NGX Total Energy Volume includes trading and clearing in natural gas, crude oil and electricity.
Management’s Discussion and Analysis 31
Information services revenue
(in millions of dollars)
$
2011
165.1
$
2010
154.4
$
$ increase
10.7
% increase
7%
• The increase in revenue was due to the addition of revenue from TMX Atrium, acquired July 29, 2011 and higher revenue from co-location
services and TMXnet.
• The increase in revenue was also due to higher revenue from fixed income indices, index data licensing and BOX’s share of U.S. market
data revenue.
• The increased revenue was partially offset by the impact of the depreciation of the U.S. dollar against the Canadian dollar in 2011
compared with 2010, price reductions that were effective October 1, 2011 and the effect of customer enterprise agreements.
• Overall, there was a 4% increase in the average number of professional and equivalent real-time market data subscriptions to Toronto
Stock Exchange and TSX Venture Exchange products (160,436+ professional and equivalent real-time market data subscriptions in 2011
compared with 154,039+ in 2010). There was also an 11% increase in the average number of MX market data subscriptions (25,770+
MX market data subscriptions in 2011 compared with 23,191+ in 2010).
Technology services and other revenue
(in millions of dollars)
$
2011
15.3
$
2010
15.9
$ (decrease)
(0.6)
$
% (decrease)
(4%)
• Technology services revenue decreased primarily due to lower SOLA technology services, this decrease was partially offset by realized and
unrealized net foreign exchange gains in 2011 compared with 2010.
Operating Expenses
Operating expenses in 2011 were $301.5 million, up $14.9 million, or 5%, from $286.6 million in 2010 due to higher costs associated with employee
performance incentive plans, an overall increase in salary and benefits costs, the inclusion of costs related to TMX Atrium, acquired July 29, 2011, as well
as a commodity tax adjustment*. These increases were partially offset by higher capitalization of costs associated with technology initiatives.
Compensation and Benefits
(in millions of dollars)
$
2011
147.9
$
2010
133.5
$
$ increase
14.4
% increase
11%
• The higher costs are related to an overall increase in salary and benefits costs relating to increased headcount and merit increases, as well as
the loss of certain exemptions related to the Québec tax holiday which ended on December 31, 2010 (see Income Tax Expense). There were
906 employees at December 31, 2011, including 24 from TMX Atrium, acquired July 29, 2011, versus 841 employees at December 31, 2010.
The increased headcount attributable to TMX Atrium contributed in part to the higher costs. We continue to invest in our leading
technologies, and over the past year we have also added resources to support the growth of our business.
• Compensation and benefits costs also increased due to higher costs associated with short-term employee performance incentive plans
and long-term employee performance incentive plans that are tied to share price appreciation.
• The increases were partially offset by higher capitalization of costs associated with technology initiatives in 2011 compared with 2010.
+
*
Includes a base number of subscriptions for customers that have entered into enterprise agreements.
See "General and Administration" section.
32 TMX Group Annual Report | 2011
Information and Trading Systems
(in millions of dollars)
$
2011
49.8
$
2010
50.7
$ (decrease)
(0.9)
$
% (decrease)
(2%)
•
Information and trading systems expenses were lower due to reduced on-going operating costs, following the replacement and
decommissioning of legacy hardware.
• The reduction in expenses was partially offset, by expenses associated with new technology initiatives. During 2011, we invested in
a number of new projects, including the second phase of enterprise expansion, market order protection, storage consolidation, TMX
Quantum XA™ and the expansion of our co-location facility.
• The reduction in expenses was further offset by the inclusion of costs related to TMX Atrium, acquired July 29, 2011.
General and Administration
(in millions of dollars)
$
2011
75.7
$
2010
73.0
$
$ increase
2.7
% increase
4%
• General and administration costs increased largely due to recording a $5.2 million provision related to a commodity tax adjustment,
which includes $2.9 million for prior periods. The commodity tax adjustment is related to ruling requests that we have submitted to
the Canada Revenue Agency (CRA) and Revenu Québec (RQ) relating to the application of Harmonized Sales Tax and Goods and Services
Tax (collectively, HST) and Québec Sales Tax (QST) on our trade execution fees on equities and derivatives. Effective February 2011, we
stopped charging HST/QST on these trade execution fees for both Toronto Stock Exchange and TSX Venture Exchange. Effective August
2011, we stopped charging HST/QST on these trade execution fees for the Montréal Exchange. TMX Select has also submitted a ruling
request to the CRA and to RQ and as such we do not charge HST/QST on any of its trade execution fees. We are confident that the
ruling requests will be approved and as such, have not provided for HST/QST not charged to customers in 2011. If the ruling requests
are approved, we may be required to repay to the taxation authorities the input tax credits for HST (ITCs) claimed prior to February 2011
on the affected businesses. TMX Group firmly believes that the liability related to these ITCs should be $0; however, a repayment of up
to four years of ITCs previously claimed may be required. As a result, we have estimated the range of possible outcomes to be between
$0 and $6.0 million. Future estimates may be different and a change in the provision may be required.
•
In addition to the commodity tax adjustment we have incurred higher marketing and new initiatives costs and have included costs related
to TMX Atrium, acquired July 29, 2011.
• These increases were partially offset by lower bad debt expenses and lower corporate development costs.
Depreciation and Amortization
(in millions of dollars)
$
2011
28.1
$
2010
29.4
$ (decrease)
(1.3)
$
% (decrease)
(4%)
• Depreciation and amortization costs decreased due to reduced amortization relating to assets that were fully depreciated by
December 31, 2011.
• This decrease was partially offset by increased amortization of intangible assets related to newly launched products, including on-book
Dark Order types and Quantum feeds.
LSEG and Maple Related Costs
(in millions of dollars)
$
2011
37.2
2010
–
$
$ increase
37.2
% increase
–
• LSEG and Maple Related Costs include a $10.0 million fee paid to LSEG following termination of our merger agreement on June 29, 2011.
• LSEG and Maple Related Costs also include legal, advisory and other costs incurred during 2011.
Management’s Discussion and Analysis 33
Finance Income (formerly Investment Income)
(in millions of dollars)
$
2011
10.1
$
2010
5.2
$
$ increase
4.9
% increase
94%
• Finance income increased primarily due to increased cash available for investment in 2011 compared with 2010.
Finance Costs (formerly Interest Expense)
(in millions of dollars)
$
2011
9.5
$
2010
6.0
$
$ increase
3.5
% increase
58%
• Finance costs increased as a result of higher interest rates and fees on the Term loan outstanding (see Term Loan).
Income Taxes
(in millions of dollars)
$
2011
93.0
$
2010
100.1
2011
28%
2010
30%
Effective tax rate (%)
• The effective tax rate for 2011 was lower than 2010 reflecting a decrease in federal and Ontario corporate income tax rates, somewhat
offset by a higher Québec corporate income tax rate that resulted from the expiry of a provincial tax holiday related to the financial sector
on December 31, 2010.
• The decrease in effective tax rate was also due to BOX reporting a significant increase in the amount of income earned in 2011,
as compared to the prior year, with no corresponding tax expense reported due to the availability of prior year tax loss carryforwards.
Net Income/(Loss) Attributable to Non-Controlling Interests
(in millions of dollars)
$
2011
6.1
$
2010
(0.2)
$
$ increase
6.3
% increase
–
• MX holds a 53.8% ownership interest in BOX. The results for BOX are consolidated in our Income Statement.
• Net income/(loss) attributable to non-controlling interests represents the other BOX unitholders’ share of BOX’s net income or loss in
the period. The increase in net income from 2010 to 2011 of $6.3 million reflected higher overall trading volumes and increased pricing
on BOX.
Segment Analysis – Product
Cash Markets – Equities and Fixed Income (includes LSEG and Maple Related Costs)
(in millions of dollars)
Revenue
LSEG and Maple Related Costs
Net Income attributable to TMX Group shareholders
$
$
$
2011
496.1
37.2
188.5
$
$
2010
475.3
–
199.0
$
$
$
$ increase/
(decrease)
20.8
37.2
(10.5)
% increase/
(decrease)
4%
–
(5%)
The increase in revenue primarily reflects higher issuer services revenue from additional and sustaining listing fees as well as from information
services in 2011 compared with 2010. The increase was partially offset by a decline in cash markets trading revenue. Net income decreased due to
the LSEG and Maple related costs, a commodity tax adjustment and higher compensation and benefits expenses. This decrease was partially offset
by higher revenue, the impact of a lower effective tax rate and lower allocation of corporate costs.
(in millions of dollars)
Total Assets
Total Liabilities
34 TMX Group Annual Report | 2011
December 31, 2011
582.8
$
557.0
$
December 31, 2010
484.9
$
534.9
$
$
$
$ increase
97.9
22.1
Total Assets increased primarily due to an increase in cash and marketable securities at December 31, 2011 compared with December 31, 2010. Total
Liabilities increased at December 31, 2011 compared with December 31, 2010 due to an increase in liabilities arising from higher costs associated
with long-term employee performance incentive plans that are tied to share price appreciation and a commodity tax adjustment in 2011.
Derivative Markets – MX and BOX
(in millions of dollars)
Revenue
Net income attributable to TMX Group shareholders
$
$
2011
132.8
37.7
$
$
2010
104.3
26.3
$
$
$ increase
28.5
11.4
% increase
27%
43%
The increase in revenue largely reflects higher volume on MX and BOX and price increases on BOX which were effective in Q3/10, Q3/11 and Q4/11.
Net income attributable to TMX Group shareholders for 2011 increased due to the increased revenue, lower general and administration costs and
lower depreciation and amortization in 2011 compared with 2010 partially offset by higher compensation and benefits expenses, a higher allocation
of corporate costs compared with 2010 and the higher effective tax rate due to the expiry of a Québec tax holiday tax on December 31, 2010, BOX’s
higher income was not subject to tax due to the availability of prior year tax loss carryforwards (see Income Tax Expense).
(in millions of dollars)
Total Assets
Total Liabilities
December 31, 2011
1,854.0
$
784.4
$
December 31, 2010
1,439.1
$
415.0
$
$
$
$ increase
414.9
369.4
Total Assets increased primarily due to an increase in Daily Settlements and Cash Deposits of $357.7 million at December 31, 2011 compared
with December 31, 2010. MX also carried offsetting liabilities related to daily settlements and cash deposits which were $357.7 million higher at
December 31, 2011 compared with December 31, 2010. The increase was also due to an increase in cash and marketable securities.
Energy Markets – NGX and Shorcan Energy Brokers
(in millions of dollars)
Revenue
Net income attributable to TMX Group shareholders
$
$
2011
44.6
11.3
$
$
2010
46.0
12.4
$ (decrease )
(1.4)
(1.1)
$
$
% (decrease)
(3%)
(9%)
The decrease in revenue in 2011 was due to a decrease in volumes at NGX in 2011 compared with 2010 and the negative impact of the depreciation
of the U.S. dollar against the Canadian dollar. The lower volumes were largely as a result of lower natural gas prices and less price volatility in the
market along with lower NGX crude oil volumes during 2011 compared with 2010. These decreases were partially offset by higher revenue from
Shorcan Energy Brokers.
The decrease in net income reflected the lower overall revenue and an increase in compensation and benefits costs, including higher organizational
transition costs and higher costs associated with long-term employee performance incentive plans that are tied to share price appreciation. These
reductions in net income were partially offset by the impact of a lower effective tax rate in 2011 compared with 2010.
(in millions of dollars)
Total Assets
Total Liabilities
December 31, 2011
958.0
$
831.4
$
December 31, 2010
1,041.8
$
926.5
$
$
$
$ (decrease)
(83.8)
(95.1)
Total Assets decreased due to a decrease in energy contracts receivable of $109.2 million due to lower gas prices compared with the end of December 2010
and lower volumes delivered. As the clearing counterparty to every trade, NGX also carries offsetting liabilities in the form of energy contracts payable,
which were also $109.2 million lower at the end of December 2011. The decrease was partially offset by an increase of $17.1 million in the fair value
of open energy contracts receivable compared with the end of December 2010. As the clearing counterparty to every trade, NGX also carries offsetting
liabilities related to the fair value of open energy contracts which were also $17.1 million higher at December 31, 2011 compared December 31, 2010.
Management’s Discussion and Analysis 35
Liquidity and Capital Resources
Cash, Cash Equivalents and Marketable Securities
(in millions of dollars)
December 31, 2011
490.4
$
December 31, 2010
331.5
$
$
$ increase
158.9
• The increase was largely due to cash generated from operating activities of $303.5 million, net of $33.8 million of cash outlays related to
LSEG and Maple related costs, partially offset by dividend payments of $119.3 million, additions to intangible assets of $17.8 million and
capital expenditures of $8.8 million.
Total Assets
(in millions of dollars)
December 31, 2011
3,394.8
$
December 31, 2010
2,965.8
$
$
$ increase
429.0
• Total assets increased due to an increase in MX daily settlements and cash deposits of $357.7 million, an increase in cash and
marketable securities of $158.9 million and a $17.1 million increase in current assets related to the fair value of open energy contracts
at December 31, 2011 compared with December 31, 2010.
• The overall increase was partially offset by a decrease in energy contracts receivable of $109.2 million related to the clearing operations
of NGX.
Credit Facilities and Guarantee
Term Loan
(in millions of dollars)
December 31, 2011
429.8
$
December 31, 2010
429.8
$
$
$ increase
–
•
In connection with the combination with MX, we established a non-revolving three-year term unsecured credit facility of $430.0 million
(the Term Loan). On April 30, 2008, we borrowed $430.0 million in Canadian funds under the Term Loan to satisfy the cash consideration
of the purchase price for MX. On December 16, 2011, we extended and amended this facility. The revised credit facility remains at
$430.0 million and will expire on June 29, 2012.
• This credit facility contains customary covenants, including a requirement that TMX Group maintain:
§
§
§
a maximum debt to adjusted EBITDA ratio of 3.5:1, where adjusted EBITDA means earnings on a consolidated basis before interest,
taxes, extraordinary, unusual or non-recurring items, depreciation and amortization, all determined in accordance with IFRS;
a minimum consolidated net worth covenant based on a pre-determined formula; and
a debt incurrence test whereby debt to adjusted EBITDA must not exceed 3.0:1.
At December 31, 2011, all covenants were met.
Other Credit Facilities and Guarantee
To backstop its clearing operations, NGX currently has a credit agreement in place with a Canadian Schedule I bank which includes a
US$100.0 million clearing backstop fund. We are NGX’s unsecured guarantor for this fund up to a maximum of US$100.0 million. This facility
had not been drawn upon at December 31, 2011.
NGX also has an Electronic Funds Transfer (EFT) Daylight facility of $300.0 million in place with a Canadian Schedule I bank.
In 2011, CDCC had a $50.0 million revolving standby credit facility with a Canadian Schedule I bank to provide liquidity in the event of default by a
clearing member. This facility had not been drawn upon at December 31, 2011.
In 2011, CDCC arranged additional credit facilities. A $300.0 million daylight liquidity facility and a $50.0 million call loan facility were signed with a
Canadian Schedule 1 bank. CDCC has not drawn on either facility.
36 TMX Group Annual Report | 2011
In January 2012, CDCC increased its revolving standby credit facility from $50.0 million to $100.0 million, signed an additional daylight facility for
$400.0 million with a Canadian Schedule 1 bank and closed the above mentioned $50.0 million call loan facility. These facilities were put in place in
relation to the launch of CDCC’s repo clearing business, scheduled for 2012.
CDCC is currently in negotiation with a syndicate of banks to establish additional credit facilities as part of its initiative to clear fixed income repos,
expected to be launched in Q1/12.
Total Equity Attributable to Shareholders of TMX Group
(in millions of dollars)
December 31, 2011
1,196.5
$
December 31, 2010
1,070.6
$
$
$ increase
125.9
• We earned $237.5 million of net income attributable to TMX Group shareholders during 2011 and paid $119.3 million in dividends. In
addition, we received $7.2 million in proceeds from share options exercised.
• At December 31, 2011, there were 74,640,033 common shares issued and outstanding. In 2011, 269,563 common shares were issued on
the exercise of share options. At December 31, 2011, 3,792,383 common shares were reserved for issuance upon the exercise of options
granted under the share option plan. At December 31, 2011, there were 1,826,729 options outstanding.
• At February 6, 2012, there were 74,640,033 common shares issued and outstanding and 1,826,729 options outstanding under the share
option plan.
Cash Flows from Operating Activities
(in millions of dollars)
Cash Flows from Operating Activities
$
2011
303.5
$
2010
277.6
$
Increase
in cash
25.9
Cash Flows from Operating Activities were $303.5 million in 2011, which were net of $33.8 million of cash outlays related to LSEG and Maple related
costs, compared with $277.6 million of cash flows from operating activities in 2010. The increase of $25.9 million was due to:
(in millions of dollars)
Income before income taxes
Depreciation and amortization
Realized (loss) on interest rate swaps
Realized gain on marketable securities
Decrease/(increase) in trade and other receivables and prepaid expenses
LSEG and Maple related costs
LSEG and Maple related cash outlays
Net increase in trade and other payables, long-term accrued
and other non-current liabilities
(Decrease)/increase in deferred revenue
Income taxes paid
Increase/(decrease) in provisions, including commodity tax adjustment (2011)
Net increase in other items
Cash Flows from Operating Activities
$
$
$
$
$
$
$
$
$
$
$
$
$
2011
336.6
28.1
(0.8)
0.6
12.4
37.2
(33.8)
21.8
(0.9)
(106.8)
7.0
2.1
303.5
$
$
$
$
$
$
$
$
$
$
$
2010
337.6
29.4
(5.2)
0.7
(10.9)
–
–
17.4
3.7
(95.7)
(1.3)
1.9
277.6
$
$
$
$
$
$
$
$
$
$
$
$
$
Increase/
(decrease)
in cash
(1.0)
(1.3)
4.4
(0.1)
23.3
37.2
(33.8)
4.4
(4.6)
(11.1)
8.3
0.2
25.9
Management’s Discussion and Analysis 37
Cash Flows from (used in) Financing Activities
(in millions of dollars)
Cash Flows from (used in) Financing Activities
$
2011
(113.9)
$
2010
(114.1)
Increase in cash
0.2
$
Cash Flows (used in) Financing Activities were $0.2 million lower in 2011 compared with 2010 due to:
(in millions of dollars)
Dividends paid on common shares
Proceeds from exercised options
Net (decrease) in other items
Cash Flows from (used in) Financing Activities
$
$
$
2011
(119.3)
7.2
( 1.8)
($113.9)
$
$
$
$
2010
(114.3)
1.2
(1.0)
(114.1)
$
$
$
$
Increase/
(decrease)
in cash
(5.0)
6.0
(0.8)
0.2
Cash Flows from (used in) Investing Activities
(in millions of dollars)
Cash Flows from (used in) Investing Activities
2011
(172.5)
$
2010
(181.8)
Increase in cash
9.3
$
$
Cash Flows (used in) Investing Activities were $9.3 million lower in 2011 compared with 2010 due to:
(in millions of dollars)
Capital expenditures primarily related to technology investments
and leasehold improvements
Additions to intangible assets including TSX Quantum Feeds (2011), TMX Select
internal development costs (2011), on book non-displayed order types (2011),
development costs related to repo clearing (2011 and 2010), Gateway Feeds (2010),
and SOLA internal development costs (2010)
Acquisitions, net of cash acquired
Proceeds on disposal of EDX investment
Net (purchases) of marketable securities
Cash Flows from (used in) Investing Activities
2011
2010
Increase/
(decrease)
in cash
$
(8.8)
$
(12.8)
$
4.0
$
$
$
$
$
(17.8)
(11.2)
6.2
(140.9)
(172.5)
$
$
$
(9.7)
–
–
(159.3)
(181.8)
$
$
$
$
$
(8.1)
(11.2)
6.2
18.4
9.3
Summary of Cash Position and Other Matters7
We had $490.4 million of cash and cash equivalents and marketable securities at December 31, 2011. During 2011, with revenues of $673.5 million,
we incurred operating expenses of $301.5 million. Cash flows from operations were $303.5 million, net of $33.8 million of cash outlays related to
LSEG and Maple related costs, and we paid $119.3 million in dividends in 2011. Based on our current business operations and model, we believe that
we have sufficient cash resources to operate our business.
We had $429.8 million of debt outstanding under the Term Loan. On December 16, 2011, we extended and amended our $430.0 million credit
facility that was due to expire on December 28, 2011. The revised credit facility remains at $430.0 million and will expire on June 29, 2012.
In June 2010, we filed a short form base shelf prospectus with securities regulators in each of the provinces of Canada. This will enable us to offer and
issue up to $1.0 billion of debt, equity or other securities over a 25-month period ending in July 2012. The net proceeds of any such offerings would be
used for general corporate purposes, including repaying outstanding indebtedness from time to time, and funding future acquisitions or investments.
Debt financing of future investment opportunities could be limited by current and future economic conditions, the covenants on TMX Group’s
existing and future credit facilities, and by our financial viability ratios imposed by securities regulators.
7
The “Summary of Cash Position and Other Matters” section above contains certain forward-looking statements. Please refer to “Caution Regarding Forward-Looking Information” for a discussion
of risks and uncertainties related to such statements.
38 TMX Group Annual Report | 2011
Under the terms of the support agreement with Maple, we are restricted from declaring or making any distribution or dividend payment other than
the regular quarterly dividend of $0.40 per common share.
The recognition order of TSX Inc. by the OSC 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. cannot, without the prior approval of the Director of the OSC, 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 OSC staff. TSX Venture Exchange is
required by various provincial securities commissions to maintain adequate financial resources for the performance of its functions in a manner
that is consistent with the public interest and the terms of its recognition orders. Under its recognition order, MX is also subject to certain financial
viability tests set by the AMF that must be met. If MX fails to meet any of these tests for a period of more than three months, MX cannot, without
the prior approval of the AMF, pay dividends (among other things) until the deficiencies have been eliminated for at least six months. NGX is
required by the ASC to maintain adequate financial resources to operate its trading system and support its trade execution functions.
As at December 31, 2011, we met all of the above requirements.
Defined Benefit Pension Plans8
Based on the most recent actuarial valuations for funding purposes, we estimate a funding deficit of approximately $8.0 million as at
December 31, 2011, on a solvency basis, of which $3.9 million was funded in 2011.
Managing Capital
Our primary objectives in managing capital, which we define to include our share capital and various credit facilities, include:
• Maintaining sufficient capital for operations to ensure market confidence. Currently, we target to retain a minimum of $100.0 million in
cash and marketable securities. This amount is subject to change.
• We do this by managing our capital subject to capital maintenance requirements imposed on us and our subsidiaries as follows:
§
In respect of TSX Inc., as required by the OSC to maintain certain regulatory ratios as defined in the OSC recognition order, as follows:
— a current ratio not less than 1.1:1;
— a debt to cash flow ratio not greater than 4:1; and
— a financial leverage ratio consisting of adjusted total assets to adjusted shareholders’ equity not greater than 4:1.
During 2011, we have complied with these externally imposed capital requirements.
§
In respect of TSX Venture Exchange Inc., as required by various provincial securities commissions to maintain adequate financial
resources.
During 2011, we have complied with these externally imposed capital requirements.
§
In respect of NGX, to:
— maintain adequate financial resources, as required by the ASC; and
— maintain a current ratio of no less than 1:1 and a tangible net worth of not less than $9.0 million, as required by a Schedule I
Canadian chartered bank.
During 2011, we have complied with these externally imposed capital requirements.
§
In respect of Shorcan;
— by IIROC which requires Shorcan to maintain a minimum level of shareholder’s equity of $0.5 million; and
— by the OSC which requires Shorcan to maintain a minimum level of excess working capital.
During 2011, we have complied with these externally imposed capital requirements.
§
In respect of TMX Select, IIROC requires TMX Select to maintain an adequate level of risk adjusted capital.
During 2011, we have complied with this externally imposed capital requirement.
§
In respect of MX, as required by the AMF to maintain certain regulatory ratios as defined in the AMF recognition order, as follows:
— a working capital ratio of more than 1.5:1;
8
The “Defined Benefit Pension Plans” section above contains certain forward-looking statements. Please refer to “Caution Regarding Forward-Looking Information” for a discussion of risks and
uncertainties related to such statements.
Management’s Discussion and Analysis 39
— a cash flow to total debt ratio of more than 20%; and
— a financial leverage ratio consisting of total assets to shareholders’ equity of less than 4:1.
During 2011, we have complied with these externally imposed capital requirements.
§
In respect of CDCC, to maintain certain cash amounts, as follows:
— $5.0 million as part of the Clearing Member default recovery process plus an additional $5.0 million in the event that the
initial $5.0 million is fully utilized during a default; and
— sufficient cash, cash equivalents and marketable securities to cover 12 months of operating expenses, excluding
amortization and depreciation;
During 2011, we have complied with these externally imposed capital requirements.
§ Maintaining sufficient capital to meet the covenants imposed in connection with our term loan (see Term Loan).
During 2011, we have complied with these externally imposed capital requirements.
§
§
Retaining sufficient capital to invest in, and continue to grow, our business both organically and through acquisitions.
Returning capital to shareholders through methods such as dividends and purchasing shares for cancellation pursuant to normal
course issuer bids.
Our objectives, policies and processes for managing capital have not changed in the current economic environment.
Financial Instruments
Cash, Cash Equivalents and Marketable Securities
Our financial instruments include cash, cash equivalents and investments in marketable securities which are held to earn investment income.
These instruments include units in a money market fund and a short-term bond and mortgage fund, managed by an external advisor, as well as
Bankers’ Acceptances and Treasury Bills. The primary risks related to these marketable securities are variation in interest rates, liquidity risk and
credit risk. For a description of these risks, please refer to Liquidity Risk – Marketable Securities, Credit Risk – Marketable Securities and Interest
Rate Risk – Marketable Securities.
We have designated our marketable securities as fair value through profit and loss. Fair values have been determined by reference to quoted market
prices or are based on market information. Unrealized gains of $0.7 million have been reflected in net income in 2011, compared with unrealized
losses of $0.7 million in 2010.
Trade Receivables
Our financial instruments include accounts receivable, which represents amounts that our customers owe us. The carrying value is based on the
actual amounts owed by the customers, net of a provision for that portion which may not be collectible. The primary risk related to accounts
receivable is credit risk. For a description of these risks, please refer to Credit Risk – Accounts Receivable.
CDCC – Daily Settlements and Cash Deposits
As part of CDCC’s clearing operations, amounts due from and to clearing members as a result of marking to market open futures positions and
settling options transactions each day are required to be collected from or paid to clearing members prior to the commencement of trading the
next day. The amounts due from and due to clearing members are recognized in the consolidated assets and liabilities as daily settlements and cash
deposits. Fair value is determined based on market information. There is no impact on the consolidated statements of income. The primary risks
associated with these financial instruments are credit risk, liquidity risk and market risk. For a description of these risks, please refer to Credit Risk
– CDCC, Liquidity Risk – CDCC and Other Market Price Risk – CDCC.
Term Loan
We established the Term Loan in connection with the combination with MX. We entered into a series of interest rate swaps to partially manage our
exposure to interest rate fluctuations on the Term Loan (see Credit Facilities and Guarantee – Term Loan). The Term Loan is subject to interest rate
risk. For a description of this risk, please refer to Interest Rate Risk – Term Loan.
40 TMX Group Annual Report | 2011
Total Return Swaps (TRS)
We have entered into a series of TRSs which synthetically replicate the economics of purchasing our shares as a partial fair value hedge to the share
appreciation rights of the non-performance element of RSUs. We have also entered into a series of TRSs as a full fair value hedge against the share
price appreciation associated with the DSUs. We mark to market the fair value of the TRSs as an adjustment to income, and simultaneously mark
to market the liability to holders of the units as an adjustment to income. These TRSs are subject to credit risk and market risk. For a description
of these risks, please refer to Credit Risk – Total Return and Interest Rate Swaps and Equity Price Risk – RSUs, DSUs, Total Return Swaps (TRS).
The fair value of the TRSs is based upon the excess or deficit of the volume weighted average price of our shares for the last five trading days of the
year compared to the price of the TRS. The fair value of the TRSs and the obligation to unit holders are reflected on the consolidated balance sheet.
The contracts are settled in cash upon maturity.
Unrealized losses and realized gains of $6.2 million and $10.2 million respectively have been reflected in net income in the consolidated financial
statements for the year ended December 31, 2011 (2010 – unrealized gains and realized losses of $5.0 million and $2.0 million respectively).
NGX – Energy Contracts
As part of its clearing operations, NGX becomes the central counterparty to each transaction cleared through its clearing operations. We record
NGX’s energy contract receivables and offsetting 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. There is no impact on the consolidated statements of income as
an equivalent amount is recognized in both the assets and liabilities.
The fair value at the balance sheet date of the undelivered physically settled trading contracts and the forward cash settled trading contracts is
recognized in the consolidated assets and liabilities as fair value of open energy contracts. Fair value is determined based on observable market
information. There is no impact on the consolidated statement of income as an equivalent amount is recognized in both the assets and liabilities.
The primary risks related to these financial instruments are credit risk, liquidity risk and market risk. For a description of these risks, please refer to
Credit Risk – NGX, Liquidity Risk – NGX and Other Market Price Risk – NGX.
Financial Risk Management
Credit Risk
Credit risk is the risk of financial loss associated with a counterparty’s failure to fulfill its financial obligations and arises principally from the
clearing operations of NGX and CDCC, cash and cash equivalents, marketable securities, total return swaps, accounts receivable and the brokerage
operations of Shorcan, and Shorcan Energy Brokers.
Credit Risk – NGX
We are exposed to credit risk in the event that contracting parties of NGX fail to settle on the contracted settlement date.
NGX requires each contracting party to provide sufficient collateral, in the form of cash or letters of credit, to exceed its outstanding credit exposure
as determined by NGX in accordance with its margining methodology. The cash collateral deposits and letters of credit are held by a Schedule I
Canadian chartered bank. This collateral may be accessed by NGX in the event of default by a contracting party. NGX measures total potential
exposure for both credit and market risk for each contracting party on a real-time basis as the aggregate of:
• outstanding energy contracts receivable;
• “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
• “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, 2011, NGX held cash collateral deposits of $835.4 million and letters
of credit of $2,047.7 million, compared with cash collateral deposits of $835.7 million and letters of credit of $1,941.4 million at December 31, 2010.
These amounts are not included in our consolidated balance sheets.
See Other Credit Facilities and Guarantee for a description of NGX’s credit facilities.
Management’s Discussion and Analysis 41
Credit Risk – CDCC
We are exposed to credit risk in the event that clearing members fail to settle on the contracted settlement date.
CDCC is exposed to the risk of default of its clearing members. CDCC is the central counterparty of all transactions carried out on MX’s markets and
on the OTC market when the transaction is cleared through CDCC. It primarily supports the credit risk of one or more counterparties, meeting strict
financial and regulatory criteria, defaulting on their obligations, in which case the obligations of that counterparty would become the responsibility
of CDCC. This risk is greater if market conditions are unfavourable at the time of the default.
CDCC’s principal risk management practice is the collection of risk-based margin deposits in the form of cash, equities and liquid government
securities. Should a clearing member fail to meet a daily margin call or otherwise not honour its obligations under open futures and options contracts,
margin deposits would be seized and would then be available to apply against the costs incurred to liquidate the clearing member’s positions.
CDCC’s margining system is complemented by a Daily Capital Margin Monitoring (DCMM) process that permits it to evaluate the ability of a clearing
member to meet its margining requirements. On a daily basis, CDCC monitors the margin requirement of a clearing member as a percentage of its
capital (net allowable assets). CDCC will make additional margin calls when the ratio of margin requirement/net allowable assets exceeds 100%.
The additional margin is equal to the excess of the ratio over 100%.
CDCC also maintains a clearing fund of deposits of cash and securities from all Clearing Members. The aggregate level of clearing funds required
from all Clearing Members must cover the worst loss that CDCC could face if one counterparty is failing under various extreme but plausible market
conditions. Each Clearing Member contributes to the clearing fund in proportion to its margin requirements. If, by a Clearing Member’s default,
further funding is necessary to complete a liquidation, CDCC has the right to require other Clearing Members to contribute additional amounts
equal to their previous contribution to the clearing fund.
CDCC’s cash margin deposits and cash clearing fund deposits are held at a Schedule I Canadian chartered bank. CDCC’s non-cash margin deposits
and non-cash clearing fund deposits are pledged to CDCC under irrevocable agreements and are held by approved depositories. This collateral may
be seized by CDCC in the event of default by a Clearing Member. As a result of these calculations of Clearing Member exposure at December 31, 2011,
non-cash margin deposits of $3,959.8 million and non-cash clearing fund deposits of $279.7 million had been pledged to CDCC, held primarily in
government and equity securities. These amounts are not included in our consolidated balance sheet.
CDCC experienced a member default in October 2011. All positions were transferred or liquidated without a loss to the clearinghouse. All excess
margin was returned to the appointed trustee at the end of the default management process.
See Other Credit Facilities and Guarantee for a description of CDCC’s credit facilities.
Credit Risk – Marketable Securities
TMX Group manages exposure to credit risk arising from investments in marketable securities by holding investment funds that actively manage
credit risk. Our investment policy will only allow excess cash to be invested within money market securities or fixed income securities. Fixed income
securities must compose less than 70% of the overall portfolio. The majority of the portfolio is held within a money market fund and a specific
short-term bond and mortgage fund. The money market fund manages credit risk by limiting its investments to government or government-
guaranteed treasury bills, and high-grade corporate notes. The short term bond and mortgage fund manages credit risk by limiting its investments
to high-quality Canadian corporate bonds, government bonds and up to 40% of the fund's net assets in conventional first mortgages and mortgages
guaranteed under the National Housing Act (Canada). Corporate bonds held must have a minimum credit rating of BBB by DBRS Limited at the time
of purchase. Mortgages may not comprise more than 40% of the portfolio and must be either multi-residential conventional first mortgages or
multi-residential government guaranteed mortgages. TMX Group does not have any investments in non-bank asset-backed commercial paper.
Credit Risk – Total Return Swaps (TRS)
We have entered into a series of TRSs which synthetically replicate the economics of purchasing our shares as a partial economic hedge to the
share appreciation rights of DSUs and RSUs that are awarded to our directors and employees, respectively. The contracts are settled in cash upon
maturity. The obligation to unit holders is reflected on the balance sheet. To manage credit risk, we entered into these TRS with a Schedule I
Canadian chartered bank.
Credit Risk – Shorcan and Shorcan Energy Brokers
We are exposed to credit risk in the event that customers of Shorcan and Shorcan Energy Brokers fail to settle on the contracted settlement date.
Shorcan and Shorcan Energy Broker’s risk is limited by their status as agents, in that they do not purchase or sell securities for its own account.
As agents, in the event of a failed trade, Shorcan or Shorcan Energy Brokers has the right to withdraw its normal policy of anonymity and advise the
two counterparties to settle directly.
42 TMX Group Annual Report | 2011
Credit Risk – Accounts Receivable
Our exposure to credit risk resulting from uncollectable accounts is influenced by the individual characteristics of our customers, many of whom
are banks and financial institutions. We invoice our customers on a regular basis and maintain a collections team to monitor customer accounts
and minimize the amount of overdue receivables. There is no concentration of credit risk arising from accounts receivable from a single customer.
In addition, customers that fail to maintain their account in good standing risk loss of listing, trading, clearing and data access privileges.
Market Risk
Market risk is the risk that changes in market price, such as foreign exchange rates, interest rates, commodity prices and equity prices will affect our
income or the value of our holdings of financial instruments.
Equity Price Risk – RSUs, DSUs, TRS
We are exposed to market risk when we grant DSUs and RSUs to our directors and employees, respectively, as our obligation under these
arrangements are partly based on our share price. We utilize total return swaps to partially hedge this exposure. The fair value of the TRSs is based
upon the excess or deficit of the volume weighted average price of our shares for the last five trading days of the reporting period compared with
the price of the TRSs. The change in the fair value of the total return swaps is generally offset by the change in the obligation to DSU and RSU
holders. As at December 31, 2011, a 25% increase in the share price of the Company would result in a net $1.2 million decrease in income before
income taxes. A 25% decrease in the share price of the Company would result in a net $1.3 million increase in income before income taxes.
Interest Rate Risk – Marketable Securities
We are exposed to interest rate risk on our marketable securities. We have engaged external investment fund managers to manage the asset mix
and the risks associated with these investments. At December 31, 2011, we held $403.2 million in these funds, compared with $261.6 million at
December 31, 2010, of which 51% and 57% were held in fixed rate money market investments at December 31, 2011 and December 31, 2010.
The approximate impact of a 1% rise in interest rates is a decrease of $4.1 million on income before income taxes and the approximate impact of a
1% fall in interest rates is an increase of $4.1 million on income before income taxes.
Interest Rate Risk – Term Loan
We are exposed to interest rate risk on our Term Loan. The approximate impact on income before income taxes of a 1% rise and a 1% fall in interest
rates with respect to this facility is a decrease of $4.3 million and an increase of $4.3 million respectively.
Foreign Currency Risk
(See Risks and Uncertainties – Currency Risk)
Other Market Price Risk – NGX, CDCC, Shorcan, and Shorcan Energy Brokers
We are exposed to other market price risk from the activities of Shorcan, Shorcan Energy Brokers, NGX and CDCC if a customer, contracting party or
clearing member, as the case may be, fails to take or deliver either securities, energy products or derivatives products on the contracted settlement
date where the contracted price is less favourable than the current market price.
Both NGX’s and CDCC’s measure of total potential exposure, as described previously, includes measures of market and credit risk which are factored
into the collateral required from each contracting party or clearing member.
Shorcan and Shorcan Energy’s risk is limited by their status as agents, in that they do not purchase or sell securities or commodities for their own
account, the short period of time between trade date and settlement date and the defaulting customer’s liability for any difference between the
amounts received upon sale and the amount paid to acquire the securities or commodities.
We are also exposed to other market price risk on a portion of our sustaining listing fee revenue, which is based on the quoted market values of
listed issuers as at December 31 of the previous year.
Management’s Discussion and Analysis 43
Liquidity Risk
Liquidity risk is the risk that we will not be able to meet our financial obligations as they fall due. We manage liquidity risk through the management
of our cash and cash equivalents and marketable securities, all of which are held in short term instruments, and our revolving and non-revolving
credit facilities. The contractual maturities of our financial liabilities are as follows:
($ millions)
Fair value of open energy contracts
Total return swaps
Trade and other payables
Obligation under finance leases
Energy contracts payable
Daily settlements and cash deposits
Term loan payable
Non-current data license and other payables
Fair value of open energy contracts
Interest rate swaps
Trade and other payables
Obligation under finance leases
Energy contracts payable
Daily settlements and cash deposits
Term loan payable
Non-current data license and other payables
$
At December 31, 2011
Between
1 and 5 years
–
0.7
–
0.3
–
–
–
2.5
$
At December 31, 2010
Between
1 and 5 years
–
–
–
1.1
–
–
–
3.1
$
$
Greater than
5 years
–
–
–
–
–
–
–
2.5
Greater than
5 years
–
–
–
–
–
–
–
2.9
$
Less than 1 year
159.0
1.0
65.1
0.8
645.7
550.8
430.0
–
$
Less than 1 year
141.9
0.7
51.4
0.7
754.9
193.1
430.0
–
Daily settlements and cash deposits
The margin deposits and clearing fund margins are held in liquid instruments. Cash margin deposits and cash clearing fund deposits from clearing
members, which are recognized on the consolidated balance sheet, are held by CDCC with a major Canadian bank. Non-cash margin deposits and
non-cash clearing fund deposits pledged to CDCC under irrevocable agreements are in government securities, letters of credit (up to March 1, 2011)
and other securities and are held with approved depositories. Clearing members may also pledge letters of credit (up to March 1, 2011) and escrow
receipts directly with CDCC.
Fair value of open energy contracts and Energy contracts payable
NGX requires each contracting party to provide sufficient collateral, in the form of cash or letters of credit, to exceed its outstanding credit exposure
as determined by NGX in accordance with its margining methodology. The cash collateral deposits and letters of credit are held by a Schedule I
Canadian chartered bank.
Credit facilities
In response to the liquidity risk that CDCC is exposed to through its clearing operations, it has arranged various facilities (see Other Credit Facilities
and Guarantee). The Daylight liquidity facilities are in place to provide liquidity in exchange for securities that have been received by CDCC.
The Daylight liquidity facilities must be cleared to zero at the end of each day.
The revolving standby credit facility is in place to provide end of day liquidity in the event that CDCC is unable to clear the Daylight liquidity facilities
to zero. This event would only occur in the event of a clearing member default. The revolving standby facility will provide liquidity in exchange for
collateral in the form of clearing member deposits.
Similarly, in response to the liquidity risk that NGX is exposed to through it clearing and settlement operations, it maintains an unsecured clearing
backstop fund of US$100.0 and an EFT daylight facility.
Cash and cash equivalents
Cash and cash equivalents consist of cash and highly liquid investments.
44 TMX Group Annual Report | 2011
Marketable securities
Our investment policy will only allow excess cash to be invested within money market securities or fixed income securities. Fixed income securities
must compose less than 70% of the overall portfolio. The majority of the portfolio is held within a money market fund and a specific short-term
bond and mortgage fund. The money market fund limits its investments to government or government-guaranteed treasury bills, and high-grade
corporate notes. The short term bond and mortgage fund limits its investments to high-quality Canadian corporate bonds, government bonds and
up to 40% of the fund's net assets in conventional first mortgages and mortgages guaranteed under the National Housing Act (Canada). Fund units
can be redeemed on any day that Canadian banks are open for business. Funds will be received the day following the redemption.
Contractual Obligations
(in thousands of dollars)
Financial Lease Obligation
Operating Leases
Debt and Other Obligations
Selected Annual Information
(in thousands of dollars, except per share amounts)
Revenue
Net income attributable to TMX Group shareholders
Total assets (as at December 31)
Non-current liabilities**** (as at December 31)
Earnings per share:
Basic
Diluted
Adjusted earnings per share**:
Basic
Diluted
Cash dividends declared per common share
Total
1,160
69,885
432,035
503,080
Less than 1 year
830
15,429
430,000
446,259
1–3 years
330
19,752
116
20,198
4–5 years
5+ years
17,642
–
17,642
17,063
1,919
18,982
IFRS
2011
673.5
237.5
3,394.8
273.8
$
$
$
$
Pre-conversion
Canadian GAAP
2009
560.1
104.7
3,524.5
708.3
$
$
$
$
2010
625.6
237.7
2,965.8
270.0
3. 18
3. 17
$
$
3.20
3.19
$
$
3.58
3.57
1.60
$
$
$
3.22
3.21
1.54
$
$
$
1.41
1.41
2.59
2.59
1.52
$
$
$
$
$
$
$
$
$
Adjusted Earnings per Share Reconciliation for 2011, 2010 and 2009 **
Earnings per share
Adjustment related to LSEG and Maple related costs,
net of income tax
Adjustment related to commodity tax adjustment,
net of income tax
Adjustment related to non-cash impairment of goodwill
pertaining to BOX
Adjustment related to a reduction in the value of future
tax assets and liabilities
Adjustment related to a write-down of our 19.9% interest
in EDX to its estimated fair value, net of income tax
Adjusted earnings per share
IFRS
2011
2010
Pre-conversion
Canadian GAAP
2009
Basic
3.18
Diluted
3.17
$
$
Basic
3.20
Diluted
3.19
$
$
Basic
1.41
Diluted
1.41
$
$
$
0.37
$
0.37
$
0.03
$
0.03
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
$
1.04
$
1.04
$
0.14
$
0.14
–
3.58
$
–
3.57
$
$
0.02
3.22
$
$
0.02
3.21
$
–
2.59
$
–
2.59
$
**** Excludes deferred revenue.
**
The terms adjusted earnings per share and adjusted diluted earnings per share do not have standardized meanings prescribed by Canadian GAAP (which for 2011 and 2010 means IFRS and for 2009
means pre-conversion Canadian GAAP) and are therefore unlikely to be comparable to similar measures presented by other companies. We present adjusted earnings per share and adjusted diluted
earnings per share to indicate operating performance exclusive of LSEG and Maple-related costs incurred in 2011, a commodity tax adjustment in 2011, the adjustment related to the write-down of
our 19.9% interest in EDX to its estimated fair value in 2010, the non-cash goodwill impairment charge in 2009 related to our investment in BOX and an income tax charge related to lower Ontario
corporate income tax rates, which reduced the value of future tax assets and liabilities in 2009. Management uses these measures to assess our financial performance exclusive of these costs and
to enable comparability across periods.
Management’s Discussion and Analysis 45
Revenue, Net Income and Earnings per Share
2011
2010
•
•
•
(See Year Ended December 31, 2011 Compared with Year Ended December 31, 2010)
It is not possible to compare total revenue for 2010 (IFRS basis) with revenue for 2009 (pre-conversion Canadian GAAP basis) as issuer
services revenue was recognized on a different basis. On an IFRS basis, issuer services revenue was $39.8 million higher in 2010 compared
with 2009. However, excluding issuer services revenue, revenue was lower in 2010 compared with 2009, reflecting lower revenue from cash
markets equity trading, U.S. derivatives markets trading and technology services, partially offset by increased cash markets fixed income
trading, Canadian derivatives markets trading and clearing, information services and energy markets trading and clearing revenue. In
2009, technology services revenue included a one-time license fee of $13.5 million from the London Stock Exchange Group plc.
It is also not possible to compare net income attributable to TMX Group shareholders and earnings per share for 2010 (IFRS basis) with
net income and earnings per share for 2009 (pre-conversion Canadian GAAP basis) as a number of items are accounted for differently, the
most significant being issuer services revenue described above and an impairment charge related to BOX in 2009.
Total Assets
2011
2010
•
•
(See Year Ended December 31, 2011 Compared with Year Ended December 31, 2010)
It is not possible to compare total assets for 2010 (IFRS basis) with total assets for 2009 (pre-conversion Canadian GAAP basis) as the
accounting treatment is different for a number of balance sheet items, the most significant being Future Income Tax Assets and Goodwill.
Non-current Liabilities
2011
2010
• Long-term liabilities increased slightly in 2011 over 2010 due to increases in accrued employee benefits payable and other non-current
liabilities, partially offset by a decrease in deferred income tax liabilities.
• Long-term liabilities decreased in 2010 over 2009 primarily due to a reclassification of the Term Loan of $429. 8 million (as of
December 31, 2010), as short-term debt rather than long-term debt.
Quarterly Information
(in thousands of dollars except per share amounts)
Revenue
Dec. 31/11
161.7
$
Sept. 30/11
167.8
$
June 30/11
169.3
$
Mar. 31/11
174.7
$
Dec. 31/10
174.1
$
Sept. 30/10
146.0
$
June 30/10
156.1
$
Mar. 31/10
149.4
$
IFRS
Net income attributable
to TMX Group
shareholders
Earnings per share:
Basic
Diluted
2011
IFRS
52.7
67.0
54.7
63.1
67.0
55.2
58.4
57.1
0.70
0.70
0.90
0.90
0.73
0.73
0.85
0.84
0.90
0.90
0.74
0.74
0.79
0.79
0.77
0.77
• Revenue in Q1/11 increased over revenue in Q4/10 due to higher derivatives trading and clearing revenue and cash equity trading revenue
largely offset by lower issuer services, energy trading as well as technology services and other revenue. Net income attributable to
TMX Group shareholders for Q1/11 decreased over Q4/10 primarily due to costs associated with the proposed merger with LSEG and an
increase in general and administration expenses related to a commodity tax adjustment.
46 TMX Group Annual Report | 2011
• Revenue in Q2/11 decreased compared with revenue in Q1/11 due to lower cash markets and energy trading revenue partially offset
by higher technology services and other revenue and increased revenue from issuer services and information services. Net income
attributable to TMX Group shareholders for Q2/11 decreased over Q1/11 primarily due to the decreased revenue and LSEG and Maple
related costs partially offset by lower general and administration costs related to a commodity tax adjustment and lower compensation
and benefits costs. Finance income was somewhat higher in Q2/11 compared with Q1/11.
• Revenue in Q3/11 decreased compared with revenue in Q2/11 due to lower issuer services revenue partially offset by higher revenue
from derivatives markets trading and clearing, information services and net foreign exchange gains on U.S. dollar accounts receivables.
Net income attributable to TMX Group shareholders for Q3/11 increased over Q2/11 primarily due to decreased LSEG and Maple related
costs as well as lower general and administration costs, partially offset by higher compensation and benefits costs.
• Revenue in Q4/11 decreased compared with revenue in Q3/11 primarily due to lower cash markets trading revenue and reduced
derivatives markets trading and clearing revenue, somewhat offset by increased issuer services and information services revenue as well
as higher energy trading and clearing revenue. In addition, other revenue included net foreign exchange gains on U.S. dollar receivables
in Q3/11 and net foreign exchange losses in Q4/11. Net income attributable to TMX Group shareholders for Q4/11 decreased from Q3/11
primarily due to the lower revenue, increased Maple related costs, higher compensation and benefits costs, increased information and
trading systems costs as well as higher general and administration expenses.
2010
IFRS
•
It is not possible to compare revenue for Q1/10 (IFRS basis) with revenue for Q4/09 (pre-conversion Canadian GAAP basis) as issuer
services revenue was recognized on a different basis. However, excluding issuer services revenue, in Q1/10 revenue decreased compared
with Q4/09 due to the higher technology services revenue in Q4/09 from the one-time license fee of $13.5 million from the London Stock
Exchange (LSE), lower cash markets equity trading and energy trading revenue. This was somewhat offset by increased revenue from cash
markets fixed income trading and information services. Also excluding the impact of recognizing issuer services revenue on a different
basis, net income attributable to TMX Group shareholders for Q1/10 increased over the net loss reported in Q4/09 largely as a result of the
noncash goodwill impairment charge of $77.3 million related to BOX and the write-down in the value of future tax assets and liabilities of
$10.4 million.
• Revenue in Q2/10 increased over revenue in Q1/10 due to higher revenue from issuer services, information services, energy trading
and Canadian derivatives trading, somewhat offset by lower revenue from cash equities trading and U.S. derivatives trading. Net
income attributable to TMX Group shareholders for Q2/10 increased over net income attributable to TMX Group shareholders in
Q1/10 largely due to higher revenue partially offset by higher expenses as we continued to invest in technology initiatives, corporate
development and marketing.
• Revenue in Q3/10 decreased over revenue in Q2/10 primarily due to lower revenue from issuer services. The decrease was also as a result
of lower cash markets trading revenue and technology services revenue, partially offset by higher energy trading revenue. Net income
attributable to TMX Group shareholders for Q3/10 decreased over Q2/10 due to lower revenue. The impact was partially offset by lower
information and trading systems costs as well as reduced general and administration expenses.
• Revenue in Q4/10 increased over revenue in Q3/10 primarily due to significantly higher issuer services and cash markets trading
revenue as well as higher derivatives trading and clearing revenue, partially offset by lower technology services revenue. Net income
attributable to TMX Group shareholders was higher in Q4/10 compared with Q3/10. The increase in revenue was partially offset by higher
compensation and benefits costs, information and trading systems costs and general and administration costs and lower finance income
(formerly investment income). In addition, there was a write-down to estimated fair value of $1.7 million on our 19.9% interest in EDX in
Q4/10.
Review of Fourth Quarter Results
Compared with Q4/10
• Revenue in Q4/11 decreased over revenue from Q4/10 for the following reasons:
§
§
§
§
Issuer services revenue was lower due to a decrease in the number and value of new listings on Toronto Stock Exchange and TSX
Venture Exchange and a decrease in the value of additional financings on Toronto Stock Exchange and TSX Venture Exchange.
There was a decrease in cash markets equities trading revenue due a decrease in the volume of securities traded on TSX Venture
Exchange and Toronto Stock Exchange. The decrease was also as a result of changes to our equity trading fee schedule in 2011.
There was also a decrease in Shorcan cash markets fixed income trading revenue reflecting lower volumes.
Energy trading revenue was lower due to a decrease in NGX crude oil volumes due to increased competition from voice brokers.
Management’s Discussion and Analysis 47
• There were several factors which partially offset the decreases in revenue in Q4/11 compared with Q4/10:
§ Derivatives markets revenue from MX and BOX increased primarily due to higher volumes of contracts traded.
§
Information services revenue increased due to revenue from TMX Atrium, acquired on July 29, 2011, and higher revenue from
co-location services, TMXnet and PC-Bond.
• Operating expenses in Q4/11 were higher than in Q4/10 primarily due to higher costs associated with short-term employee performance
incentive plans, an overall increase in salary and benefits costs and the inclusion of expenses related to TMX Atrium, acquired on July 29,
2011, offset by higher capitalization of costs associated with technology initiatives and lower organizational transition costs and bad
debt expenses.
• Net income decreased in Q4/11 compared with Q4/10 primarily due to the lower revenue, increased operating expenses and Maple related
costs, partially offset by reduced income tax expense.
• Cash flows from operating activities in Q4/11 of $71.1 million decreased by $4.9 million compared with $76.0 million in Q4/10 largely due
to a decrease in net income. Cash flows used in financing activities in Q4/11 of $30.0 million increased by $0.8 million compared with
$29.2 million in Q4/10. Cash flows used in investing activities in Q4/11 of $39.6 million increased by $9.7 million compared with $29.9 million
of cash flows from investing activities in Q4/10, due to increased additions to intangible assets and additional capital expenditures.
Compared with Q3/11
• Revenue in Q4/11 decreased compared with revenue in Q3/11 primarily due to lower cash markets equity trading revenue and reduced
derivatives markets trading and clearing revenue, somewhat offset by increased issuer services and information services revenue as well
as higher energy trading and clearing revenue. In addition, other revenue included net foreign exchange gains and net foreign exchange
losses in Q4/11. Net income attributable to TMX Group shareholders for Q4/11 decreased from Q3/11 primarily due to the lower revenue,
increased Maple related costs, higher compensation and benefits costs, increased information and trading systems costs as well as higher
general and administration expenses.
• Cash flows from operating activities in Q4/11 of $71.1 million increased by $18.0 million compared with $53.1 million in Q3/11 largely due to
an increase in trade payables, partially offset by lower net income in Q4/11 compared with Q3/11. Cash flows used in financing activities in
Q4/11 of $30.0 million increased by $0.2 million compared with $29.8 million in Q3/11 primarily due to increased fees on the Term Loan. Cash
flows used in investing activities in Q4/11 of $39.6 million increased by $0.2 million compared with $39.4 million in Q3/11, primarily due to
higher capital expenditures and additions to intangible assets, partially offset by the costs of an acquisition in Q3/11.
Accounting and Control Matters
Critical Accounting Estimates
Goodwill and Other Intangible Assets9
Goodwill is recognized at cost on acquisition less any subsequent impairment in value. We measure goodwill arising on a business combination as
the fair value of the consideration transferred less the fair value of the identifiable assets acquired and liabilities assumed, all measured as of the
acquisition date.
Other intangible assets are recognized at cost less accumulated amortization, where applicable, and any impairment in value. Cost includes any
expenditure that is directly attributable to the acquisition of the asset. The cost of internally developed assets includes the cost of materials and
direct labour, and any other costs directly attributable to bringing the assets to a working condition for their intended use.
Assets are considered to have indefinite lives where management believes that there is no foreseeable limit to the period over which the assets are
expected to generate net cash flows.
We test for impairment as follows:
The carrying amounts of our goodwill and intangible assets are reviewed at each reporting date to determine whether there is any indication of
impairment. If any such indication exists, then the asset’s recoverable amount is estimated. Goodwill and intangible assets that have indefinite
useful lives or that are not yet available for use, are tested for impairment at least annually even if there is no indication of impairment, and the
recoverable amount is estimated each year at the same time.
For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that
generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the cash-generating
9
The “Identifiable Intangible Assets and Goodwill” section above contains certain forward looking statements. Please refer to “Caution Regarding Forward-Looking Information” for a discussion of
risks and uncertainties related to such statements.
48 TMX Group Annual Report | 2011
unit, or CGU). For the purposes of goodwill impairment testing, goodwill acquired in a business combination is allocated to the CGU, or the group
of CGUs, that is expected to benefit from the synergies of the combination and reflects the lowest level at which that goodwill is monitored for
internal reporting purposes.
The recoverable amount of an asset or cash-generating unit (CGU) is the greater of its value in use and its fair value less costs to sell. In assessing
value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market
assessments of the time value of money and the risks specific to the asset.
An impairment loss is recognized if the carrying amount of an asset, or its CGU, exceeds its estimated recoverable amount. Impairment losses
recognized in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the units, and then to reduce the
carrying amounts of the other assets in the unit on a pro rata basis. Impairment losses are recognized in the income statement.
MX
Goodwill and indefinite life intangible assets
Included with the MX CGU is $898.0 million of goodwill and indefinite life intangible assets recognized as part of the acquisition of MX in 2008.
MX activity and growth was affected by the credit crisis and the follow on economic conditions. Specifically, the deleveraging of balance sheets
and historically low and stable interest rates reduced fixed income and overall derivatives activity. However, the view of management is that this
reduction was temporary and that the fundamental growth opportunities that were included in the original valuation of MX are still valid. In 2011,
MX set records for contracts traded and open interest. In addition, the size of the Canadian derivatives market relative to the size of the underlying
cash market is still substantially below that of global peers, thus leaving much room for growth if new technology, products and participants
are added to the marketplace. Lastly, the global push from regulators and market participants to move over the counter derivatives products to
exchange traded and/or centrally cleared models suggests further upside potential.
It is the combination of the foregoing that resulted in management maintaining the growth projections and discount rates at levels that were in
line with the original assumptions, such that MX goodwill and indefinite life intangible assets are not impaired. These assumptions include:
• a cash flow projection period of eight years, which is consistent with the original acquisition economics, and reflects the stage of its
product life cycle with significant long-term growth potential remaining beyond a five-year forecast
• a terminal value for MX determined using an estimated long-term growth rate of 4.5%, which is based on our estimates of expected
future operating results, future business plans, economic conditions and a general outlook for the industry
• a recoverable amount applying a pre-tax discount rate to MX of 11.9%, which was set considering the weighted average cost of capital of
TMX Group and certain risk premiums, based on management’s past experience.
Based on current assumptions, the fair value of MX goodwill and indefinite life intangible assets remains above carrying value.
No impairment was identified as a result of the tests discussed above for 2011 or 2010.
NTP
Definite life intangible assets
Included within the NGX CGU is $28.7 million definite life intangible assets relating to the crude oil customer list recognized as part of the
acquisition of NTP in 2009. We converted NTP to NGX’s fully backstopped clearing model in 2009, but a number of customers have not maintained
their level of activity in these crude oil products. There has also been limited traction following the launch of crude oil products in March 2011
under the NGX/ICE alliance, and increased competition from voice brokers, including Shorcan Energy Brokers. This asset was tested as part of the
2011 impairment review process using a value-in-use calculation, using certain key assumptions, and was found not to be impaired.
The calculation is sensitive to changes in the key assumptions used and the impact of such changes is as follows:
($ millions)
NTP customer list
Impact on value-in-use
10% reduction
in cash flows
1% reduction in
long-term growth rate
1% increase in pre-tax
discount rate
(3.3)
(0.7)
(1.6)
Changes in Accounting Policies – International Financial Reporting Standards (IFRS)
Detailed explanations and additional reconciliations for each quarter of 2010 are available in our Q1/11 MD&A. The following is a supplementary
reconciliation of the impact of the conversion to IFRS on our Consolidated Income Statement for 2010.
Management’s Discussion and Analysis 49
Reconciliation of Consolidated Income Statement for the year ended December 31, 2010
Pre-conversion
Canadian
GAAP balance
IFRS
adjustments
IFRS
reclassifications
IFRS
balance
Revenue:
Issuer services
Trading, clearing and related
Information services
Technology services and other
Total revenue
Expenses:
Compensation and benefits
Information and trading systems
General and administration
Depreciation and amortization
Total operating expenses
Income from operations
Share of net income of equity accounted investee
Impairment of investment
Finance income (costs):
Finance income
Finance costs
Net mark to market on interest rate swaps
Income before income taxes
Income tax expense
Non-controlling interests
Net income
Net income attributable to:
Equity holders of the Company
Non-controlling interests
Earnings per share:
Basic
Diluted
$
$
$
$
$
$
$
$
$
$
163.0
242.2
154.4
15.9
575.5
133.5
47.8
73.0
32.3
286.6
288.9
1.3
(1.7)
5.2
(6.2)
(0.2)
287.3
90.7
0.1
196.5
196.5
–
196.5
2.64
2.64
50.1
–
–
–
50.1
–
2.9
–
(2.9)
–
50.1
–
–
–
0.2
–
50.3
9.4
–
40.9
41.2
(0.3)
40.9
$
$
$
$
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(0.1)
0.1
–
0.1
0.1
$
$
$
$
$
$
213.1
242.2
154.4
15.9
625.6
133.5
50.7
73.0
29.4
286.6
339.0
1.3
(1.7)
5.2
(6.0)
(0.2)
337.6
100.1
–
237.5
237.7
(0.2)
237.5
3.20
3.19
Future Changes in Accounting Policies
A number of new standards, and amendments to standards and interpretations, are not yet effective for the year ended December 31, 2011, and
have not been applied in preparing our financial statements. In particular, the following new and amended standards and interpretations are
required to be implemented for financial years beginning on or after January 1, 2013, unless otherwise noted:
•
•
•
•
•
•
•
•
•
•
•
IFRS 9, Financial instruments (January 1, 2015
IFRS 10, Consolidated financial statements
IFRS 11, Joint arrangements
IFRS 12, Disclosure of interests in other entities
IFRS 13, Fair value measurement
IAS 27, Separate financial statements
IAS 28, Investments in associates and joint ventures
IAS 1, Presentation of financial statements: Presentation of items of other comprehensive income – Amendments requiring the grouping
of items within other comprehensive income (effective for annual periods beginning on or after July 1, 2012)
IFRS 7, Financial instruments – disclosure – Amendments regarding transfers of financial assets (effective for annual periods beginning on
or after July 1, 2011)
IAS 12, Income taxes – Amendments regarding deferred income tax – Recovery of underlying assets (effective for annual periods beginning
on or after January 1, 2012)
IAS 19, Employee benefits – Amendments regarding the recognition of gains and losses, the presentation of changes in assets and
liabilities, and enhanced disclosure requirements
50 TMX Group Annual Report | 2011
We are reviewing these new standards and amendments to determine the potential impact, if any, on our financial statements.
In June 2010, the IASB issued an Exposure Draft on Revenue from Contracts from Customers (ED) and requested comments by October 22, 2010.
The IASB issued a revised ED in November 2011 based on feedback received and requested comments by March 13, 2012.
The ED proposes an effective date for the standard of no earlier than annual reporting periods beginning on or after 1 January 2015; however,
it proposes that the amendments be applied retrospectively. We are currently considering the impact that this ED will have on Issuer Services
Revenue. It is possible that it could result in changes to the current revenue standard, IAS 18 Revenue.
Disclosure Controls and Procedures and Internal Control over Financial Reporting
Disclosure Controls and Procedures
The Chief Executive Officer (CEO) and Chief Financial Officer (CFO) are responsible for establishing and maintaining adequate disclosure controls
and procedures, as defined in National Instrument 52-109 – Certification of Disclosure in Issuers’ Annual and Interim Filings (NI 52-109). Disclosure
controls and procedures are designed to provide reasonable assurance that information required to be disclosed in our filings under securities
legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation. They are also designed to
provide reasonable assurance that all information required to be disclosed in these filings is accumulated and communicated to management,
including the CEO and CFO as appropriate, to allow timely decisions regarding public disclosure. 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 CEO and CFO, conducted an evaluation of the effectiveness of our disclosure controls and procedures as of
December 31, 2011. Based on this evaluation, the CEO and CFO have concluded that our disclosure controls and procedures were effective as
of December 31, 2011.
Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in NI 52-109. Internal
control over financial reporting means a process designed by or under the supervision of the CEO and CFO, and effected by our board of directors,
management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with GAAP, and 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 TMX Group; (2) are designed to
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 TMX Group are being made only in accordance with authorizations of management and directors of
TMX Group; and (3) are designed to provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of TMX Group’s assets that could have a material effect on the financial statements.
All internal control systems have inherent limitations and therefore our internal control over financial reporting can only provide reasonable
assurance and may not prevent or detect misstatements due to error or fraud.
Our management, including the CEO and CFO, conducted an evaluation of the effectiveness of our internal control over financial reporting as of
December 31, 2011 using the Committee of Sponsoring Organizations of the Treadway Commission (COSO) framework. Based on this evaluation,
the CEO and CFO have concluded that our internal control over financial reporting was effective as of December 31, 2011.
Changes in Internal Control over Financial Reporting
Notwithstanding our conversion to IFRS, there were no changes to internal control over financial reporting during the quarter beginning
October 1, 2011 and ended on December 31, 2011 that materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
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 the Risk Management Committee (comprised of
senior management) oversees the 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.
Management’s Discussion and Analysis 51
We have identified the most significant risks to which we are exposed to be the following:
• Competition
• Economic
• Regulatory
• Execution/Strategic
• Product/Service Relevance
• Technology
• Human Resources
•
Interface/Dependency
• Currency
• Credit
• Litigation/Legal/Regulatory Proceedings
•
• Business Continuity/Geopolitical
•
• Corporate Structure
Intellectual Property
Integration
These risks are taken into account when developing and implementing TMX Group strategies, tactics, policies, operating procedures and governance
processes, including the design and implementation of compensation policies and practices.
The risks and uncertainties described below are not the only ones facing TMX Group. Additional risks and uncertainties not presently known to us or
that we currently believe are immaterial may also adversely affect our business. If any of the following risks actually occur, our reputation, business,
financial condition, or operating results could be materially adversely affected.
Competition Risk
We Face Competition from Other Exchanges, ATSs, OTC Markets and Other Sources
Our listing and trading cash equities, derivatives, energy and fixed income markets face competition from other exchanges as well as from other
marketplaces, the OTC markets and other sources. If we cannot maintain and enhance our ability to compete or respond to competitive threats, this
will have an adverse impact on our business, financial condition and operating results.
Our Equity Exchanges Face Increased Competition from Other Exchanges, Other Marketplaces
and Trading Mechanisms
We face increased competition for business from other exchanges, especially those in the United States as they consolidate 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. In Canada, there is currently one exchange competing for junior listings and an exchange
that will list both senior and junior securities is expected to launch in 2012. Our listing operations compete with institutions and various market
participants that offer alternative forms of financing that are not necessarily traded in public markets including private venture capital and various
forms of debt financing.
Domestic competition in our cash equities trading business has intensified with the establishment of ATSs in Canada. Technological advances have
lowered barriers to entry and have created a multiple marketplace for trading Toronto Stock Exchange and TSX Venture Exchange listed securities.
There are 13 Canadian equity marketplaces which trade or intend to trade Toronto Stock Exchange and TSX Venture Exchange listed securities,
including dark and visible trading venues. There are also sophisticated mechanisms to internalize order flow within a PO, liquidity aggregators and
smart order routers that also facilitate trading on other venues. New market entrants have fragmented domestic equities market share and we
continue to face significant competitive pressure.
Alpha ATS, an alternative trading system formed by a group of Canada’s banks and investment dealers, has become a significant competitor
in our cash equities trading business. Alpha ATS currently trades Toronto Stock Exchange and TSX Venture Exchange listed issuer securities. In
December 2011, the OSC approved the recognition of Alpha LP and Alpha Exchange as an exchange giving them the ability to also list issuers
effective in 2012. As of the date of this MD&A, they not received the same recognition from the BCSC or the ASC.
These new entrants may, among other things, respond more quickly to competitive pressures, develop similar products to those Toronto Stock
Exchange and TSX Venture Exchange offer that are preferred by customers, or they may develop alternative competitive products, or they may price
their trading and data products more competitively in order to gain market share, develop and expand their network infrastructures and offerings
more efficiently, adapt more swiftly to new or emerging technologies and changes in customer requirements and use better, more user friendly and
reliable technology. If these trading venues attract significant order flow, or other market structure changes occur in the marketplace, our trading
and information services revenue could be materially adversely affected.
There is intense price competition in the cash equities markets. While we have developed a pricing mix to attract greater liquidity to our markets,
the competitive environment in which we operate places significant pricing pressures on our trading and market data offerings, and with the entry
52 TMX Group Annual Report | 2011
of a new domestic exchange may place additional competitive pressure on our listing fees. Some competitors may seek to increase their share of
trading by reducing their transaction fees, by offering larger liquidity payments, by offering inverted pricing or by offering other forms of financial
or other incentives. We have in the past lowered our equity trading fees and we may, in the future, be required to adjust our pricing to respond to
competitive pricing pressure. If we are unable to compete successfully with respect to the pricing of our offerings, our business, financial condition
and results of operations could be materially adversely affected.
Our Derivatives Markets Face Competition from Other Marketplaces
MX and BOX are in direct competition with, among others, securities, options and other derivatives exchanges as well as ATSs or Electronic Crossing
Networks (ECNs) and other trading and crossing venues, some of our clearing member firms and interdealer brokerage firms. This competition
exists particularly in the United States, but also in Europe and Asia. In Canada, MX’s competition in derivatives trading is the OTC market. In
addition, OTC regulatory reform that is underway in Canada could encourage the formation of another clearing house in Canada. In the United
States, BOX will continue to face increased competition in the U.S. equity options market. These competitors may, among other things, respond
more quickly to competitive pressures, develop similar products to those MX and BOX offer that are preferred by customers or they may develop
alternative competitive products, they may price their products more competitively, develop and expand their network infrastructures and offerings
more efficiently, adapt more swiftly to new or emerging technologies and changes in customer requirements and use better, more user friendly and
reliable technology. Increased competition could lead to reduced interest in MX’s and BOX’s products which could materially adversely affect our
business and operating results.
The derivatives trading industry is characterized by intense price competition. While our derivatives markets have developed a pricing mix to
attract greater liquidity to these markets while maintaining our average price per contract, market conditions may result in increased competition
which, in turn, may place significant pricing pressures in the future. Some competitors may seek to increase their share of trading by reducing their
transaction fees, by offering larger liquidity payments or by offering other forms of financial or other incentives. Our business, financial condition
and results of operations could be materially adversely affected as a result of these developments.
Our Energy Markets Face Competition from OTC Markets and Other Sources
NGX’s business of trading and clearing natural gas, electricity and crude oil contracts and Shorcan Energy Brokers business face primary competition
in Canada and the United States from other exchanges, electronic trading and clearing platforms and from the OTC or bilateral markets (supported
by other voice brokers) and competing exchanges listing and clearing energy products. Other exchanges and electronic trading platforms are
now starting to list physical products designed to compete more directly with the NGX contracts. Shorcan Energy Brokers also faces competition
primarily from other brokerage firms. If NGX or Shorcan Energy Brokers is unable to compete with these platforms and markets including voice
brokers, they may not be able to maintain or expand their businesses, which could materially affect their business and operating results.
Our Fixed Income Markets Face Competition from OTC Markets and Other Sources
Shorcan has several competitors in the fixed income IDB market. If Shorcan fails to attract institutional dealer order flow from this market, it would
adversely affect its operating results.
Economic Risk
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 across our markets and market data sales.
Our Operating Results May be Adversely Impacted by Global Economic Uncertainties
The economic and market conditions in Canada, the United States, Europe and the rest of the world impact the different aspects of our business
and our revenue drivers. Because listing, financing and trading activities are significantly affected by economic, political and market conditions
and the overall level of investor confidence, the impact the level of listing activity (including IPOs), the market capitalization of our issuers, trading
volumes and sales of data across our markets. In addition, our clearing customers are now facing higher credit costs associated with complying
with margining regimes which could result in lower volumes.
Global market and economic conditions have been difficult and volatile in recent years and continue to exhibit volatility. While volatile markets can
generate increased transactions volume, prolonged recessionary conditions can adversely affect trading volumes and the demand for market data
and can lead to slower collections of accounts receivable as well as increased counterparty risk.
Management’s Discussion and Analysis 53
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 on our cash markets;
the number of transactions, volume of contracts or products traded and cleared on our derivatives and energy markets; the number and market
capitalization of listed issuers; the number of new listings; the number of active traders and brokerage firms; 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:
• the overall economic conditions and monetary policies in Canada, the United States, Europe, and in the world in general (especially
growth levels, political stability and debt crisis);
• broad trends in business and corporate finance, including capital market trends and the mergers and acquisitions environment;
• the condition of the resource sector;
• the interest rate environment and resulting attractiveness of alternative asset classes;
• the regulatory environment for investment in securities, including the regulation of marketplaces and other market participants;
• the relative activity and performance of global capital markets;
•
• pricing volatility of global commodities and energy markets; and
• changes in tax legislation that would impact the relative attractiveness of certain types of securities.
investor confidence in the prospects and integrity of our listed issuers, and the prospects of Canadian-based listed issuers in general;
We may be able to indirectly influence the volume and value 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 Cost Structure is Largely Fixed
Most of our expenses are fixed and cannot be easily lowered in the short-term if our revenue decreases, which could have an adverse effect on our
operating results and financial condition.
Regulatory Risk
We Are Subject to Significant Regulatory Constraints
We operate in a highly regulated industry and are subject to extensive government regulation and we could be subject to increased regulatory
scrutiny in the future. Provincial securities regulators in Canada regulate us and our exchanges and in the case of CDCC and NGX, our clearing
operations, and regulators in other jurisdictions may regulate our future operations. MX and CDCC are regulated as SROs in Québec. In addition,
MX carries on activities in accordance with the regulations of securities regulators in the United States as a foreign board of trade (FBOT) and in
France and the U.K. CDCC is also subject to regulatory requirements of the SEC and various U.S. state securities regulators. NGX also currently
operates as an exempt commercial market (ECM) under the jurisdiction of the U.S. Commodity Futures Trading Commission (CFTC) and is registered
as a derivative clearing organization (DCO) by the CFTC. BOX is an electronic equity options market and is regulated by the SEC. CDCC is expected
to be designated by the Bank of Canada (BOC) as being of systemic importance under the Payment Clearing and Settlement Act (Canada). Following
such designation, the BOC will have broad powers relating to the regulation and oversight of CDCC.
The Canadian securities regulators, regulating our cash equities, derivatives and energy exchanges and clearing operations, the SEC which regulates
BOX and the CFTC which regulates NGX’s clearing have broad powers to audit, investigate and enforce compliance with their regulations and impose
sanctions for non-compliance.
Those Canadian and United States regulators are vested with broad powers to prohibit us from engaging in certain business activities or suspend
or revoke approval as a recognized exchange or clearing agency, as the case may be, and, in the case of MX and CDCC, as an SRO. In the case of
actual or alleged non-compliance with legal or regulatory requirements, our exchanges or clearing agencies could be subject to investigations and
administrative or judicial proceedings that may result in substantial penalties, including revocation of our approval as a recognized exchange,
clearing agency and SRO, as applicable. Any such investigation or proceeding, whether successful or not, would result in substantial costs and
diversions of resources and might also harm our reputation, any of which may have a material adverse effect on our business, financial condition
and results of operations.
54 TMX Group Annual Report | 2011
In addition, there may be a conflict between our self-regulatory responsibilities and the interests of some of our members or our own commercial
interests. Although we have implemented stringent governance measures to avoid such conflicts, any failure to diligently and fairly regulate
members or to otherwise fulfill these regulatory obligations could significantly harm our reputation, prompt regulatory scrutiny and materially
adversely affect our business, financial condition and results of 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,
derivatives and energy exchanges and clearing operations. Some of the 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 results of operations.
TMX Group could be subject to increased regulatory scrutiny in the future. The multi-market environment in Canada and the global economic
crisis could lead to more aggressive regulation of our businesses by securities and other regulatory agencies both in Canada and the U.S. and could
extend to areas of our businesses that to date have not been regulated.
A number of regulatory initiatives and changes have been identified or proposed or are being implemented by regulators in Canada and the United
States. In some cases we cannot be certain whether or in what form, regulatory changes will take place, and cannot predict with certainty their
impact on our businesses and operations. Changes in and additions to the rules affecting our markets and clearing houses could require us to
change the manner in which we and our members conduct business or govern ourselves.
Expanding U.S. regulation and proposed initiatives, in particular, the Dodd-Frank Consumer Protection Act impacting OTC derivatives markets,
ECMs, DCOs and FBOTs, among others, could increase the regulation of and cost of compliance for our markets whose business is impacted by
U.S. regulatory developments.
In Canada, the provincial securities regulators are in the process of releasing a series of proposal papers regarding the regulation of the Canadian
OTC derivatives markets which could lead to expanded regulation and increase the cost of compliance for our markets whose business is impacted
by these developments. The Canadian provincial securities regulators continue to review developments in the structure of the equities market, and
in June 2009, they indicated they would be undertaking a review of market data fees.
Unexpected and new regulatory requirements could make it more costly to comply with relevant regulations and for affected markets to operate
their existing businesses or to enter into new business areas. In addition, high levels of regulation may stifle growth and innovation in capital
markets generally and may adversely affect our business, financial condition and results of operations.
Execution/Strategic Risk
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 may have difficulty executing our strategies because of, among other things,
increased global competition, difficulty developing and introducing products or introducing new products on a timely basis, barriers to entry in
other geographic markets, and changes in regulatory requirements. [In addition, we may have difficulty obtaining financing for new business
opportunities, due to financial restrictions that currently or may in the future be placed on TMX Group under borrowing facilities.] Any of these
factors could materially adversely affect the success of our strategies.
New Business Activities May Adversely Affect Income
We may enter new business activities which, while they could provide opportunities for us, may also impose restrictions on us and/or 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.
Expansion of Our Operations Internationally Involves Special Challenges that We May Not Be Able to Meet
We continue to expand our operations internationally, including by opening offices and by acquiring distribution, technology and other systems in
foreign jurisdictions, obtaining regulatory authorizations or exemptions to allow remote access to our markets by approved participants outside
Canada. We expect that the expansion of access to our electronic markets will continue to increase the portion of our business that is generated
from outside Canada. We face certain risks inherent in doing business in international markets, particularly in the regulated exchange and clearing
businesses. These risks include:
•
•
restrictions on the use of trading terminals or the contracts that may be traded;
reduced protection for intellectual property rights;
Management’s Discussion and Analysis 55
• difficulties in staffing and managing foreign operations;
• potentially adverse tax consequences;
• enforcing agreements and collecting receivables through certain foreign legal systems; and
•
foreign currency fluctuations for international business.
We would be required to comply with the laws and regulations of foreign governmental and regulatory authorities of each country in which we
obtain authorizations or exemptions for remote access to our markets. These may include laws, rules and regulations relating to any aspect of
the business. International expansion may expose TMX Group to geographic regions that may be subject to greater political, economic and social
uncertainties than countries with developed economies.
Any of these factors could have a material adverse effect on the success of our plans to grow our international presence and market products and
services and consequently on our business, financial condition and results of operations.
Product/Service Relevance Risk
Our Exchanges Depend on the Development, Marketing and Acceptance of New Products and Services
We are dependent to a great extent on developing and introducing new investment trading and clearing products and services and their
acceptance by the investment community. While we continue to review and develop new products and services that respond to the needs of the
marketplace, we may not continue to develop successful new products and services or we may not effectively promote and sell our products and
services. Our current offerings may become outdated or lose market favour before we can develop adequate enhancements or replacements. Other
exchanges, ATSs or ECNs may introduce new products or services or enhancements that make our offerings less attractive. Even if we develop an
attractive new product, we could lose trading activity to another marketplace that introduces a similar or identical offering which offers greater
liquidity or lower cost. We also may not receive regulatory approval (in a timely manner or at all) for our new offerings. Any of these events could
materially adversely affect our business, financial condition and operating results.
Human Resources Risk
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.
Technology Risk
We Depend Heavily on Information Technology, Which Could Fail or Be Subject to Disruptions,
including Cyber Attack
We are extremely dependent on our information technology systems. Trading and data on our cash equities markets and trading and clearing on
our derivatives and energy markets are conducted exclusively on an electronic basis. SOLA, the MX proprietary trading system, is currently in use at
BOX and other venues. In addition, we provide the technical operations services related to BOX’s trading and surveillance platforms.
We have incident and disaster recovery and contingency plans as well as back-up procedures to manage, mitigate and minimize the risk of an
interruption, failure or disruption due to cyber attack on the critical information technology of Toronto Stock Exchange, TSX Venture Exchange,
TMX Select, TMX Datalinx, NGX, MX, CDCC and BOX. We also test and exercise our disaster recovery plans for trading on Toronto Stock Exchange, TSX
Venture Exchange, MX and CDCC, and, in the case of our cash equities markets, include customers in that process. However, depending on an actual
failure or disruption, 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 information technology failures and delays in the past, and we could
experience future information technology failures, delays or other interruptions.
The current technological architecture for our cash equities, energy, derivatives trading and clearing and market data information technology
systems may not effectively or efficiently support our changing business requirements. Over the past several years, we have made hardware and
software upgrades in response to increases in order message and quote message volumes and to reduce overall average response time to optimize
execution speeds of our cash equities, derivatives, energy and market data platforms.
56 TMX Group Annual Report | 2011
We are continually improving our information technology systems so that we can handle increases and changes in our trading and clearing activities
and market data volumes to respond to customer demand for improved performance. This requires ongoing expenditures which may require us
to expend significant amounts of resources in the future. While system changes may introduce risk, we have and follow, standard deployment
processes for managing and testing these changes.
If the TSX Quantum trading enterprise, the SOLA derivatives trading enterprise, the SOLA Clearing platform or NGX’s clearing system fails to perform
in accordance with expectations, 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 cash equities trading services,
MX’s trading and CDCC’s and NGX’s clearing services, as well as the services we provide to BOX; cause delays in settlement; cause us to lose data;
corrupt our trading and clearing operations, data and records; or disrupt our business operations, including BOX’s 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.
Our Networks and Those of Our Third Party Service Providers May be Vulnerable to Security Risks
Our networks and those of our third party service providers, our POs and approved participants and our customers may be vulnerable to cyber risks,
including unauthorized access, computer viruses and other security issues. Persons who circumvent security measures could wrongfully use our
information or cause interruptions or malfunctions in our operations which could damage the integrity of our markets and data provision, any of which
could have a material adverse effect on our business, financial condition and results of operations. We may be required to expend significant resources
to protect against the threat of security breaches or to alleviate problems, including reputational harm and litigation, caused by any breaches. Although
we intend to continue to implement industry-standard security measures, these measures may prove to be inadequate and result in system failures
and delays that could lower trading volume and have a material adverse effect on our business, financial condition and results of operations.
Interface/Dependency Risk
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, or approved participants
are able to access our cash equity or derivatives exchanges, including market data information generated from these 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, derivatives or energy operations, our financial condition and our operating results.
Our Trading Operations Depend Primarily on a Small Number of Clients
During 2011, approximately 51% of our trading and related revenue on Toronto Stock Exchange and approximately 60% of our trading and related
revenue on TSX Venture Exchange were accounted for by the top ten POs on each exchange based on volumes traded. 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.
Approximately 67% of MX’s trading revenue in 2011 was accounted for by the top ten participants based on volume of contracts traded.
Approximately 91% of BOX’s trading revenue in 2011 was accounted for by the top ten participants based on volumes traded.
Approximately 45% of NGX’s trading and clearing revenue in 2011 was accounted for by the top ten customers.
We Depend on Third Party Suppliers and Service Providers
We depend on a number of third parties, such as CDS, IIROC, data processors, software and hardware suppliers, communication and network
suppliers and suppliers of electricity, for elements of our businesses including trading, routing, providing market data and other products and
services. These third parties may not be able to provide their services without interruption, or in an efficient, cost-effective manner. In addition,
we may not be able to renew our agreements with these third parties on favourable terms or at all. These third parties also may not be able to
adequately expand their services to meet our needs. If a third party suffers an interruption in or stops providing services and we cannot make
suitable alternative arrangements, or if we fail to renew certain of our agreements on favourable terms or at all, our business, financial condition or
operating results could be materially adversely affected.
Management’s Discussion and Analysis 57
Currency Risk
We Are Subject to Fluctuations in Exchange Rates
We are exposed to foreign currency risk on cash and cash equivalents, trade receivables and trade payables, principally denominated in U.S. dollars.
We are also exposed to foreign currency risk on revenue and expenses where we invoice or procure in U.S. dollars. At December 31, 2011, cash
and cash equivalents and trade receivables net of current liabilities, excluding BOX, include U.S. $18.5 million (compared with U.S. $20.8 million
at December 31, 2010) and GBP £0.4 million (compared with GBP £nil at December 31, 2010), which are exposed to changes in the U.S.-Canadian
dollar and GBP-Canadian dollar exchange rates. In addition, net assets related to BOX and TMX Atrium are denominated in U.S. dollars and Euros,
respectively, and the effect of exchange rate movements on TMX Group’s share of these net assets is included in other comprehensive income.
The approximate impact of a 10% rise and a 10% decline in the Canadian dollar compared to the U.S dollar, GBP, and Euro on these transactions
as at December 31, 2011 is a $1.9 million decrease or increase in income before income taxes, respectively. The approximate impact of a 10% rise
and a 10% decline in the Canadian dollar compared to the U.S dollar, GBP, and Euro on these transactions as at December 31, 2011 is a $7.6 million
decrease or increase in other comprehensive income respectively.
We do not currently employ hedging strategies and therefore significant moves in exchange rates, specifically a strengthening of the Canadian
dollar against the US dollar can have an adverse affect on the value of our revenue, expenses, or assets in Canadian dollars.
Credit Risk
We Could Suffer Losses as a Result of NGX’s Clearing Activities
NGX is the central counterparty to each transaction (whether it relates to natural gas, electricity or crude oil contracts) cleared through its clearing
operations. 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. There is no assurance that these measures will be sufficient to protect us from a default or that our business,
financial condition and results of operations will not be materially adversely affected in the event of a significant default.
To backstop its clearing operations, NGX has a credit agreement in place with a Canadian chartered bank which includes a US$100.0 million clearing
backstop fund. We are NGX’s unsecured guarantor for this fund up to a maximum of US$100.0 million. In addition, NGX has covenanted under the
agreement to maintain a minimum of $9.0 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$100.0 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 cannot assure that these measures will be sufficient to protect us from a default or that our business, financial condition and results of
operations will not be materially adversely affected in the event of a significant default.
We Could Suffer Losses as a Result of CDCC’s Clearing Activities
CDCC acts as the central counterparty of all transactions executed on MX’s markets and on some OTC products. As a result, CDCC is exposed to
the risk of default of its clearing members. CDCC primarily supports the risk of one or more counterparties, meeting strict financial and regulatory
criteria, defaulting on their obligations, in which case the obligations of that counterparty would become the responsibility of CDCC. This risk is
greater if market conditions are unfavourable at the time of the default.
In order to manage the risks associated with the default of its clearing members, CDCC’s principal technique is the collection of risk-based margin
deposits in the form of cash, equities and liquid government securities. Should a clearing member fail to meet a daily margin call or otherwise not
honour its obligations under open futures and options contracts, margin deposits would be seized and would then be available to apply against the
costs incurred to liquidate or transfer the clearing member’s positions.
CDCC’s margining system is complemented by a Daily Capital Margin Monitoring (DCMM) process that permits it to evaluate the ability of a clearing
member to meet its margining requirements. On a daily basis, CDCC monitors the margin requirement of a clearing member as a percentage of its
capital (net allowable assets). CDCC will make additional margin calls when the ratio of margin requirement/net allowable assets exceeds 100%.
The additional margin is equal to the excess of the ratio over 100%.
58 TMX Group Annual Report | 2011
CDCC also maintains a clearing fund through deposits of cash and highly liquid securities from all clearing members. The aggregate level of clearing
funds required from all clearing members must cover the worst loss that CDCC could face if one counterparty was failing under various extreme
but plausible market conditions. Each clearing member contributes to the clearing fund in proportion to its margin requirements. If, by a clearing
member’s default, further funding is necessary to complete a liquidation, CDCC has the right to require other clearing members to contribute
additional amounts equal to their previous contribution to the clearing fund. From a legal perspective, the maximum loss that we could face is
limited to CDCC’s net worth.
We cannot assure that these measures will be sufficient to protect us from a default or that our business, financial condition and results of
operations will not be materially adversely affected in the event of a significant default.
Our Derivatives Business Could be Harmed by a Systemic Market Event
In case of sudden, large price movements, certain market participants may not be able to meet their obligations to brokers who, in turn, may not
be able to meet their obligations to their counterparties. The impact of such an event could have a material adverse effect on CDCC’s business. In
such cases, it could be possible that clearing members default with CDCC. As referred to in the Credit Risk – CDCC section CDCC would use its risk
management mechanisms to manage such a default. In extreme situations such as large scale market price moves or multiple defaults occurring at
the same time, all these mechanisms may prove insufficient to cover losses and this would result in a loss.
Litigation/Legal/Regulatory Proceedings Risk
We Are Subject to Risks of Litigation and Regulatory Proceedings
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 or they may challenge our regulatory actions, decisions or jurisdiction. 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. We could incur significant legal expenses defending claims, even
those without merit. If a lawsuit or claim is resolved against us, it could materially adversely affect our reputation, business, financial condition and
operating results.
Integration Risk
We Face Risks Associated with Integrating the Operations, Systems and Personnel of New Acquisitions
As part of our strategy to sustain growth, we have and 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. It is possible
that integrating an acquisition could result in less management time being devoted to other parts of our core business. If an investment, acquisition
or other transaction does not fulfill expectations, we may have to write down its value in the future or sell at a loss.
Business Continuity/Geopolitical Risk
Geopolitical and Other 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, telecommunication failures, theft, sabotage and
vandalism. Given our position in the Canadian capital markets, we may be more likely than other companies to be a target of such activities.
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 duplicate facilities to provide redundancy and back-up to reduce the risk and recovery time of system disruptions for key
systems at Toronto Stock Exchange, TSX Venture Exchange, MX, CDCC, BOX and NGX. However, not all systems are duplicated, and any major
disruption 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 59
Intellectual Property Risk
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,
confidentiality 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, affect our ability to compete effectively and may
limit our ability to maintain or increase information services revenue. It could also take significant 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 license. 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 license for
the intellectual property from the owner. We may not succeed in developing or obtaining a license 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.
Corporate Structure Risk
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 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 OSC, 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 OSC staff. In addition, the recognition order of MX
imposes similar restrictions on the payment of dividends. If MX fails to meet the financial viability ratios for more than three months, MX will not,
without the prior approval of Quebec’s AMF, pay dividends (among other things) until the deficiencies have been eliminated for at least six months.
Restrictions on Ownership of TMX Group Shares May Restrict Trading and Transactions
Under the Securities Act (Ontario) and related regulations and orders, and pursuant to an undertaking we provided to the AMF as a condition to
obtaining approval of the combination with MX, 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 OSC and the AMF. Each of the OSC and the AMF 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 discourage potential acquisition and strategic alliance proposals, and may prevent
transactions in which our shareholders could receive a premium for their shares.
Caution Regarding Forward-Looking Information
This MD&A of TMX Group contains “forward-looking information” (as defined in applicable Canadian securities legislation) that is based on
expectations, assumptions, estimates, projections and other factors that management believes to be relevant 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, by its nature, requires us to make assumptions and is subject to significant risks and
uncertainties which may give rise to the possibility that our expectations or conclusions will not prove to be accurate and that our assumptions
may not be correct.
60 TMX Group Annual Report | 2011
Examples of such forward-looking information in this MD&A include, but are not limited to, factors relating to stock, derivatives and energy
exchanges and clearing houses and the business, strategic goals and priorities, market condition, pricing, proposed technology and other
initiatives, financial condition, operations and prospects of TMX Group, which are subject to significant risks and uncertainties. These risks include:
competition from other exchanges or marketplaces, including alternative trading systems and new technologies, on a national and international
basis; dependence on the economy of Canada; adverse effects on our results caused by global economic uncertainties; failure to retain and attract
qualified personnel; geopolitical and other factors which could cause business interruption; dependence on information technology; vulnerability
of our networks and third party service providers to security risks; failure to implement our strategies; regulatory constraints; risks of litigation or
regulatory proceedings; dependence on adequate numbers of customers; failure to develop, market or gain acceptance of new products; currency
risk; adverse effect of new business activities; not being able to meet cash requirements because of our holding company structure and restrictions
on paying dividends; dependence on third party suppliers and service providers; dependence of trading operations on a small number of clients;
risks associated with our clearing operations; challenges related to international expansion; restrictions on ownership of TMX Group shares;
inability to protect our intellectual property; adverse effect of a systemic market event on our derivatives business; risks associated with the credit
of customers; cost structures being largely fixed; risks associated with integrating the operations, systems, and personnel of new acquisitions; and
dependence on market activity that cannot be controlled.
The forward looking information contained in this MD&A is presented for the purpose of assisting readers of this document in understanding our
financial condition and results of operations and our strategies, priorities and objectives and may not be appropriate for other purposes. Actual
results, events, performances, achievements 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.
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 ability of TMX Group to successfully compete against global and regional marketplaces; 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 TMX Group’s key products; business development and marketing and sales
activity; the continued availability of financing on appropriate terms for future projects; productivity at TMX Group, as well as that of TMX
Group’s competitors; market competition; research & development activities; the successful introduction and client acceptance of new products;
successful introduction of various technology assets and capabilities; the impact on TMX Group and its customers of various regulations;
TMX Group’s ongoing relations with its employees; and the extent of any labour, equipment or other disruptions at any of its 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
materially 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. A description of the above-
mentioned items is contained in this MD&A under the heading Risks and Uncertainties.
Management’s Discussion and Analysis 61
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
International Financial Reporting Standards and, in the opinion of management, fairly reflect the financial position, results of operations and
changes in the financial position of TMX 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
meaning 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 management and external auditors to discuss audit plans, internal controls over accounting and financial reporting processes, auditing
matters and financial reporting issues.
TMX 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.
Thomas A. Kloet
Chief Executive Officer
TMX Group Inc.
February 8, 2012
Michael Ptasznik
Senior Vice President and Chief Financial Officer
TMX Group Inc.
62 TMX Group Annual Report | 2011
Independent Auditors' Report
To the Shareholders of TMX Group Inc.
We have audited the accompanying consolidated financial statements of the TMX Group Inc., which comprise the consolidated balance sheets as at
December 31, 2011, December 31, 2010 and January 1, 2010, the consolidated income statement, consolidated statement of comprehensive income,
consolidated statement of changes in equity, and consolidated statement of cash flows for the years ended December 31, 2011 and December 31,
2010, and notes, comprising a summary of significant accounting policies and other explanatory information.
Management’s responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International
Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated
financial statements that are free from material misstatement, whether due to fraud or error.
Auditor's Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance
with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements.
The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial
statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity’s preparation and
fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for
the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of
accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of
the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the balance sheets of TMX Group Inc. as at December 31, 2011,
December 31, 2010, and January 1, 2010, and its financial performance and its cash flows for the years ended December 31, 2011 and December 31, 2010 in
accordance with International Financial Reporting Standards.
Chartered Accountants, Licensed Public Accountants
Toronto, Canada
February 7, 2012
Management Statement & Auditors’ Report to Shareholders 63
Consolidated Balance Sheets
(In millions of Canadian dollars)
Assets
Current assets:
Cash and cash equivalents
Marketable securities
Trade and other receivables
Energy contracts receivable
Fair value of open energy contracts
Daily settlements and cash deposits
Prepaid expenses
Current income tax assets
Non-current assets:
Premises and equipment
Investment in equity accounted investees
Goodwill
Other intangible assets
Deferred income tax assets
Other non-current assets
Total Assets
Liabilities and Equity
Current liabilities:
Trade and other payables
Energy contracts payable
Fair value of open energy contracts
Daily settlements and cash deposits
Deferred revenue
Provisions
Current income tax liabilities
Fair value of interest rate swaps
Term loan
Non-current liabilities:
Accrued employee benefits payable
Deferred income tax liabilities
Other non-current liabilities
Fair value of interest rate swaps
Term loan
Total Liabilities
Equity:
Share capital
Retained earnings (Deficit)
Contributed surplus – share option plan
Accumulated other comprehensive loss
Total Equity attributable to Shareholders of the Company
Non-controlling interests
Total Equity
Commitments and contingent liabilities
Total Liabilities and Equity
Note
December 31, 2011
December 31, 2010
January 1, 2010
$
$
$
8
8
9
25
25
25
10
11
12
12
24
13
16
25
25
25
18
17
25
15
14
24
20
25
15
21
22
$
$
$
87.2
403.2
79.0
645.7
159.0
550.8
6.9
3.8
1,935.6
29.5
16.3
432.8
919.0
52.6
9.0
3,394.8
81.7
645.7
159.0
550.8
19.4
7.5
4.4
–
429.8
1,898.3
14.0
230.0
30.5
–
–
2,172.8
968.3
216.8
14.0
(2.6)
1,196.5
25.5
1,222.0
$
$
$
69.9
261.6
89.7
754.9
141.9
193.1
6.7
4.3
1,522.1
28.4
14.2
421.3
920.1
43.4
16.3
2,965.8
58.6
754.9
141.9
193.1
18.7
0.4
7.3
0.7
429.8
1,605.4
12.1
233.5
25.4
–
–
1,876.4
959.4
102.4
12.0
(3.2)
1,070.6
18.8
1,089.4
88.9
103.2
79.4
714.5
202.8
565.4
6.0
12.3
1,772.5
24.4
12.8
422.5
932.0
41.7
21.2
3,227.1
43.9
714.5
202.8
565.4
15.1
1.2
10.9
2.1
–
1,555.9
10.9
232.9
23.7
3.6
429.0
2,256.0
957.9
(16.5)
9.6
–
951.0
20.1
971.1
19,30
$
3,394.8
$
2,965.8
$
3,227.1
See accompanying notes which form an integral part of these consolidated financial statements.
Approved on behalf of the Board on February 7, 2012:
Wayne Fox
Chair
J. Spencer Lanthier
Director
64 TMX Group Annual Report | 2011
Consolidated Income Statements
Years ended December 31, 2011 and 2010 (In millions of Canadian dollars, except per share amounts)
Revenue:
Note
Issuer services
Trading, clearing and related
Information services
Technology services and other
Total revenue
Expenses:
Compensation and benefits
Information and trading systems
General and administration
Depreciation and amortization
Total operating expenses
Income from operations
Share of net income of equity accounted investees
Gain on disposal/(impairment) of available for sale investment
LSEG and Maple related costs
Finance income (costs):
Finance income
Finance costs
Net mark to market on interest rate swaps
Net finance income (costs)
Income before income taxes
Income tax expense
Net income
Net income attributable to:
Equity holders of the Company
Non-controlling interests
Earnings per share (attributable to equity holders of the Company):
Basic
Diluted
See accompanying notes which form an integral part of these consolidated financial statements.
7
6
4
24
5
$
$
2011
230.5
262.6
165.1
15.3
673.5
147.9
49.8
75.7
28.1
301.5
372.0
1.1
0.2
(37.2)
10.1
(9.5)
(0.1)
0.5
336.6
93.0
2010
213.1
242.2
154.4
15.9
625.6
133.5
50.7
73.0
29.4
286.6
339.0
1.3
(1.7)
–
5.2
(6.0)
(0.2)
(1.0)
337.6
100.1
$
243.6
$
237.5
$
$
$
$
237.5
6.1
243.6
$
$
237.7
(0.2)
237.5
3.18
3.17
$
$
3.20
3.19
Consolidated Financial Statements 65
Consolidated Statements of Comprehensive Income
Years ended December 31, 2011 and 2010 (In millions of Canadian dollars)
Note
2011
2010
Net income
Other comprehensive (loss) income:
Unrealized gain (loss) on translating financial statements of foreign operations
(net of tax of $nil in 2011 and $nil in 2010)
Actuarial losses on defined benefit pension and other post employment benefit plans
(net of tax benefit of $1.3 in 2011 and $1.5 in 2010)
Total comprehensive income
Total comprehensive income (loss) attributable to:
Equity holders of the Company
Non-controlling interests
See accompanying notes which form an integral part of these consolidated financial statements.
$
243.6
$
237.5
1.2
(3.8)
241.0
$
234.3
6.7
241.0
$
$
(4.3)
(4.5)
228.7
230.0
(1.3)
228.7
14
$
$
$
66 TMX Group Annual Report | 2011
Consolidated Statements of Changes in Equity
Years ended December 31, 2011 and 2010 (In millions of Canadian dollars)
Balance at January 1, 2010
$
Note
Attributable to equity holders of the Company
Contributed
surplus
– share
option plan
9.6
$
Accumulated
other
comprehensive
loss
–
$
Share
capital
957.9
Retained
earnings
$ (16.5)
Total
attributable
to equity
holders
951.0
$
Non-
controlling
interests
20.1
$
Total
equity
971.1
$
Net income
Other comprehensive
income:
Foreign currency translation
differences, net of taxes
Actuarial losses on defined
benefit pension and other
post employment benefit
plans, net of taxes
Total comprehensive
(loss) income
Dividends to equity holders
Proceeds from exercised
share options
Cost of exercised
share options
Cost of share option plan
Balance at December 31, 2010
Net income
Other comprehensive
income:
Foreign currency
translation differences,
net of taxes
Actuarial losses on defined
benefit pension and other
post employment benefit
plans, net of taxes
Total comprehensive income
Dividends to equity holders
Proceeds from exercised
share options
Cost of exercised
share options
Cost of share option plan
Balance at December 31, 2011
14
23
22
14
23
22
–
–
–
–
–
1.2
0.3
–
959.4
–
–
–
–
–
7.2
1.7
–
968.3
$
–
–
–
–
–
–
(0.3)
2.7
12.0
–
–
–
–
–
–
–
237.7
237.7
(0.2)
237.5
(3.2)
–
(3.2)
(1.1)
(4.3)
–
(4.5)
(4.5)
–
(4.5)
(3.2)
233.2
230.0
(1.3)
228.7
–
–
–
–
(3.2)
(114.3)
(114.3)
–
1.2
–
–
102.4
–
2.7
1,070.6
–
–
–
–
18.8
(114.3)
1.2
–
2.7
1,089.4
–
237.5
237.5
6.1
243.6
0.6
–
0.6
–
–
–
0.6
(3.8)
233.7
(3.8)
234.3
(119.3)
(119.3)
–
7.2
0.6
–
6.7
–
–
1.2
(3.8)
241.0
(119.3)
7.2
(1.7)
3.7
14.0
$
–
–
(2.6)
–
–
$ 216.8
–
3.7
$ 1,196.5
$
–
–
25.5
–
3.7
$ 1,222.0
$
See accompanying notes which form an integral part of these consolidated financial statements.
Consolidated Financial Statements 67
Consolidated Statements of Cash Flows
Years ended December 31, 2011 and 2010 (In millions of Canadian dollars)
Cash flows from (used in) operating activities:
Income before income taxes
Adjustments to determine net cash flows:
Depreciation and amortization
Net finance (income) costs
Share of net income of equity accounted investees
(Gain on disposal) impairment of available for sale investment
Cost of share option plan
Unrealized foreign exchange loss
LSEG and Maple related costs
LSEG and Maple related cash outlays
Trade and other receivables, and prepaid expenses
Other non-current assets
Trade and other payables
Provisions
Deferred revenue
Long-term accrued and other non-current liabilities
Realized gain on marketable securities
Realized loss on interest rate swaps
Interest paid
Interest received
Income taxes paid
Cash flows from (used in) financing activities:
Reduction in obligations under finance leases
Proceeds from exercised options
Financing fees on term loan
Dividends on common shares
Cash flows from (used in) investing activities:
Additions to premises and equipment
Additions to intangible assets
Acquisitions, net of cash acquired
Proceeds on disposal of available-for-sale investment
Marketable securities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Unrealized foreign exchange gain (loss) on cash and cash equivalents held in foreign currencies
Note
2011
2010
$
336.6
$
337.6
4
22
6
15
23
10
12
28.1
(0.5)
(1.1)
(0.2)
3.7
0.2
37.2
(33.8)
12.4
(0.1)
16.7
7.0
(0.9)
5.1
0.6
(0.8)
(8.7)
8.8
(106.8)
303.5
(0.9)
7.2
(0.9)
(119.3)
(113.9)
(8.8)
(17.8)
(11.2)
6.2
(140.9)
(172.5)
17.1
69.9
0.2
29.4
1.0
(1.3)
1.7
2.7
0.1
–
–
(10.9)
(2.1)
15.4
(1.3)
3.7
2.0
0.7
(5.2)
(5.6)
5.4
(95.7)
277.6
(1.0)
1.2
–
(114.3)
(114.1)
(12.8)
(9.7)
–
–
(159.3)
(181.8)
(18.3)
88.9
(0.7)
Cash and cash equivalents, end of year
$
87.2
$
69.9
See accompanying notes which form an integral part of these consolidated financial statements.
68 TMX Group Annual Report | 2011
Notes to the Consolidated Financial Statements
Years ended December 31, 2011 and 2010 (In millions of Canadian dollars, except per share amounts)
General information
TMX Group Inc. is a company domiciled in Canada and incorporated under the Business Corporations Act (Ontario). The registered office is located at
The Exchange Tower, 130 King Street West, Toronto, Ontario, Canada.
TMX Group Inc. directly or indirectly controls TSX Inc. (“TSX”), which operates the Toronto Stock Exchange, a national stock exchange serving the
senior equity market, TSX Venture Exchange Inc. (“TSX Venture Exchange”), a national stock exchange serving the public venture equity market,
Montréal Exchange Inc. (“MX”), Canada’s national derivatives exchange, Canadian Derivatives Clearing Corporation (“CDCC”), the issuer and
clearing house for options and futures contracts traded at MX and certain over-the-counter (“OTC”) products, Natural Gas Exchange Inc. (“NGX”),
an exchange providing a platform for the trading and clearing of natural gas, electricity, and crude oil contracts in North America and Shorcan
Brokers Limited (“Shorcan”), an inter-dealer broker.
These consolidated financial statements as at and for the year ended December 31, 2011 (the “financial statements”), comprise the accounts of TMX
Group Inc. and its wholly-owned subsidiaries, including TSX, MX, NGX and Shorcan, and their wholly-owned or controlled subsidiaries, collectively
referred to as “TMX Group” or the “Company”.
1. Basis of preparation
(a) Statement of compliance:
The financial statements have been prepared by management in accordance with International Financial Reporting Standards (“IFRS”) and
International Financial Reporting Interpretations Committee (“IFRIC”) interpretations, as issued by the International Accounting Standards
Board (“IASB”).
These are TMX Group’s first financial statements prepared in accordance with IFRS and as such, IFRS 1, First-time Adoption of International
Financial Reporting Standards (“IFRS 1”) has been applied.
Reconciliations and explanations of how the transition to IFRS has affected the reported financial position, financial performance and cash
flows of the Company are provided in note 32.
The financial statements were approved by the Company’s Board of Directors on February 7, 2012.
(b) Basis of measurement:
The financial statements have been prepared on the historical cost basis except for the following items which are measured at fair value:
§ Derivative financial instruments;
§
Financial instruments at fair value through profit or loss;
§ Available-for-sale financial assets;
§
Liabilities arising from share-based payment plans.
(c) Use of estimates and judgements:
The preparation of the financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions
that affect the reported amounts of assets, liabilities and contingent liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. The estimates and associated assumptions are based on historical experience
and other factors that management considers to be relevant. Actual results could differ from these estimates and assumptions.
Judgements, estimates and underlying assumptions are reviewed on an ongoing basis, and revisions to accounting estimates are recognized
in the period in which the estimates are revised and in any future periods affected.
Significant judgements and estimates have been made in the following areas in the preparation of the financial statements:
§ Goodwill and other intangible assets – impairment tests are completed using the higher of fair value less costs to sell, where available,
and value-in-use calculations, determined using management’s best estimates of future cash flows, long-term growth rates and
appropriate discount rates. Purchased intangibles are valued on acquisition using appropriate methodologies and amortized over their
estimated useful economic lives, except in those cases where intangibles are determined to have indefinite lives, where there is no
foreseeable limit over which these intangibles would generate net cash flows. These valuations and lives are based on management's
best estimates of future performance and periods over which value from the intangible assets will be derived (note 12);
§
The accounting for pensions and other post retirement and post employment benefits – the valuations of the defined benefit assets
and liabilities are based on actuarial assumptions made by management with advice from TMX Group’s external actuary (note 14);
Notes to Consolidated Financial Statements 69
Notes to the Consolidated Financial Statements
Years ended December 31, 2011 and 2010 (In millions of Canadian dollars, except per share amounts)
§
§
§
§
§
§
Premises and equipment and intangible assets – useful lives over which assets are depreciated or amortized are based on
management’s judgement of future use and performance (notes 10 and 12);
Leases – the classification of leases between operating and finance leases is partly based on management’s judgement regarding the
substance of the agreement, supported by other indicators within the lease (note 19);
Provisions and contingencies – management judgement is required to assess whether provisions and/or contingencies should be
recognized or disclosed, and at what value. Management bases its decisions on past experience and other factors it considers to be
relevant on a case by case basis (notes 17 and 30);
Income taxes – the accounting for income taxes requires estimates and judgements to be made. Where differences arise between
estimated income tax provisions and final income tax liabilities, an adjustment is made when the difference is identified (note 24);
Trade and other receivables – judgement is required when providing for doubtful accounts. Management bases its estimates on
historical experience and other relevant factors (note 9);
Share-based payments – The liabilities associated with TMX Group’s share-based payment plans are measured at fair value using a
recognized option pricing model based on management’s assumptions. Management’s assumptions are based on historical share
price movements, dividend policy and past experience (note 22).
2. Significant accounting policies
The accounting policies set out below have been applied consistently to all periods presented in the financial statements and in preparing the
opening IFRS consolidated balance sheet as at January 1, 2010, for the purposes of the transition to IFRS, unless otherwise indicated.
The accounting policies have been applied consistently by TMX Group entities.
(a) Basis of consolidation:
Subsidiaries are entities controlled by TMX Group, and they are consolidated from the date on which control is transferred to TMX Group until
the date that control ceases. Balances and transactions between TMX Group’s subsidiaries have been eliminated on consolidation.
Equity accounted investees are entities in which TMX Group has determined it has significant influence, but not control, over the financial and
operating policies. Investments in these entities are recognized initially at cost and subsequently accounted for using the equity method of
accounting.
(b) Revenue recognition:
Revenue is measured at the fair value of the consideration received or receivable. Revenue is recognized when the service or supply is provided,
when it is probable that the economic benefits will flow to TMX Group, and when the revenue and the costs incurred in respect of the
transaction can be reliably measured.
Issuer services
Issuer services revenue includes revenue from initial and additional listing fees, annual sustaining fees and other issuer services. Initial and
additional listing fees are recognized when the listing has taken place. 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. Sustaining fees for new issuers
are billed when the issuers’ securities are officially listed and the amount is recorded as deferred revenue and amortized over the remainder of
the year on a straight-line basis. Other issuer services revenue is recognized as the services are provided.
Trading, clearing and related
Trading and related revenues for cash markets, primarily through TSX, TSX Venture Exchange and Shorcan, are recognized in the month in
which the trades are executed or when the related services are provided.
Trading and related revenues for derivatives markets, through MX and Boston Options Exchange Group, LLC (“BOX”), a subsidiary of MX,
are recognized in the month in which the trades are executed or when the related services are provided.
Revenue related to derivatives clearing through CDCC is recognized on the settlement date of the related transaction.
Energy trading, clearing, settlement and related revenues relating to NGX are recognized over the period the services are provided. Unrealized
gains and losses on open energy contracts are not recognized in the financial statements.
70 TMX Group Annual Report | 2011
Information services
Real time market data revenue is recognized based on usage as reported by customers and vendors, less a provision for sales adjustments
from the same customers. TMX Group conducts periodic audits of the information provided and records adjustments to revenues, if any,
at the time that collectability of the revenue is reasonably assured. Fixed income indices revenue is recognized over the period the service
is provided. BOX revenue from the Options Price Reporting Authority (“OPRA”) is received quarterly based on its pro-rata share of industry
trade (not contract) volume. Estimates of OPRA’s quarterly revenue are made and accrued each month. Other information services revenue is
recorded and recognized as revenue when the services are provided.
Technology services and other
Technology services and other revenue is recorded and recognized as revenue over the period the service is provided.
(c) Foreign currency:
Items included in the financial statements of each of TMX Group’s entities are measured using the currency of the primary economic
environment in which the entity operates (“the functional currency”). The consolidated financial statements are presented in Canadian
dollars, which is TMX Group’s functional and presentation currency.
The assets and liabilities of TMX Group’s foreign operations for which the Canadian dollar is not the functional currency are translated at the
rate of exchange in effect at the balance sheet date. Revenue and expenses are translated at the relevant average monthly exchange rates.
The resulting unrealized exchange gain or loss is included in accumulated other comprehensive income within equity.
Revenues earned, expenses incurred and capital assets purchased in foreign currencies are translated into the functional currency at the
prevailing exchange rate on the transaction date. Monetary assets and liabilities denominated in foreign currencies are translated at the
period end rate or at the transaction rate when settled. Resulting unrealized and realized foreign exchange gains and losses are recognized
within technology services and other revenue in the consolidated income statement for the period.
(d) Premises and equipment:
Items of premises and equipment are recognized at cost less accumulated depreciation and any impairment losses.
Legal obligations associated with the restoration costs on the retirement of premises and equipment are recognized as incurred.
The obligations are initially measured at an estimated fair value of the future cost discounted to present value, and a corresponding
amount is capitalized with the related assets and depreciated in line with their useful lives.
Assets are depreciated from the date of acquisition. Depreciation is recognized in the consolidated income statement on a straight-line basis
over the estimated useful life of the asset, or a major component thereof. The residual values and useful lives of the assets are reviewed
annually, and revised as necessary.
Depreciation is provided over the following useful lives of the assets:
Asset
Computers and electronic trading equipment
Computers and electronic trading equipment under finance leases
Furniture, fixtures and other equipment
Leasehold improvements
Basis
Straight-line
Straight-line
Straight-line
Straight-line
(e) Goodwill and other intangible assets:
Goodwill
Goodwill is recognized at cost on acquisition less any subsequent impairment in value.
Rate
3–5 Years
Over the term of the leases
5 Years
Over terms of various leases to a
maximum of 15 Years
TMX Group measures goodwill arising on a business combination as the fair value of the consideration transferred less the fair value of the
identifiable assets acquired and liabilities assumed, all measured as of the acquisition date.
TMX Group elects on a transaction by transaction basis whether to measure non-controlling interests at fair value or at their proportionate
share of the recognized amount of the identifiable net assets acquired, at the acquisition date.
Transaction costs, other than those associated with the issue of debt or equity securities as consideration, that TMX Group incurs in
connection with a business combination are expensed as incurred.
Notes to Consolidated Financial Statements 71
Notes to the Consolidated Financial Statements
Years ended December 31, 2011 and 2010 (In millions of Canadian dollars, except per share amounts)
Other intangible assets
Other intangible assets are recognized at cost less accumulated amortization, where applicable, and any impairment in value. Cost includes
any expenditure that is directly attributable to the acquisition of the asset. The cost of internally developed assets includes the cost of
materials and direct labour, and any other costs directly attributable to bringing the assets to a working condition for their intended use.
Costs incurred in research activities, undertaken with the prospect of gaining new technical knowledge, are recognized in the consolidated
income statement as incurred. Costs incurred in development activities are capitalized when all of the following criteria are met:
§
§
§
§
§
§
It is technically feasible to complete the work such that the asset will be available for use or sale,
TMX Group intends to complete the asset for use or sale,
TMX Group will be able to use the asset once completed,
The asset will be useful and is expected to generate future economic benefits for TMX Group,
TMX Group has adequate resources available to complete the development of and to use the asset, and
TMX Group is able to reliably measure the costs attributable to the asset during development.
Definite life intangible assets are amortized from the date of acquisition or, for internally developed intangible assets, from the time the asset is
available for use. Amortization is recognized in the consolidated income statement either on a declining balance or on a straight-line basis over
the estimated useful life of the asset. Residual values and the useful lives of the assets are reviewed at each year end, and revised as necessary.
Assets are considered to have indefinite lives where management believes that there is no foreseeable limit to the period over which the assets
are expected to generate net cash flows.
Amortization is provided over the following useful lives of intangible assets:
Asset
Indefinite life intangibles – not amortized
Derivative products
Trade names
Regulatory designation
Crude oil products
Index licenses
Definite life intangibles – amortized
Customer bases
Customer bases
Data license
Capitalized software and software development
Basis
n/a
n/a
n/a
n/a
n/a
Declining balance
Straight-line
Straight-line
Straight-line
Rate
n/a
n/a
n/a
n/a
n/a
2–7%
3–30 Years
10 Years
5 Years
(f) Impairment:
The carrying amounts of TMX Group’s non-financial assets, other than deferred income tax assets and employee future benefit assets, are reviewed
at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount
is estimated. Goodwill, and intangible assets that have indefinite useful lives or that are not yet available for use, are tested for impairment at least
annually even if there is no indication of impairment, and the recoverable amount is estimated each year at the same time.
The recoverable amount of an asset or cash-generating unit is the greater of its value-in-use and its fair value less costs to sell. In assessing
value-in-use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market
assessments of the time value of money and the risks specific to the asset. For the purpose of impairment testing, assets that cannot be
tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely
independent of the cash inflows of other assets or groups of assets (the “cash-generating unit”, or “CGU”). For the purposes of goodwill
impairment testing, goodwill acquired in a business combination is allocated to the CGU, or the group of CGUs, that is expected to benefit
from the synergies of the combination and reflects the lowest level at which that goodwill is monitored for internal reporting purposes.
An impairment loss is recognized if the carrying amount of an asset, or its CGU, exceeds its estimated recoverable amount. Impairment losses
recognized in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the units, and then to reduce the
carrying amounts of the other assets in the unit on a pro rata basis. Impairment losses are recognized in the consolidated income statement.
An impairment loss in respect of goodwill can not be reversed. In respect of other non-financial assets, impairment losses recognized in prior
periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed
72 TMX Group Annual Report | 2011
if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that
the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no
impairment loss had been recognized.
(g) Leases:
Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases.
Payments made under operating leases and any lease incentives received are recognized in the consolidated income statement on a
straight-line basis over the term of the lease.
TMX Group has entered into leases for equipment where substantially all of the risks and rewards of ownership have transferred to TMX Group,
and these are classified as finance leases. The leased assets are capitalized on inception of the lease at the lower of their fair value and the present
value of the minimum lease payments, and then amortized over their useful lives. Payments made under finance leases are apportioned between
the finance expense and a reduction in the outstanding liability, to achieve a constant periodic rate of interest on the remaining liability.
(h) Employee benefits:
Defined contribution and defined benefit pension plans
The Company has registered pension plans with both a defined benefit tier and a defined contribution tier covering substantially all
employees, as well as retirement compensation arrangements ("RCA") for senior management. The costs of these programs are being funded
currently, except for MX, where a portion is guaranteed by a letter of guarantee.
TMX Group’s net obligation in respect of defined benefit pension plans is calculated separately for each plan by estimating the amount
of future benefit that employees have earned in return for their service in the current and prior periods, and that benefit is discounted to
determine its present value. Any unrecognized past service costs and the fair value of any plan assets are deducted. The discount rates used
are based on Canadian AA corporate bond yields. The calculation is performed annually by an actuary based on management’s best estimates
using the projected benefit method pro-rated on service. When the calculation results in a benefit to TMX Group, the recognized asset is
limited to the total of any unrecognized past service costs and the present value of economic benefits available in the form of any future
refunds from the plan or reductions in future contributions to the plan. An economic benefit is considered available to TMX Group if it is
realizable during the life of the plan, or on settlement of the plan liabilities, and consideration is given to any minimum funding requirements
that apply to the plan when calculating the present value of these economic benefits. The service cost, which represents the benefits accruing
to the employees, along with the interest cost and the expected return on plan assets, is recognized in the consolidated income statement.
When the benefits of a plan are amended, the portion of the increased benefit relating to past service by employees is recognized in the
consolidated income statement on a straight-line basis over the average period until the benefits become vested. To the extent that the
benefits vest immediately, the expense is recognized immediately in the consolidated income statement.
TMX Group recognizes all actuarial gains and losses arising from defined benefit plans immediately in other comprehensive income.
For defined contribution plans, the expense is charged to the consolidated income statement as it is incurred.
Non-pension post retirement and post employment benefit plans
TMX Group also provides other post retirement and post employment benefits, such as supplementary medical and dental coverage and a
long-term disability plan, which are funded on a cash basis by TMX Group, and contributions from plan members in some circumstances.
TMX Group’s net obligation in respect of these plans is the amount of future benefit that employees have earned in return for their service
in the current and prior periods, discounted to determine its present value. The discount rates used are based on Canadian AA corporate
bond yields. The calculation is performed annually by an actuary based on management’s best estimates and it is performed using the
projected benefit method pro-rated on service. For post retirement plans, any actuarial gains and losses are recognized immediately in other
comprehensive income in the period in which they arise. For the long-term disability plan, actuarial gains and losses are recognized within
compensation and benefits expense in the consolidated income statement.
Termination benefits
Termination benefits are recognized as an expense when TMX Group is committed demonstrably, without realistic possibility of withdrawal, to
a formal detailed plan to terminate employment before retirement.
Short-term employee benefits
Short-term employee benefit obligations, such as wages, salaries and annual vacation entitlements, are measured on an undiscounted basis
and are expensed as the related service is provided.
Notes to Consolidated Financial Statements 73
Notes to the Consolidated Financial Statements
Years ended December 31, 2011 and 2010 (In millions of Canadian dollars, except per share amounts)
A liability is recognized for TMX Group’s annual short-term incentive plan if a present legal or constructive obligation to pay this amount
exists as a result of past service provided by the employee, and the obligation can be estimated reliably.
Share-based payments
TMX Group has both equity-settled and cash-settled share-based compensation plans.
TMX Group accounts for all share-based plans to eligible employees that call for settlement by the issuance of equity instruments 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, using a recognized option pricing model, and amortized over the vesting period. The amount recognized as an expense is
adjusted to reflect the actual number of options expected to vest.
Compensation cost attributable to employee awards that call for settlement in cash is measured at fair value at each reporting date, using a
recognized option pricing model. Changes in fair value between the grant date and the measurement date are recognized in the consolidated
income statement over the vesting period, with a corresponding increase in either current or non-current liabilities, depending on the period
in which the award is expected to be paid.
(i) Income tax:
Income tax expense comprises current and deferred income tax. Income tax expense is recognized in the consolidated income statement
except to the extent that it relates to items recognized directly in equity or in other comprehensive income.
Current income tax is the expected income tax payable or receivable on the taxable income or loss for the period using income tax rates
enacted or substantively enacted at the reporting date in the countries where TMX Group has a permanent establishment and generates
taxable income, and any adjustments to income tax payable in respect of previous years.
Deferred income tax is recognized in respect of certain temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for taxation purposes. Deferred income tax is measured at the income tax rates that are expected to
be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted at the reporting date.
A deferred income tax asset is recognized only to the extent that it is probable that future taxable income will be available against which it can
be utilized. Deferred income tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the
related tax benefit will be realized.
Uncertain income tax positions are recognized in the financial statements using management’s best estimate of the amount expected to be paid.
Current income tax assets and liabilities are offset in the financial statements if there is a legally enforceable right to offset them and they
relate to income taxes levied by the same taxation authority on the same taxable entity, or on different taxable entities but TMX Group intends
to settle them on a net basis or where the income tax assets and liabilities will be realized simultaneously.
(j) Provisions:
A provision is recognized if, as a result of a past event, TMX Group has a present legal or constructive obligation that can be estimated
reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions
are determined by discounting the expected future cash flows at a pre-tax discount rate that reflects current market assessments of the
time value of money and the risks specific to the liability. The unwinding of the discount is recognized as a finance cost. For onerous leases,
TMX Group provides for the lower of the cost of meeting surplus property lease commitments, net of any sub-lease income, and the costs or
penalties it would incur on breaking its lease commitments.
(k) Earnings per share:
Basic earnings per share is computed by dividing net income attributable to the equity holders of the Company by the weighted average
number of common shares outstanding during the reporting period.
Diluted earnings per share is determined by dividing the net income attributable to the equity holders of the Company by the weighted
average number of common shares outstanding, adjusted for the effects of all potential dilutive common shares arising from share options
granted to employees.
Adjusted basic and diluted earnings per share are presented where considered helpful to enable a comparison of the underlying performance
of TMX Group with prior periods.
(l) Segment reporting:
An operating segment is a component of TMX Group that engages in business activities from which it may earn revenues and incur
expenses, including revenues and expenses that relate to transactions with any of TMX Group’s other components. In addition, there are
74 TMX Group Annual Report | 2011
certain corporate costs and/or balances that are not allocated across the group and these are included within the Cash segment. All operating
segments’ operating results are reviewed regularly by the Executive Management Committee (“Executive Committee”) to make decisions
about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available.
(m) Financial instruments:
Non-derivative financial assets
Financial assets are recognized on the trade date at which TMX Group becomes a party to the contractual provisions of the instrument.
Financial assets are generally derecognized when the contractual rights to the cash flows from the assets expire, or when TMX Group transfers
the rights to receive the contractual cash flows on the financial assets to another party without retaining substantially all the risks and
rewards of ownership of the financial assets.
Financial assets and liabilities are offset and the net amount presented in the consolidated balance sheet only when TMX Group has a current
legal right to offset the amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously.
TMX Group classifies its non-derivative financial assets in the following categories, depending on the purpose for which they were acquired:
Financial assets at fair value through profit or loss
Financial assets at fair value through profit or loss are assets classified as held for trading or assets designated as fair value through profit or
loss by management and TMX Group manages the asset, and makes purchase and sale decisions, based on its fair value in accordance with
TMX Group’s documented risk management or investment strategy. Financial assets at fair value through profit or loss are measured at fair
value, with changes recognized in the consolidated income statement. Transaction costs thereon are expensed as incurred.
Loans and receivables
Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are
recognized initially at fair value plus any incremental directly attributable transaction costs. Subsequent to initial recognition, loans and
receivables are measured at amortized cost using the effective interest method, less any impairment losses. Short-term receivables with no
stated interest rate are measured at the original transaction amounts where the effect of discounting is immaterial.
Available for sale financial assets
Available for sale financial assets are non-derivative financial assets that are designated as available for sale or that are not classified in
any of the previous categories. These assets are measured at fair value, both initially and subsequently, with changes in fair value, except
for impairment losses and certain foreign exchange gains and losses, recognized in other comprehensive income until the asset is sold.
Impairment losses are recognized in the consolidated income statement as incurred, as are foreign exchange gains and losses arising on
monetary items. Foreign exchange gains and losses arising on non-monetary items, such as an investment in an equity instrument,
are recognized in other comprehensive income. When an investment is derecognized, the cumulative gain or loss in accumulated other
comprehensive income is reclassified to the consolidated income statement.
Non-derivative financial liabilities
TMX Group initially recognizes its financial liabilities on the trade date at which TMX Group becomes a party to the contractual provisions of
the instrument. TMX Group derecognizes a financial liability when its contractual obligations are discharged, cancelled or expired.
Financial liabilities are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition these
financial liabilities are measured at amortized cost using the effective interest method. Short-term payables with no stated interest rate are
measured at the original transaction amounts where the effect of discounting is immaterial.
Derivative financial instruments
TMX Group holds certain derivative financial instruments which, while providing a partial economic hedge, are not designated as hedges for
accounting purposes. As such, these derivatives are recognized at fair value, both initially and subsequently, with changes in the fair value
recognized in the consolidated income statement.
(n) Cash and cash equivalents:
Cash and cash equivalents consist of cash and liquid investments having an original maturity of three months or less.
Cash and cash equivalents also include restricted cash. MX operates a separate regulatory division, responsible for the approval of
participants and market regulation, which operates on a cost recovery basis. Restricted cash represents the surplus of this regulatory division.
An equivalent and off-setting amount is included in trade and other payables.
Notes to Consolidated Financial Statements 75
Notes to the Consolidated Financial Statements
Years ended December 31, 2011 and 2010 (In millions of Canadian dollars, except per share amounts)
(o) Marketable securities:
Marketable securities consist of pooled fund investments in Canadian money market funds and short-term bond and mortgage funds.
They are carried at their estimated fair values, with changes in fair value being recorded within finance income in the consolidated income
statement in the period in which they occur. Estimated fair values are determined based on quoted market values, and there is no contracted
maturity date for the investments.
(p) Trade and other receivables:
Trade receivables generally have terms of 30 days. The recoverability of the trade receivables is assessed at each reporting date and an
allowance for doubtful accounts is deducted from the asset’s carrying value if the asset is not considered fully recoverable. Any change in the
allowance is recognized within general and administration costs in the consolidated income statement.
(q) Finance income and finance costs:
Finance income comprises interest income on funds invested, and changes in the fair value of marketable securities.
Finance costs comprise interest expense on borrowings and finance leases.
(r) Future accounting changes:
A number of new standards, and amendments to standards and interpretations, are not yet effective for the year ended December 31, 2011,
and have not been applied in preparing the financial statements. In particular, the following new and amended standards and interpretations
are required to be implemented for financial years beginning on or after January 1, 2013, unless otherwise noted:
§
§
§
§
§
§
§
§
§
§
§
IFRS 9, Financial instruments (effective for annual periods beginning on or after January 1, 2015)
IFRS 10, Consolidated financial statements
IFRS 11, Joint arrangements
IFRS 12, Disclosure of interests in other entities
IFRS 13, Fair value measurement
IAS 27, Separate financial statements
IAS 28, Investments in associates and joint ventures
IAS 1, Presentation of financial statements: Presentation of items of other comprehensive income – Amendments requiring the grouping
of items within other comprehensive income (effective for annual periods beginning on or after July 1, 2012)
IFRS 7, Financial instruments – disclosure – Amendments regarding transfers of financial assets (effective for annual periods beginning
on or after July 1, 2011)
IAS 12, Income taxes – Amendments regarding deferred income tax – Recovery of underlying assets (effective for annual periods
beginning on or after January 1, 2012)
IAS 19, Employee benefits – Amendments regarding the recognition of gains and losses, the presentation of changes in assets and
liabilities, and enhanced disclosure requirements
TMX Group is reviewing these new standards and amendments to determine the potential impact on TMX Group’s financial statements once
they are adopted.
3. Segmented information
TMX Group operates in three reportable segments: the Cash Markets (“Cash”) segment, the Derivatives Markets (“Derivatives”) segment,
and the Energy Markets (“Energy”) segment. In the Cash segment, TMX Group owns and operates Canada’s two national stock exchanges,
Toronto Stock Exchange and TSX Venture Exchange, Shorcan, a fixed income inter-dealer broker, The Equicom Group Inc. (“Equicom”), an
investor relations and corporate communications services provider, and Finexeo S.A. (“Finexeo”), which operates TMX Atrium. This segment
also includes certain corporate costs and/or balances not allocated across the group, such as the LSEG and Maple related costs. The Derivatives
segment provides markets for trading derivatives, clearing options and futures contracts and certain over-the-counter (“OTC”) products
through MX and its subsidiaries, including CDCC and BOX. The Energy segment provides a marketplace for the trading and clearing of natural
gas, electricity and crude oil contracts through NGX, and includes the brokering of crude oil contracts through Shorcan Energy Brokers Inc.
(“Shorcan Energy Brokers”), a wholly-owned subsidiary of Shorcan.
76 TMX Group Annual Report | 2011
TMX Group’s Executive Committee reviews internal management reports on a regular basis and performance is measured based on revenue,
income from operations and net income attributable to equity holders of the Company.
The accounting policies of the reportable segments are consistent with the accounting policies described in note 2.
Year ended December 31*
2011
Revenue:
Issuer services
Trading, clearing and related
Information services
Technology services and other
Total revenue
Depreciation and amortization
Other operating expenses
Income from operations
LSEG and Maple related costs (note 6)
Other income/costs, including income tax
expense and net income attributable to
non-controlling interests
Net income attributable to equity holders
of the Company
Additions to premises and equipment
and intangible assets
2010
Revenue:
Issuer services
Trading, clearing and related
Information services
Technology services and other
Total revenue
Depreciation and amortization
Other operating expenses
Income from operations
LSEG and Maple related costs (note 6)
Other income/costs, including income tax
expense and net income attributable to
non-controlling interests
Net income attributable to equity holders
of the Company
Cash
Derivatives
Energy
Total
$
$
230.5
105.5
148.6
11.5
496.1
13.1
178.8
304.2
37.2
$
–
112.7
16.2
3.9
132.8
11.9
68.4
52.5
–
78.5
14.8
$
–
44.4
0.3
(0.1)
44.6
3.1
26.2
15.3
–
4.0
230.5
262.6
165.1
15.3
673.5
28.1
273.4
372.0
37.2
97.3
$
188.5
$
37.7
$
11.3
$
237.5
$
14.9
$
10.1
$
1.6
$
26.6
$
$
213.1
113.1
138.5
10.6
475.3
12.8
171.5
291.0
–
$
–
83.7
15.3
5.3
104.3
13.7
60.1
30.5
–
92.0
4.2
$
–
45.4
0.6
–
46.0
2.9
25.6
17.5
–
5.1
213.1
242.2
154.4
15.9
625.6
29.4
257.2
339.0
–
101.3
$
199.0
$
26.3
$
12.4
$
237.7
Additions to premises and equipment
and intangible assets
* Includes results from dates of acquisitions in the year.
$
12.7
$
7.7
$
2.1
$
22.5
As at December 31
2011
Investments in equity accounted investees
Total assets
Total liabilities
2010
Investments in equity accounted investees
Total assets
Total liabilities
Cash
Derivatives
Energy
Total
$
$
$
$
16.3
582.8
557.0
14.2
484.9
534.9
$
$
–
1,854.0
784.4
–
1,439.1
415.0
$
$
–
958.0
831.4
–
1,041.8
926.5
16.3
3,394.8
2,172.8
14.2
2,965.8
1,876.4
Notes to Consolidated Financial Statements 77
Notes to the Consolidated Financial Statements
Years ended December 31, 2011 and 2010 (In millions of Canadian dollars, except per share amounts)
TMX Group’s geographical information is as follows:
For the year ended December 31,
Revenue
Canada
US
Other
Revenue is allocated based on the country to which customer invoices are addressed.
As at December 31,
Non-current assets*
Canada
US
Other
2011
490.8
143.3
39.4
673.5
2011
1,345.4
51.7
0.5
1,397.6
$
$
$
$
* Non-current assets above are primarily comprised of premises and equipment, investments in equity accounted investees, goodwill and other
intangible assets.
* 2010 comparative geographical information is not available.
4. Finance income and finance costs
For the years ended December 31,
Finance income
Interest income on funds invested
Fair value gains (losses) on marketable securities:
– realized
– unrealized
Finance costs
Interest expense on borrowings, including amortization of financing fees
Interest expense on finance leases
Net mark to market on interest rate swaps
2011
2010
$
8.8
$
0.6
0.7
10.1
(9.4)
(0.1)
(9.5)
(0.1)
5.2
0.7
(0.7)
5.2
(5.9)
(0.1)
(6.0)
(0.2)
Net finance income (costs)
$
0.5
$
(1.0)
5. Earnings per share
For the years ended December 31,
Net income attributable to the equity holders of the Company
$
2011
237.5
$
2010
237.7
Weighted average number of common shares outstanding – basic
Effect of dilutive share options
Weighted average number of common shares outstanding – diluted
Basic earnings per share
Diluted earnings per share
74,575,962
256,965
74,832,927
74,331,877
79,123
74,411,000
$
$
3.18
3.17
$
$
3.20
3.19
78 TMX Group Annual Report | 2011
Adjusted earnings per share
For the years ended December 31,
Net income attributable to the equity holders of the Company
Adjustments:
– LSEG and Maple related costs (note 6)
– Income tax effect on LSEG and Maple related costs
– Commodity tax adjustment (note 7)
– Income tax effect on commodity tax adjustment
– Impairment of available for sale investment
– Income tax effect on impairment of available for sale investment
Adjusted net income attributable to the equity holders of the Company
Adjusted basic earnings per share
Adjusted diluted earnings per share
$
2011
237.5
$
2010
237.7
37.2
(9.4)
2.9
(0.8)
–
–
267.4
$
3.58
3.57
$
$
–
–
–
–
1.7
(0.1)
239.3
3.22
3.21
$
$
$
Adjusted earnings per share exclude LSEG and Maple related costs, a commodity tax adjustment relating to prior years and an impairment
charge related to an available for sale investment, along with their income tax effect. This measure is presented to enable a comparison of the
underlying business with prior periods.
6. London Stock Exchange Group plc (“LSEG”) and Maple Group Acquisition
Corporation (“Maple”) related costs
On February 9, 2011, TMX Group announced an agreement to combine its operations with LSEG in an all-share merger. On June 29, 2011,
TMX Group agreed with LSEG to terminate their merger agreement.
On October 30, 2011, TMX Group announced that it had entered into a support agreement with Maple regarding Maple’s proposed acquisition
of all of the outstanding shares of TMX Group pursuant to an integrated two-step transaction valued at approximately $3.8 billion.
The Maple offer was originally open for acceptance until August 8, 2011, but has since been extended to February 29, 2012. Maple or TMX
Group may terminate the support agreement if the Maple offer has not been completed by February 29, 2012, provided that this outside
date may be extended to April 30, 2012, in order to obtain the required regulatory approvals. The transaction remains subject to a number of
conditions and regulatory approvals.
During 2011, TMX Group incurred costs of $37.2 in relation to these proposed transactions, which are reflected in the consolidated income
statement (2010 – $nil). The costs for the year ended December 31, 2011, include a $10.0 expense fee that TMX Group paid LSEG following the
termination of the LSEG merger agreement.
A further $29.0 is payable to LSEG if Maple’s proposed acquisition is consummated as contemplated in the support agreement. This $29.0 fee
has not been accrued for in the financial statements.
TMX Group is liable for the payment of success fees of approximately $19.0 which are contingent upon the successful completion of the Maple
transaction. These fees have not been accrued for in the financial statements.
7. Commodity tax adjustment
TMX Group has submitted ruling requests to the Canada Revenue Agency (“CRA”) and Revenu Québec (“RQ”) relating to the application of
Harmonized Sales Tax and Goods and Services Tax (collectively, “HST”) and Québec Sales Tax (“QST”), imposed under section 165 of the Excise
Tax Act and section 16 of the Act respecting the Québec sales tax respectively, on its trade execution fees on equities and derivatives. Effective
February 2011, TMX Group stopped charging HST/QST on its trade execution fees for both Toronto Stock Exchange and TSX Venture Exchange.
Effective August 2011, TMX Group stopped charging HST/QST on its trade execution fees for the Montréal Exchange. On July 11, 2011, TMX
Select Inc. (“TMX Select”) was successfully launched to the marketplace. TMX Select has also submitted a ruling request to the CRA and to RQ
and as such does not charge HST/QST on any of its trade execution fees. TMX Group is confident that the ruling requests will be approved, and
as such, has not provided for HST/QST not charged to customers in 2011.
If the ruling requests are approved, TMX Group may be required to repay to the taxation authorities the input tax credits for HST (“ITC”)
claimed prior to February 2011 on the affected businesses. TMX Group firmly believes that the liability related to these ITCs should be $nil;
however, a repayment of up to four years of ITCs previously claimed may be required. As a result, TMX Group has estimated the range of
possible outcomes to be between $nil and $6.0. A provision of $2.9 was recorded in the year ended December 31, 2011, and the cost is included
within general and administration expenses in the consolidated income statement.
Notes to Consolidated Financial Statements 79
Notes to the Consolidated Financial Statements
Years ended December 31, 2011 and 2010 (In millions of Canadian dollars, except per share amounts)
TMX Group has not yet amended its 2011 ITC claims to reflect the changes in tax treatment, and as such a provision of $4.5 was recorded in
the year ended December 31, 2011, for 2011 ITCs over-claimed.
Future estimates may be different and a change in the provision may be required.
8. Cash and cash equivalents and marketable securities
Cash and cash equivalents and marketable securities are comprised of:
Cash
Bankers’ acceptances
Overnight money market
Treasury bills
Restricted cash
Cash and cash equivalents
Money market funds
Bonds and bond funds
Marketable securities
December 31, 2011
46.3
$
1.8
36.6
0.5
2.0
87.2
$
December 31, 2010
24.3
$
1.8
42.0
0.7
1.1
69.9
$
January 1, 2010
49.9
1.8
34.3
2.0
0.9
88.9
$
$
$
$
206.8
196.4
403.2
$
$
148.4
113.2
261.6
$
$
30.6
72.6
103.2
Restricted cash represents the surplus of the regulatory division operated by MX. An equivalent and off-setting amount is included in trade
and other payables.
TMX Group’s exposure to interest rate risk and a sensitivity analysis for marketable securities is discussed in note 26.
9. Trade and other receivables
Trade and other receivables are comprised of:
Trade receivables, gross
Less: Allowance for doubtful accounts
Trade receivables, net
Other receivables
Trade and other receivables
December 31, 2011
79.9
$
(7.4)
72.5
6.5
79.0
$
December 31, 2010
90.7
$
(8.1)
82.6
7.1
89.7
$
January 1, 2010
84.5
(8.5)
76.0
3.4
79.4
$
$
Trade and other receivables are regularly reviewed for objective evidence of impairment.
Trade receivables that are more than three months past due are considered to be impaired, and an allowance, which varies depending on
the age of the receivable, is recorded within general and administration costs. Other specific trade receivables are also provided against as
considered necessary.
The aging of the trade receivables was as follows:
Not due
Past due 0-90 days
More than 90 days
Trade receivables
$
$
$
As at December 31, 2011
Allowance
Gross
0.2
56.0
1.4
15.4
5.8
8.5
7.4
79.9
$
$
$
$
As at December 31, 2010
Allowance
Gross
0.1
58.1
0.6
21.6
7.4
11.0
8.1
90.7
$
$
$
Gross
43.0
28.7
12.8
84.5
$
January 1, 2010
Allowance
0.3
1.2
7.0
8.5
$
The movement in TMX Group’s allowance for doubtful accounts is as follows:
Balance as at January 1
Allowance recognized in the year, net of allowance released as not required
Receivables written off as uncollectible
Balance as at December 31
No allowance for impairment is considered necessary for other receivables.
80 TMX Group Annual Report | 2011
$
$
2011
8.1
1.5
(2.2)
7.4
$
$
2010
8.5
2.5
(2.9)
8.1
10. Premises and equipment
Premises and equipment are comprised of:
Computers and
electronic trading
equipment
Computers and
electronic trading
equipment under
finance leases
Furniture,
fixtures and
other equipment
Leasehold
improvements
$
Cost:
Balance at January 1, 2010
Additions
Disposals
Effect of movements in
exchange rates
Balance at December 31, 2010
Additions
Acquired through business
combinations
Effect of movements in
exchange rates
Balance at December 31, 2011
$
$
Accumulated depreciation:
Balance at January 1, 2010
Charge for the year
Disposals
Effect of movements in
exchange rates
Balance at December 31, 2010
Charge for the year
Effect of movements in
exchange rates
Balance at December 31, 2011
$
58.5
7.7
(1.8)
(0.7)
63.7
5.5
0.1
0.3
69.6
47.5
5.9
(1.8)
(0.6)
51.0
4.6
0.2
55.8
$
$
$
$
2.4
1.2
(0.8)
–
2.8
0.1
–
–
2.9
0.6
0.9
(0.5)
–
1.0
0.7
–
1.7
$
$
$
$
16.4
0.3
–
–
16.7
0.7
0.6
(0.1)
17.9
15.3
0.4
–
–
15.7
0.6
(0.1)
16.2
$
$
$
$
48.6
5.3
(0.3)
–
53.6
2.5
–
–
56.1
38.1
2.9
(0.3)
–
40.7
2.6
–
43.3
$
$
$
$
Net book values:
At December 31, 2011
At December 31, 2010
At January 1, 2010
$
$
$
13.8
12.7
11.0
$
$
$
1.2
1.8
1.8
$
$
$
1.7
1.0
1.1
$
$
$
12.8
12.9
10.5
$
$
$
Total
125.9
14.5
(2.9)
(0.7)
136.8
8.8
0.7
0.2
146.5
101.5
10.1
(2.6)
(0.6)
108.4
8.5
0.1
117.0
29.5
28.4
24.4
11. Investment in equity accounted investees
Investment in CanDeal.ca Inc
Other
Investments in equity accounted investees
December 31, 2011
15.4
$
0.9
16.3
$
December 31, 2010
14.2
$
–
14.2
$
January 1, 2010
12.8
–
12.8
$
$
As at December 31, 2011, TMX Group owns a 47% equity interest in CanDeal.ca Inc. (“CanDeal”) (2010 – 47%), an electronic trading system for
the institutional debt market. The investment is accounted for using the equity method.
Summary financial information, not adjusted for the percentage ownership held by TMX Group, is as follows:
Assets
Liabilities
Revenue
Net income
December 31, 2011
17.9
$
1.9
12.2
2.6
December 31, 2010
15.3
$
1.9
10.9
3.9
$
January 1, 2010
11.2
1.7
9.1
1.2
Notes to Consolidated Financial Statements 81
Notes to the Consolidated Financial Statements
Years ended December 31, 2011 and 2010 (In millions of Canadian dollars, except per share amounts)
CanDeal is subject to regulation by the Investment Industry Regulatory Organization of Canada (“IIROC”). Under the rules prescribed by
IIROC, CanDeal is required to maintain prescribed/minimum levels of risk-adjusted capital, which could restrict its ability to transfer funds
to the Company.
In 2011, TMX Group remitted to CanDeal $1.2 (2010 – $0.6) as part of a revenue sharing arrangement.
12. Goodwill and intangible assets
a) Goodwill:
A summary of the changes in goodwill is as follows:
Balance as at January 1
Additions
Effect of movements in exchange rates
Balance as at December 31
b) Intangible assets – indefinite life:
There were no changes in TMX Group’s indefinite life intangible assets during 2011 or 2010:
Derivative products
Trade names
Regulatory designation
Crude oil products
Index licenses
Balance as at January 1 and December 31
$
$
$
$
2011
421.3
11.5
–
432.8
$
$
2011
630.9
28.2
2.0
14.9
1.9
677.9
$
$
2010
422.5
–
(1.2)
421.3
2010
630.9
28.2
2.0
14.9
1.9
677.9
These assets are considered to have indefinite lives as management believes that there is no foreseeable limit to the period over which the
assets are expected to generate net cash flows.
82 TMX Group Annual Report | 2011
c) Intangible assets – definite life:
A summary of TMX Group’s definite life intangible assets is as follows:
Capitalized
software and
software
development
Customer bases
Data licenses
$
$
$
$
$
$
$
40.4
9.7
(0.7)
(2.1)
47.3
17.8
0.1
–
0.6
65.8
8.3
9.0
(0.7)
(0.8)
15.8
10.5
–
0.4
26.7
$
$
$
$
267.7
–
–
(2.0)
265.7
–
–
(2.4)
0.8
264.1
50.2
9.6
–
(1.0)
58.8
8.4
(2.4)
0.4
65.2
$
$
$
$
6.5
–
–
–
6.5
–
–
–
–
6.5
2.0
0.7
–
–
2.7
0.7
–
–
3.4
$
$
$
$
39.1
31.5
32.1
$
$
$
198.9
206.9
217.5
$
$
$
3.1
3.8
4.5
$
$
$
Total
314.6
9.7
(0.7)
(4.1)
319.5
17.8
0.1
(2.4)
1.4
336.4
60.5
19.3
(0.7)
(1.8)
77.3
19.6
(2.4)
0.8
95.3
241.1
242.2
254.1
Cost:
Balance at January 1, 2010
Additions
Disposals
Effect of movements in exchange rates
Balance at December 31, 2010
Additions
Acquired through business combinations
Written off as fully amortized
Effect of movements in exchange rates
Balance at December 31, 2011
Accumulated amortization:
Balance at January 1, 2010
Charge for the year
Disposals
Effect of movements in exchange rates
Balance at December 31, 2010
Charge for the year
Written-off as fully amortized
Effect of movements in exchange rates
Balance at December 31, 2011
Net book values:
At December 31, 2011
At December 31, 2010
At January 1, 2010
d) Impairment testing:
Goodwill and indefinite life intangible assets:
For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that
generates cash inflows from continuous use and that are largely independent of the cash inflows of other assets or groups of assets. The
carrying values of goodwill and indefinite life intangible assets allocated to each CGU are as follows:
December 31, 2011
December 31, 2010
January 1, 2010
CGU
MX
Other
Goodwill
236.9
195.9
432.8
$
$
Indefinite life
intangibles
661.1
16.8
677.9
$
$
Goodwill
236.9
184.4
421.3
$
$
Indefinite life
intangibles
661.1
16.8
677.9
$
$
Goodwill
236.9
185.6
422.5
$
$
Indefinite life
intangibles
661.1
16.8
677.9
$
$
The recoverable amounts of the above CGUs were determined based on value-in-use calculations, using management’s discounted cash flow
projections over periods of five to eight years, depending on the CGU, along with a terminal value. Specifically for MX, a cash flow projection
period of eight years was used, which is consistent with the original acquisition economics, and reflects the stage of its product life cycle with
significant long-term growth potential remaining beyond a five year forecast.
The terminal value is the value attributed to the CGUs operations beyond the projected time period. The terminal value for MX was determined
using an estimated long-term growth rate of 4.5% (2010 – 4.5%), which is based on TMX Group’s estimates of expected future operating
results, future business plans, economic conditions and a general outlook for the industry in which the CGU operates.
Notes to Consolidated Financial Statements 83
Notes to the Consolidated Financial Statements
Years ended December 31, 2011 and 2010 (In millions of Canadian dollars, except per share amounts)
In calculating the recoverable amount of these CGUs, a pre-tax discount rate is used. The pre-tax discount rate applied to MX was 11.9%
(2010 – 11.9%), which was set considering the weighted average cost of capital of TMX Group and certain risk premiums, based on
management’s past experience.
No impairment was identified as a result of the tests discussed above for 2011 or 2010.
As at December 31, 2011, management believes that the goodwill and indefinite life intangibles allocated to the MX CGU are unlikely to be
impaired under any reasonable changes in the key assumptions used.
Definite life intangible assets:
At the end of each reporting period, TMX Group assesses whether there is any indication that any of its definite life intangible assets may be
impaired, and performs an impairment analysis where indicators are noted.
An impairment loss is recognized when the carrying amount of an asset exceeds its recoverable amount, which is the higher of the asset’s fair
value less costs to sell and its value-in-use. Where impairment tests were necessary on certain definite life intangibles, TMX Group determined
the recoverable amounts based on value-in-use calculations, which used discounted cash flow projections for the assets over periods of 18 to
26 years, depending on the CGU.
The future cash flows were estimated using long-term growth rates of 3.5% to 5.0% (2010 – 3.5% to 3.8%) which are based on TMX Group’s
estimates of expected future operating results, future business plans, economic conditions and a general outlook for the industry in which the
CGU operates.
Pre-tax discount rates of 15.5% to 24.4% (2010 – 18.3% to 18.8%) were used in calculating the recoverable amount of each asset, which was
set considering the weighted average cost of capital of TMX Group and certain risk premiums, based on management’s past experience.
No impairment was identified as a result of the tests discussed above for 2011 or 2010.
The definite life intangible assets include $28.7 relating to the crude oil customer list recognized as part of the acquisition of NTP in 2009.
This asset was tested as part of the 2011 impairment review process using a value-in-use calculation, and was found not to be impaired.
The calculation is sensitive to changes in the key assumptions used and the impact of such changes is shown below:
NTP customer list
Impact on value-in-use
10% reduction
in cash flows
(3.3)
$
1% reduction in
long-term
growth rate
(0.7)
$
1% increase in
pre-tax
discount rate
(1.6)
$
The tests referred to above for goodwill and intangible assets require TMX Group to make various assumptions regarding projected cash flows,
including long-term growth rates, and pre-tax discount rates for the various CGUs and definite life intangible assets. These assumptions are
subjective judgements based on TMX Group’s experience, knowledge of operations and knowledge of the economic environment in which
it operates. It is possible that, if future cash flow projections, long-term growth rates or pre-tax discount rates are different to those used,
the outcome of future impairment tests could result in a different outcome with a CGU’s goodwill and/or intangible assets being impaired.
13. Other non-current assets
Accrued employee benefit assets (note14)
Available for sale investments
Other
Other non-current assets
14. Employee future benefits
December 31, 2011
7.6
$
1.4
–
9.0
$
December 31, 2010
9.5
$
6.6
0.2
16.3
$
January 1, 2010
12.7
8.3
0.2
21.2
$
$
a) Defined contribution plans:
The total expense recognized in respect of TMX Group’s defined contribution plans for the year ended December 31, 2011, was $4.3 (2010 –
$4.1), which represents the employer contributions for the period.
84 TMX Group Annual Report | 2011
b) Defined benefit plans:
TMX Group measures the present value of its defined benefit obligations and the fair value of plan assets for accounting purposes as at the
balance sheet date of each fiscal year. The most recent actuarial valuation of the registered pension plans for funding purposes was as at
December 31, 2009, and the next required valuation is as at December 31, 2012. For the RCA plan, the most recent actuarial valuation for
funding purposes was as at December 31, 2010, and the next required valuation is as at December 31, 2011.
The accrued benefit assets and accrued benefit obligations related to TMX Group’s defined benefit pension and non-pension post-retirement
plans are included in TMX Group’s consolidated balance sheet as follows:
As at December 31,
Other non-current assets
Accrued employee benefits payable
Pension and RCA plans
Other benefit plans
$
$
2011
7.6
(3.2)
4.4
$
$
2010
9.5
(1.9)
7.6
$
$
2011
–
(9.4)
(9.4)
$
$
2010
–
(9.0)
(9.0)
Accrued employee benefits payable on the consolidated balance sheet also includes the obligation under the post employment benefit plan of
$1.4 (2010 – $1.2).
Pension and RCA plans
Other benefit plans
As at December 31
Accrued benefit obligation:
Balance, beginning of year
Current service cost
Interest cost
Benefits paid
Employee contributions
Actuarial losses (gains)
Reduction in obligation due to settlement
Balance, end of year
Plan assets:
Fair value, beginning of year
Expected return on plan assets
Actuarial gains (losses)
Employer contributions
Employee contributions
Benefits paid
Reduction in assets due to settlement
Fair value, end of year
Funded status of wholly or partly funded obligations
Present value of unfunded obligations
Total funded status of obligations
Unrecognized past service benefits
$
$
$
$
$
$
$
$
$
$
2011
65.1
2.2
3.8
(2.7)
0.2
3.6
(0.2)
72.0
72.7
3.7
(1.1)
3.9
0.2
(2.7)
(0.3)
76.4
6.0
(1.6)
4.4
–
$
$
$
$
$
2010
53.8
2.0
3.6
(2.8)
0.2
8.3
–
65.1
64.9
3.5
2.7
4.1
0.2
(2.7)
–
72.7
9.1
(1.5)
7.6
–
2011
2010
$
$
$
$
$
7.7
0.4
0.4
(0.3)
–
0.4
–
8.6
–
–
–
0.3
–
(0.3)
–
–
–
(8.6)
(8.6)
(0.8)
6.6
0.3
0.4
(0.2)
–
0.6
–
7.7
–
–
–
0.2
–
(0.2)
–
–
–
(7.7)
(7.7)
(1.3)
Accrued benefit asset (liability)
$
4.4
$
7.6
$
(9.4)
$
(9.0)
Plan assets consist of:
Asset category
Equity securities
Debt securities
Other
December 31, 2011
47%
39%
14%
100%
Percentage of plan assets
December 31, 2010
51%
36%
13%
100%
January 1, 2010
50%
35%
15%
100%
The plan assets include units held in a pooled fund investment which holds shares in TMX Group Inc. as at and for the years ended
December 31, 2011 and 2010.
Notes to Consolidated Financial Statements 85
Notes to the Consolidated Financial Statements
Years ended December 31, 2011 and 2010 (In millions of Canadian dollars, except per share amounts)
The elements of TMX Group’s defined benefit plan costs recognized in the year are as follows. The full cost is recognized within compensation
and benefits in the consolidated income statement.
For the years ended December 31
Current service cost
Interest cost
Expected return on plan assets
Amortization of past service costs
Settlement loss recognized
Net benefit plan expense
Pension and RCA plans
Other benefit plans
2011
2.2
3.8
(3.7)
–
0.1
2.4
$
$
2010
2.0
3.6
(3.5)
–
–
2.1
$
$
2011
0.4
0.4
–
(0.5)
–
0.3
$
$
2010
0.3
0.4
–
(0.4)
–
0.3
$
$
TMX Group recognizes experience adjustments and the effects of changes in actuarial assumptions immediately in other comprehensive
income. The aggregate actuarial gains and losses and effects of asset limits recognized in other comprehensive income are as follows:
At January 1
Net actuarial losses recognized in the year
At December 31
Pension and RCA plans
Other benefit plans
$
$
2011
(5.5)
(4.7)
(10.2)
$
$
2010
–
(5.5)
(5.5)
$
$
2011
(0.6)
(0.4)
(1.0)
$
$
2010
–
(0.6)
(0.6)
TMX Group has applied the IFRS 1 exemption with regards to disclosure of four years of historical data relating to its defined benefit plans;
such information will be provided as it becomes available. Required historical information for the plans is as follows:
Pension and RCA plans
Other benefit plans
Present value of defined benefit obligations
Fair value of plan assets
Surplus (deficit)
Experience adjustments arising on plan assets
Experience gain (loss) arising on plan obligations
$
$
$
$
2011
(72.0)
76.4
4.4
$
$
2010
(65.1)
72.7
7.6
January 1,
2010
(53.8)
64.9
11.1
$
$
2011
(8.6)
–
(8.6)
$
$
2010
(7.7)
–
(7.7)
$
$
January 1,
2010
(6.6)
–
(6.6)
$
$
(1.1)
(0.7)
$
$
2.7
(1.1)
n/a
n/a
$
n/a
(0.4)
$
n/a
(0.6)
n/a
n/a
The significant actuarial assumptions adopted in measuring the obligation are as follows (weighted average):
As at December 31
Discount rate
Rate of compensation increase
Expected long-term rate of return on plan assets
Pension and RCA plans
Other benefit plans
2011
5.30%
3.75%
5.25%
2010
5.70%
4.00%
5.80%
2011
5.30%
3.75%
n/a
2010
5.70%
4.00%
n/a
To develop the expected long-term rate of return on assets assumption, TMX Group considered the current level of expected returns on risk
free investments (primarily government bonds), the historical level of the risk premium associated with the other asset classes in which the
portfolio is invested and the expectations for future returns of each asset class. The expected return for each asset class was then weighted
based on the target asset allocation to develop the expected long-term rate of return on assets. Assumptions regarding mortality rates are
based on published statistics and mortality tables. The mortality tables used in 2011 for the pension and RCA plans was UP1994 Uninsured
Pensioners Mortality Table, with generational improvements for all other results (2010 – UP1994 Uninsured Pensioners Mortality Table) and for
other benefit plans was UP1994 Fully Generational Table (2010 – UP1994 Fully Generational Table).
The assumed health care cost trend rate at December 31, 2011 was 7.1% (2010 – 7.2%), decreasing to 4.5% (2010 – 4.5%) over 18 years
(19 years in 2010).
Increasing or decreasing the assumed health care cost trend rates by one percentage point would have the following effects for 2011:
Total of service and interest cost
Accrued benefit obligation
86 TMX Group Annual Report | 2011
Increase
–
0.6
$
$
Decrease
–
(0.5)
$
$
MX has provided a letter of guarantee in the amount of $0.7 to the benefit of the trustee of the MX supplementary pension plan, using a part
of the operating line of credit in place with its bank (note 15).
TMX Group expects to contribute approximately $2.0 to its registered pension plan in 2012. Amounts to be contributed to the RCA will be
determined by management once the valuations have been prepared.
15. Credit facilities
TMX Group has the following credit facilities:
TMX Group Inc. non-revolving three year term facility
MX operating line of credit
CDCC revolving standby credit facility
CDCC daylight liquidity facility
CDCC call loan facility
NGX letter of credit
NGX overdraft facility
NGX EFT daylight facility
Total credit facilities
Interest rate
30 day B.A. + 85 bps
–
–
–
–
–
–
–
Year of maturity
2012
N/A
N/A
N/A
N/A
N/A
N/A
N/A
$
US$
Authorized
430.0
3.0
50.0
300.0
50.0
100.0
20.0
300.0
Amount drawn at
December 31, 2011
430.0
$
–
–
–
–
–
–
–
430.0
$
On December 16, 2011, TMX Group extended and amended its $430.0 credit facility. The facility will now expire on June 29, 2012. Until April 18,
2011, the credit facility attracted interest at Bankers’ Acceptances (“BAs”) plus 45 basis points. After that date, interest was charged at BAs
plus 85 basis points. TMX Group prepaid $0.9 of financing fees during 2011, which are amortized over the life of the loan. The facility remains
unsecured and continues to include certain covenants that TMX Group must maintain (note 27). TMX Group was in compliance with these
covenants at December 31, 2011.
In 2011, CDCC arranged new credit facilities. A $300.0 daylight liquidity facility and a $50.0 call loan facility were signed during the year with a
Canadian Schedule 1 bank. CDCC has not drawn on either facility.
In addition, in January 2012, CDCC increased its standby credit facility from $50.0 to $100.0, signed an additional daylight facility for $400.0
with a Canadian Schedule 1 bank and closed the $50.0 call loan facility. These facilities were put in place in relation to the launch of CDCC’s
repo clearing business, scheduled for 2012.
MX has an outstanding letter of guarantee for $0.7 issued against the MX operating line of credit. This letter of guarantee has been issued as a
guarantee to the trustee under the MX supplementary pension plan in respect of accrued future employee benefits.
During 2011, TMX Group recognized interest expense on the facilities of $9.4 (2010 – $5.9) which included $0.9 (2010 – $0.7) of amortized
financing fees.
16. Trade and other payables
Trade and other payables are comprised of:
Trade payables
Sales taxes payable
Employee and director costs payable
Accrued expenses
Obligation under finance leases
Other payables
Trade and other payables
December 31, 2011
10.9
$
5.6
42.4
14.8
0.8
7.2
81.7
$
December 31, 2010
6.2
$
4.7
30.8
12.2
0.7
4.0
58.6
$
January 1, 2010
4.1
2.7
25.0
8.1
0.7
3.3
43.9
$
$
The fair value of trade and other payables is approximately equal to their carrying amount given their short term until settlement.
Notes to Consolidated Financial Statements 87
Notes to the Consolidated Financial Statements
Years ended December 31, 2011 and 2010 (In millions of Canadian dollars, except per share amounts)
17. Provisions
A summary of TMX Group’s provisions is as follows:
Depreciation
Balance at January 1, 2010
Provisions recognized during the period
Provisions used or reversed during
the period
Balance at December 31, 2010
Current
Non-current
Balance at December 31, 2010
Provisions recognized during the period
Provisions used or reversed during
the period
Balance at December 31, 2011
Current
Non-current
Balance at December 31, 2011
Onerous leases
0.9
$
0.5
Decommissioning
liabilities
1.7
0.5
$
Commodity tax
provision
(note 7)
–
–
$
$
$
$
$
(0.9)
0.5
0.4
0.1
0.5
0.1
(0.4)
0.2
0.1
0.1
0.2
$
$
$
$
(0.2)
2.0
–
2.0
2.0
0.1
(0.1)
2.0
–
2.0
2.0
$
$
$
$
–
–
–
–
–
7.4
–
7.4
7.4
–
7.4
Other
0.7
–
(0.7)
–
–
–
–
–
–
–
–
–
–
$
$
$
$
$
$
$
$
$
$
Total
3.3
1.0
(1.8)
2.5
0.4
2.1
2.5
7.6
(0.5)
9.6
7.5
2.1
9.6
18. Deferred revenue
Current deferred revenue
Cash segment
Energy segment
Derivatives segment
Long-term deferred revenue
Energy segment
December 31, 2011
December 31, 2010
January 1, 2010
$
$
13.8
5.6
–
19.4
0.7
$
13.3
5.4
–
18.7
1.0
10.0
5.0
0.1
15.1
0.9
$
20.1
$
19.7
$
16.0
Deferred revenue related to the cash segment includes initial and additional listing fees for TSX Venture Exchange, which are paid in advance of
the services being provided and which are deferred until the point at which the listing occurs and the service is completed. The cash segment
also includes deferred revenue arising from annual information service subscriptions paid throughout the year and deferred over a twelve
month period.
Energy segment deferred revenue relates to NGX, which recognizes trading, clearing and related revenue over the trade, delivery and
settlement months of each transaction.
Long-term deferred revenue is included within other non-current liabilities on the consolidated balance sheet.
19. Commitments and finance lease obligations
TMX Group is committed under long-term leases and licenses as follows:
(a)
The rental of office space, under various long-term operating leases with remaining terms of up to 10 years, including certain asset
retirement obligations with regards to these leases.
(b) The rental of computer hardware and software for remaining terms of one to three years under operating leases.
(c)
The rental of computer hardware and software for remaining terms of one to two years under finance leases.
(d) Certain data licenses for remaining terms of up to five years.
88 TMX Group Annual Report | 2011
Non-cancellable operating lease rentals are payable as follows:
Less than one year
Between one and five years
More than five years
December 31, 2011
15.4
$
37.4
17.1
69.9
$
December 31, 2010
17.6
$
38.6
19.5
75.7
$
January 1, 2010
24.9
47.5
18.3
90.7
$
$
The figures above do not include the Company’s obligations to restore certain leased premises to their original condition (note 17).
In addition, TMX Group is responsible for additional taxes, maintenance and other direct charges with respect to its leases. The additional
amount will be approximately $9.4 for 2012.
TMX Group has entered into sub-lease agreements with third parties for the rental of office space, and rentals receivable from these sub-leases
are as follows:
Less than one year
Between one and five years
More than five years
December 31, 2011
1.0
$
3.8
1.2
6.0
$
December 31, 2010
1.0
$
3.8
2.1
6.9
$
January 1, 2010
1.0
3.8
3.1
7.9
$
$
Payments of $27.3 (2010 – $31.7) were charged to the consolidated income statement in 2011 in relation to operating leases, net of
sub-lease income.
Finance lease liabilities that are payable in less than one year are included in trade and other payables and the remaining liabilities are included
in other non-current liabilities. Finance lease liabilities are payable as follows:
December 31, 2011
December 31, 2010
January 1, 2010
Future
minimum
lease
payments
Interest
Present
value of
minimum
lease
payments
Future
minimum
lease
payments
Present
value of
minimum
lease
payments
Future
minimum
lease
payments
Present
value of
minimum
lease
payments
Interest
Interest
$
0.9
$
0.1
$
0.8
$
0.8
$
0.1
$
0.7
$
0.9
$
0.2
$
0.7
0.3
1.2
$
–
0.1
$
0.3
1.1
$
1.2
2.0
$
0.1
0.2
$
1.1
1.8
$
1.2
2.1
$
0.1
0.3
$
1.1
1.8
$
Less than
one year
Between
one and
five years
The fair value of the finance lease liabilities is approximately equal to their carrying amount.
On November 29, 2011, TMX Group entered into a Takeover Bid Implementation Agreement with Razor Risk Technologies Limited (“Razor”), a
company listed on the Australian Stock Exchange. Pursuant to this agreement, TMX Australia Pty Ltd, a wholly-owned subsidiary of TMX Group,
made a takeover bid for all the issued shares of Razor on December 14, 2011, for consideration of approximately AUD $10.0 and the bid
remained open as at December 31, 2011.
20. Other non-current liabilities
Long-term incentive plan and director compensation obligations (note 22)
Obligation under finance leases (note 19)
Provisions (note 17)
Deferred revenue (note 18)
Data license payable
Other
Other non-current liabilities
December 31, 2011
22.4
$
0.3
2.1
0.7
2.5
2.5
30.5
$
December 31, 2010
15.2
$
1.1
2.1
1.0
3.1
2.9
25.4
$
January 1, 2010
12.8
1.1
2.1
0.9
3.8
3.0
23.7
$
$
Notes to Consolidated Financial Statements 89
Notes to the Consolidated Financial Statements
Years ended December 31, 2011 and 2010 (In millions of Canadian dollars, except per share amounts)
21. Share capital
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 (“OSC”) and Quebec’s Autorité des marchés financiers (“AMF”).
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.
The following transactions occurred with respect to the Company’s common shares during the period:
Balance, beginning of year
Options exercised
Balance, end of year
Number of common shares
issued and fully paid
2011
74,370,470
269,563
74,640,033
2010
74,307,049
63,421
74,370,470
$
$
22. Share-based payments
At December 31, 2011, TMX Group had the following share-based payment arrangements:
a)
Share option plan
b)
Restricted share units
c) Deferred share units
d)
Employee share purchase plan
Share capital
2011
959.4
8.9
968.3
$
$
2010
957.9
1.5
959.4
a) Share option plan:
TMX Group established a share option plan in 2002, the year of its initial public offering. All employees of TMX Group and those of its
designated subsidiaries at or above the director level are eligible to be granted share options under the share option plan.
According to the terms of TMX Group’s plan, under no circumstances may any one person’s share options and all other share compensation
arrangements exceed 5% of the outstanding common shares issued of TMX Group. At December 31, 2011, 3,792,383 common shares of TMX
Group remain reserved for issuance upon exercise of share options granted under the plan, representing approximately 5% of the outstanding
common shares of TMX Group.
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 2011: dividend yield of 3.9% (2010 – 4.1%); expected volatility of 31.4% (2010 – 31.0%); risk-free interest rate
of 2.1% (2010 – 3.5%); expected forfeiture rates of between 11.0% and 14.0%, depending on the tranche (2010 – between 13.0% and 16.0%);
expected life of 4 years (2010 – 7 years); and a share price of $41.74 (2010 – $29.52). The assumptions are based on TMX Group’s historical
share price movements and historical dividend policy and the expected life is based on past experience. The resulting fair value calculated for
share options granted in 2011 was $7.86 (2010 – $6.74).
Options outstanding at December 31, 2011 will expire in 2012, 2013, 2014, 2015, 2016, 2017, and 2018.
90 TMX Group Annual Report | 2011
Movements in the number of share options outstanding are as follows:
2011
2010
Outstanding, beginning of year
Granted
Forfeited
Exercised
Outstanding, end of year
Number of share
options
1,678,731
476,394
(58,833)
(269,563)
1,826,729
$
Weighted average
exercise price
34.23
41.74
39.74
26.72
37.12
$
Number of share
options
1,382,569
457,782
(98,199)
(63,421)
1,678,731
$
Weighted average
exercise price
35.53
29.52
40.24
19.32
34.23
$
Vested and exercisable, end of year
889,591
$
38.22
720,715
$
37.05
During the year ended December 31, 2011, the weighted average share price of options exercised at the date of exercise was $41.74 (year
ended December 31, 2010 – $32.53).
The range of exercise prices and weighted average remaining contractual life of options outstanding are as follows:
Exercise price range
$10.53 – $19.99
$20.00 – $29.99
$30.00 – $39.99
$40.00 – $54.50
As at December 31, 2011
As at December 31, 2010
Number of
share options
47,300
429,191
495,361
854,877
1,826,729
Weighted average
remaining
contractual life
1
5
4
5
4
Number of
share options
82,300
575,535
609,101
411,795
1,678,731
Weighted average
remaining
contractual life
2
5
5
4
5
In the year ended December 31, 2011, TMX Group recognized compensation costs of $3.7 in relation to its share option plan (year ended
December 31, 2010 – $2.7).
b) Restricted share units (“RSUs”):
TMX Group offers a long-term incentive plan (“LTIP”) for certain employees and officers of the Company. The LTIP provides for the granting of
RSUs which vest over a maximum of three years and are payable provided the employee is still employed by TMX Group. The amount of the
award payable at the end of the second year following the year in which the RSUs were granted will be determined by the total shareholder
return over the 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.
TMX Group records its obligation for the RSUs, if any, over the service period in which the award is earned. The liability is measured at fair value
on date of grant and at each subsequent reporting date, using a Black Scholes option pricing model with the following assumptions: dividend
yield of 3.9% (2010 – 4.1%); expected volatility of 31.4% (2010 – 31.0%); risk-free interest rate of 2.1% (2010 – 3.5%), expected life of 1 to 2
years (2010 – 1 to 2 years), and a weighted average share price of $42.09 (2010 – $36.98). The assumptions are based on TMX Group’s historical
share price movements and historical dividend policy, and the expected life is based on past experience. The weighted average fair value was
$42.09 (2010 – $36.98). An estimated forfeiture rate of 19.5% was used for 2011 (2010 – 21.5%).
As at December 31, 2011, the total accrual for TMX Group’s RSUs is $15.8 (December 31, 2010 – $5.9) and this is included in trade and
other payables and other non-current liabilities on the consolidated balance sheet. The maximum amount to be paid is not known until
the awards have vested and will be based on total shareholder return from the date of grant to the time of payout. The accrual is based on
expected dividend yield, continuation of the most recent quarterly dividend and the closing price of TMX Group’s common shares at the end
of the reporting period. TMX Group has purchased total return swaps (“TRSs”) to economically hedge against the impact of its share price
fluctuations on the non-performance based portion of the RSUs (note 25).
During 2011, TMX Group recognized compensation and benefits expense of $10.1 in relation to its RSUs (2010 – $4.5).
c) Deferred share units (“DSUs”):
To assist the Company’s officers to meet their equity ownership requirements, the Company gives officers who have not met their ownership
requirements the opportunity to convert all or part of their short-term incentive award into DSUs. In addition, members of the Board of
Directors are granted DSUs annually and are also given the opportunity to convert some of their annual remuneration into DSUs. These DSUs
Notes to Consolidated Financial Statements 91
Notes to the Consolidated Financial Statements
Years ended December 31, 2011 and 2010 (In millions of Canadian dollars, except per share amounts)
vest immediately. The amount of the award payable is based on the number of units outstanding multiplied by the share price of the Company
at the date of the payout. The DSUs will only be paid out when the Officer or Board member is no longer employed by the Company.
During 2011, TMX Group granted additional retention DSUs to certain executives. These DSUs have the same terms as those discussed
above except that they vest on the third anniversary of grant date and will be forfeited on resignation, retirement or termination prior to
the vesting date.
As at December 31, 2011, the total accrual for TMX Group’s DSUs is $20.7 (December 31, 2010 – $15.8) and this is included in other non-current
liabilities on the consolidated balance sheet. The maximum amount to be paid is not known until the awards have vested and will be based
on total shareholder return from the date of grant to the time of payout. The accrual is based on expected dividend yield, continuation of
the most recent quarterly dividend and the closing price of TMX Group’s common shares at the end of the reporting period. TMX Group has
purchased TRSs to economically hedge against the impact of its share price fluctuations on the DSUs (note 25).
During 2011, TMX Group recognized costs of $4.7 in relation to its DSUs (2010 – $3.5).
d) Employee share purchase plan:
TMX Group offers an employee share purchase plan for eligible employees of the Company. Under the employee share purchase plan,
contributions by TMX Group 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. TMX Group 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. Shareholder
approval is not required for this plan or any amendments to the plan.
TMX Group accounts for its contributions as compensation expense when the amounts are contributed to the plan. Compensation expense
related to this plan was $1.4 for the year ended December 31, 2011 (2010 – $1.3).
23. Dividends
Dividends recognized and paid in the year are as follows:
Dividend paid in March
Dividend paid in June (2010 – May)
Dividend paid in September (2010 – August)
Dividend paid in December (2010 – November)
2011
2010
$
Cost per share
0.40
0.40
0.40
0.40
Total paid
29.8
29.9
29.8
29.8
119.3
$
$
$
Cost per share
0.38
0.38
0.38
0.40
Total paid
28.0
28.3
28.2
29.8
114.3
$
$
On February 7, 2012, the Company’s Board of Directors declared a dividend of 40 cents per share. This dividend is expected to be paid on
March 9, 2012, and is estimated to amount to $29.9.
92 TMX Group Annual Report | 2011
24. Income taxes
a) Income tax expense recognized in the consolidated income statement:
Current income tax expense:
Income tax for the current period
Adjustments relating to prior years
Deferred income tax expense:
Origination and reversal of temporary differences
$
$
2011
104.1
0.3
104.4
(11.4)
2010
100.8
(1.1)
99.7
0.4
Total income tax expense
$
93.0
$
100.1
Income tax expense attributable to income differs from the amounts computed by applying the combined federal and provincial income tax
rate of 28.25% (2010 – 31.00%) to income before income taxes as a result of the following:
Income before income taxes
Computed expected income tax expense
Rate differential due to various jurisdictions
Provincial tax holiday
Non-deductible expenses
Share of affiliate income
Current year losses for which no deferred income tax asset was recognized
Adjustments relating to prior years
Other
Income tax expense
$
2011
336.6
$
95.1
(0.1)
–
1.3
(0.3)
(4.8)
0.3
1.5
93.0
$
$
2010
337.6
104.7
(3.1)
(3.6)
1.8
(0.4)
0.8
(1.1)
1.0
100.1
The federal and Ontario statutory corporate income tax rates were reduced in 2011 compared to 2010 by 1.5% and 1.25% respectively.
b) Income tax recognized in other comprehensive income:
Related to actuarial losses on employee defined
benefit plans
Total
$
$
(5.1)
(5.1)
$
$
1.3
1.3
$
$
(3.8)
(3.8)
$
$
(6.0)
(6.0)
$
$
1.5
1.5
$
$
(4.5)
(4.5)
Before tax
2011
Tax benefit
Net of tax
Before tax
2010
Tax benefit
Net of tax
c) Deferred income tax assets and liabilities:
Deferred income tax assets and liabilities are attributable to the following:
Premises and equipment
Cumulative eligible capital / intangible assets
Tax loss carry-forwards
Total return swaps
Employee future benefits
RSUs and DSUs
Other
Net deferred income tax assets (liabilities)
Assets
Liabilities
Net
2011
4.3
19.6
11.6
0.4
3.3
9.3
4.1
52.6
$
$
2010
4.6
21.1
6.8
0.2
2.8
5.7
2.2
43.4
2011
–
(228.1)
–
–
(1.8)
–
(0.1)
(230.0)
2010
(0.1)
(229.8)
–
(1.3)
(2.3)
–
–
(233.5)
$
$
$
$
2011
4.3
(208.5)
11.6
0.4
1.5
9.3
4.0
(177.4)
2010
4.5
(208.7)
6.8
(1.1)
0.5
5.7
2.2
(190.1)
$
$
$
$
$
$
Notes to Consolidated Financial Statements 93
Notes to the Consolidated Financial Statements
Years ended December 31, 2011 and 2010 (In millions of Canadian dollars, except per share amounts)
Movements in the deferred income tax balances in the year are as follows:
Cumulative
eligible
capital/
intangible
assets
(206.9)
(1.8)
$
Premises
and
equipment
3.2
$
1.3
Tax loss
carry-
forwards
5.1
1.7
$
Total
return
swaps
1.8
(2.9)
$
Employee
future
benefits
(0.6)
(0.4)
$
RSUs and
DSUs
3.7
2.0
$
$
Other
2.5
(0.3)
Total
$ (191.2)
(0.4)
–
4.5
(0.2)
–
4.3
$
–
(208.7)
0.2
–
6.8
4.8
–
(208.5)
–
11.6
$
$
$
–
(1.1)
1.5
–
0.4
1.5
0.5
(0.3)
1.3
1.5
$
–
5.7
3.6
–
9.3
$
–
2.2
1.8
–
4.0
$
1.5
(190.1)
11.4
1.3
(177.4)
Balance at January 1, 2010
Recognized in net income
Recognized in other
comprehensive income
Balance at December 31, 2010
Recognized in net income
Recognized in other
comprehensive income
Balance at December 31, 2011
As at December 31, 2011, $11.3 of the above deferred income tax assets related to tax losses incurred in the TMX Group legal entity.
Recoverability of this asset is dependant on the availability of future taxable profits within that legal entity. The Company is confident that
these losses will be recoverable.
Deferred income tax assets have not been recognized in respect of the following items:
Tax losses
Other deductible temporary differences
$
$
2011
13.3
37.3
50.6
$
$
2010
16.2
36.5
52.7
The income tax losses will expire between 2024 and 2031. The other deductible temporary differences do not expire under current income tax
legislation. Deferred income tax assets have not been recognized in respect of the items above because it is not probable that future taxable
profit will be available against which TMX Group can utilize the tax benefits.
At December 31, 2011, deferred income tax liabilities for temporary differences of $0.5 (December 31, 2010 – $0.2) relating to investments
in foreign subsidiaries and equity accounted investees were not recognized as TMX Group is able to control the timing of the reversal of the
temporary differences, and it is probable that the temporary differences will not reverse in the foreseeable future.
At December 31, 2011, temporary differences relating to wholly-owned domestic subsidiaries have not been recognized as the carrying
amount of the asset can be settled without tax consequences.
94 TMX Group Annual Report | 2011
25. Financial instruments
(a) Financial instruments – carrying values and fair values:
Assets at fair value through profit or loss
- Designated
Marketable securities
- Classified
Fair value of open energy contracts
Total return swaps
Available for sale financial assets
Investments in privately-owned companies
Loans and receivables
Cash and cash equivalents
Trade and other receivables
Energy contracts receivable
Daily settlements and cash deposits
Liabilities at fair value through profit or loss
- Classified
Fair value of open energy contracts
Total return swaps
Interest rate swaps
Other financial liabilities
Trade and other payables
Obligations under finance leases
Energy contracts payable
Daily settlements and cash deposits
Non-current data license and other payables
Term loan payable, net
December 31, 2011
Carrying
amount
Fair value
December 31, 2010
Carrying
amount
Fair value
January 1, 2010
Carrying
amount
Fair value
$
$
403.2
403.2
$
$
403.2
403.2
$
$
261.6
261.6
$
$
261.6
261.6
$
$
103.2
103.2
$
$
103.2
103.2
$
$
159.0
–
159.0
$
$
159.0
–
159.0
$
$
141.9
4.5
146.4
$
$
141.9
4.5
146.4
$
$
202.8
–
202.8
$
$
202.8
–
202.8
$
$
1.4
1.4
$
$
1.4
1.4
$
$
6.6
6.6
$
$
6.6
6.6
$
$
8.3
8.3
$
$
8.3
8.3
$
87.2
79.0
645.7
550.8
$ 1,362.7
$
87.2
79.0
645.7
550.8
$ 1,362.7
$
69.9
85.2
754.9
193.1
$ 1,103.1
$
69.9
85.2
754.9
193.1
$ 1,103.1
$
88.9
79.4
714.5
565.4
$ 1,448.2
$
88.9
79.4
714.5
565.4
$ 1,448.2
$
(159.0)
(1.7)
–
$ (160.7)
$
(159.0)
(1.7)
–
$ (160.7)
$
$
(141.9)
–
(0.7)
(142.6)
$
$
(141.9)
–
(0.7)
(142.6)
$
$
(202.8)
(0.5)
(5.7)
(209.0)
$
$
(202.8)
(0.5)
(5.7)
(209.0)
$
(65.1)
(1.1)
(645.7)
(550.8)
(5.0)
(429.8)
$ (1,697.5)
$
(65.1)
(1.1)
(645.7)
(550.8)
(5.0)
(429.8)
$ (1,697.5)
$
(51.4)
(1.8)
(754.9)
(193.1)
(6.0)
(429.8)
$ (1,437.0)
$
(51.4)
(1.8)
(754.9)
(193.1)
(6.0)
(428.9)
$ (1,436.1)
$
(41.4)
(1.8)
(714.5)
(565.4)
(6.8)
(429.0)
$ (1,758.9)
$
(41.4)
(1.8)
(714.5)
(565.4)
(6.8)
(427.0)
$ (1,756.9)
The carrying values for TMX Group’s financial instruments approximate their fair values at each reporting date.
(b) Fair value measurement:
TMX Group uses a fair value hierarchy to categorize the inputs used in its valuation of assets and liabilities carried at fair value. The extent of
TMX Group’s use of unadjusted quoted market prices (Level 1), models using observable market information as inputs (Level 2) and models
using unobservable market information (Level 3) in its valuation of assets and liabilities carried at fair value is as follows:
Notes to Consolidated Financial Statements 95
Notes to the Consolidated Financial Statements
Years ended December 31, 2011 and 2010 (In millions of Canadian dollars, except per share amounts)
Asset/(Liability)
Marketable securities
Fair value of open energy contracts
Investments in a privately-owned companies
Total return swaps
Fair value of open energy contracts
Asset/(Liability)
Marketable securities
Fair value of open energy contracts
Investments In a privately-owned companies
Total return swaps
Interest rate swaps
Fair value of open energy contracts
$
$
As at December 31, 2011
Fair value measurements using:
$
Level 1
403.2
–
–
–
–
$
Level 2
–
159.0
–
(1.7)
(159.0)
As at December 31, 2010
Fair value measurements using:
$
Level 1
261.6
–
–
–
–
–
$
Level 2
–
141.9
–
4.5
(0.7)
(141.9)
Level 3
–
–
1.4
–
–
Level 3
–
–
6.6
–
–
–
$
Assets/(liabilities)
at fair value
403.2
159.0
1.4
(1.7)
(159.0)
$
Assets/(liabilities)
at fair value
261.6
141.9
6.6
4.5
(0.7)
(141.9)
There were no transfers during the years between any of the levels.
i) Marketable securities:
The investment portfolio includes pooled fund investments managed by an external investment fund manager as well as Bankers’
Acceptances and Treasury Bills. There is no contracted maturity date for the pooled fund investments and the contracted term for the
Bankers Acceptances and Treasury Bills is less than 3 months.
TMX Group has designated its marketable securities as fair value through profit and loss. Fair values have been determined by reference
to quoted market prices or are based on observable market information. Unrealized gains of $0.7 have been reflected in net income for
the year ended December 31, 2011 (2010 – unrealized losses of $0.7).
ii) NGX and CDCC clearing and settlement balances:
The NGX and CDCC clearing and settlement balances include the following:
a) NGX – Energy contracts receivable and energy contracts payable
These balances represent the amounts receivable and payable where physical delivery of energy trading contracts has occurred
and/or settlement amounts have been determined but payments have not yet been made. There is no impact on the consolidated
income statement as an equivalent amount is recognized in both the assets and the liabilities.
b) NGX – Fair value of open energy contracts
These balances represent the fair value at the balance sheet date of the undelivered physically settled energy trading contracts and
the forward cash settled energy trading contracts. Fair value is determined based on observable market information. There is no
impact on the consolidated income statement as an equivalent amount is recognized in both the assets and the liabilities.
c) CDCC – Daily settlements and cash deposits, consists of:
Daily settlements due from, and to, clearing members of CDCC (“Clearing Members”)
These balances result from marking open futures positions to market and settling option transactions each day. These amounts
are required to be collected from and paid to Clearing Members prior to the commencement of trading the next day. There is no
impact on the consolidated income statement as an equivalent amount is recognized in both assets and liabilities.
Clearing members’ cash margin deposits
These balances represent the cash deposits of Clearing Members held in the name of CDCC as margins against open positions. The
cash held is recognized as an asset and an equivalent and offsetting liability is recognized as these amounts are ultimately owed to
the Clearing Members. There is no impact on the consolidated income statement.
96 TMX Group Annual Report | 2011
Clearing fund cash deposits
These balances represent the cash deposits of Clearing Members held in the name of CDCC as part of the clearing fund. The cash
held is recognized as an asset and an equivalent and offsetting liability is recognized as these amounts are ultimately owed to the
Clearing Members. There is no impact on the consolidated income statement.
Both NGX and CDCC also have access to other collateral that is not recognized on the consolidated balance sheet (note 26).
iii)
Investments in privately-owned companies:
TMX Group holds investments in privately-owned companies, whose shares are not traded on an active market. As such, the fair values
of these investments are calculated using unobservable assumptions and information, and are therefore categorized as Level 3 assets.
A reconciliation of the movement in these investments is as follows:
Fair value at January 1
Purchase of investment
Gains transferred to net income
Impairment loss recognized in net income
Sale of investment
Fair value at December 31
iv)
Total return swaps:
$
$
2011
6.6
0.8
0.2
–
(6.2)
1.4
$
$
2010
8.3
–
–
(1.7)
–
6.6
TMX Group has entered into a series of TRSs which synthetically replicate the economics of TMX Group purchasing the Company’s shares
as a partial fair value hedge to the share appreciation rights of the non-performance element of RSUs. TMX Group has also entered into
a series of TRSs as a full fair value hedge against the share price appreciation associated with the DSUs. TMX Group 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 units as
an adjustment to income. The fair value of the TRSs is based upon the excess or deficit of the volume weighted average price of the
Company’s shares for the last five trading days of the year compared to the price of the TRS. The fair value of the TRSs and the obligation
to unit holders are reflected on the consolidated balance sheet. The contracts are settled in cash upon maturity.
Unrealized losses and realized gains of $6.2 and $10.2 respectively have been reflected in net income in the consolidated financial
statements for the year ended December 31, 2011 (2010 – unrealized gains and realized losses of $5.0 and $2.0 respectively).
v)
Interest rate swaps:
TMX Group entered into a series of interest rate swap agreements in August 2008 to partially manage its exposure to interest rate
fluctuations on the original non-revolving three year term facility (note 15). The swaps have all expired as at December 31, 2011.
TMX Group marked to market the fair value of the interest rate swaps, using a discounted cash flow analysis based on relevant yield
curves and credit risk analysis. Unrealized gains of $0.7 and realized losses of $0.8 have been reflected within net income, as net mark to
market on interest rate swaps, for the year ended December 31, 2011 (2010 – unrealized gains of $5.0 and realized losses of $5.2).
26. Financial risk management
TMX Group is exposed to a number of financial risks as a result of its operations, which are discussed below. It seeks to monitor and minimize
adverse effects from these risks through its risk management policies and processes.
(a) Credit risk:
Credit risk is the risk of financial loss to the Company associated with a counterparty’s failure to fulfill its financial obligations, and arises
principally from TMX Group’s cash and cash equivalents and investments in marketable securities, trade receivables, total return swaps and
the clearing and/or brokerage operations of Shorcan, Shorcan Energy Brokers, NGX and CDCC.
(i)
Cash and cash equivalents
Cash and cash equivalents are deposited with Schedule 1 chartered Canadian banks.
(ii)
Investments in marketable securities
TMX Group manages its exposure to credit risk arising from investments in marketable securities by holding investment funds that
actively manage credit risk. The investment policy of the Company will only allow excess cash to be invested within money market
securities or fixed income securities. Fixed income securities must compose less than 70% of the overall portfolio. The majority of the
Notes to Consolidated Financial Statements 97
Notes to the Consolidated Financial Statements
Years ended December 31, 2011 and 2010 (In millions of Canadian dollars, except per share amounts)
portfolio is held within a money market fund and a specific short-term bond and mortgage fund. The money market fund manages
credit risk by limiting its investments to government or government-guaranteed treasury bills, and high-grade corporate notes. The short
term bond and mortgage fund manages credit risk by limiting its investments to high-quality Canadian corporate bonds, government
bonds and up to 40% of the fund's net assets in conventional first mortgages and mortgages guaranteed under the National Housing
Act (Canada). Corporate bonds held must have a minimum credit rating of BBB by DBRS Limited at the time of purchase. Mortgages may
not comprise more than 40% of the portfolio and must be either multi-residential conventional first mortgages or multi-residential
government guaranteed mortgages. TMX Group does not have any investments in non-bank asset-backed commercial paper.
(iii) Trade receivables
TMX Group’s exposure to credit risk resulting from uncollectable accounts is influenced by the individual characteristics of its customers,
many of whom are banks and financial institutions. TMX Group invoices its customers on a regular basis and maintains a collections
team to monitor customer accounts and minimize the amount of overdue receivables. There is no concentration of credit risk arising
from trade receivables from a single customer. In addition, customers that fail to maintain their account in good standing risk loss of
listing, trading, clearing and data privileges.
(iv) Total return swaps
The Company limits its exposure to credit risk on TRSs by contracting with a major Canadian chartered bank.
(v) Clearing and/or brokerage operations
TMX Group is exposed to credit risk in the event that customers, in the case of Shorcan and Shorcan Energy Brokers, contracting parties,
in the case of NGX, or Clearing Members, in the case of CDCC, fail to settle on the contracted settlement date.
Shorcan and Shorcan Energy Brokers’ risk is limited by their status as agents, in that they do not purchase or sell securities for their
own account. As agents, in the event of a failed trade, Shorcan or Shorcan Energy Brokers has the right to withdraw its normal policy of
anonymity and advise the two counterparties to settle directly.
NGX requires each contracting party to provide sufficient collateral, in the form of cash or letters of credit, to exceed its outstanding
credit exposure as determined by NGX in accordance with its margining methodology. The cash collateral deposits and letters
of credit are held by a Schedule I Canadian chartered bank. This collateral may be accessed by NGX in the event of default by a
contracting party. NGX measures total potential exposure for both credit and market risk for each contracting party on a real-time
basis as the aggregate of:
(a) “Initial Margin”, an amount that estimates the worst expected loss that a contract might incur under normal market conditions
during a liquidation period;
(b) “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
(c) Outstanding energy contracts receivable.
As a result of these calculations of contracting party exposure at December 31, 2011, NGX had access to cash collateral deposits of
$835.4 (December 31, 2010 – $835.7) and letters of credit of $2,047.7 (December 31, 2010 – $1,941.4). These amounts are not included in
TMX Group’s consolidated balance sheet.
CDCC is exposed to the risk of default of its Clearing Members. CDCC is the central counterparty of all transactions carried out on MX’s
markets and on the OTC market when the transaction is cleared through CDCC. It primarily supports the risk of one or more counterparties,
meeting strict financial and regulatory criteria, defaulting on their obligations, in which case the obligations of that counterparty would
become the obligations of CDCC. This risk is greater if market conditions are unfavourable at the time of the default.
CDCC’s principal risk management practice is the collection of risk-based margin deposits in the form of cash, letters of credit (until
March 1, 2011), equities and liquid government securities. Should a Clearing Member fail to meet a margin call or otherwise not honour
its obligations under open futures and options contracts, margin deposits would be seized and would then be available to apply against
the costs incurred to liquidate the Clearing Member’s positions.
CDCC’s margining system is complemented by a Daily Capital Margin Monitoring (“DCMM”) process that evaluates the financial strength
of a Clearing Member against its margin requirements. CDCC monitors the margin requirements of a Clearing Member as a percentage
of its capital (net allowable assets). CDCC will make additional margin calls when the ratio of margin requirement/net allowable assets
exceeds 100%. The additional margin requirement is equal to the excess of the ratio over 100%.
CDCC also maintains a clearing fund of deposits of cash and securities from all Clearing Members. The aggregate level of clearing funds
required from all Clearing Members must cover the worst loss that CDCC could face if one counterparty is failing under various extreme
98 TMX Group Annual Report | 2011
but plausible market conditions. Each Clearing Member contributes to the clearing fund in proportion to its margin requirements. If, by a
Clearing Member’s default, further funding is necessary to complete a liquidation, CDCC has the right to require other Clearing Members
to contribute additional amounts equal to their previous contribution to the clearing fund.
CDCC’s cash margin deposits and cash clearing fund deposits are held at a Schedule I Canadian chartered bank. CDCC’s non-cash margin
deposits and non-cash clearing fund deposits are pledged to CDCC under irrevocable agreements and are held by approved depositories.
This collateral may be seized by CDCC in the event of default by a Clearing Member. As a result of these calculations of Clearing Member
exposure at December 31, 2011, non-cash margin deposits of $3,959.8 (December 31, 2010 – $2,911.2), and non-cash clearing fund
deposits of $279.7 (December 31, 2010 – $264.1) had been pledged to CDCC, held primarily in government and equity securities. These
amounts are not included in the Company’s consolidated balance sheet.
(vi) Guarantees
NGX maintains an unsecured clearing backstop fund of US $100.0. The Company is the guarantor, on an unsecured basis, of this fund.
The facility has not been drawn upon at December 31, 2011.
The Company is also the guarantor of a premises lease for MX, which expires in 2020.
(b) Market risk:
Market risk is the risk that changes in market price, such as foreign exchange rates, interest rates, commodity prices and equity prices will
affect TMX Group’s income or the value of its holdings of financial instruments.
(i)
Foreign currency risk
TMX Group is exposed to foreign currency risk on cash and cash equivalents, trade receivables and trade payables, principally
denominated in US dollars. It is also exposed to foreign currency risk on revenue and expenses where it invoices or procures in
US dollars. At December 31, 2011, cash and cash equivalents and trade receivables net of current liabilities, excluding BOX, include US
$18.5 (December 31, 2010 – US $20.8) and GBP £0.4 (December 31, 2010 – GBP £nil), which are exposed to changes in the US-Canadian
dollar and GBP-Canadian dollar exchange rates. In addition, net assets related to BOX and Finexeo are denominated in US dollars
and Euros, respectively, and the effect of exchange rate movements on TMX Group’s share of these net assets is included in other
comprehensive income.
(ii)
Interest rate risk
TMX Group is exposed to interest rate risk on its marketable securities and the non-revolving term loan payable.
External investment fund managers have been engaged by TMX Group to manage the asset mix and the risks associated with its
marketable securities. At December 31, 2011, TMX Group held $403.2 in these funds (December 31, 2010 – $261.6), of which 51%
(December 31, 2010 – 57%) were held in fixed rate money market investments.
TMX Group has a non-revolving term loan payable of $430.0 (note 15). In 2008, TMX Group entered into a series of interest rate swap
agreements to partially manage its exposure to interest rate fluctuations on the loan. The last of these interest rate swaps expired during
2011.
(iii) Equity price risk
TMX Group is exposed to equity price risk arising from its RSUs and DSUs, as TMX Group’s obligation under these arrangements are partly
based on the price of the Company’s shares. TMX Group has entered into TRSs as a partial fair value hedge to the share appreciation
rights of these RSUs and DSUs.
(iv) Other market price risk
TMX Group is exposed to other market price risk from the activities of Shorcan, Shorcan Energy Brokers, NGX and CDCC if a customer,
contracting party or Clearing Member, as the case may be, fails to take or deliver either securities, energy products or derivative products
on the contracted settlement date where the contracted price is less favourable than the current market price.
Shorcan and Shorcan Energy Brokers’ risk is limited by their status as an agent, in that they do not purchase or sell securities or
commodities for their own account, the short period of time between trade date and settlement date, and the defaulting customer’s
liability for any difference between the amounts received upon sale of, and the amount paid to acquire, the securities or commodities.
Both NGX’s and CDCC’s measure of total potential exposure, as described previously, includes measures of market risk which are factored
into the collateral required from each contracting party or Clearing Member.
TMX Group is also exposed to other market price risk on a portion of its sustaining fees revenue, which is based on quoted market values
of listed issuers as at December 31 of the previous year.
Notes to Consolidated Financial Statements 99
Notes to the Consolidated Financial Statements
Years ended December 31, 2011 and 2010 (In millions of Canadian dollars, except per share amounts)
(v) Market risk sensitivity summary
Foreign currency
USD, GBP, and EUR currency
USD, GBP, and EUR currency
Interest rates
Marketable securities
Marketable securities
Term loan
Term loan
Equity price
RSUs, DSUs and TRSs
RSUs, DSUs and TRSs
Change in
underlying factor
Impact on income
before income
taxes
Impact on other
comprehensive
income
+10% $
-10%
$
1.9
(1.9)
+1% $
-1%
+1%
-1%
+25% $
-25%
(4.1)
4.1
(4.3)
4.3
(1.2)
1.3
7.6
(7.6)
n/a
n/a
n/a
n/a
n/a
n/a
(c) Liquidity risk:
Liquidity risk is the risk that TMX Group will not be able to meet its financial obligations as they fall due. TMX Group manages liquidity risk
through the management of its cash and cash equivalents and marketable securities, all of which are held in short term instruments, and its
revolving and non-revolving credit facilities (note 15) and capital (note 27). The contractual maturities of TMX Group’s financial liabilities are
as follows:
Fair value of open energy contracts
Total return swaps
Trade and other payables
Obligation under finance leases
Energy contracts payable
Daily settlements and cash deposits
Term loan payable
Non-current data license and other payables
Fair value of open energy contracts
Interest rate swaps
Trade and other payables
Obligation under finance leases
Energy contracts payable
Daily settlements and cash deposits
Term loan payable
Non-current data license and other payables
(i)
Daily settlements and cash deposits
$
$
$
$
Less than
1 year
159.0
1.0
65.1
0.8
645.7
550.8
430.0
–
$
At December 31, 2011
Between
1 and 5 years
–
0.7
–
0.3
–
–
–
2.5
Less than
1 year
141.9
0.7
51.4
0.7
754.9
193.1
430.0
–
$
At December 31, 2010
Between
1 and 5 years
–
–
–
1.1
–
–
–
3.1
Greater than
5 years
–
–
–
–
–
–
–
2.5
Greater than
5 years
–
–
–
–
–
–
–
2.9
The margin deposits and clearing fund margins are held in liquid instruments. Cash margin deposits and cash clearing fund deposits
from Clearing Members, which are recognized on the consolidated balance sheet, are held by CDCC with a major Canadian bank. Non-
cash margin deposits and non-cash clearing fund deposits pledged to CDCC under irrevocable agreements are in government securities,
letters of credit (up to March 1, 2011) and other securities and are held with approved depositories. Clearing Members may also pledge
letters of credit (up to March 1, 2011) and escrow receipts directly with CDCC.
100 TMX Group Annual Report | 2011
(ii)
Fair value of open energy contracts and Energy contracts payable
NGX requires each contracting party to provide sufficient collateral, in the form of cash or letters of credit, to exceed its outstanding
credit exposure as determined by NGX in accordance with its margining methodology. The cash collateral deposits and letters of credit
are held by a Schedule I Canadian chartered bank.
(iii) Credit facilities
In response to the liquidity risk that CDCC is exposed to through its clearing operations, it has arranged various facilities as disclosed
in note 15. The Daylight liquidity facility is in place to provide liquidity in exchange for securities that have been received by CDCC.
The Daylight liquidity facility must be cleared to zero at the end of each day.
Both the revolving standby credit facility and the call loan facility are in place to provide end of day liquidity in the event that CDCC is
unable to clear the Daylight liquidity facility to zero. This event would only occur in the event of a Clearing Member default. The facility
will provide liquidity in exchange for collateral in the form of Clearing Member deposits,
Similarly, in response to the liquidity risk that NGX is exposed to through it clearing and settlement operations, it maintains an
unsecured clearing backstop fund of US$100.0 and an EFT daylight facility.
(iv) Cash and cash equivalents
Cash and cash equivalents consist of cash and highly liquid investments.
(v) Marketable securities
The investment policy of the Company will only allow excess cash to be invested within money market securities or fixed income
securities. Fixed income securities must compose less than 70% of the overall portfolio. The majority of the portfolio is held within a
money market fund and a specific short-term bond and mortgage fund. The money market fund limits its investments to government or
government-guaranteed treasury bills, and high-grade corporate notes. The short term bond and mortgage fund limits its investments
to high-quality Canadian corporate bonds, government bonds and up to 40% of the fund's net assets in conventional first mortgages
and mortgages guaranteed under the National Housing Act (Canada). Fund units can be redeemed on any day that Canadian banks are
open for business. Funds will be received the day following the redemption.
27. Capital maintenance
TMX Group’s primary objectives in managing capital, which it defines as including its share capital and various credit facilities, include:
(i)
Maintaining sufficient capital for operations to ensure market confidence. Currently, we target to retain a minimum of $100.0 in cash,
cash equivalents and marketable securities. This amount is subject to change.
(ii)
Maintaining sufficient capital to meet capital maintenance requirements imposed on its subsidiaries:
(a) In respect of TSX, as required by the OSC to maintain certain financial ratios as defined in the OSC recognition order, as follows:
(i)
a current ratio not less than 1.1:1;
(ii) a debt to cash flow ratio not greater than 4:1; and
(iii) a financial leverage ratio consisting of adjusted total assets to adjusted shareholders’ equity not greater than 4:1.
During 2011, TMX Group has complied with these externally imposed capital requirements;
(b) In respect of TSX Venture Exchange, as required by various provincial securities commissions, to maintain adequate financial
resources.
During 2011, TMX Group has complied with these externally imposed capital requirements;
(c) In respect of NGX to:
(i)
maintain adequate financial resources as required by the Alberta Securities Commission; and
(ii)
maintain a current ratio of no less than 1:1 and a tangible net worth of not less than $9.0 as required by a major Canadian
chartered bank.
During 2011, TMX Group has complied with these externally imposed capital requirements;
(d) In respect of MX, as required by the AMF, to maintain certain financial ratios as defined in the AMF recognition order, as follows:
(i) a working capital ratio of more than 1.5:1;
Notes to Consolidated Financial Statements
101
Notes to the Consolidated Financial Statements
Years ended December 31, 2011 and 2010 (In millions of Canadian dollars, except per share amounts)
(ii) a cash flow to total debt ratio of more than 20%; and
(iii) a financial leverage ratio consisting of total assets to shareholders’ equity of less than 4:1.
During 2011, TMX Group has complied with these externally imposed capital requirements;
(e) In respect of CDCC, was required to maintain certain cash amounts, as follows:
(i)
(ii)
$5.0 as part of the Clearing Member default recovery process plus an additional $5.0 in the event that the initial $5.0 is fully
utilized during a default; and
sufficient cash, cash equivalents and marketable securities to cover 12 months of operating expenses, excluding amortization
and depreciation;
TMX Group has complied with these externally imposed capital requirements put into place during 2011;
(f) In respect of Shorcan:
(i) by IIROC which requires Shorcan to maintain a minimum level of shareholders’ equity of $0.5;
(ii by the OSC which requires Shorcan to maintain a minimum level of excess working capital;
During 2011, TMX Group has complied with these externally imposed capital requirements;
(g) In respect of TMX Select by IIROC which requires TMX Select to maintain adequate risk adjusted capital;
During 2011, TMX Group has complied with this externally imposed capital requirement;
(iii)
Providing sufficient capital to meet the covenants imposed in connection with credit facilities (note 15) that require TMX Group to maintain:
(a) a maximum debt to adjusted EBITDA ratio of 3.5:1;
(b) a minimum consolidated net worth based on a contracted formula; and
(c) a debt incurrence test of not more than 3:1.
During 2011, TMX Group has complied with these externally imposed capital requirements;
(iv) Retaining sufficient capital to invest and continue to grow our business; and
(v)
Returning capital to shareholders through dividends paid to shareholders and purchasing shares for cancellation pursuant to normal
course issuer bids.
The current economic conditions have not changed TMX Group’s objectives, policies or processes for managing capital.
28. Related party relationships and transactions
Parent:
The ultimate controlling party of TMX Group is TMX Group Inc.
Key management personnel compensation:
Compensation for key management personnel, including the Company’s Board of Directors, was as follows for the year:
Salaries and other short-term employee benefits
Post-employment benefits
Share-based payments
Balance as at December 31
Other related party transactions:
$
$
2011
8.6
1.1
10.3
20.0
$
$
2010
8.8
1.0
6.4
16.2
Any transactions entered into between TMX Group and related parties are on terms and conditions that are at least as favourable to TMX
Group as market terms and conditions, and are recorded at the agreed upon exchange amount.
During 2011, TMX Group provided $1.7 (2010 – $1.7) of technology services to The Canadian Depository for Securities Limited (“CDS”) and
acquired services of $0.1 (2010 – $0.1) from CDS, a company in which it holds an 18% interest.
102 TMX Group Annual Report | 2011
29. Controlled entities
Controlled entities of
TMX Group Inc.:
Controlled entities of TSX Inc.:
Controlled entities of TSX Venture
Exchange Inc.:
Controlled entities of Montréal
Exchange Inc.:
Controlled entity of Canadian
Derivatives Clearing Corporation:
Controlled entities of Natural Gas
Exchange Inc.:
Controlled entity of Shorcan
Brokers Limited:
Controlled entities of Finexeo S.A.:
TSX Inc.
Montréal Exchange Inc.
Natural Gas Exchange Inc.
Shorcan Brokers Limited
The Equicom Group Inc.
NetThruPut Inc. (dormant)
Toronto Futures Exchange (dormant)
CDEX Inc. (dissolved)
TMX Select Inc.
TMX Exchange Services Limited
Finexeo S.A.
TMX Group US Inc.
TMX Australia Pty Ltd.
TMX Atrium Canada Inc.
TSX Venture Exchange Inc.
TSX Group US Holdings, Inc. (dormant)
Canadian Unlisted Board Inc.
Vancouver Curb Exchange Limited
(dormant)
Vancouver Stock Exchange Inc.
(dormant)
VCT Management Limited (dormant)
West Canada Clearing Corporation
(dormant)
West Canada Depository Trust
Company (dormant)
Alberta Stock Exchange Inc. (dormant)
Canadian Derivatives Clearing
Corporation
Canadian Resources Exchange Inc.
(dissolved)
Montréal Climate Exchange Inc.
Boston Options Exchange Group, LLC
MX US 1. Inc.
MXUS 2. Inc.
3226506 Nova Scotia Company
(dissolved)
3226507 Nova Scotia Company
(dissolved)
Canadian Derivatives Clearing
Corporation (U.S.A.) Inc. (dormant)
Alberta Watt Exchange Limited
NGX US Inc.
Shorcan Energy Brokers Inc.
Finexeo UK Limited
Finexeo US Inc.
Finexeo SARL
Controlled entities of TMX Group
US Inc.:
TSX US Inc.
MX US Inc.
Country of
incorporation
December 31,
2011
%
December 31,
2010
%
January 1,
2010
%
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
U.K.
Luxembourg
U.S.
Australia
Canada
Canada
U.S.
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
U.S.
U.S.
U.S.
Canada
Canada
U.S.
Canada
U.S.
Canada
U.K.
U.S.
France
U.S.
U.S
100
100
100
100
100
100
100
–
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
–
51
53.8
100
100
–
–
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
–
100
100
–
–
–
–
100
100
100
100
100
100
100
100
100
100
–
51
53.8
100
100
–
–
100
100
100
100
–
–
–
–
–
100
100
100
100
100
100
100
100
–
–
–
–
–
–
100
100
100
100
100
100
100
100
100
100
100
51
53.8
100
100
100
100
100
100
100
100
–
–
–
–
–
Notes to Consolidated Financial Statements
103
Notes to the Consolidated Financial Statements
Years ended December 31, 2011 and 2010 (In millions of Canadian dollars, except per share amounts)
30. Contingent liabilities
From time to time in connection with its operations, TMX Group 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 TMX Group’s or its subsidiaries’ regulatory actions, decisions or
jurisdiction.
TMX Group may make additional acquisition-related payments up to a maximum of EUR €2.0 in the next two years contingent on future
operating results.
31. Subsequent events
In January 2012, CDCC increased its standby credit facility from $50.0 to $100.0, signed an additional daylight facility for $400.0 with a
Canadian Schedule 1 bank and closed the $50.0 call loan facility. These facilities were put in place in relation to the launch of CDCC’s repo
clearing business, scheduled for 2012.
32. Transition to IFRS
As discussed in note 1, the financial statements have been prepared in accordance with IFRS. These are TMX Group’s first annual financial
statements that comply with IFRS, and as such IFRS 1 is applicable.
In accordance with IFRS 1, TMX Group has applied IFRS retrospectively as of January 1, 2010 (the “Transition Date”) for comparative purposes.
In preparing its opening consolidated balance sheet and comparatives in accordance with IFRS, TMX Group has adjusted amounts reported
previously in its financial statements prepared in accordance with pre-conversion Canadian generally accepted accounting principles (“GAAP”).
The impact of the transition on TMX Group’s financial position and financial performance is discussed below. The impact of the transition on
TMX Group’s statement of cash flows was minimal.
(A) Initial elections upon adoption:
In accordance with IFRS 1, TMX Group has applied certain optional exemptions and mandatory exceptions from full retrospective application
of IFRS. Set out below are the IFRS 1 optional exemptions that TMX Group has elected to apply on its conversion to IFRS and the mandatory
exceptions that are applicable to TMX Group.
IFRS 1 optional exemptions:
1.
2.
3.
4.
Business combinations – This exemption allows first-time adopters to elect to apply IFRS 3 (revised), Business Combinations (“IFRS 3”),
prospectively from the Transition Date or retrospectively only to acquisitions after a chosen date that is prior to the Transition Date.
Not taking this exemption would require retrospective restatement of all business combinations occurring before the Transition
Date. TMX Group has elected to not apply IFRS 3 to all business combinations that occurred prior to January 1, 2008. Accordingly, only
business combinations that took place on or after January 1, 2008 – the acquisitions of MX, BOX, and NetThruPut Inc. (“NTP”) – have
been restated to reflect the requirements of IFRS 3 upon adoption of IFRS. As a result of applying this exemption, goodwill arising on
these three acquisitions has been adjusted accordingly as at the Transition Date. In applying this exemption there are certain additional
requirements in relation to acquisitions that are not restated under IFRS. An analysis of these requirements as they relate to TMX Group
was conducted with no resulting implications and as such, goodwill relating to business combinations prior to January 1, 2008 has not
been adjusted from its pre-conversion Canadian GAAP carrying value.
Employee benefits – This exemption allows first-time adopters to recognize all cumulative unamortized actuarial gains and losses
directly to retained earnings on the Transition Date, thus resetting unamortized actuarial gains and losses to zero. Not taking this
exemption would require retrospective application of IAS 19, Employee Benefits (“IAS 19”), from the inception of all benefit plans. TMX
Group has elected to apply this exemption, and recognize all unamortized actuarial gains and losses under pre-conversion Canadian
GAAP to retained earnings on the Transition Date.
Cumulative translation differences – This exemption allows first-time adopters to recognize all cumulative translation differences
relating to foreign operations directly to retained earnings on the Transition Date, thus resetting the cumulative translation difference
to zero. Not taking this election would require retrospective application of IAS 21, The Effect of Changes in Foreign Exchange Rates
(“IAS 21”), from the date the foreign operations were formed or acquired. TMX Group has elected to apply this exemption, and reset all its
cumulative translation differences to zero through retained earnings on the Transition Date.
Share-based payments – This exemption allows first-time adopters to limit its application of IFRS 2, Share-based Payments (“IFRS 2”) to
only certain historical transactions. IFRS 1 encourages, but does not require, first-time adopters to apply IFRS 2 to equity instruments
granted on or before November 7, 2002, or to equity instruments granted after that date but which have vested by the Transition Date.
In addition, it encourages, but again does not require, first-time adopters to apply IFRS 2 to liabilities arising from share-based payment
104 TMX Group Annual Report | 2011
5.
6.
transactions that were settled before the date of transition to IFRS. TMX Group has elected to only apply IFRS 2 to equity instruments
granted after November 7, 2002 and remaining unvested at the Transition Date as well as to cash-settled share-based liabilities
remaining unsettled as at the Transition Date.
Decommissioning liabilities included in the cost of premises and equipment – This exemption allows first-time adopters to elect to
apply the guidance in IFRIC 1, Changes in Existing Decommissioning, Restoration and Similar Liabilities (“IFRIC 1”), prospectively from the
Transition Date, as opposed to retrospectively. IFRIC 1 requires that changes in these liability estimates be added to, or deducted from,
the cost of the asset to which it relates, and the adjusted depreciable amount of the asset is then depreciated prospectively over its
remaining useful life. TMX Group has elected to apply this exemption thereby applying the requirements of IFRIC 1 prospectively to
decommissioning liabilities that existed as at the Transition Date. Accordingly, TMX Group recognized such liabilities as at the Transition
Date in accordance with IAS 37, Provisions, Contingent Liabilities and Contingent Assets, and adjusted the cost of the related assets
accordingly.
Leases – This exemption allows first-time adopters to elect to apply IFRIC 4, Determining whether an Arrangement contains a Lease
(“IFRIC 4”), only to arrangements existing at the Transition Date. An additional exemption also exists, allowing a first-time adopter to
opt out of reassessing its arrangements under IFRIC 4 if it has already assessed whether an arrangement contains a lease in accordance
with pre-conversion Canadian GAAP EIC-150, Determining Whether an Arrangement Contains a Lease (“EIC-150”). TMX Group has elected
to apply both exemptions thus limiting its reassessment under IFRIC 4 to arrangements in place at the Transition Date that were not
subject to the scope of EIC-150 under pre-conversion Canadian GAAP.
IFRS 1 mandatory exceptions:
IFRS 1 prohibits retrospective application of certain aspects of IFRS. The mandatory exceptions that are applicable to TMX Group on its
conversion to IFRS are as follows:
1.
2.
Estimates – Hindsight cannot be used to create or revise estimates. The estimates previously made by TMX Group under pre-conversion
Canadian GAAP have not been revised for application of IFRS except where necessary to reflect any difference in accounting policies.
Non-controlling interests – This exception requires entities to account for non-controlling interests following the requirements of IAS 27,
Consolidated and Separate Financial Statements (“IAS 27”), prospectively from the date of transition to IFRS. However, if an entity elects
to apply IFRS 3 retrospectively to past business combinations as of a designated date, it should also apply IAS 27 retrospectively from that
same date. As TMX Group has elected to apply IFRS 3 as of January 1, 2008, IAS 27 has also been applied from the same date.
(B) Reconciliation of pre-conversion Canadian GAAP to IFRS:
In accordance with IFRS 1, the following tables and notes present reconciliations and explanations of how the transition to IFRS has affected
TMX Group’s comparative financial statements:
Reconciliation of Equity*
Equity under pre-conversion Canadian GAAP
Differences increasing (decreasing) reported equity:
Business combinations
Employee benefits
Share-based compensation
Revenue
Impairment
Leases
Income taxes
Non-controlling interests
Equity under IFRS
* Figures in the table above are net of income tax where applicable.
Note
January 1, 2010
770.6
$
December 31, 2010
853.1
$
a
b
c
d
f
g
h
a, f, j
$
(163.0)
(3.4)
0.4
354.7
(8.0)
–
(0.3)
20.1
971.1
$
(163.0)
(8.2)
0.5
395.9
(7.1)
0.1
(0.7)
18.8
1,089.4
Notes to Consolidated Financial Statements
105
Notes to the Consolidated Financial Statements
Years ended December 31, 2011 and 2010 (In millions of Canadian dollars, except per share amounts)
Reconciliation of Comprehensive Income*
Comprehensive income under pre-conversion Canadian GAAP
Differences increasing (decreasing) reported comprehensive income:
Employee benefits
Share-based compensation
Revenue
Impairment
Leases
Income taxes
Non-controlling interests
Comprehensive income under IFRS
* Figures in the table above are net of income tax where applicable.
Notes to the reconciliations:
Changes in accounting policies
Note
Year ended
December 31, 2010
192.8
$
b
c
d
f
g
h
j
$
(4.8)
0.2
41.2
0.9
0.1
(0.4)
(1.3)
228.7
In addition to the exemptions and exceptions discussed above, the following describes the differences between TMX Group’s pre-conversion
Canadian GAAP accounting policies and those adopted on transition to IFRS which have impacted TMX Group’s financial position and/or
financial performance:
(a) Business combinations:
As stated previously, TMX Group has elected to apply IFRS 3 retrospectively to business combinations that occurred on or after
January 1, 2008; specifically, the acquisitions of MX, BOX and NTP have been restated. The significant differences between the standards
as applicable to these acquisitions are discussed below.
Measurement of purchase price:
Pre-conversion Canadian GAAP – Shares issued as consideration were measured at their estimated fair value on the date the parties to
the business combination reached an agreement on the purchase price and the proposed transaction was announced.
IFRS – Shares issued as consideration are measured at their fair value on the acquisition date.
Acquisition costs:
Pre-conversion Canadian GAAP – Direct and incremental costs of business combinations were recognized as part of the purchase cost.
IFRS – Acquisition related costs are accounted for separately from the business combination and they are expensed as incurred.
Restructuring provisions:
Pre-conversion Canadian GAAP – If certain conditions were met, the costs of restructuring activities were included as part of the
purchase price even if a present obligation did not exist as of the date of acquisition.
IFRS – Restructuring provisions are included as part of the business combination only if they represent a present obligation as of the
date of acquisition.
Non-controlling interests:
Pre-conversion Canadian GAAP – Non-controlling interests were recorded at their share of the existing carrying values of the net
assets acquired.
IFRS – Non-controlling interests are recorded at either their fair value or their proportionate share of the fair value of the acquiree’s net
assets. TMX Group has opted for the latter method.
Increase in ownership of a subsidiary:
Pre-conversion Canadian GAAP – Increase in ownership interests of a subsidiary was accounted for using the purchase method.
IFRS – When an entity increases its ownership in an investment that results in the acquisition of control, the previously held equity
interests are re-measured to fair value through net income. When an entity increases its ownership in a previously controlled subsidiary,
the carrying amounts of the controlling and non-controlling interests are adjusted to reflect the changes in their relative interests in
the subsidiary.
106 TMX Group Annual Report | 2011
Contingent liabilities:
Pre-conversion Canadian GAAP – Contingent liabilities assumed in a business combination were recognized when it was probable that a
liability had been incurred on the date of acquisition and when the amount could be reasonably estimated.
IFRS – A contingent liability is recognized at fair value on the date of acquisition if it is a present obligation that arises from past events
and its fair value can be measured reliably.
Impact on TMX Group – On the Transition Date, the acquisitions of MX, BOX and NTP were restated under IFRS 3, and as a result of this,
the acquisition accounting was amended. The goodwill associated with the MX acquisition decreased by $155.5, share capital decreased by
$141.1, and retained earnings decreased by $14.4. Intangible assets related to the acquisition of BOX increased by $14.3, non-controlling
interests increased by $16.0, and were reclassified to equity, and retained earnings decreased by $1.7. The goodwill related to the acquisition of
NTP decreased by $5.3, share capital decreased by $3.6, and retained earnings decreased by $1.7. The income tax effect on the above transition
adjustments was a reduction of $0.5 in goodwill with the offset to retained earnings.
The above adjustments remained unchanged as at December 31, 2010.
(b)
Employee benefits:
As stated previously, TMX Group has applied the IFRS 1 exemption and elected to recognize all cumulative unamortized actuarial gains
and losses that existed at the Transition Date directly to retained earnings for all of its employee benefit plans. In taking this exemption,
TMX Group is applying IAS 19 retrospectively from the Transition Date. The significant differences between IAS 19 and pre-conversion
Canadian GAAP as applicable to TMX Group are discussed below.
Actuarial gains and losses:
Pre-conversion Canadian GAAP – TMX Group amortized actuarial gains and losses arising from its employee benefit plans over the
expected average remaining service period of active employees when the net accumulated actuarial gain or loss was in excess of 10% of
the greater of the accrued benefit obligations and the fair value of plan assets at the beginning of the fiscal year.
IFRS – As permitted under IAS 19, TMX Group has elected to recognize all actuarial gains and losses on pension and other post retirement
plans immediately in other comprehensive income without recycling to the consolidated income statement in subsequent periods.
Measurement date:
Pre-conversion Canadian GAAP – TMX Group measured its defined benefit obligations and plan assets for certain plans as at
September 30.
IFRS – An entity is required to determine the present value of the defined benefit obligations and the fair value of plan assets as at the
balance sheet date. As a result, on transition to IFRS, TMX Group changed the measurement date of its plans to December 31.
Recognition of past service costs:
Pre-conversion Canadian GAAP – Past service costs arising from plan amendments or initiation were amortized on a straight-line basis
over the expected average remaining service period of employees active at the time of the amendment.
IFRS – Past service costs arising from plan amendments or initiation are amortized on a straight-line basis over the expected average
period remaining to vest. Any benefits already vested are recognized immediately in net income.
Limit on accrued benefit asset:
Pre-conversion Canadian GAAP – When a defined benefit plan gave rise to an accrued benefit asset, a valuation allowance was
recognized for any excess of the accrued benefit asset over the expected future benefit, and the accrued benefit asset was presented net
of any valuation allowance in the consolidated balance sheet. Any change in the valuation allowance was recognized in net income.
IFRS – IFRS also sets a limit on the accrued benefit asset that can be recognized in the consolidated balance sheet, although this is
calculated differently than under pre-conversion Canadian GAAP. Any change in the recoverable amount will be recognized immediately
in other comprehensive income.
Impact on TMX Group – On the Transition Date, pension benefit assets (included within other non-current assets on the consolidated balance
sheet) and accrued employee benefits payable were reduced by $8.1 and $3.5 respectively, with the offset of $4.6 to retained earnings. The
income tax effect on the above transition adjustment was a decrease of $0.7 and a decrease of $1.9 in deferred income tax assets and deferred
income tax liabilities respectively, with the offset to retained earnings.
In the year ended December 31, 2010, comprehensive income was reduced by $4.8 in respect of changes relating to employee benefits. As at
December 31, 2010, pension benefit assets and accrued employee benefits payable were reduced by $13.6 and $2.6 respectively, and deferred
income tax assets and deferred income tax liabilities were reduced by $0.5 and $3.3 respectively.
Notes to Consolidated Financial Statements
107
Notes to the Consolidated Financial Statements
Years ended December 31, 2011 and 2010 (In millions of Canadian dollars, except per share amounts)
(c)
Share based compensation:
As stated previously, TMX Group has elected to only apply IFRS 2 to equity instruments granted after November 7, 2002, and remaining
unvested at the Transition Date as well as to liabilities remaining unsettled as at the Transition Date. The significant differences between
IFRS 2 and pre-conversion Canadian GAAP as applicable to TMX Group are discussed below.
Recognition of expense:
Pre-conversion Canadian GAAP – For share-based awards with graded vesting the total fair value of the award was recognized by TMX
Group on a straight-line basis over the vesting period.
IFRS – Each tranche of an award with graded vesting is considered a separate grant with a different vesting date and fair value. Each
tranche is accounted for on that basis.
Forfeitures:
Pre-conversion Canadian GAAP – Forfeitures of awards were recognized as they occurred.
IFRS – Compensation expense is recognized based on an estimate of the number of awards expected to vest and is revised if subsequent
information indicates that actual forfeitures differ from the estimate.
Cash-settled share based payments:
Pre-conversion Canadian GAAP – The liability for restricted share units and deferred share units was accrued based on the intrinsic value
of the award with changes in the intrinsic values at each reporting period recognized in the consolidated income statement.
IFRS – TMX Group is required to measure the liability at fair value on the date of grant and at each subsequent reporting date by applying
an option pricing model. Changes in fair value are recognized in the consolidated income statement.
Impact on TMX Group – On the Transition Date, the share option plan component of equity was increased by $0.9 as a result of the changes
in the accounting treatment of share options, and trade and other payables and other non-current liabilities decreased by $0.5 in respect of
the cash-settled share based payments, the offset to which decreased retained earnings by $0.4. The income tax effect on the above transition
adjustment was a decrease of $0.1 in deferred income tax assets with the offset to retained earnings.
As at December 31, 2010, the above adjustments remained largely unchanged and the impact on comprehensive income for the year ended
December 31, 2010 was minimal.
(d) Revenue:
Pre-conversion Canadian GAAP – Initial and additional listing fees were recorded as deferred revenue – initial and additional listing
fees, and were recognized on a straight-line basis over an estimated service period of 10 years, in accordance with EIC-141, Revenue
Recognition.
IFRS – Initial and additional listing fees are recognized in full in the period when the listings occur.
Impact on TMX Group – On the Transition Date, short-term deferred revenue – initial and additional listing fees and long-term deferred
revenue – initial and additional listing fees were reduced by $78.0 and $405.1 respectively, with the offset to retained earnings. The income tax
effect on the above transition adjustment was a reduction of $128.4 in deferred income tax assets with the offset to retained earnings.
For the year ended December 31, 2010, revenue was increased by $50.1 and income tax expense was increased by $8.9 as a result of this
change in accounting policy. As at December 31, 2010, short-term deferred revenue – initial and additional listing fees and long-term deferred
revenue – initial and additional listing fees were reduced by a further $10.9 and $39.2 respectively. Deferred income tax assets were reduced by
a further $8.9.
(e) Cumulative translation differences:
As noted in the IFRS 1 optional exemptions section above, TMX Group has applied the one-time exemption to set the foreign currency
cumulative translation adjustment (“CTA”) to zero on January 1, 2010.
Impact on TMX Group – The CTA balance of $3.2 as at the Transition Date was recognized as an adjustment to retained earnings on transition
to IFRS. The application of the exemption had no impact on net equity.
The above adjustment remained unchanged as at December 31, 2010.
108 TMX Group Annual Report | 2011
(f)
Impairment:
Pre-conversion Canadian GAAP – An impairment loss was recognized when a long lived asset's carrying amount exceeded its recoverable
amount which was estimated, by TMX Group, as the sum of the undiscounted cash flows expected to result from the use of the asset
and its eventual disposition.
IFRS – An impairment loss is recognized when the carrying amount of an asset exceeds its recoverable amount, which is the higher of the
fair value less costs to sell and its value-in-use.
Impact on TMX Group – An impairment charge of $14.8 was recognized on the Transition Date in respect of the BOX trading participants’
intangible asset, $6.8 of which related to the non-controlling interests share, with the remaining $8.0 relating to TMX Group’s share and
therefore charged to retained earnings on transition. Value-in-use was the recoverable amount of the asset, using a discount rate of 15%. The
impairment primarily resulted from increased competition and a weakening market share in the US equity options trading market, resulting
in a decline in current and forecasted revenues during 2009. A goodwill impairment charge was recognized at the time under pre-conversion
Canadian GAAP, and the trading participant intangible was also tested, but was found not to be impaired in accordance with pre-conversion
Canadian GAAP.
As at December 31, 2010, the above adjustments remained largely unchanged. The overall impact on comprehensive income was an increase
of $0.9 for the year ended December 31, 2010.
(g)
Leases:
As stated previously, TMX Group has elected to limit its assessment in accordance with IFRIC 4 to arrangements in place on the Transition
Date that had not been previously assessed under EIC-150. The significant differences between IAS 17, Leases and pre-conversion
Canadian GAAP as applicable to TMX Group are discussed below.
Classification:
Pre-conversion Canadian GAAP – The criteria used to determine whether a lease was to be classified as an operating lease or a finance
lease (previously termed a capital lease under pre-conversion Canadian GAAP) included “bright-line” thresholds such as whether a lease
term was greater than 75% of the economic life of the leased asset, or the present value of the minimum lease payments was above
90% of the fair value of the lease.
IFRS – The criteria for lease classification rely heavily on the substance of the agreement and do not include any “bright-line” thresholds.
Present value of minimum lease payments:
Pre-conversion Canadian GAAP – The present value of minimum lease payments was calculated using the lower of (i) the interest rate
implicit in the lease and (ii) the lessee’s incremental borrowing rate.
IFRS – The present value of minimum lease payments should be determined using the interest rate implicit in the lease. The lessee’s
incremental borrowing rate should only be used when the interest rate implicit in the lease cannot be determined.
Impact on TMX Group – A number of leases were reclassified on the Transition Date from finance leases to operating leases. As a result,
obligations under finance leases, and the associated equipment assets, decreased by $7.1 on the consolidated balance sheet. The effect on
retained earnings was negligible.
As at December 31, 2010, the cumulative adjustment to obligations under finance leases and the associated equipment assets was a decrease
of $5.3 and $5.2 respectively in respect of the above. The overall impact on net income for the year ended December 31, 2010, was minimal.
(h)
Income taxes:
Intercompany transactions:
Pre-conversion Canadian GAAP – The recognition of deferred income taxes relating to temporary differences arising from intercompany
transactions was prohibited.
IFRS – There is no such prohibition under IFRS.
Impact on TMX Group – On the Transition Date, deferred income tax assets were reduced by $0.3, with the offset to retained earnings.
In the year ended December 31, 2010, deferred income tax assets were reduced by a further $0.4, the offset to which decreased net income.
Notes to Consolidated Financial Statements
109
Notes to the Consolidated Financial Statements
Years ended December 31, 2011 and 2010 (In millions of Canadian dollars, except per share amounts)
Income tax effect of the other adjustments between pre-conversion Canadian GAAP and IFRS:
Income tax adjustments related to the IFRS transition include the effect of recording, where applicable, the deferred income tax effect of
the other differences between pre-conversion Canadian GAAP and IFRS discussed above. These income tax impacts have been included in
the notes above.
(i)
Financial instruments:
Pre-conversion Canadian GAAP – Available for sale investments in equity instruments that do not have quoted prices on an active
market are carried at cost less any impairment losses.
IFRS – Available for sale investments in equity instruments that do not have quoted prices on an active market are measured at fair value
at each reporting period provided the fair value can be reliably measured. Changes in fair value, except for impairment losses and certain
foreign exchange gains or losses, are recognized in other comprehensive income until the assets are sold.
Impact on TMX Group – This difference had no impact on TMX Group on the Transition Date or at December 31, 2010.
Presentation
The following describes differences in presentation between TMX Group’s IFRS financial statements and those prepared in accordance with
pre-conversion Canadian GAAP:
(j) Non-controlling interests:
Pre-conversion Canadian GAAP – Non-controlling interests were presented between liabilities and shareholders’ equity in the
consolidated balance sheet and as a component of net income in the consolidated income statement.
IFRS – Non-controlling interests are classified as a component of equity, separate from the equity of the parent company, in the
consolidated balance sheet and their portion of the results is presented as an allocation of net income.
(k) Restricted cash:
Pre-conversion Canadian GAAP – Cash and cash equivalents subject to restrictions were presented separately on the consolidated
balance sheet.
IFRS – Cash and cash equivalents subject to restrictions are not required to be presented separately on the face of the consolidated
balance sheet.
(l) Deferred income taxes:
Pre-conversion Canadian GAAP – Deferred income taxes (previously future income taxes) were split between short-term and long-term
components based on either (i) the underlying asset or liability or (ii) the expected reversal of items not related to a particular asset or
liability.
IFRS – All deferred income tax balances are classified as non-current.
(m) Current income taxes:
Pre-conversion Canadian GAAP – Current income taxes were offset if they related to the same legal entity and the same taxation authority.
IFRS – Current income taxes are only offset if there is a legally enforceable right to offset and they relate to income taxes levied by the
same taxation authority on the same taxable entity, or on different taxable entities but TMX Group intends to either settle on a net basis
or to realize the asset and settle the liability simultaneously.
(n) Provisions:
Pre-conversion Canadian GAAP – TMX Group presented provisions as part of trade and other payables or other non-current liabilities on
the consolidated balance sheet.
IFRS – Provisions will be presented separately where significant.
(o) Pension assets and liabilities:
Pre-conversion Canadian GAAP – Accrued benefit assets and liabilities relating to TMX Group’s pension plans were offset for balance
sheet presentation.
IFRS – An accrued benefit asset relating to one plan can only be offset against an accrued benefit liability of another plan if there is a
legally enforceable right to offset and TMX Group intends to settle obligations on a net basis or simultaneously.
110 TMX Group Annual Report | 2011
Reconciliation of Consolidated Balance Sheet as at January 1, 2010
Pre-conversion
Canadian GAAP balance
IFRS
adjustments
IFRS
reclassifications
IFRS
balance
Assets
Current assets:
Cash and cash equivalents
Marketable securities
Restricted cash
Trade and other receivables
Energy contracts receivable
Fair value of open energy contracts
Daily settlements and cash deposits
Prepaid expenses
Current income tax assets
Deferred income tax assets
Non-current assets:
Premises and equipment
Investment in equity accounted investee
Goodwill
Other intangible assets
Deferred income tax assets
Other non-current assets
Total Assets
Liabilities and Equity
Current liabilities:
Trade and other payables
Energy contracts payable
Fair value of open energy contracts
Daily settlements and cash deposits
Deferred revenue
Deferred revenue – initial & additional listing fees
Obligation under finance leases
Deferred income tax liabilities
Provisions
Current income tax liabilities
Fair value of interest rate swaps
Non-current liabilities:
Accrued employee benefits payable
Obligations under finance leases
Deferred income tax liabilities
Other non-current liabilities
Deferred revenue
Deferred revenue – initial & additional listing fees
Fair value of interest rate swaps
Term loan
Total Liabilities
Non-controlling Interests
Equity:
Share capital
Deficit
Contributed surplus – share option plan
Accumulated other comprehensive income
Total Equity attributable to Shareholders of the Company
Non-controlling interests
Total Equity
Total Liabilities and Equity
$
$
$
$
88.0
103.2
0.9
79.4
714.5
202.8
565.4
6.0
4.6
26.7
1,791.5
31.5
12.8
583.8
932.4
144.6
27.8
3,524.4
44.9
714.5
202.8
565.4
15.1
78.0
3.4
0.1
–
3.2
2.1
1,629.5
12.8
5.5
234.7
21.9
0.9
405.1
3.6
429.0
2,743.0
10.8
1,102.6
(343.9)
8.7
3.2
770.6
–
770.6
3,524.4
$
$
$
$
–
–
–
–
–
–
–
–
–
(24.0)
(24.0)
(7.1)
–
(161.3)
(0.4)
(105.6)
(8.2)
(306.6)
(0.1)
–
–
–
–
(78.0)
(2.7)
–
–
–
–
(80.8)
(3.5)
(4.4)
(1.9)
(0.6)
–
(405.1)
–
–
(496.3)
9.3
(144.7)
327.4
0.9
(3.2)
180.4
–
180.4
(306.6)
$
$
$
$
0.9
–
(0.9)
–
–
–
–
–
7.7
(2.7)
5.0
–
–
–
–
2.7
1.6
9.3
(0.9)
–
–
–
–
–
(0.7)
(0.1)
1.2
7.7
–
7.2
1.6
(1.1)
0.1
2.4
(0.9)
–
–
–
9.3
(20.1)
–
–
–
–
–
20.1
20.1
9.3
$
$
$
$
88.9
103.2
–
79.4
714.5
202.8
565.4
6.0
12.3
–
1,772.5
24.4
12.8
422.5
932.0
41.7
21.2
3,227.1
43.9
714.5
202.8
565.4
15.1
–
–
–
1.2
10.9
2.1
1,555.9
10.9
–
232.9
23.7
–
–
3.6
429.0
2,256.0
–
957.9
(16.5)
9.6
–
951.0
20.1
971.1
3,227.1
Notes to Consolidated Financial Statements
111
Notes to the Consolidated Financial Statements
Years ended December 31, 2011 and 2010 (In millions of Canadian dollars, except per share amounts)
Reconciliation of Consolidated Income Statement for the year ended December 31, 2010
Pre–conversion Canadian
GAAP balance
IFRS
adjustments
IFRS
reclassifications
IFRS
balance
Revenue:
Issuer services
Trading, clearing and related
Information services
Technology services and other
Total revenue
Expenses:
Compensation and benefits
Information and trading systems
General and administration
Depreciation and amortization
Total operating expenses
Income from operations
Share of net income of equity accounted investee
Impairment of available for sale investment
Finance income (costs):
Finance income
Finance costs
Net mark to market on interest rate swaps
Income before income taxes
Income tax expense
Non-controlling interests
Net income
Net income attributable to:
Equity holders of the Company
Non-controlling interests
Earnings per share:
Basic
Diluted
$
$
$
$
$
$
$
163.0
242.2
154.4
15.9
575.5
133.5
47.8
73.0
32.3
286.6
288.9
1.3
(1.7)
5.2
(6.2)
(0.2)
287.3
90.7
0.1
$
50.1
–
–
–
50.1
–
2.9
–
(2.9)
–
50.1
–
–
–
0.2
–
50.3
9.4
–
$
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(0.1)
213.1
242.2
154.4
15.9
625.6
133.5
50.7
73.0
29.4
286.6
339.0
1.3
(1.7)
5.2
(6.0)
(0.2)
337.6
100.1
–
196.5
$
40.9
$
0.1
$
237.5
196.5
–
196.5
$
$
41.2
(0.3)
40.9
$
$
–
0.1
0.1
$
$
237.7
(0.2)
237.5
2.64
2.64
$
$
3.20
3.19
Reconciliation of Consolidated Statement of Comprehensive Income for the year ended December 31, 2010
Net income
Other comprehensive (loss) income:
Unrealized (loss) gain on translating financial statements
of foreign operations (net of tax – $nil)
Actuarial gains (losses) on defined benefit pension and other
post retirement benefit plans (net of tax – $1.5)
Total comprehensive income (loss)
Total comprehensive income (loss) attributable to:
Equity holders of the Company
Non-controlling interests
Pre–conversion Canadian
GAAP balance
196.5
$
IFRS
adjustments
40.9
IFRS
reclassifications
0.1
$
$
$
IFRS
balance
237.5
(3.7)
–
192.8
$
0.5
(4.5)
36.9
$
(1.1)
–
(1.0)
$
192.8
–
192.8
$
$
37.2
(0.3)
36.9
$
$
–
(1.0)
(1.0)
$
$
(4.3)
(4.5)
228.7
230.0
(1.3)
228.7
$
$
$
112 TMX Group Annual Report | 2011
Reconciliation of Consolidated Balance Sheet as at December 31, 2010
Pre–conversion
Canadian GAAP balance
IFRS
adjustments
IFRS
reclassifications
IFRS
balance
Assets
Current assets:
Cash and cash equivalents
Marketable securities
Restricted cash
Trade and other receivables
Energy contracts receivable
Fair value of open energy contracts
Daily settlements and cash deposits
Prepaid expenses
Current income tax assets
Deferred income tax assets
Non-current assets:
Premises and equipment
Investment in equity accounted investee
Other intangible assets
Goodwill
Deferred income tax assets
Other non-current assets
Total Assets
Liabilities and Equity
Current liabilities:
Trade and other payables
Energy contracts payable
Fair value of open energy contracts
Daily settlements and cash deposits
Deferred revenue
Deferred revenue – initial & additional listing fees
Obligation under finance leases
Provisions
Current income tax liabilities
Fair value of interest rate swaps
Term loan
Non-current liabilities:
Accrued employee benefits payable
Obligations under finance leases
Deferred income tax liabilities
Other non-current liabilities
Deferred revenue
Deferred revenue – initial & additional listing fees
Total Liabilities
Non-controlling Interests
Equity:
Share capital
(Deficit) Retained earnings
Contributed surplus – share option plan
Accumulated other comprehensive income (loss)
Total Equity attributable to Shareholders of the Company
Non-controlling interests
Total Equity
Total Liabilities and Equity
$
$
$
$
68.8
261.6
1.1
89.7
754.9
141.9
193.1
6.7
3.1
29.6
1,550.5
33.6
14.2
920.5
582.6
152.5
28.0
3,281.9
59.1
754.9
141.9
193.1
18.7
88.9
3.3
–
6.1
0.7
429.8
1,696.5
12.8
3.8
236.7
23.3
1.0
444.3
2,418.4
10.4
1,104.1
(261.7)
11.2
(0.5)
853.1
–
853.1
3,281.9
$
$
$
$
–
–
–
–
–
–
–
–
–
(25.5)
(25.5)
(5.2)
–
(0.4)
(161.3)
(113.2)
(13.6)
(319.2)
(0.7)
–
–
–
–
(88.9)
(2.6)
–
–
–
–
(92.2)
(2.6)
(2.7)
(3.2)
(0.1)
–
(444.3)
(545.1)
8.4
(144.7)
364.1
0.8
(2.7)
217.5
–
217.5
(319.2)
$
$
$
$
1.1
–
(1.1)
–
–
–
–
–
1.2
(4.1)
(2.9)
–
–
–
–
4.1
1.9
3.1
0.2
–
–
–
–
–
(0.7)
0.4
1.2
–
–
1.1
1.9
(1.1)
–
2.2
(1.0)
–
3.1
(18.8)
–
–
–
–
–
18.8
18.8
3.1
$
$
$
$
69.9
261.6
–
89.7
754.9
141.9
193.1
6.7
4.3
–
1,522.1
28.4
14.2
920.1
421.3
43.4
16.3
2,965.8
58.6
754.9
141.9
193.1
18.7
–
–
0.4
7.3
0.7
429.8
1,605.4
12.1
–
233.5
25.4
–
–
1,876.4
–
959.4
102.4
12.0
(3.2)
1,070.6
18.8
1,089.4
2,965.8
Notes to Consolidated Financial Statements
113
Board of Directors
as of March 1, 2012
WAYNE C. FOX (CHAIR)
Corporate Director
Committees: Governance, Human Resources
Director since: 1997
TULLIO CEDRASCHI
Corporate Director
Committees: Governance, Human Resources (Chair)
Director since: 2001
RAYMOND CHAN
Executive Chairman
Baytex Energy Corp.
Committees: Finance and Audit and Human Resources
Director since: 2006
DENYSE CHICOYNE
Corporate Director
Committees: Finance and Audit
Director since: 2008
JOHN A. HAGG
Corporate Director
Committees: Human Resources, Public Venture Market
Director since: 2001
HARRY A. JAAKO
Executive Officer and Principal
Discovery Capital Management Corp.
Committees: Finance and Audit, Public Venture Market (Chair)
Director since: 2001
THOMAS A. KLOET
Chief Executive Officer
TMX Group Inc.
Director since: 2008
J. SPENCER LANTHIER
Corporate Director
Committees: Finance and Audit (Chair), Governance
Director since: 2000
JEAN MARTEL
Partner
Lavery, de Billy LLP
Committees: Finance and Audit, Public Venture Market
Director since: 1999
JOHN P. MULVIHILL
Chairman and Chief Executive Officer
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
Corporate Director
Committees: Human Resources, Public Venture Market
Director since: 2005
114 TMX Group Annual Report | 2011
TMX Group Executive Committee
as of March 1, 2012
THOMAS A. KLOET
Chief Executive Officer
TMX Group
KEVAN COWAN
President, TSX Markets and Group Head of Equities
BRENDA HOFFMAN
Senior Vice President, Group Head of Information Technology
TMX Group
MARY LOU HUKEzALIE
Vice President, Group Head of Human Resources
TMX Group
PETER KRENKEL
President and Chief Executive Officer
NGX
ALAIN MIQUELON
President and Chief Executive Officer
Montréal Exchange Inc.
SHARON C. PEL
Senior Vice President, Group Head of Legal and Business Affairs
TMX Group
MICHAEL PTASzNIK
Senior Vice President and Group Head Chief Financial Officer
TMX Group
ERIC SINCLAIR
President
TMX Datalinx
Executive Committee
115
Shareholder Information
STOCK LISTING
Toronto Stock Exchange
Share Symbol “X”
AUDITOR
KPMG LLP
Toronto, ON
SHARE TRANSFER AGENT
Requests for information regarding share transfers
should be directed to the Transfer Agent:
CIBC Mellon Trust Company
P.O. Box 700, Station B
Montreal, Quebec H3B 3K3
Tel: (416) 682-3860 (Toronto Area)
1-800-387-0825 (North America)
Fax: 1-888-249-6189
E-mail: inquiries@canstockta.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@tmx.com
Canadian Best Bid and Offer, Capital Pool Company, CBBO, CDF, CDB,
CPC, Equities News, Groupe TMX, Groupe TSX, Infosuite, Market Book,
MarketDepth, Natural Gas Exchange, NEX, NGX, PC-Bond, TMX, TMX Atrium,
TMX Datalinx, TMX Group, TMXnet, TMX Quantum XA, TMX Select, Toronto
Stock Exchange, TSX, TSX Group, TSX Quantum, TSX Venture Exchange, TSXV
and their respective designs are trade-marks of TSX Inc.
BAX, Bourse de Montréal, CGB, Montréal Exchange, MX, SOLA, SXM, and
their respective designs are trade-marks of Bourse de Montréal Inc. and are
used under license.
Boston Options Exchange, BOX and their respective designs are trade-marks
of Boston Options Exchange Group, LLC and are used under license.
CCCPD, CCCPD/CDCC Design, CDCC are trademarks of Canadian Derivatives
Clearing Corporation and are used under license.
CanDeal and design is the trade-mark of Candeal.ca Inc. and is used under
license.
Equicom is a trade-mark of The Equicom Group Inc. and is used under
license.
ICE is a trade-mark of IntercontinentalExchange, Inc. and is used under
license.
NetThruPut and NetThruPut design are trade-marks of NGX and are used
under license.
Razor, Razor Risk and their respective designs are trademarks of Razor Risk
Technologies Limited and are used under license.
Shorcan, Shorcan Brokers and Shorcan Energy Brokers are trade-marks of
Shorcan Brokers Limited and are used under license.
“S&P”, as part of the composite mark of S&P/TSX which is used in the name
the S&P/TSX Composite Index, the S&P/TSX Venture Composite Index, the
S&P/TSX 60 Index and other S&P/TSX indices, is a trade-mark of Standard &
Poor’s Financial Services LLC and is used under license.
All other trade-marks used in this Annual Report are the property of their
respective owners.
116 TMX Group Annual Report | 2011
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
HEAd OFFiCE OF BOX
101 Arch Street
Suite 610
Boston, MA
02110
REgiSTEREd OFFiCE And HEAd OFFiCE
OF TMX 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 MOnTRéAl EXCHAngE
Tour de la Bourse
800, Square Victoria
Montreal, QC
H4Z 1A9
HEAd OFFiCE OF ngX
140 – 4th Avenue SW
Suite 2330
Calgary, AB
T2P 3N3
Design and production by TMX Equicom
REgiOnAl OFFiCES
Beijing
China World Office 1, Suite 3711
No. 1, Jianguomenwai Avenue
Beijing
100004
Houston
19500 State Highway 249
Houston, TX
77070
london
New Broad Street House
35 New Broad Street
London, UK
EC2M 1NH
new York
30 Broad Street, 22nd floor
New York, NY
10004
Vancouver
650 West Georgia Street
Suite 2700
Vancouver, BC
V6B 4N9
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