TMX Group
Annual Report 2019

Plain-text annual report

TMX GROUP LIMITED 2019 A N N U A L R E P O R T 2019 Annual Report 1 TMX Group Limited The future is yours to see. 2019 Annual Report 2 TMX Group Limited Letter from the chair In the last sixteen months, we have witnessed significant change and uncertainty in global capital markets. We closed 2018 in a highly volatile environment, which settled at times throughout 2019, but resurfaced again in recent weeks. What has been clear and apparent is the strength and resilience of TMX’s business model throughout these times. Our strategy of diversification through our product offerings and geographic coverage served us well last year, and will continue to serve us well in the years to come as we grow and build on that strategy. As you know, we are also going through a period of leadership change at TMX with the retirement of Lou Eccleston as CEO in January. John McKenzie stepped in as our Interim CEO and has led our management team in seamlessly carrying out the strategy that Lou helped to put in place. That strategy has positioned us well for these more challenging and uncertain times. Your Board is currently engaged in an extensive search process as we interview both internal and external candidates to be our next CEO. I look forward to updating you on this in the coming months. In closing, I want to thank our clients, whose confidence is critical to everything we do. I also want to thank our employees, who consistently delivered in so many ways in what was a challenging 2019. I want to recognize and thank my fellow Directors for their wise counsel and dedication over the past year. And last but not least, I want to thank you, our shareholders, for your ongoing support of our company. Charles Winograd Chair, Board of Directors TMX Group Limited March 3, 2020 2019 Annual Report 3 TMX Group Limited Letter from the Interim CEO 2019 at a glance Market conditions in 2019 presented a significant challenge for the financial services industry and the exchange sector. Uncertainty, fueled by macroeconomic and geopolitical factors led to a global slowdown in capital markets activity. While these factors had a negative impact on some of our business areas and growth drivers last year, the work we have done to transform TMX Group over the last five years enabled us to deliver value to clients and positive results for shareholders during difficult markets. Our share price was up 59% over 2018 and total shareholder return was 63% for 2019. The balance we have achieved in reshaping the makeup of our business model - a diverse and complementary portfolio of assets with a shift to more recurring revenue sources - has strengthened our enterprise for the long-term. Our recurring revenue was 52% of our total revenue in 2019. Overall revenue of $807 million was down 2% from 2018, due to softer capital markets activity, reflecting a decrease in financing activity on our exchanges and lower activity in equities and fixed income trading. Offsetting the decreases, there was solid revenue growth from Trayport, our Montreal Exchange (MX) and the Canadian Derivatives Clearing Corporation. Our financial performance also continued to reflect the benefits of consistent cost management discipline, with overall expenses down 6%. Our income from operations increased by 4% over 2018. Our Roadmap for Growth and our Growth Champions At all times, but especially in the midst of challenging markets, we must remain focused on execution and driving growth with our cohesive global strategy. Our enterprise strategy is centered around our growth champions - the business areas we have identified as having the highest growth potential, including Capital Formation, Derivatives and Trayport. Across these growth champions, we are focused on capitalizing on secular trends, or longer-term consistent patterns in the marketplace to drive growth, while also looking for targeted opportunities to leverage our capabilities in new markets. 2019 Annual Report 4 TMX Group Limited Capital Formation In Capital Formation, we continue our global expansion efforts, targeting specific regions where our unique ecosystem and sectoral expertise give us a competitive edge. The ability of Toronto Stock Exchange (TSX) and TSX Venture Exchange (TSXV) to serve a company’s full spectrum of needs from early-stage to senior issuer, and to support each phase of that evolution with a sophisticated investor community, separates TMX Group- and Canada’s markets - from our global peers. In 2019 our Capital Formation business had a number of significant wins. We continued to build on our track record of enabling growth in the innovation sector. The S&P/TSX Tech Index was up more than 60% in 2019, outperforming all the major North American indices. Our markets welcomed 40 new innovation companies last year, including high profile IPOs like Lightspeed and Docebo. In total, there were 146 new corporate listings on TSX and TSXV in 2019, not including investment funds - a number that stacks up very well when you look at listing activity around the world. In fact, we added more new listings last year than any other exchange in North America, and ranked number two in the world in new listings for 2019, according to data from the World Federation of Exchanges. We also ranked number two in new international listings among our peers for 2019. Derivatives In Derivatives, we are focused on moving to capitalize on the growing demand - particularly on the buy-side - for derivatives products in global markets by expanding MX’s existing international sales networks in foreign markets. We see this as a growth opportunity and are working closely with our clients to increase investor awareness of key Canadian benchmarks and liquidity in MX’s signature products. Volumes traded during our extended hours represented about 4% of overall volume in the products offered during the additional five trading hours. On the product front, the performance of the relaunched 5-year Government of Canada Bond Futures Contract has been a major win for MX. Overall, volumes on MX were up 4% compared to 2018, and 2020 has been off to a strong start with volumes up 24% through the end of February. Trayport Trayport continued to deliver strong revenue growth during 2019. Revenue from the core subscriber business, including VisoTech, was up 15% in Sterling over 2018, with growth in average trader subscribers of 12%. Trayport also took significant steps forward in its strategy to capitalize on secular energy market trends, including the shift to cleaner and renewable sources and the evolution of how and where these transactions take place, with the globalization and digitization of markets. Brokers using 2019 Annual Report 5 TMX Group Limited Trayport are a substantial source of liquidity in the burgeoning global liquid natural gas market. Activity in the signature European and Asian benchmark liquid natural gas contracts, accessible through Trayport’s system, increased significantly year-over-year. In May of 2019, Trayport acquired Vienna-based VisoTech, a leading provider of European short-term energy trading solutions. VisoTech’s advanced algorithmic trading capabilities have been integrated into Joule, Trayport’s core trading screen. At the end of 2019, Trayport also established an entry point into the U.S. energy market with an agreement with the Nodal Exchange, a Washington DC-based derivatives exchange serving commodities markets. U.S. energy contracts will be available on Trayport screens this year, and the Joule network will be expanded to include Nodal’s trading participants. In Conclusion We have made so much progress in the last few years in increasing our global footprint and becoming the TMX Group we need to be: indispensable to clients, valuable to investors. Over the last several years we have continued to return cash to shareholders. In fact, we have increased our quarterly dividend five times since the third quarter of 2016, from 40 cents to 66 cents per share, an increase of 65%. In February, our Board approved a plan to repurchase up to 560,000 common shares, approximately 1% of our common shares outstanding, by way of a normal course issuer bid (NCIB). This decision reflects the high level of confidence we have in our strategy and our ability to deliver solid operating results. While we recognize that 2020 is off to an even more challenging start than 2019, we remain equally confident in our strategy and our proven ability to deliver solid results in more volatile times. John D. McKenzie Interim Chief Executive Officer TMX Group Limited March 3, 2020 2019 Annual Report 6 TMX Group Limited MD& A Management's Discussion and Analysis 2019 Annual Report 7 TMX Group Limited TMX Group Limited MANAGEMENT'S DISCUSSION AND ANALYSIS February 10, 2020 This Management’s Discussion and Analysis (MD&A) of TMX Group Limited’s (TMX Group) financial condition and financial performance is provided to enable a reader to assess our financial condition, material changes in our financial condition and our financial performance, including our liquidity and capital resources, for the year ended December 31, 2019 (2019) compared with the year ended December 31, 2018 (2018). This MD&A should be read together with our audited annual consolidated financial statements for the year ended December 31, 2019 (financial statements). Our financial statements and this MD&A for 2019 are filed with Canadian securities regulators and can be accessed at www.tmx.com and www.sedar.com. The financial measures included in this MD&A are based on financial statements prepared in accordance with International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board (IASB), unless otherwise specified. All amounts are in Canadian dollars unless otherwise indicated. Certain comparative figures have been reclassified in order to conform with the financial presentation adopted in the current year. Additional information about TMX Group, including the Annual Information Form, is available at www.tmx.com and www.sedar.com. We are not incorporating information contained on our website in this MD&A. MD&A Structure Our MD&A is organized into the following key sections: • Mission, Client First Vision and Corporate Strategy; • Initiatives and Accomplishments - 2019 initiatives and accomplishments; • Organizational Changes - an update on senior management changes; • Regulatory Changes - an update on the regulatory environment; • Market Conditions - a discussion of our current business environment; • Our Business - a detailed description of our operations and our products and services; • Results of Operations - a year-over-year comparison of results; • 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; • Managing Capital - an outline of objectives for managing our cash and cash equivalents, marketable securities, share capital, Commercial Paper, Debentures, and credit and liquidity facilities; • • • Financial Instruments; Critical Accounting Estimates - a review of our goodwill and intangible assets - valuation and impairment; Select Annual and Quarterly Financial Information - a discussion of select annual information from 2017-2019, the fourth quarter of 2019 compared with the corresponding period in 2018 and the results over the previous eight quarters; 2019 Annual Report 8 TMX Group Limited Page 1 • Enterprise Risk Management - a discussion of the risks to our business as identified through our risk management process as well as Financial Risk Management; • Accounting and Control Matters - a discussion of changes in accounting policies adopted in 2019 and future changes in accounting policies, an evaluation of our disclosure controls and procedures and internal control over financial reporting and changes to internal control over financial reporting; and • Caution Regarding Forward-Looking Information. MISSION, CLIENT FIRST VISION AND CORPORATE STRATEGY Mission Powering capital and commodity markets, investment, and economic growth for clients in Canada, across North America, and around the world. Client First Vision To be an indispensable solution for companies around the world to raise capital and the preferred destination for traders and investors to prosper. Corporate Strategy1 The last five years and looking forward In 2015, we engaged in a comprehensive review of our portfolio of assets and an in-depth strategic review of the organization to establish our strategy going forward. We developed a strategic direction and execution plans to transform the organization from a regional infrastructure provider to a global technology solutions provider. In 2016, we created leverage in our organizational structure by advancing beyond a group of companies to an integrated organization. We identified businesses that were core to our strategy, and sold certain non-core businesses in 2016 and 2017. We also announced a realignment of the organization that helped us achieve operational and cost efficiencies. In 2017, we completed the acquisition of Trayport Holdings Limited and its subsidiaries, and its U.S.-based affiliate, Trayport Inc. (collectively, Trayport) which transformed our revenue mix, and accelerated our global growth. Since the acquisition, our recurring revenues increased from approximately 40% in 2016 to approximately 52%2 in 2019; while our revenue from outside of Canada grew from less than 30% in 2016 to approximately 33% in 20193. In 2018 and 2019, we continued integrating Trayport assets and talent, as well as capturing global growth opportunities in all key business areas. We also added leading short-term and algorithmic trading capabilities to Trayport through the acquisition of Vienna-based VisoTech. We have the following long term financial objectives that are based on certain assumptions and expected performance over time. While we believe these aspirational goals are reasonable, we may not be able to achieve these financial objectives as our assumptions may prove to be inaccurate and therefore our actual results could differ materially from 1 The "Corporate Strategy" section contains certain forward-looking statements. Please refer to "Caution Regarding Forward-Looking Information" for a discussion of risks and uncertainties related to such statements. 2 Recurring revenue streams include substantially all of Global Solutions, Insights & Analytics, as well as sustaining listing fees, custody fees, transfer agency fees, and other access/subscription based revenues. 3 Based on full year 2019 revenue from customers with an address outside of Canada. Page 2 2019 Annual Report 9 TMX Group Limited our long term objectives. Our long term objectives do not constitute guidance. Our current profitability and our ability to attain these goals in a given period must be weighed against our need to invest in our business in order to execute on our strategy. Some examples of these assumptions include successful execution of our strategic growth initiatives and business objectives; continued investment in growth businesses; and continued re-prioritization of investment towards enterprise solutions. Our business is organized into the following areas: Capital formation: Energize and expand the capital markets community to better facilitate capital raising for issuers of all types at all stages of their development, and provide access to alternative sources of capital. Lines of business include Toronto Stock Exchange (TSX) and TSX Venture Exchange (TSXV) listing and issuer services, and TSX Trust (TMX Group's transfer agency and corporate trust services business). Equities and fixed income trading and clearing: Operate innovative, efficient, reliable, fast, easy to use platforms for equities and fixed income trading and clearing. Lines of business include TSX, TSXV and TSX Alpha Exchange (Alpha) equities trading, Shorcan Brokers Limited (Shorcan) fixed income trading and Canadian Depository for Securities Limited and its subsidiaries including CDS Clearing and Depository Services Inc (CDS Clearing) and CDS Innovations (collectively, CDS). Derivatives trading and clearing: Intensify new product creation and leverage our unique market position to benefit from increasing demand for derivatives products both in Canada and globally. Lines of business include Montréal Exchange (MX) and Canadian Derivatives Clearing Corporation (CDCC). Global solutions, insights and analytics: Provide solutions to European and global wholesale energy markets for price discovery, trade execution, post-trade transparency and straight through processing. Deliver integrated data sets to fuel high-value proprietary and third party analytics to help clients make better trading and investment decisions. Lines of business include TMX Datalinx (information services), Co-location, as well as Trayport (acquired December 14, 2017) and Vienna-based VisoTech (acquired May 15, 2019). 2019 Annual Report 10 TMX Group Limited Page 3 INITIATIVES AND ACCOMPLISHMENTS Capital Formation In February 2019, we announced that Toronto Stock Exchange (TSX) and TSX Venture Exchange (TSXV) joined the United Nations Sustainable Stock Exchanges (SSE) initiative to promote sustainability performance and transparency in capital markets. As an SSE partner, we will engage in peer to peer dialogue to explore how exchanges can work together with investors, regulators, and companies, to encourage sustainable investment, while also enhancing corporate transparency and performance in respect to environmental, social and corporate governance issues. In April 2019, Toronto Stock Exchange launched TSX Sandbox, a program that encourages innovation and provides support for novel financing structures proposed by issuers already listed on TSX. TSX Sandbox is also relevant to new applicants in all sectors, including the innovation space, which have high growth potential but do not meet traditional criteria such as profitability or operating history. In September 2019, we announced the first company to be listed on TSX under the TSX Sandbox program. In November 2019, a second company was listed on TSX under the TSX Sandbox program. In 2019, TSX and TSXV attracted 2504 new listings (excluding 21 graduates), and including 20 new international listings. For the year-ended December 31, 2019, TSX and TSXV were ranked second globally by the World Federation of Exchanges for new international listings. In 2019, highlights for TSX Trust included winning the largest IPO in Canada, switching over 40 ETFs from our competitors in Q4/19, and increasing Corporate Trust mandates by 14% over 2018. Effective September 2019, TSX Trust successfully became an Acceptable Institution (AI) for Investment Industry Regulatory Organization of Canada (IIROC) purposes. Being an IIROC AI enables TSX Trust to provide custody related services to IIROC dealers. Equities and Fixed Income Trading and Clearing 5 In December 2019, CDS filed a proposal to make two changes to the existing fee model. The first and most significant change is the proposal to modify its fee model by eliminating the rebates that are paid annually to participants based on their respective use of CDS services. The second change is the elimination of network connectivity fees currently paid by participants. The elimination of the rebates is being proposed to ensure that we can make the significant investment required to modernize CDS technology, and have adequate funding for ongoing future technology upgrades, while enabling us to earn an appropriate rate of return on our capital investment. (See Update on Modernization of Clearing Platforms - Phase Two). CDS is proposing to permanently eliminate the 50/50 Rebates on Core CDS Services and to permanently eliminate the Additional Rebate of $4.0 million annually (see Equities and Fixed Income Clearing, Settlement, Depository and Other Services - CDS - Revenue Description). The total rebates of $10.1 million for 2019 represented 9% of CDS’s consolidated (pre-rebate) revenues for 2019. CDS also proposes to eliminate Port and Network connectivity fees. In 2019, participants paid $1.5 million in Port fees and $1.7 million in Network fees. The above proposals are all subject to regulatory approval. 4 Excludes graduates from TSXV to TSX, and companies that moved from TSX to TSXV. 5 The "Equities and Fixed Income Trading and Clearing" section contains certain forward-looking statements. Please refer to "Caution Regarding Forward-Looking Information" for a discussion of risks and uncertainty related to such statements. Page 4 2019 Annual Report 11 TMX Group Limited Derivatives Trading and Clearing 6 In October 2018, MX launched extended trading hours from the previously 6:00 a.m. ET open to a 2:00 a.m. ET open. Initially, this included MX's suite of interest rate products7. Beginning in February 2019, MX offered clients the ability to also trade its equity index futures8 in these extended hours. For 2019, volumes during extended trading hours represented approximately 4% of total volumes in these products. MX is preparing for the next phase of extended hours to align with Asian trading hours. In 2019, MX set a new annual total volume record with 116 million contracts traded. The Ten-Year Government of Canada Bond Futures (CGB) set a new monthly volume record with 4,274,256 contracts, and new annual volume record with 31,684,621 contracts. In 2019, the CGF set a new daily volume record with 61,211 contracts, as well as a new monthly volume record with 513,679 contracts. The CGF also set a new annual volume record of 4,130,134 contracts. The S&P/TSX 60 Index Standard Futures (SXF) has set a new daily volume record with 276,951 contracts, as well as a new annual volume record with 7,805,301 contracts. Share Futures (SSF) set a new monthly volume record with 553,696 contracts in 2019, as well as a new annual volume record with 4,406,202 contracts. Finally, the Three-Month Canadian Bankers' Acceptance Futures (BAX) set a new annual volume record with 29,816,722 contracts. In May 2019, MX re-launched Options on the U.S. dollar (USX). MX is looking to relaunch the Two-Year Government of Canada Bond Futures as we did for the Five-Year Government of Canada Bond Futures (CGF). Global Solutions, Insights and Analytics (GSIA)9Trayport Trayport is the primary connectivity network and data and analytics platform for European wholesale energy markets. Trayport's solutions enable price discovery, trade execution, post-trade transparency, and post-trade straight through processing. Global Gas - Liquid Natural Gas (LNG) In 2019, volumes remained strong for the European and Asian benchmark gas contracts, the Dutch Title Transfer Facility (TTF) and the Japan Korea Marker (JKM). TTF volumes rose 39% in 2019 vs 2018, and record average daily volumes were reported for JKM in November, 2019, up 267% compared with November, 2018.10In both these markets, brokers who utilize Trayport technology execute the majority of deals and use Trayport to connect to their trader customers, and additional brokers and exchanges continue to enter these markets through Trayport. The increase in volumes in these markets results in an expansion in market participants, which drives growth in the number of subscribers connecting with Trayport to trade these products. 6 The "Derivatives Trading and Clearing" section contains certain forward-looking statements. Please refer to "Caution Regarding Forward- Looking Information" for a discussion of risks and uncertainty related to such statements. 7 BAX - Three-Month Canadian Bankers' Acceptance Futures, OBX - Options on Three-Month Canadian Bankers' Acceptance Futures, CGZ - Two-Year Government of Canada Bond Futures, CGF - Five-Year Government of Canada Bond Futures, CGB - Ten-Year Government of Canada Bond Futures, LGB - 30-Year Government of Canada Bond Futures and OGB - Options on Ten-Year Government of Canada Bond Futures. 8 SXF - S&P/TSX 60 Index Standard Futures, SXM - S&P/TSX 60 Index Mini Futures, SCF - S&P/TSX Composite Index Mini Futures, and SXA, SXB, SXH, SXK, SXU, SXY - Sector Index Futures. 9 The "Global Solutions Insights and Analytics" section contains certain forward-looking statements. Please refer to "Caution Regarding Forward-Looking Information" for a discussion of risks and uncertainty related to such statements. 10 Source:Intercontinental Exchange press release, December 4, 2019. Page 5 2019 Annual Report 12 TMX Group Limited Digitalization Trayport's updated broker screen, Joule, was recently released to brokers, and is intended to give brokers better visibility and customizability for the markets in which they operate. VisoTech Acquisition 11 In May 2019, Trayport Limited completed the acquisition of Vienna-based VisoTech, a leading provider of European short- term energy trading solutions. VisoTech provides advanced algorithmic trading solutions to customers in the European spot power and natural gas markets, enabling clients to use VisoTech’s pre-defined algorithms to develop their own customized trading strategies. These capabilities have been integrated with Trayport’s core trading screen, Joule, allowing traders to view and control algorithms within the trading screen and enabling Trayport to address the increasing market demand for intraday trading of energy products as the shift to renewable generation continues. The trend of algorithmic power trading in European intraday markets continues to grow. In 2019, intraday volumes on EPEX Spot grew 13% over the same period in 2018.12 In July 2019, 52% of the electricity traded on the leading power market in the Nordics and Baltics, Nord Pool power exchange's intraday market was executed by algorithms, up from 13% in July 2018.13 Geographic Expansion In October 2019, we announced that Trayport and Nodal Exchange, a Washington D.C.-based derivatives exchange serving North American commodities markets, announced an agreement to offer Trayport’s core trading screen, Joule, to trading participants of Nodal Exchange. This will be rolled out to participants in early 2020. In December 2019, the Balkan Gas Hub (Bulgarian Exchange) went live on the Trayport Exchange System, allowing them to connect to the Trayport network of gas traders. At the first auction, 550,000 MWh were traded. Balkan Gas Hub will initially introduce over the counter (OTC) and exchange contracts that best fit the needs of Bulgarian market participants. TMX Datalinx In November 2019, three new indices were announced14: S&P/TSX Cannabis Index The S&P/TSX Cannabis Index measures the performance of companies trading on either TSX (Toronto Stock Exchange) or TSXV (TSX Venture Exchange) that are significantly involved in the cannabis market. This index was released and the methodology was made available on January 20, 2020. 11 The "VisoTech Acquisition" section contains certain forward-looking statements. Please refer to "Caution Regarding Forward-Looking Information" for a discussion of risks and uncertainty related to such statements. 12 Sourced from collection of monthly EPEX volume reports 13 Source: Reuters article 'Algorithm trades hit record on Nord Pool intraday power market' (published August 2019). 14 The S&P/TSX Cannabis Index and S&P/TSX Small Cap Select Index are products of S&P Dow Jones Indices LLC and TSX Inc. All rights reserved. S&P® is a registered trademark of Standard & Poor’s Financial Services LLC (“S&P”). Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”). TSX® is a registered trademark of TSX Inc. The S&P/MX International Cannabis Index is a product of S&P Dow Jones Indices LLC and Bourse de Montreal Inc. and has been licensed for use. All rights reserved. MX® is a registered trademark of Bourse de Montreal Inc., used under license. Neither S&P Dow Jones Indices LLC, S&P, Dow Jones, TSX Inc., Bourse de Montreal Inc., their affiliates nor their third party licensors make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and none such entities shall have any liability for any errors, omissions, or interruptions of any index or any data related thereto. Page 6 2019 Annual Report 13 TMX Group Limited The S&P/MX International Cannabis Index The S&P/MX International Cannabis Index measures the performance of companies trading on TSX or TSXV, NYSE (New York Stock Exchange) or NASDAQ that are significantly involved in the cannabis market. MX has announced that futures contracts on this index will be made available early 2020. S&P/TSX Small Cap Select Index The S&P/TSX SmallCap Select Index seeks to measure constituents of the S&P/TSX SmallCap Index that have a demonstrated track record of generating positive earnings. Key benefits relative to traditional small-cap indices are improved long-term total returns, lower risk, lower tracking error and enhanced liquidity. New Pricing and Packaging Programs Throughout 2019, we received regulatory approval and launched two new data pricing and packaging programs. Enterprise non-professional (non-pro) fee discount program Under this program we introduced tiered discounts for clients based on the total amount spent on all non-pro TSX and TSXV products and a fee cap after a specific spend limit has been reached. As of December 31, 2019, we had entered into enterprise non pro data fee discount agreements with six customers for a three year period. Canadian Exchange Group (CEG) locked-in pricing The CEG product includes a feed of real-time data to customers outside of Canada. Effective October 1, 2019, the price for the Level 1 subscription was increased by approximately 3% from $56.50 to $58.30. Clients have the option of locking in for a two year period at the $56.50 price if they make a commitment for a minimum number of subscriptions based on the average usage over the previous twelve months. Those clients not exercising the option are charged the new price of $58.30 per subscription. Update on Modernization of Clearing Platforms15 In 2017, we commenced work on an initiative to modernize the technology platforms for our CDS and CDCC clearing and settlement businesses as well as for our entitlement systems. We have separated the modernization of our clearing houses into two phases: Phase One During phase one, we focused on the CDCC risk management element of the project, and went live with this phase in Q2/19. We spent $6.3 million up to the end of 2018 and $4.9 million in 2019 on capital expenditures related to this phase. While it was contemplated initially to integrate the clearing and settlement platforms, CDCC will continue to run on the SOLA platform. As previously anticipated, there will be no cost savings in this phase. Phase Two Phase two of this project involves the replacement of other legacy systems at CDS including those related to clearing and settlement, as well as an expanded scope to address entitlement payment systems. In March 2017, we implemented an Issuer Services Program that included a number of fee changes in anticipation of the investment that would be required to modernize the entitlement payments system. We spent $22.5 million up to the end of 2018 and $21.3 million in 2019 15 The "Update on Modernization of Clearing Platforms" section contains certain forward-looking statements. Please refer to "Caution Regarding Forward-Looking Information" for a discussion of risks and uncertainties related to such statements. Page 7 2019 Annual Report 14 TMX Group Limited on capital expenditures related to phase two. Overall, we expect to incur between approximately $95 and $105 million in capital expenditures over the entire project. We expect to complete this project by the end of 2021. We will continue to provide updates on estimates for capital expenditures and timing as this complex project progresses. Strategic Re-alignment16 In Q1/19, we took the following measures to position TMX Group for ongoing success, and incurred strategic re- alignment expenses of approximately $3.3 million: • We made changes in our post-trade business with the retirement of Glenn Goucher, President, CDCC and CDS. Jay Rajarathinam, Chief Technology and Operations Officer, TMX Group, assumed leadership of our post-trade business as President, CDCC and CDS. • We eliminated the centralized innovation product development unit and moved this function to TMX Group's business areas in order to increase our focus on delivering client-centric solutions. • We made changes to our enterprise risk approach with an objective-centric focus, enhancing the way we manage risk. In Q2/19, we incurred non-recurring charges related to onerous contracts of approximately $1.3 million related to our initiative on modernizing our clearing platforms. In Q4/19, we recovered approximately $0.9 million of these charges (see RESULTS OF OPERATIONS - Strategic re-alignment expenses) In aggregate, the organizational changes generated an annual savings of approximately $1.8 million starting in Q2/19. These efforts are intended to bring increased focus to modernizing our clearinghouses and enhancing client service, which should lead to a more efficient cost structure. ORGANIZATIONAL CHANGES In January 2020, we announced the retirement of Chief Executive Officer, Lou Eccleston. We announced the appointment of John McKenzie as interim Chief Executive Officer of TMX Group, also effective January 10, 2020. Mr. McKenzie has been with TMX Group for over 19 years, and assumed the responsibilities of interim CEO in addition to his current role as Chief Financial Officer. REGULATORY CHANGES Equities Trading On January 23, 2020, the Canadian Securities Administrators (CSA) published a notice confirming that it has approved a Trading Fee Rebate Pilot Study that applies temporary pricing restrictions on marketplace transaction fees, to examine the effects of a prohibition of rebate payments by Canadian Marketplaces (Pilot Study). The implementation of the Pilot Study will be conditional on the implementation of a similar study by the United States Securities and Exchange Commission (SEC). If the SEC fee pilot study does not proceed, the CSA will not implement the Pilot Study. While TMX Group is supportive of the reduction of maker-taker fees in Canada, we are concerned that should the Pilot Study proceed, the reduction in rates will negatively impact liquidity in our markets, execution quality, and Canada's competitiveness for global capital. TMX Group provided comments to the CSA’s Pilot Study proposal expressing significant concerns related to the proposal and the potential negative impacts and risks it would impose on the market, in addition to suggesting alternative approaches. 16 The "Strategic re-alignment" section contains certain forward-looking statements. Please refer to "Caution Regarding Forward-Looking Information" for a discussion of risks and uncertainty related to such statements. Page 8 2019 Annual Report 15 TMX Group Limited MARKET CONDITIONS AND OUTLOOK17 Overall, Canadian equities trading volumes were down 11% in 2019 compared with 2018.18 The average CBOE Volatility Index (VIX) was 15.4 in 2019 down slightly from 16.6 in 2018. Trading volumes on TSX and TSX Alpha Exchange (Alpha) decreased by 4% and 10%, respectively, in 2019 compared with 2018; volumes traded on TSXV (including NEX) were down 28% over the same period reflecting lower demand for trading TSXV-listed issues this year. Derivative trading in Canada increased by 4% based on the volume of contracts traded on MX in 2019 over 2018. The increase was lower than the growth rate seen in previous years reflecting more certainty around the interest rate environment in Canada. The uncertain market environment at the end of 2018 continued to contribute to less favourable conditions for capital raising in 2019. On TSX, the total amount of financing dollars raised increased by 2% and the total number of financings decreased by 3% in 2019 compared with 2018. On TSXV (including NEX) there was a 40% decrease in the total amount of financing dollars raised and a 14% decrease in the total number of financings in 2019 over 2018. On January 22, 2020, the Bank of Canada announced that it was maintaining its target for the overnight rate at 1 ¾ percent. The Bank said that the global economy is showing signs of stabilization, and some recent trade developments have been positive. However, it added that there remains a high degree of uncertainty and geopolitical tensions have re-emerged. The Canadian economy has been resilient but indicators since the October Monetary Policy Report (MPR) have been mixed. The Bank noted that data for Canada indicates that growth in the near term will be weaker, and the output gap wider, than the Bank projected in October. The Bank now estimates growth of 0.3 percent in the fourth quarter of 2019 and 1.3 percent in the first quarter of 2020. Some of the slowdown in growth in late 2019 was related to special factors that include strikes, poor weather, and inventory adjustments. The weaker data could also signal that global economic conditions have been affecting Canada’s economy to a greater extent than was predicted. Looking ahead, the Bank said, Canadian business investment and exports are expected to contribute modestly to growth, supported by stronger global activity and demand. The Bank is also projecting a pickup in household spending, supported by population and income growth, as well as by the recent federal income tax cut. In its January MPR, the Bank projects the global economy will grow by just over 3 percent in 2020 and 3 ¼ percent in 2021. For Canada, the Bank now forecasts real GDP will grow by 1.6 percent in 2020 and 2 percent in 2021, following 1.6 percent growth in 2019.19 17 The "Markets Conditions and Outlook" section contains certain forward-looking statements. Please refer to "Caution Regarding Forward-Looking Information" for a discussion of risks and uncertainty related to such statements. 18 Source: IIROC (excluding intentional crosses). 19 Source: Extracted from Bank of Canada press release, January 22, 2020. Page 9 2019 Annual Report 16 TMX Group Limited OUR BUSINESS On the following pages, we provide an overview and description of products and services, strategy and revenue description for each of our segments as outlined below: 1. Capital Formation 2. Equities and Fixed Income Trading and Clearing 3. Derivatives Trading and Clearing 3. Global Solutions, Insights and Analytics i. TMX Datalinx ii. Co-location Services iii. Trayport For key statistics related to each business above, please see Results of Operations. 2019 Annual Report 17 TMX Group Limited Page 10 Capital Formation Overview and Description of Products and Services Our goal is to provide solutions for corporate clients in need of growth capital and liquidity, and provide investors with a broad range of investment opportunities. TMX operates a unique two-tiered ecosystem, comprised of Toronto Stock Exchange (TSX) and TSX Venture Exchange (TSXV) to help companies access the public markets, raise capital and provide liquidity to shareholders. TSX is a leading listings venue for established domestic and international issuers. TSXV is the pre-eminent global platform for facilitating venture stage capital formation. In general, issuers initially list on TSX through an Initial Public Offering (IPO), by graduating from TSXV, or by seeking a secondary listing (to complement an existing listing on another listing venue). Venture stage companies generally list on TSXV either in connection with an IPO, or through alternative methods such as TSXV’s Capital Pool Company program or a reverse takeover. We also operate NEX, a market for issuers that have fallen below the listing standards of TSXV. Issuers list a number of different types of securities including conventional securities such as common shares, preferred shares, rights and warrants; and a variety of alternative types of structures such as exchangeable shares, debt or convertible debt instruments, limited partnership units, ETFs, and structured products such as investment funds. We are a global leader in listing global growth capital marketplaces20 with concentration in resource sector listings and a growing number of innovation companies (including those in the technology, clean technology, renewable energy and life science sectors). As of December 31, 2019, we had 20 new international (non-Canadian) listings, of which 11 are innovation companies. Issuers listed on TSX and TSXV raised a combined $39.0 billion in 2019 ($34.8 billion on TSX and $4.2 billion on TSXV). In addition to our listing facilities, we offer other services to our listed issuers. TSX Company Services is focused on enhancing and expanding our service offering to support the funding, growth, and success of our listed companies. 20 Global growth capital marketplace is defined as small and medium-sized enterprises. Page 11 2019 Annual Report 18 TMX Group Limited Together with industry leading service providers, we offer solutions and resources designed to help our clients reach their corporate objectives. Within Capital Formation is TSX Trust, second by market share, servicing approximately 23% of listed issuers when measured by clients on the TSX and TSXV. The business supports over 1,100 equity and debt issuers and private companies with corporate trust, transfer agent and registrar services. Strategy • Our business development and sales efforts focus on: Expanding our geographic focus to attract international listings across all sectors Accelerating growth in targeted sectors (including the innovation sector) where we are uniquely positioned, while maintaining our resource sector franchise Activating new pools of capital in Canada and globally • Streamlining and digitizing issuer on-boarding processes to improve issuer engagement, lower costs for issuers, and accelerate revenue capture • Driving policy innovation • Adapting to the evolving needs of public and private growth companies (across their business lifecycle) and their capital providers by offering new platforms and solutions. • For TSX Trust, the strategy focuses on three main pillars of growth: Growing from the core - accelerating growth through expanding product line-up and selling more to existing clients Private markets - expand service offering to meet unique needs of the client base Corporate, government and infrastructure debt - leveraging the trust license to expand into adjacent markets with recurring revenue and cash balances Revenue Description We generate Capital Formation revenue from several fees and services, including: Initial Listing Fees TSX and TSXV 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 value of securities being listed or reserved at the time of listing. Revenues from initial listing fees are deferred over a 12-month period from the date of listing. 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 and reserving additional shares to be issued under stock option plans. Additional listing fees are based on the value of the securities to be listed or reserved, subject to minimum and maximum fees and are recognized in the period the transaction occurred. Page 12 2019 Annual Report 19 TMX Group Limited Sustaining Listing Fees21 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 after the new listing takes place and are amortized over the remainder of the year on a straight-line basis. Fees charged to issuers vary based on the type of issuer (corporate, structured product or ETF). The aggregate market capitalization of issuers listed on TSX increased from $2.65 trillion at the end of 2018 to $3.20 trillion at the end of 2019. The market capitalization of issuers listed on TSXV including NEX was essentially unchanged from $45.4 billion at the end of 2018 and 2019. We estimate that the increase in the total market capitalization on TSX should result in an increase in sustaining fee revenue of less than $1.0 million in 2020. We do not anticipate any change in TSXV sustaining fee revenue for 2020. Other Services TSX Trust has over 1,100 unique clients, and revenue is primarily derived from recurring monthly fees and net interest income on cash balances. Corporate trust fees relate to services that include acting as trustee for debt instruments, depository for takeover bid offers, warrant agent, subscription receipt agent, and agent for voluntary escrow arrangements. TSX Trust also benefits from periodic and large cash balances that are held in its trust account, which results in net interest income. Equities and Fixed Income Trading & Clearing 21 The "Sustaining Listing" 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. Page 13 2019 Annual Report 20 TMX Group Limited Equities and Fixed Income Trading – TSX, TSXV, Alpha and Shorcan Overview and Description of Products and Services We operate innovative, efficient, reliable, high performance platforms for trading and clearing. Equities Trading TSX, TSXV and Alpha operate fully electronic exchanges that facilitate secondary trading in TSX and TSXV-listed securities on a continuous auction basis throughout the trading day. Retail, institutional and other proprietary investors and traders place orders to buy or sell securities through Participating Organizations (POs)/Members of the exchanges. In addition to continuous trading throughout the day, TSX and TSXV also operate opening and closing auctions, which are central sources of liquidity for trading in Canada during those times. The closing auctions also establish the industry benchmark closing price for our listed securities. A post-closing trading session on TSX and TSXV allows for further opportunity to trade at the closing price. Additional trading features and functionalities are offered to accommodate a range of trading strategies and provide flexibility and optionality to clients. Each of TSX, TSXV and Alpha also allow POs to report their internally matched orders, by printing these as crosses on the exchanges at no cost. Fixed Income Trading Shorcan acts as an inter-dealer bond broker (IDB) that specializes in the Canadian fixed income marketplace, brokering products that include Government of Canada, provincial, corporate, strip, and mortgage bonds, repurchase agreements (repos) and swaps. Shorcan serves financial institutions that are broker-dealers registered with IIROC and that are CDCC members; the buy-side does not participate. Interdealer brokers can be accessed via broker screens that run on desktop computers at a trader’s desk or via voice lines. Strategy • Continue to deploy innovative trading features and functionalities aimed at enhancing market efficiency and trading liquidity • Continue to maintain leading market share Revenue Description Equities Trading Most of the fees on TSX, TSXV and Alpha are volume-based. These fees are applied to traded shares, and in most cases, involve one side of the trade being charged a per share fee and the other side being provided with a per share rebate. The excess of the fee over the rebate represents the exchanges' net fee per share traded. These types of models are intended to incent different types of customers and behaviors. The primary fee structure on TSX and TSXV is a maker-taker model that pays a rebate to the liquidity providing side of the trade so that market participants have an incentive to enter passive orders into the central limit order book, while the liquidity taking side of the trade pays a fee. Alpha supports an inverted pricing model which is intended to provide incentives to take liquidity by providing a rebate, with the liquidity providing side of the trade paying the fee. Regardless of the fee structure applied, trading revenue is recognized in the month in which the trade is executed. (also see REGULATORY CHANGES - Equity Trading for details regarding a proposed Trading Fee Rebate Pilot Study to examine the effects of a prohibition of rebate payments). Page 14 2019 Annual Report 21 TMX Group Limited Fixed Income Trading Shorcan charges broker commissions on both sides of the trade upon execution. Shorcan broker commission varies by different types of instruments and by execution method, voice vs. electronic. Equities and Fixed Income Clearing, Settlement, Depository and Other Services - CDS Overview and Description of Products and Services The Canadian Depository for Securities Limited (CDS) is Canada's national securities depository, clearing and settlement hub for domestic and cross-border depository-eligible securities. CDS supports Canada's equities, fixed income and money markets and is accountable for the safe custody and movement of securities, the processing of post-trade transactions, and the collection and distribution of entitlements relating to securities deposited by participants. CDS’s domestic clearing and settlement services enable participants to report, confirm or match, reconcile, net and settle exchange and OTC traded equity, debt and money market transactions, as well as derivative transactions in depository- eligible securities (e.g., the processing of rights and warrants and the settlement of exercised options). CDS also offers related services such as buy-ins, risk controls and reporting, and facilitates trading in CDSX (CDS’s multilateral clearing and settlement system) eligible securities before they are publicly distributed (trades in these securities settle after public distribution). CDSX is designated by the Bank of Canada as being systemically important, under the Payment Clearing and Settlement Act (Canada). CDS Depository is accountable for the safe custody and movement of depository-eligible domestic and international securities, accurate record-keeping, processing post-trade transactions, and collecting and distributing entitlements arising from securities deposited by participants. Other CDS services include, the issuance of International Security Identification Numbers (ISINs), depository eligibility, securities registration as well as entitlement and corporate action (E&CA) event management. Strategy TMX Group is implementing a post-trade services strategy that covers CDS and CDCC. Under this strategy, TMX Group will invest in modernizing core technology and developing growth opportunities for each of the two businesses under these main focuses: • Clearing and Depository: Develop and migrate to an advanced clearing, settlement, and risk management solution, to deliver enhanced client experiences at higher efficiency (see INITIATIVES AND ACCOMPLISHMENTS - Update on Modernization of Clearing Platforms) • Global Liquidity Solutions: Provide streamlined access to funding and margining, and continue growth in Repo central-counterparties offering • Global Connectivity Solutions: Create access gateways that connect global clients within an increasingly global marketplace such as the CDS-DTCC (The Depository Trust & Clearing Corporation) link 2019 Annual Report 22 TMX Group Limited Page 15 Revenue Description For reported trades, both exchange traded and OTC trades, CDS charges clearing fees to participants on a per trade basis. Clearing fees are recognized as follows: • Reporting fees are recognized when the trades are delivered to CDS. • Netting/novation fees are recognized when the trades are netted and novated. Other clearing-related fees are recognized when services are performed. For those trades that are netted in Continuous Net Settlement (CNS), settlement fees are charged on the basis of the number of netted trades settled. Settlement fees for those trades that are not netted (i.e., trades that are settled individually on a trade-for-trade (TFT) basis) are charged on a per transaction basis. Settlement-related fees are recognized when the trades are settled. Depository fees are charged per transaction and custody fees are charged based on a daily average of volume (i.e., number of shares held for equity securities and nominal value held for fixed income securities) and positions held. Depository fees are charged for custody of securities, depository related activities, and processing of entitlement and corporate actions, and are recognized when the services are performed. International revenue consists of revenue generated through offering links as channels to participants to affect cross- border transactions and custodial relationships with other international organizations. The related fees are recognized as follows: • Fees are charged to participants based on participant usage of National Securities Clearing Corporation (NSCC) and Depository Trust Company (DTC) services. Participants are sponsored into NSCC and DTC services via the New York Link service and the DTC Direct Link service respectively. • Custodial fees and other international services related revenues are recognized when the services are performed. Issuer services fees are fees levied to issuers and/or their agents for ISIN, and entitlements and corporate actions management services for which they benefit. The transition period for the discount on entitlement and corporate action event management fees ended on December 31, 2018. Full fees are applicable effective January 1, 2019. 50:50 Rebates on Core CDS Services For the period starting November 1, 2012 and subsequent fiscal years starting on January 1, 2013, CDS shares with participants, on a 50:50 basis, any annual increases in revenue on clearing and other core CDS Clearing services, as compared with revenues in fiscal year 2012 (the 12-month period ending October 31, 2012). Beginning January 1, 2015 and subsequent years, CDS also shares with Participants, on a 50:50 basis, any annual increases in revenue applicable to the New York Link/Depository Trust Company Direct Link Liquidity Premium. Rebates are paid on a pro rata basis to participants in accordance with the fees paid by such participants for these services. Additional Rebates In addition, CDS must rebate an additional $4.0 million annually to participants in respect of exchange clearing services for trades conducted on an exchange or alternative trading systems (ATS). In December 2019, CDS filed a proposal to eliminate the rebates described above (see INITIATIVES AND ACCOMPLISHMENTS - Equities and Fixed Income Trading and Clearing). 2019 Annual Report 23 TMX Group Limited Page 16 Derivatives Trading and Clearing Derivatives Trading & Clearing – MX, CDCC and BOX Overview and Description of Products and Services Our domestic financial derivatives trading is conducted through MX, Canada’s standardized financial derivatives exchange. Headquartered in Montréal, MX offers trading in interest rate, index, equity and exchange-rate derivatives. BOX is an equity options market located in the U.S for which MX provided transitional technology services in 2019. As at December 31, 2019, MX held approximately 41% ownership interest in BOX. 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. In 2019, approximately 60% of MX’s volume was represented by four futures contracts – the Three-Month Canadian Bankers’ Acceptance Futures contract (BAX), the 5-Year Government of Canada Bond Futures contract (CGF), the 10-Year Government of Canada Bond Futures contract (CGB) and the S&P/TSX 60 Standard Futures contract (SXF) – with the balance largely represented by our equity and ETF options market. BOX BOX (BOX Options Market LLC and BOX Exchange LLC) is an all-electronic equity derivatives market and is one of a number of equity options markets in the U.S. All BOX trade volume is cleared through the Options Clearing Corporation. BOX runs on our SOLA technology. Effective December 31, 2018, the term of such service offerings ended, and we are currently providing transitional services to BOX as it becomes more self sufficient in managing its technology needs. We expect this transition period to end in Q2/20. In 2019, derivatives trading and clearing revenue included approximately $5.5 million of revenue from providing transitional services to BOX. Derivatives – Clearing CDCC acts as the central clearing counterparty for exchange-traded derivative products in Canada and for a growing range of customized financial instruments. CDCC’s role is to ensure the integrity and stability of the markets that it supports. CDCC provides central clearing counterparty (CCP) clearing and settlement services for all MX transactions and certain over-the-counter (OTC) derivatives, including fixed income repurchase and reverse repurchase agreement (REPO) transactions. In addition, CDCC is the issuer of options traded on MX markets. CDCC is an integrated central clearing counterparty in North America that clears and settles futures, options and options on futures. The Canadian Derivatives Clearing Service (CDCS) operated by CDCC has been designated by the Bank of Canada as being a systemically important financial market infrastructure under the Payment Clearing and Settlement Act (Canada). CDCC generates revenue from clearing and settlement, as well as from options and futures exercise activities (see Revenue Description section below). 2019 Annual Report 24 TMX Group Limited Page 17 Derivatives – Regulatory Division MX is recognized by the Autorité des marchés financiers (AMF) as a Self-Regulatory Organization (SRO) that has responsibility for maintaining the transparency, credibility and integrity of the exchange-traded derivatives market in Canada. MX’s Regulatory Division oversees the regulatory functions. It is responsible for the regulation of its markets and its trading participants. The Regulatory Division operates as a separate and independent unit of MX. It is subject to the 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 operations are self-funded and are carried out on a not-for-profit basis. The Regulatory Division generates revenue from regulatory fees principally comprised of market surveillance fees collected by MX on behalf of its 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 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 fines are accounted for separately from regulatory fees revenues. The regulatory fines can be used only for specifically approved purposes, such as educational initiatives. Strategy MX sales and business development efforts will focus on: • • Continuation of global expansion through trading hours and access expansion Introduction of new client focused products and services with new offerings to unlock the yield curve and further build out the equities derivatives complex CDCC strengthens and supports Derivatives markets growth with trusted, deep post-trade capabilities. Enhancements of CDCC’s products and services will focus on: • • Supporting a vertically-integrated introduction of new derivatives products and services Providing efficient international access to a global pool of traders and asset owners • Upgrading operational, risk and regulatory compliance capabilities • Complementing the Derivatives ecosystem with an expanded REPO facility Revenue Description Those who trade on MX are charged fees for buying and selling derivatives products on a per transaction basis, determined by factors that include contract type and volume of contracts traded. Since MX trading fee rates are charged on each transaction based on the number of contracts included in each transaction, MX trading revenue is 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 (Clearing Members) pay fees for clearing and settlement, including OTC fixed income and REPO transactions, on a per transaction basis. Fees for fixed income transactions are based on the size and term of the original Page 18 2019 Annual Report 25 TMX Group Limited agreement. Clearing Members are also eligible for a revenue sharing arrangement based on annual cleared volumes of REPO transactions. Clearing and settlement revenues other than for REPO transactions are correlated to the trading volume of such products and therefore fluctuate based on the same factors that affect our derivatives trading volume. Revenue is recognized as performance obligations are satisfied; this occurs within a short period of time. Clearing revenue for fixed income REPO agreements is recognized on the novation date of the related transaction. Global Solutions, Insights, and Analytics (GSIA) Overview and Description of Products and Services We deliver data to fuel high-value proprietary and third party analytics to help clients make better trading and investment decisions, and provide solutions to European wholesale energy markets for price discovery, trade execution, post-trade transparency, and post-trade straight through processing. TMX Datalinx Real-Time Equity Market Data Products – TSX and TSXV Level 1 and Level 2 and Alpha Feeds Trading activity on TSX, TSXV and Alpha 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, our information services division, into real-time market data products and delivered to end users directly or via Canadian and global redistributors that sell data as feeds and for desktop product use. Our market data is available globally through a large number of network carriers and extranets. 2019 Annual Report 26 TMX Group Limited Page 19 We offer our subscribers Level 1, and Level 2 real-time services for TSX, TSXV and Alpha. 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 TSX, TSXV and Alpha. Market Book is an end-user display service that includes Market-by-Price, Market-by-Order and Market Depth by Broker for all committed orders and trades. 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. Our Information Processor mandate from securities regulators was approved in June 2018 for an additional four year period. Real-Time Derivative Market Data Products We also derive data revenue from MX. Similarly to equities markets, we distribute MX real-time Level 1, and Level 2 trading data to market participants on a global basis directly and through data distributors. Historical, Online, and Other Market Data Products Historical market data products include market information such as historical tick data, official market statistics and close prices and corporate information such as dividends and corporate actions used in research, analysis and trade clearing, including via TMX Analytics product suites to enable increased usability for clients. Equities and Derivatives - Index Products We have an arrangement with S&P Dow Jones Indices (S&P DJI) 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 these proprietary products. In January 2016 we announced the renewal of the multi-year Index Operation and License Agreement between TSX Inc. and S&P DJI which further extended our long-standing partnership. The agreement between S&P DJI and TSX covers the creation and publication of all S&P/TSX indices, while also providing MX with the rights to list futures and options on the S&P/ TSX indices22. Co-location Services We provide co-location services to a broad range of domestic and international market participants. Our co-location services clients, benefit from stable, low-latency access to TSX, TSXV, Alpha, and MX trading engines and market data feeds, as well as access to other capital market clients, financial content providers, and technology providers. Strategy • Go to market with new innovations in product pricing and packaging • • • • Provide new platforms for TMX Group proprietary content Expand our suite of multi-asset class, real time and historical analytics using proprietary and third party data Capture the global addressable market for TMX Group content Shift to a more client centric model for managing data entitlements and administration 22 The S&P/TSX indices are a product of S&P Dow Jones Indices LLC (“SPDJI”) and TSX Inc. (“TSX”). Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC and TSX® is a registered trademark of TSX. Page 20 2019 Annual Report 27 TMX Group Limited Trayport Trayport is the primary connectivity network and data and analytics platform for the European wholesale energy markets. Trayport's solutions provide price discovery, trade execution, post-trade transparency, and post-trade straight through processing. Strategy Trayport intends to focus on capitalizing on four macro themes in the global energy markets that present growth opportunities in both new markets and in new services to existing clients: • • • • Leverage increasing demand for data and analytics, and provide a new analytic interface and new applications giving clients the ability to mine critical data sets Provide enhanced execution, data and analytics to both new and existing clients globally who need to access developing gas markets. Trayport clients will have one of the most complete views and trading access to the rapidly growing global gas market Leverage new technologies to drive automation and efficiency as business processes become digitized. This will enable Trayport to deliver increased value along the full trade lifecycle by increasing data and analytics tools available for OTC markets and facilitating broker expansion into new asset classes and geographies The rise of renewable energy sources is having an increasing impact on energy generation and trading. Trayport will help clients meet the increasing demand in spot power and gas markets with new trading tools Revenue Description TMX Datalinx Subscribers generally pay fixed monthly rates for access to real-time streaming data, which differ depending on 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. We charge market data vendors and direct feed clients a fixed monthly fee for access to data feeds. 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. Other Global Solutions, Insights and Analytics revenue is recognized when the services are provided. Generally, we sell historical data products for a fixed amount per product accessed. Fees vary depending on the type of end use. Co-location Services Subscribers to TMX Group’s co-location services, pay a fixed monthly fee depending on the number of cabinets and other related services they receive. Co-location services are normally contracted for a period of one to five years. 2019 Annual Report 28 TMX Group Limited Page 21 Trayport Trayport subscribers pay a monthly rate for access to the platform. While some customers are on multi-year contracts, the average term is about one year. In 2019, approximately 49% of our GSIA (excluding Trayport) revenue was billed in U.S. dollars, and approximately 93% of our Trayport revenue was billed in British Pound Sterling. We do not currently hedge this revenue and therefore it is subject to foreign exchange fluctuations. (For details, see Financial Risk Management - Market Risk - Foreign Currency Risk.) RESULTS OF OPERATIONS Non-IFRS Financial Measures Adjusted earnings per share, adjusted diluted earnings per share and adjusted net income are non-IFRS measures and 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, adjusted diluted earnings per share, and adjusted net income to indicate ongoing financial performance from period to period, exclusive of a number of adjustments. These adjustments include amortization of intangibles related to acquisitions, strategic re-alignment expenses, transaction related costs, net income tax recovery on gain on sale of Natural Gas Exchange Inc. (NGX), gain on sale of interest in Bermuda Stock Exchange, gain on sale of interest in FTSE TMX Global Debt Capital Markets Limited (TMX FTSE), gain on sale of Contigo, gain on reduction in our shareholding in CanDeal, commodity tax provision, and change in net deferred income tax liabilities resulting from decrease in Alberta corporate income tax rate and non-cash impairment charge on Shorcan. Management uses these measures, and excludes certain items, because it believes doing so results in a more effective analysis of underlying operating and financial performance, including, in some cases, our ability to generate cash. Excluding these items also enables comparability across periods. The exclusion of certain items does not imply that they are non-recurring or not useful to investors. 2019 Annual Report 29 TMX Group Limited Page 22 Year ended December 31, 2019 (2019) Compared with Year ended December 31, 2018 (2018) The information below reflects the financial statements of TMX Group for 2019 compared with 2018. Certain comparative information has been reclassified in order to conform with the financial presentation adopted in the current year. (in millions of dollars, except per share amounts) Revenue Operating expenses Income from operations Net income Adjusted net income23 Earnings per share Basic Diluted Adjusted Earnings per share24 Basic Diluted 2019 $806.9 424.5 382.4 247.6 300.2 4.42 4.38 5.36 5.31 Cash flows from operating activities 344.0 2018 $820.7 451.7 369.0 286.0 289.5 5.14 5.10 5.20 5.16 347.1 $ increase/ (decrease) % increase/ (decrease) $(13.8) (27.2) 13.4 (38.4) 10.7 (0.72) (0.72) 0.16 0.15 (3.1) (2)% (6)% 4% (13)% 4% (14)% (14)% 3% 3% (1)% 23 See discussion under the heading "Non-IFRS Financial Measures". 24 See discussion under the heading "Non-IFRS Financial Measures". Page 23 2019 Annual Report 30 TMX Group Limited Net Income and Earnings per Share Net income in 2019 was $247.6 million, or $4.42 per common share on a basic and $4.38 per common share on a diluted basis, compared with a net income of $286.0 million, or $5.14 per common share on a basic and $5.10 on a diluted basis, for 2018. The decrease in net income and earnings per share was largely driven by lower gains on the sale of investments in 2019 compared with 2018 and higher income tax expense: • • • In 2018, we recognized a gain on the sale of our interest in TMX FTSE of $26.8 million before and after income tax (48 cents per basic and diluted share). In 2019, we recognized a gain of $2.3 million before income tax ($2.0 million after income tax, or 4 cents per basic and diluted share) on the sale of our interest in the Bermuda Stock Exchange. In 2018, the income tax expense was lower because we carried back a capital loss to reduce prior year income tax paid by approximately $10.0 million. In 2019, the Alberta general corporate income tax rate decreased. This change resulted in a decrease in net deferred income tax liabilities and a corresponding decrease in income tax expense of $4.3 million. In addition, during 2019, we determined that the fair value of Shorcan was below its carrying value, resulting in a non- cash impairment charge of $18.0 million, which reduced net income. Offsetting the declines in net income, income from operations increased by $13.4 million. The increase in income from operations from 2018 to 2019 was largely driven by a decrease in operating expenses of $27.2 million from 2018 to 2019. In 2018, we recorded a commodity tax provision of $7.6 million (10 cents per basic and diluted share) and a lease termination payment of $4.5 million (6 cents per basic and diluted share). There was also a decrease in severance costs of approximately $7.8 million and a reduction in short term employee performance incentive plan costs of approximately $6.8 million from 2018 to 2019. The decreases in expenses were somewhat offset by higher long term employee performance incentive plan costs of approximately $0.5 million. Revenue declined by $13.8 million from 2018 to 2019. There was a decrease in Capital Formation revenue driven by lower additional listings fees, a reduction in Other revenue as well as lower Equities and Fixed Income Trading revenue. These decreases were partially offset by an increase in Global Solutions, Insights and Analytics revenue, including higher revenue from Trayport and VisoTech (acquired May 15, 2019), as well as higher Derivatives Trading and Clearing and CDS revenue. In addition, net finance costs declined by $4.8 million from 2018 to 2019. 2019 Annual Report 31 TMX Group Limited Page 24 Adjusted Earnings per Share25 Reconciliation for 2019 and 2018 The following is a reconciliation of earnings per share to adjusted earnings per share: (unaudited) Earnings per share Adjustments related to: Amortization of intangibles related to acquisitions Impairment charges Strategic re-alignment expenses26 Net income tax recovery on gain on sale of NGX Gain on sale of Contigo Gain on sale of interest in TMX FTSE Gain on reduction in our shareholding in CanDeal Gain on sale of interest in Bermuda Stock Exchange Commodity tax provision Transaction related costs27 Change in net deferred income tax liabilities resulting from decrease in Alberta corporate income tax rate Adjusted earnings per share28 2019 2018 Basic $4.42 0.68 0.32 0.05 — — — — (0.04) — 0.01 (0.08) $5.36 Diluted $4.38 0.67 0.32 0.05 — — — — (0.04) — 0.01 (0.08) $5.31 Basic $5.14 0.68 — — (0.18) (0.04) (0.48) (0.02) — 0.10 — — $5.20 Diluted $5.10 0.68 — — (0.18) (0.04) (0.48) (0.02) — 0.10 — — $5.16 Weighted average number of common shares outstanding 56,045,211 56,570,669 55,635,123 56,093,543 Adjusted diluted earnings per share increased by 3% from $5.16 in 2018 to $5.31 in 2019. The increase in adjusted diluted earnings per share from 2018 to 2019 was largely driven by lower operating expenses related to lease termination, a decrease in severance costs, a reduction in short term employee performance incentive plan costs as well as lower net finance costs. The decreases in expenses were slightly offset by higher long term employee performance incentive plan costs. There was also an increase in revenue from Global Solutions, Insights and Analytics revenue, including higher revenue from Trayport and VisoTech (acquired May 15, 2019), as well as higher Derivatives Trading and Clearing and CDS revenue. The increases in revenue were more than offset by decreases in Capital Formation revenue driven by lower additional listings fees, a reduction in Other revenue as well as lower Equities and Fixed Income Trading revenue. The increase in adjusted diluted earnings per share was also somewhat reduced by an increase in the number of weighted- average common shares outstanding in 2019 compared with 2018. 25 See discussion under the heading "Non-IFRS Financial Measures". 26 Please refer to "Initiatives and Accomplishments - Strategic re-alignment" for more details. 27 Includes costs related to the integration of Trayport in 2018, and costs related to an acquisition in 2019. 28 See discussion under the heading "Non-IFRS Financial Measures". Page 25 2019 Annual Report 32 TMX Group Limited Adjusted Net Income29 Reconciliation for 2019 and 2018 The following is a reconciliation of net income to adjusted net income: (in millions of dollars) (unaudited) Net income Adjustments related to: 2019 $247.6 2018 $ increase / (decrease) % increase / (decrease) $286.0 $(38.4) (13)% Amortization of intangibles related to acquisitions Impairment charges Strategic re-alignment expenses30 Net income tax recovery on gain on sale of NGX Gain on sale of Contigo Gain on sale of interest in TMX FTSE Gain on reduction in our shareholding in CanDeal Gain on sale of interest in Bermuda Stock Exchange Commodity tax provision Transaction related costs31 Change in net deferred income tax liabilities resulting from decrease in Alberta corporate income tax rate 37.5 18.0 2.8 — — — — (2.0) — 0.6 (4.3) 37.7 — — (10.0) (2.3) (26.8) (0.9) — 5.6 0.2 — (0.2) 18.0 2.8 10.0 2.3 26.8 0.9 (2.0) (5.6) 0.4 (4.3) Adjusted net income32 $300.2 $289.5 $10.7 (1)% n/a n/a (100)% (100)% (100)% (100)% n/a (100)% 200% n/a 4% Adjusted net income increased by 4% from $289.5 million in 2018 to $300.2 million in 2019. The increase in adjusted net income from 2018 to 2019 was largely driven by lower operating expenses related to lease termination, a decrease in severance costs, a reduction in short term employee performance incentive plan costs as well as lower net finance costs. The decreases in expenses were slightly offset by higher long term employee performance incentive plan costs. There was also an increase in revenue from Global Solutions, Insights and Analytics revenue, including higher revenue from Trayport and VisoTech (acquired May 15, 2019), as well as higher Derivatives Trading and Clearing and CDS revenue. The increases in revenue were more than offset by decreases in Capital Formation revenue driven by lower additional listings fees, a reduction in Other revenue as well as lower Equities and Fixed Income Trading revenue. 29 See discussion under the heading "Non-IFRS Financial Measures". 30 Please refer to "Initiatives and Accomplishments - Strategic re-alignment" for more details. 31 Includes costs related to the integration of Trayport in 2018, and costs related to an acquisition in 2019. 32 See discussion under the heading "Non-IFRS Financial Measures". Page 26 2019 Annual Report 33 TMX Group Limited Revenue (in millions of dollars) 2019 2018 $ increase / (decrease) % increase / (decrease) Capital Formation $180.7 $198.7 $(18.0) Equities and Fixed Income Trading and Clearing Derivatives Trading and Clearing Global Solutions, Insights and Analytics Other 193.5 133.2 299.7 (0.2) $806.9 198.2 129.9 289.3 4.6 $820.7 (4.7) 3.3 10.4 (4.8) $(13.8) (9)% (2)% 3% 4% (104)% (2)% Revenue was $806.9 million in 2019, down $13.8 million or 2% compared with $820.7 million in 2018. There was a decrease in Capital Formation revenue driven by lower additional listings fees, a reduction in Other revenue as well as lower Equities and Fixed Income Trading revenue. These decreases were partially offset by an increase in Global Solutions, Insights and Analytics revenue, including higher revenue from Trayport and VisoTech (acquired May 15, 2019), as well as higher Derivatives Trading and Clearing and CDS revenue. Capital Formation (in millions of dollars) 2019 2018 $ (decrease) % (decrease) Initial listing fees Additional listing fees Sustaining listing fees Other issuer services $11.0 72.7 68.9 28.1 $13.4 84.6 71.0 29.7 $180.7 $198.7 $(2.4) (11.9) (2.1) (1.6) $(18.0) (18)% (14)% (3)% (5)% (9)% • Initial listing fees in 2019 decreased from 2018 primarily due to a decline in the amount of deferred initial listing fees recognized in 2019 compared with 2018. We recognized initial listing fees received in 2018 and 2019 of $10.0 million in 2019 compared with initial listing fees received in 2017 and 2018 of $12.4 million in 2018. • Based on initial listing fees billed in 2019, the following amounts have been deferred to be recognized in Q1/20, Q2/20, Q3/20, and Q4/20: $2.0 million, $1.4 million, $0.8 million and $0.2 million respectively. Total initial listing fees revenue for future quarters will also depend on listing activity in those quarters. • Additional listing fees in 2019 decreased from 2018 reflecting the impact of an 11% decrease in the number of transactions billed on TSX, including a 24% decline in the number of transactions billed on TSX at the maximum fee, and a decrease in additional listing fees on TSXV where there was a decrease in the number of financings and total financing dollars raised. Page 27 2019 Annual Report 34 TMX Group Limited • Issuers listed on TSX and TSXV pay annual sustaining listing fees primarily based on their market capitalization at the end of the prior calendar year, subject to minimum and maximum fees. There was a decrease in sustaining listing fees on both TSX and TSXV due to the decrease in the market capitalization of issuers at December 31, 2018 compared with December 31, 2017; however, the decrease was partially offset by the impact from an increase in the maximum annual sustaining listing fee for corporate issuers on TSX from $110,000 to $125,000 effective January 1, 2019. • Other issuer services revenue in 2019 was lower compared to 2018 reflecting decreased revenue from TSX Trust due to lower margin income as well as reduced transfer agent and corporate trust fees. This was largely attributable to lower client balances and reduced capital markets activity. Equities and Fixed Income Trading and Clearing (in millions of dollars) 2019 2018 $ increase / (decrease) % increase / (decrease) Equities and fixed income trading Equities and fixed Income clearing, settlement, depository and other services (CDS) $98.0 95.5 $108.8 ($10.8) (10)% $193.5 $198.2 89.4 6.1 ($4.7) 7% (2)% • • • • • There was a 10% decrease in Equities and Fixed Income Trading revenue in 2019 compared with 2018 driven by lower overall volumes on all of our exchanges, partially offset by the impact from a favourable product mix. There was also a decrease in fixed income trading revenue largely due to decreased activity in Government of Canada Bonds. The overall volume of securities traded on our equities marketplaces decreased by 12% (131.4 billion securities in 2019 versus 150.0 billion securities in 2018). There was a decrease in volumes of 4% on TSX, 28% on TSXV and 10% on Alpha in 2019 compared with 2018. Excluding intentional crosses, in all listed issues in Canada, our combined domestic equities trading market share was 57% in 2019, down 1% from 58% in 201833. We only trade securities that are listed on TSX or TSXV. Excluding intentional crosses, for TSX and TSXV listed issues, our combined domestic equities trading market share was approximately 65% in 2019, down 2% from approximately 67% in 2018.34 CDS revenue increased by 7% from 2018 to 2019 reflecting revisions to the fee schedule for issuer services as well as higher international revenue. In addition, certain recoverable costs related to CDS's clearing operation, previously netted, are now included in both CDS revenue and Selling, general and administration expenses. The amounts reclassified to CDS revenue were $5.3 million for 2019 and $3.6 million for 2018. Derivatives Trading and Clearing (in millions of dollars) 2019 2018 $ increase % increase $133.2 $129.9 $3.3 3% 33 Source: IIROC. 34 Source: IIROC. 2019 Annual Report 35 TMX Group Limited Page 28 • • The increase in Derivatives Trading and Clearing revenue was driven by a 3% increase in revenue from MX and CDCC. There was a 4% increase in volumes on MX (116.2 million contracts traded in 2019 versus 112.2 million contracts traded in 2018). There was also an increase in revenue from REPO (repurchase agreements) clearing in 2019 compared with 2018. The increases were also somewhat offset by a decrease in revenue from BOX following the expiry of our agreement at the end of 2018 to provide SOLA technology and services to BOX. We are currently providing transitional services to BOX. Global Solutions, Insights and Analytics (in millions of dollars) 2019 2018 $ increase % increase Trayport GSIA (excluding Trayport) $119.6 $180.1 $299.7 $111.7 $177.6 $289.3 $7.9 $2.5 $10.4 7% 1% 4% • • • The increase in GSIA revenue in 2019 compared with 2018 reflected an increase in revenue from Trayport, including VisoTech (acquired May 15, 2019). The increase in GSIA revenue was also driven by higher revenue from recoveries related to under-reported usage of real-time quotes in prior periods, co-location, benchmarks and indices as well as price changes implemented in 2H/19. The increases were somewhat offset by lower revenue from subscriptions and usage based quotes in 2019 compared with 2018. These increases were partially offset by revenue from Contigo (sold November 30, 2018) of approximately $5.3 million, and from TMX FTSE (sold April 12, 2018) of approximately $1.1 million in 2018. There was also an unfavourable impact of a stronger Canadian dollar relative to GBP, which more than offset the favourable impact from a weaker Canadian dollar relative to the U.S. dollar in 2019 compared with 2018. • Revenue from GSIA, excluding VisoTech, Contigo and TMX FTSE, increased by 5% from 2018 to 2019. Trayport Revenue from Trayport's core subscriber business, including VisoTech (acquired May 15, 2019), was £70.8 million in 2019, up 15% over 2018. Revenue from Contigo (sold on November 30, 2018); the ancillary non-subscriber based risk application business of Trayport; was £3.1 million in 2018. The following table summarizes the average number of Trayport subscribers (excluding VisoTech) over the last eight quarters: Trader Subscribers Total Subscribers Q4/19 Q3/19 Q2/19 Q1/19 Q4/18 Q3/18 Q2/18 Q1/18 5,116 4,900 4,850 4,727 4,665 4,356 4,321 4,207 23,003 22,128 21,946 21,683 21,465 20,602 20,310 20,171 Revenue (in millions of GBP) £18.0 £18.2 £17.8 £16.7 £16.8 £16.5 £16.0 £15.4 Total Subscribers means all chargeable licenses of core Trayport products in core customer segments including Traders, Brokers and Exchanges. Trader Subscribers are a subset of Total Subscribers. Trader Subscribers revenue represents over 50% of total Trayport revenue. 2019 Annual Report 36 TMX Group Limited Page 29 GSIA (excluding Trayport) • • The average number of professional market data subscriptions for TSX and TSXV products decreased by 1% from 2018 to 2019 (100,792 professional market data subscriptions in 2019 compared with 101,668 in 2018.) The average number of MX professional market data subscriptions was essentially unchanged from 2018 to 2019 (18,820 MX professional market data subscriptions in 2019 compared with 18,779 in 2018). Other (in millions of dollars) 2019 2018 $ (decrease) % (decrease) $(0.2) $4.6 $(4.8) (104)% • The decrease in Other revenue was primarily due to recognizing net foreign exchange gains on net monetary assets in 2018 compared with net foreign exchange losses in 2019. 2019 Annual Report 37 TMX Group Limited Page 30 Operating expenses (in millions of dollars) 2019 2018 $ increase / (decrease) % increase / (decrease) Compensation and benefits $207.9 $220.1 Information and trading systems Selling, general and administration Depreciation and amortization Strategic re-alignment expenses 51.9 81.4 79.6 3.7 52.4 108.9 70.3 — $(12.2) (0.5) (27.5) 9.3 3.7 $424.5 $451.7 $(27.2) (6)% (1)% (25)% 13% n/a (6)% Operating expenses in 2019 were $424.5 million, down $27.2 million or 6%, from $451.7 million in 2018. The decrease in costs was largely related to a commodity tax provision of $7.6 million (10 cents per basic and diluted share) and a lease termination payment of $4.5 million (6 cents per basic and diluted share) in 2018. There was also a decrease in severance costs of approximately $7.8 million and a reduction in short term employee performance incentive plan costs of approximately $6.8 million from 2018 to 2019. The decreases in expenses were somewhat offset by higher long term employee performance incentive plan costs of approximately $0.5 million. In addition, certain recoverable costs related to CDS's clearing operation, previously netted, are now included in both CDS revenue and Selling, general and administration expenses. The amounts reclassified to Selling, general and administration expenses were $5.3 million for 2019 and $3.6 million for 2018. Compensation and benefits (in millions of dollars) 2019 2018 $ (decrease) % (decrease) $207.9 $220.1 $(12.2) (6)% • Compensation and benefits costs decreased in 2019 compared with 2018 reflecting lower severance costs of approximately $7.8 million, lower short term employee performance incentive plan costs of approximately $6.8 million and an increase in the capitalization of labour costs. In addition, the decrease in expenses related to Contigo (sold November 30, 2018) exceeded the increase in costs related to VisoTech (acquired May 15, 2019) by approximately $0.9 million. These decreases were partially offset by increased costs related to higher headcount, merit increases and payroll taxes. In addition, there was a net increase in long term employee performance incentive plan costs of approximately $0.5 million. These costs increased by approximately $4.5 million due to the appreciation in our share price, but were largely offset by the reversal of an accrual of approximately $4.0 million relating to long term employee performance incentives that were forfeited upon the execution of an agreement on January 10, 2020 in respect of the CEO's retirement. • There were 1,287 TMX Group employees at December 31, 2019 versus 1,208 employees at December 31, 2018 reflecting a higher headcount related to the acquisition of VisoTech (acquired May 15, 2019) which employs approximately 45 people. There was also an increase in headcount attributable to investing in the various growth areas of our business, including Capital Formation and Trayport. 2019 Annual Report 38 TMX Group Limited Page 31 Information and trading systems (in millions of dollars) 2019 $51.9 2018 $52.4 $ (decrease) % (decrease) $(0.5) (1)% • The decrease in Information and trading systems expenses from 2018 to 2019 reflected lower information technology professional services costs. Selling, general and administration (in millions of dollars) 2019 $81.4 2018 $ (decrease) % (decrease) $108.9 $(27.5) (25)% • Selling, general and administration expenses decreased by $27.5 million in 2019 compared with 2018 partially due to recording a commodity tax provision of $7.6 million (10 cents per basic and diluted share) and a lease termination payment of $4.5 million (6 cents per basic and diluted share) in 2018. The decrease also reflected lower project spending including amounts paid to external consultants. In addition, there were lower Selling, general and administration expenses of $10.3 million related to the implementation of IFRS 16, Leases (see Accounting and Control Matters - Changes in accounting policies - ADOPTION OF IFRS 16). • Offsetting these decreases, certain recoverable costs related to CDS's clearing operation, previously netted, are now included in both CDS revenue and Selling, general and administration expenses. The amounts reclassified to Selling, general and administration expenses were $5.3 million for 2019 and $3.6 million for 2018. • The decreases in Selling, general and administration expenses were also partially offset by increased transaction costs related to an acquisition of $0.6 million (1 cent per basic and diluted share). Depreciation and amortization (in millions of dollars) 2019 $79.6 2018 $70.3 $ increase % increase $9.3 13% • • • There were higher Depreciation and amortization costs driven by the implementation of IFRS 16 (see Accounting and Control Matters - Changes in accounting policies - ADOPTION OF IFRS 16). The Depreciation and amortization costs in 2019 of $79.6 million included $47.1 million related to amortization of intangibles assets related to acquisitions (0.68 cents per basic and 0.67 cents per diluted share). The Depreciation and amortization costs in 2018 of $70.3 million included $47.5 million related to amortization of intangibles assets related to acquisitions (68 cents per basic and diluted share). Strategic re-alignment expenses 2019 2018 (in millions of dollars) Pre-tax Amount Basic and Diluted Earnings per Share Impact Pre-tax Amount Basic and Diluted Earnings per Share Impact $3.7 $0.05 $— $— 2019 Annual Report 39 TMX Group Limited Page 32 • Strategic re-alignment expenses for 2019 included $3.3 million related to organizational changes we made in our post- trade business, elimination of centralized innovation product development unit, and changes to our enterprise risk approach. In Q2/19 we incurred non-recurring charges for onerous contracts related to our initiative on modernizing our clearing platforms of $1.3 million. In Q4/19, we recovered approximately $0.9 million of these charges (See INITIATIVES AND ACCOMPLISHMENTS - Strategic Re-alignment). Additional Information Share of income from equity accounted investees (in millions of dollars) 2019 $3.8 2018 $3.0 $ increase % increase $0.8 27% • In 2019 our share of income from equity accounted investees increased by $0.8 million which is primarily attributable to increases in our share of income from BOX, partially offset by a decrease in our share of income from TMX FTSE (sold on April 12, 2018). Impairment charge (in millions of dollars) 2019 $18.0 2018 $— $ increase % increase $18.0 100% • In Q4/19 we determined that the fair value of Shorcan was below its carrying value, resulting in a non-cash impairment charge of $18.0 million. Other income (in millions of dollars) 2019 $2.3 2018 $30.7 $ (decrease) % (decrease) $(28.4) (93)% • • In 2018, we completed the sale of our entire 24.2% interest in TMX FTSE. The proceeds of $70.4 million resulted in a gain on sale of approximately $26.8 million before and after income taxes (48 cents per basic and diluted share). In 2019, we completed the sale of our interest in Bermuda Stock Exchange resulting in a gain on sale of approximately $2.3 million before tax ($2.0 million after income tax, or 4 cents per basic and diluted share). Net finance costs (in millions of dollars) 2019 $35.6 2018 $40.4 $ (decrease) % (decrease) $(4.8) (12)% • The decrease in net finance costs from 2018 to 2019 reflected lower interest expense due to decreased debt levels. The lower costs were partially offset by the impact from a higher average interest rate in 2019 driven by the interest rate on our Series E Debentures compared with that on our Series A Debentures, which matured at the beginning of Q4/18. The decrease was also partially offset by a charge of $3.5 million relating to the implementation of IFRS 16, Leases (see Accounting and Control Matters - Changes in accounting policies - ADOPTION OF IFRS 16). 2019 Annual Report 40 TMX Group Limited Page 33 Income tax expense and effective tax rate Income Tax Expense (in millions of dollars) Effective Tax Rate (%) 2019 $87.3 2018 $76.3 2019 26% 2018 21% Excluding adjustments, primarily related to the items noted below, the effective tax rate would have been approximately 26% for both 2019 and 2018. 2019 • In 2019, the Alberta general corporate income tax rate decreased. This change resulted in a decrease in net deferred income tax liabilities and a corresponding decrease in income tax expense of $4.3 million. In 2019, we incurred non- cash impairment charges of $18.0 million related to Shorcan, which is not deductible for income tax purposes. This resulted in an increase in our effective tax rate, which essentially offset the positive impact from the decrease in the Alberta general corporate income tax rate. 2018 • • In 2018, we realized a capital loss on the liquidation of a foreign wholly-owned subsidiary. The capital loss was carried back to reduce the income tax on the sale of NGX in 2017, resulting in a tax benefit of approximately $2.0 million. In 2018, we realized a capital loss on the windup of a limited partnership, resulting in a tax benefit of approximately $11.8 million. A portion of this capital loss was utilized to eliminate the income tax otherwise payable of $3.8 million on the sale of our interest in TMX FTSE. In addition, we carried back the balance of this net capital loss to reduce the income tax of $8.0 million on the sale of NGX in 2017. Also, the non-taxable portion of the capital gain on the sale of our interest in TMX FTSE resulted in a tax benefit of approximately $3.3 million. As a result, there was a decrease in income tax expense, which reduced our effective tax rate for 2018. Total equity (in millions of dollars) Total equity As at December 31, 2019 As at December 31, 2018 $ increase $3,499.1 $3,380.8 $118.3 • At December 31, 2019, there were 56,233,929 common shares issued and outstanding and 1,538,160 options outstanding under the share option plan. • At February 7, 2020, there were 56,256,637 common shares issued and outstanding and 1,503,198 options outstanding under the share option plan. • The increase in Total equity is primarily attributable to the inclusion of net income of $247.6 million and proceeds from exercised share options of $24.4 million, less dividend payments to shareholders of TMX Group of $141.3 million and foreign currency translation differences of $12.5 million. 2019 Annual Report 41 TMX Group Limited Page 34 Segments The following information reflects TMX Group’s segment results for 2019 compared with 2018. 2019 (in millions of dollars) Capital Formation Equities and Fixed Income Trading & Clearing Derivatives Trading & Clearing Global Solutions, Insights & Analytics Other Total Revenue from external customers $ 180.7 $ 193.5 $ 133.2 $ 299.7 $ (0.2) $ 806.9 Inter-segment revenue Total revenue — 180.7 1.6 195.1 — 133.2 0.3 300.0 (1.9) (2.1) — 806.9 Income (loss) from operations 96.8 85.8 59.3 193.0 (52.5) 382.4 2018 (in millions of dollars) Capital Formation Equities and Fixed Income Trading & Clearing Derivatives Trading & Clearing Global Solutions, Insights & Analytics Other Total Revenue from external customers $ 198.7 $ 198.2 $ 129.9 $ 289.3 $ 4.6 $ 820.7 Inter-segment revenue Total revenue — 198.7 1.6 199.8 — 129.9 0.5 289.8 (2.1) 2.5 — 820.7 Income (loss) from operations 111.3 83.5 57.3 173.4 (56.5) 369.0 Income (loss) from operations The decrease in Income from operations from Capital Formation reflected lower revenue from all listing fee types, especially additional listing fee revenue, and lower revenue from TSX Trust in 2019 compared with 2018. This was partially offset by lower operating expenses in 2019 compared with 2018. The increase in Income from operations from Equities and Fixed Income Trading and Clearing reflected lower operating expenses and an increase in revenue from CDS in 2019 compared with 2018. The increases were somewhat offset by a decrease in Equities and Fixed Income Trading revenue. Income from operations from Derivatives Trading and Clearing increased reflecting higher revenue from MX and CDCC, driven by a 4% increase in volumes on MX, and an increase in revenue from REPO (repurchase agreements) clearing in 2019 compared with 2018. This increase was partially offset by a decrease in revenue from BOX, and higher operating expenses in 2019 compared with 2018. 2019 Annual Report 42 TMX Group Limited Page 35 The increase in Income from operations from Global Solutions, Insights and Analytics largely reflects an increase in revenue from Trayport, including VisoTech (acquired May 15, 2019). The increase in GSIA revenue was also driven by higher revenue from recoveries related to under-reported usage of real-time quotes in prior periods, co-location, benchmarks and indices as well as price changes implemented in 2H/19. There were also lower operating expenses in 2019 compared with 2018. The increases were somewhat offset by lower revenue from subscriptions and usage based quotes in 2019 compared with 2018. These increases were also partially offset by revenue from Contigo (sold November 30, 2018) of approximately $5.3 million, and from TMX FTSE (sold April 12, 2018) of approximately $1.1 million in 2018. Other includes certain revenue as well as corporate and other costs, not allocated to the operating segments. Revenue related to foreign exchange gains and losses and other services are presented in the Other segment. The decrease in Other revenue was primarily due to recognizing net foreign exchange gains on net monetary assets in 2018 compared with net foreign exchange losses in 2019. Costs and expenses related to the amortization of purchased intangibles, along with certain consolidation and elimination adjustments, are also presented in Other. The loss from operations for the Other segment in 2019 was somewhat lower than in 2018. In 2019, there was a reversal of an accrual of approximately $4.0 million relating to long term employee performance incentives that were forfeited upon the execution of an agreement on January 10, 2020 in respect of the CEO's retirement. LIQUIDITY AND CAPITAL RESOURCES Summary of Cash Flows 2019 compared with 2018 (in millions of dollars) Cash flows from operating activities Cash flows from/(used in) financing activities Cash flows from/(used in) investing activities 2019 $344.0 (234.8) (95.3) 2018 $347.1 (425.1) 37.4 $ increase / (decrease) in cash $(3.1) 190.3 (132.7) • • • In 2019, Cash flows from operating activities decreased compared with 2018 reflecting a decrease in cash related to trade and other payables. The decrease was largely offset by higher income from operations (excluding depreciation and amortization), and an increase in cash related to other assets and liabilities. In 2019, Cash flows used in financing activities were lower than in 2018 largely reflecting the net repayment of $200.0 million of debentures in 2018. In 2018, we issued $200.0 million of Series E Debentures, but repaid $400.0 million of Series A Debentures. The net increase in cash from 2018 to 2019 was partially offset by a $16.6 million increase in the amount of cash used to pay dividends to equity holders. In 2019, Cash flows used in investing activities were higher than in 2018 when we generated cash from investing activities. During 2018, we received proceeds from the sale of investments and businesses of $83.9 million compared with $3.8 million in 2019. In 2019, we also had a cash outflow of $23.6 million related to an acquisition. There was also a decrease in cash of $19.3 million related to the net purchase of marketable securities in 2019. 2019 Annual Report 43 TMX Group Limited Page 36 Summary of Cash Position and Other Matters35 Cash, Cash Equivalents and Marketable Securities (in millions of dollars) As at December 31, 2019 As at December 31, 2018 $229.4 $230.7 $ (decrease) $(1.3) We had $229.4 million of cash, cash equivalents and marketable securities at December 31, 2019. There was a slight decrease in cash, cash equivalents and marketable securities primarily reflecting cash flows from operating activities of $344.0 million, proceeds from exercised options of $24.4 million, proceeds from the sale of our interest in Bermuda Stock Exchange of $3.1 million and interest received of $4.1 million. Offsetting these increases in cash and cash equivalents were a cash outflow related to an acquisition of $23.6 million, the net movement in Commercial Paper of approximately $79.9 million, a decrease in cash of $39.8 million related to repayment of a bank overdraft from December 31, 2018, cash outflows for dividends to TMX Group shareholders of $141.3 million, interest paid of $38.4 million and additions to premises and equipment and intangible assets of $57.6 million. Based on our current business operations and model, we believe that we have sufficient cash resources and access to financing to operate our business, make interest payments, as well as meet our covenants under the trust indentures governing our Debentures and the terms of the Credit Agreement (as defined in the 2019 MD&A) and commercial paper program (Commercial Paper Program) (see LIQUIDITY AND CAPITAL RESOURCES - Commercial Paper, Debentures, Credit and Liquidity Facilities), and satisfy the capital maintenance requirements imposed by regulators. We will also have cash outlays related to the modernization of our clearing platforms (see - INITIATIVES AND ACCOMPLISHMENTS - Update on Modernization of Clearing Platforms). Debt financing of future investment opportunities could be limited by current and future economic conditions, the covenants in the Credit Agreement and the trust indentures governing the Debentures, and by capital maintenance requirements imposed by regulators. At December 31, 2019, there was $239.6 million of Commercial Paper outstanding, and the authorized limit under the program was $500.0 million. Total Assets (in millions of dollars) As at December 31, 2019 As at December 31, 2018 $32,359.7 $31,658.3 $ increase $701.4 • Our consolidated balance sheet as at December 31, 2019 includes outstanding balances on open REPO agreements within Balances with Participants and Clearing Members. These balances have equal amounts included within Total Liabilities. The increase in Total Assets of $701.4 million from December 31, 2018 reflected higher balances in CDCC at December 31, 2019 related to both REPO agreements and increased collateral. There was also an increase in Total Assets relating to the implementation of IFRS 16 (see Accounting and Control Matters - ADOPTION OF IFRS 16). On transition to IFRS 16, we recognized $94.9 million of right-of-use assets. The amount included in Total Assets at December 31, 2019 was $93.0 million. Defined Benefits Pension Plan Based on the most recent actuarial valuations, we estimate a net deficit of approximately $7.1 million of which $1.5 million was funded in 2019. The next required tri-annual valuation for the TMX registered pension plan (RPP) will be as at December 31, 2020. 35 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. Page 37 2019 Annual Report 44 TMX Group Limited Commercial Paper, Debentures, Credit and Liquidity Facilities Commercial Paper (in millions of dollars) As at December 31, 2019 As at December 31, 2018 $ (decrease) $239.6 $319.5 $(79.9) TMX Group maintains a Commercial Paper Program to offer potential investors up to $500.0 million (or the equivalent U.S. dollars) of Commercial Paper to be issued in various maturities of no more than one year from the date of issue. The Commercial Paper bears interest rates based on the prevailing market conditions at the time of issuance. The Commercial Paper Program is fully backstopped by the Credit Agreement (as defined below). The Commercial Paper issued represents an unsecured obligation and ranks equally with all other senior unsecured obligations of TMX Group. The Commercial Paper has been assigned a rating of "R-1 (low)" with a Stable trend by DBRS Limited (DBRS). There was $239.6 million of Commercial Paper outstanding, including accrued interest, under the program at December 31, 2019 reflecting a net reduction of approximately $79.9 million from December 31, 2018. Commercial paper is short term in nature, and the average term to maturity from the date of issue was 62 days in 2019. Debentures As of December 31, 2019, TMX Group had the following Debentures outstanding: Debenture Series B Series D Series E Principal Amount ($ millions) 250.0 300.0 200.0 Coupon Maturity Date DBRS Credit Rating 4.461% per annum, payable in arrears in equal semi-annual installments (long first coupon) 2.997% per annum, payable in arrears in equal semi-annual installments 3.779% per annum, payable in arrears in equal semi-annual installments October 3, 2023 A (high) December 11, 2024 A (high) June 5, 2028 A (high) • On June 5, 2018, TMX Group completed a Canadian private placement offering of $200.0 million aggregate principal amount of 3.779% senior unsecured debentures due June 5, 2028 ("Series E Debentures") to accredited investors in Canada. The Series E Debentures received a credit rating of A (high) with a Stable trend from DBRS Limited. TMX Group incurred financing costs of $1.1 million for the initial issuance of the Series E Debentures, and these costs are offset against the initial carrying value of the Series E Debentures. • The Series B and Series E Debentures may be redeemed, at the option of TMX Group, in whole or in part at the redemption price together with accrued and unpaid interest to the date fixed for redemption. The redemption price is equal to the greater of the applicable Canada Yield Price (as defined in the relevant Trust Indenture (as defined below)) and 100% of the principal amount of the Series B and Series E Debentures being redeemed to the date fixed for redemption. If the Series B and Series E Debentures are redeemed anytime on or after three months prior to the maturity date of the series, the redemption price is equal to 100% of the aggregate principal amount outstanding on the Series B and Series E Debentures together with accrued and unpaid interest to the date of the redemption. • The Series D Debentures may be redeemed, in whole or in part, at the option of TMX Group, at the redemption price together with accrued and unpaid interest to the date fixed for redemption. The redemption price is equal to the Page 38 2019 Annual Report 45 TMX Group Limited greater of the Canada Yield Price (as defined in the relevant Trust Indenture) and 100% of the principal amount of the Series D Debentures being redeemed. If the Series D Debentures are redeemed anytime on or after two months prior to the maturity date of the series, the redemption price will be equal to 100% of the aggregate principal amount outstanding on the Series D Debentures together with accrued and unpaid interest to the date of the redemption. • The trust indenture and the supplements thereto which govern the Debentures (collectively, the Trust Indentures and each a Trust Indenture) include the following covenants: A negative pledge which restricts the ability of TMX Group and each of its material subsidiaries (as defined in the Trust Indentures) to create a lien on these entities’ assets unless the Debentures are similarly secured on an equal and rateable basis. A limitation on the ability of material subsidiaries of TMX Group to enter into certain types of indebtedness. In the event of a change of control (as such term is defined in the Trust Indentures) of either TSX Inc. or MX, if the rating of the Debentures is lowered to below investment grade (as defined in the Trust Indentures), TMX Group will be required, at the option of the Debenture holder to repurchase, in whole or in part, the holder’s Debentures at a cash price of 101% of the outstanding principal amount of the Debentures plus all accrued and unpaid interest up to the date of repurchase. A requirement for TMX Group to maintain at least one credit rating from a Specified Credit Rating Agency (as defined in the Trust Indentures). (in millions of dollars) Series B - Non-Current Debentures Series D - Non-Current Debentures Series E - Non-Current Debentures As at December 31, 2019 As at December 31, 2018 $ increase/ (decrease) $249.6 $298.6 $198.9 $747.1 $249.5 $298.4 $198.9 $746.8 $0.1 $0.2 $0.0 $0.3 On October 1, 2018, TMX Group issued Commercial Paper which was used to repay Series A Debentures on October 3, 2018. Credit Facility In 2016, TMX Group entered into an amended and restated credit agreement (as amended on each of December 14, 2017 and September 12, 2018, the Credit Agreement) which replaced our existing 2014 credit agreement. The Credit Agreement provides 100% backstop to the Commercial Paper Program and is also available for general corporate purposes. $500 million (or the USD equivalent) is available under the Credit Agreement which amount is reduced by the outstanding amount of Commercial Paper and any outstanding inter-company notes payable to CDS and CDCC. The maturity date of the Credit Agreement is May 2, 2021. Under the terms of the Credit Agreement there is: • an Interest Coverage Ratio of more than 4.0:1. The Interest Coverage Ratio is the ratio of adjusted EBITDA for the period comprised of the four most recently completed financial quarters to the consolidated interest expense for such four financial quarters. Adjusted EBITDA means earnings on a consolidated basis before interest, taxes, extraordinary, unusual or non-recurring items, depreciation and amortization, as well as non-cash items; • a Total Leverage Ratio of not more than 3.5:1. Total Leverage Ratio at any time is the ratio of consolidated debt as at such time to adjusted EBITDA for the period comprised of the four most recently completed financial quarters. Page 39 2019 Annual Report 46 TMX Group Limited As at December 31, 2019, all covenants were met under the Credit Agreement. The following table summarizes the Applicable Rates and Fee Rates and corresponding Total Leverage Ratios under the Credit Agreement. The Standby Fee is charged on the unutilized portion of the revolving facility. The Applicable Rate represents the corporate spread that is included in the interest rate that is applied to the drawn portion of the facility. Total Leverage Ratio (x) Standby Fee for undrawn portion of Revolving Facility Prime Rate Loans and US Base Rate Loans BA Instruments/ LIBOR Loans / Letters of Credit Applicable Margin Pricing Matrix 21.5 bps 24.5 bps 27.5 bps 32.5 bps 7.5 bps 22.5 bps 37.5 bps 62.5 bps 107.5 bps 122.5 bps 137.5 bps 162.5 bps Effective Interest Rates The effective interest rates as at December 31, 2019 for the Debentures and Commercial Paper are shown below: Debentures and Commercial Paper Principal ($CAD millions) Maturity All-in Rate Series B Debentures Series D Debentures Series E Debentures Commercial Paper 250.0 300.0 200.0 239.6 Oct. 3, 2023 Dec. 11, 2024 Jun. 5, 2028 4.461% 2.997% 3.779% Jan. 3, 2020 - Feb. 28, 2020 1.891% Other Credit and Liquidity Facilities CDCC maintains daylight liquidity facilities for a total of $600.0 million to provide liquidity on the basis of collateral in the form of securities that have been received by CDCC. The daylight liquidity facilities must be cleared to zero at the end of each day. CDCC also maintains a $20,622.0 million repurchase facility with a syndicate of six Canadian major chartered banks. This 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 or if emergency liquidity is required in the event of a Clearing member default. It will provide liquidity in exchange for securities that have been pledged to or received by CDCC. CDCC has the option to re-size this facility on a quarterly basis in order to stay consistent with its liquidity risk policy. The facility was re-sized from $18,102.0 million at December 31, 2019 to $20,622.0 million effective January 10, 2020. On March 1, 2019, this facility was extended from March 1, 2019 to February 28, 2020. CDCC maintains a $400.0 million syndicated revolving standby liquidity facility to provide end-of-day liquidity in the event that CDCC is unable to clear the daylight liquidity facilities to zero or if emergency liquidity is required in the event of a Clearing member default. Advances under the facility are secured by collateral in the form of securities that have been pledged to or received by CDCC. As at December 31, 2019, CDCC had drawn $8.2 million on the syndicated Page 40 2019 Annual Report 47 TMX Group Limited revolving standby liquidity facility to facilitate a failed REPO settlement. The amount drawn when required, is fully collateralized by liquid securities included in cash and cash equivalents and fully re-paid subsequent to the reporting date. In addition, CDCC has an agreement that would allow the Bank of Canada to provide emergency liquidity to CDCC at the discretion of the Bank of Canada. This facility is intended to provide end- of-day liquidity in the event that CDCC is unable to access liquidity from the revolving standby liquidity facility and the syndicated REPO facility or in the event that the liquidity under such facilities is insufficient. Use of this facility would be on a fully collateralized basis. On February 28, 2019, this facility was extended from March 1, 2019 to February 28, 2020. CDS maintains unsecured operating demand loans totaling $5.0 million to support short-term operating requirements. To support processing and settlement activities of Participants, an unsecured overdraft facility of $5.0 million, demand loan of $15.0 million and an overnight facility of US$5.5 million are available. The borrowing rates for these facilities are the Canadian prime rate or the U.S. base rate, depending on the currency drawn. CDS also has a US$720.0 million, or Canadian dollar equivalent, secured standby liquidity facility with a syndicate of banks to support processing and settlement activities in the event of a Participant default. This agreement was also amended so the facility is available to support processing and settlement activities in the event of a Participant default in the New York Link Service and The Depository Trust Company Direct Link Service. The terms of the facility permits CDS to increase the amount available by an additional US$600.0 million or Canadian equivalent, with approval of the lenders. Borrowings under the secured facility are obtained by pledging or providing collateral pledged by Participants primarily in the form of debt instruments issued or guaranteed by federal, provincial and/or municipal governments in Canada or U.S. treasury instruments and equity instruments. The facility can be drawn in either U.S. or Canadian currencies and depending upon the currency drawn, the borrowing rate for the secured standby liquidity facility is the U.S. base rate plus 150 bps or the Canadian prime rate plus 150 bps. On March 25, 2019, CDS extended the maturity date to March 24, 2020. On March 27, 2018, CDS also entered into a secured standby liquidity facility of $2.0 billion or US equivalent that can be drawn in either Canadian or US currency. This arrangement is available to support settlement activities in the event of a Participant default with CDS’s Continuous Net Settlement service. The terms of the facility permits CDS to increase the amount available by an additional $500.0 million or US equivalent, with approval of the lenders. Borrowings under this secured facility are obtained by pledging or providing collateral pledged by Participants primarily in the form of debt and equity instruments. Depending on the currency drawn, the borrowing rate for the secured standby liquidity facility is the US base rate plus 150 bps or the Canadian prime rate plus 150 bps. On March 25, 2019, CDS extended the maturity date to March 24, 2020. In addition, CDS has an agreement that would allow the Bank of Canada to provide emergency last-resort liquidity to CDS at the discretion of the Bank of Canada. This liquidity facility is intended to provide end-of-day liquidity for payment obligations arising from CDSX, and only in the event that CDS is unable to access liquidity from its standby liquidity facility or in the event that the liquidity under such facilities is insufficient. Use of this facility would be on a fully collateralized basis. In compliance with PFMIs and additional Canadian regulatory and oversight guidance, CDS and CDCC each maintain a recovery plan, to be applied in the event that the entity is unable to provide defined critical operations and services as a going concern. These recovery plans are filed with their respective Canadian regulators. In connection with the recovery plans, and if certain funding conditions are met, TMX Group agreed to provide certain limited financial support to CDS and CDCC, if necessary, in the context of a recovery. Shorcan maintains a facility with a major chartered bank to provide end of day liquidity to cover any shortfalls due to timing of payments and receipts. Utilization of this facility is secured by collateral in the form of securities. 2019 Annual Report 48 TMX Group Limited Page 41 Contractual Obligations (in millions of dollars) Participants’ tax withholdings* Accrued interest payable Other trade and other payables Provisions Lease liabilities Total 151.5 3.8 61.0 16.1 103.7 Balances with Participants and Clearing Members* 26,588.9 26,588.9 Total return swaps Commercial Paper Debentures 1.1 239.6 747.1 1.1 239.6 — Less than 1 year Between 1 and 5 years Greater than 5 years December 31, 2019 151.5 3.8 61.0 7.9 8.3 — — — 8.2 32.2 — — — — — — — 63.2 — — — 548.2 198.9 *The above financial liabilities are covered by assets that are restricted from use in the ordinary course of business. MANAGING CAPITAL The Company’s primary objectives in managing capital, which we define to include our cash and cash equivalents, marketable securities, share capital, Commercial Paper, Debentures, and various credit facilities, include: • Maintaining sufficient capital for operations to ensure market confidence and to meet regulatory requirements and credit facility requirements (see Commercial Paper, Debentures, Credit and Liquidity Facilities for a description of certain financial covenants under the Credit Agreement). Currently, we target to retain a minimum of $185.0 million in cash, cash equivalents and marketable securities. This amount is subject to change; • Maintaining a credit rating in a range consistent with the Company’s current A (high) and R1-low credit ratings from DBRS; • Using excess cash to invest in and continue to grow the business; • Returning capital to shareholders through methods such as dividends paid to shareholders and purchasing shares for cancellation pursuant to normal course issuer bids; and • Reducing the debt levels to be below the total leverage ratios as discussed in (a) below, which decrease over time. TMX Group aims to achieve the above objectives while managing its capital subject to capital maintenance requirements imposed on TMX Group and certain subsidiaries as follows: a. In respect of the TMX Group Limited credit facility that requires TMX Group to maintain: i. an interest coverage ratio of more than 4.0:1; ii. a total leverage ratio of not more than 3.50:1 b. In respect of TSX, as required by the OSC to maintain certain financial ratios on both a consolidated and non- consolidated basis, as defined in the OSC recognition order, as follows: i. a current ratio of greater than or equal to 1.1:1; Page 42 2019 Annual Report 49 TMX Group Limited ii. a debt to cash flow ratio of less than or equal to 4.0:1; and iii. a financial leverage ratio of less than or equal to 4.0:1. c. In respect of Alpha Exchange Inc., as required by the OSC to maintain certain financial ratios as defined in the OSC recognition order, as follows: i. a current ratio of greater than or equal to 1.1:1; ii. a debt to cash flow ratio of less than or equal to 4.0:1; and iii. a financial leverage ratio of less than or equal to 4.0:1. d. e. In respect of TSX Venture Exchange, as required by certain provincial securities commissions, to maintain sufficient financial resources to perform its functions. 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; ii. a cash flow to total debt outstanding ratio of more than 20%; and iii. a financial leverage ratio of less than 4.0. f. In respect of CDCC, to maintain certain amounts, as follows: i. maintain sufficient financial resources as required by the OSC and AMF; ii. $5.0 million cash and cash equivalents or marketable securities 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; iii. sufficient cash, cash equivalents and marketable securities to cover 12 months of operating expenses, excluding amortization and depreciation; and iv. $30.0 million total shareholder's equity. g. In respect of CDS and CDS Clearing, as required by the OSC and the AMF to maintain certain financial ratios as defined in the OSC recognition order, as follows: i. a debt to cash flow ratio of less than or equal to 4:1; and ii. a financial leverage ratio of less than or equal to 4:1. iii. In addition, the OSC requires CDS and CDS Clearing to maintain working capital to cover 6 months of operating expenses (excluding, in the case of CDS, the amount of shared services fees charged to CDS Clearing). iv. CDS is required to dedicate a portion of its own resources in the CNS default waterfall for the CNS function. The Company maintains $1.0 million in cash and cash equivalents or marketable securities to cover potential losses incurred as a result of a Participant default. h. In respect of Shorcan: i. by IIROC which requires Shorcan to maintain a minimum level of shareholders’ equity of $0.5 million; ii. by the National Futures Association ("NFA") which requires Shorcan to maintain a minimum level of net capital; and Page 43 2019 Annual Report 50 TMX Group Limited iii. by the OSC which requires Shorcan to maintain a minimum level of excess working capital. i. In respect of TSX Trust: i. as required by the Office of the Superintendent of Financial Institutions, to maintain the following minimum capital ratios: 1. common equity tier 1 capital ratio of 7%; 2. tier 1 capital ratio of 8.5%; and 3. total capital ratio of 10.5% ii. as required by IIROC, to maintain in excess of $100.0 million of paid up capital and surplus on the last audited balance sheet for the acceptable institution designation. As at December 31, 2019, we were in compliance with each of these externally imposed capital requirements. 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. Marketable securities consist of Federal and Provincial treasury bills. We have designated our marketable securities as fair value through profit and loss. Fair values have been determined by reference to quoted market prices. The primary risks related to cash, cash equivalents and marketable securities are credit risk, market risk and liquidity risk. For a description of these risks, please refer to Credit Risk - Cash and cash equivalents, Credit Risk – Marketable Securities, Market Risk - Interest Rate Risk – Marketable Securities, Liquidity Risk - Cash and cash equivalents and Liquidity Risk - Marketable securities. Restricted Cash and Cash Equivalents Restricted cash and cash equivalents contains tax withheld by CDS on entitlement payments made by CDS on behalf of CDS participants. The restricted cash and cash equivalents related to this withheld tax is ultimately under the control of CDS; however, the amount is payable to various taxation authorities within a relatively short period of time and so is restricted from use in normal operations. An equivalent and offsetting amount is included in the consolidated balance sheet under the caption Participants' tax withholdings. At December 31, 2019, we had restricted cash and cash equivalents of $151.5 million. The primary risks related to restricted cash and cash equivalents are credit risk and liquidity risk. For a description of these risks, please refer to Credit Risk - Restricted Cash and cash equivalents and Liquidity Risk - Restricted Cash and cash equivalents. 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 loss allowances for trade receivables measured at an amount equal to lifetime expected credit losses, calculated using historical credit loss experience taking Page 44 2019 Annual Report 51 TMX Group Limited into account current observable data at the reporting date to reflect the effects of any relevant current market conditions and forecasts of future economic conditions. The primary risks related to trade receivables are credit risk and market risk. For a description of these risks, please refer to Credit Risk – Trade Receivables and Market risk - Foreign Currency Risk. CDS – Participant cash collateral and entitlements and other funds As part of CDS’s clearing operations, CDS Participant Rules require participants to pledge collateral to CDS in the form of cash or securities in amounts calculated in relation to their activities. Cash pledged and deposited with CDS is recognized as an asset and an equivalent and offsetting liability is recognized as these amounts are ultimately owed to the participants. There is no impact on the consolidated income statement. Securities pledged do not result in an economic inflow to CDS, and therefore, are not recognized. The primary risks associated with these financial instruments are credit risk, market risk and liquidity risk. For a description of these risks, please refer to Credit Risk – CDS, Other Market Price Risk – CDS, Market Risk - Foreign Currency Risk, Liquidity Risk - Balances with Clearing members and participants, Liquidity Risk - New York Link service - CDS and Liquidity Risk - Credit and liquidity facilities - Clearing operations. CDCC – Daily Settlements due to and due from Clearing Members 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 Balances with Participants and Clearing Members. There is no impact on the consolidated statements of income. CDCC – Clearing Members’ cash margin deposits and clearing fund cash deposits These balances represent the cash deposits of Clearing Members held in the name of CDCC as margins against open positions and 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. CDCC – Net amounts receivable/payable on open REPO agreements CDCC clears fixed income REPO agreements. OTC REPO agreements between buying and selling Clearing Members are novated to CDCC whereby the rights and obligations of the Clearing Members under the REPO agreements are cancelled and replaced by new agreements with CDCC. Once novation occurs, CDCC becomes the counterparty to both the buying and selling Clearing Member. As a result, the contractual right to receive and return the principal amount of the REPO as well as the contractual right to receive and pay interest on the REPO is thus transferred to CDCC. These balances represent outstanding balances on open REPO agreements. Receivable and payable balances outstanding with the same Clearing Member are offset when they are in the same currency and are to be settled on the same day, as CDCC has a legally enforceable right to offset and the intention to net settle. The balances include both the original principal amount of the REPO and the accrued interest, both of which are carried at amortized cost. As CDCC is the central counterparty, an equivalent amount is recognized in both TMX Group's’ assets and liabilities. The primary risks associated with these financial instruments are credit risk, market risk and liquidity risk. For a description of these risks, please refer to Credit Risk - CDCC, Other Market Price Risk - CDCC, Liquidity Risk - Balances with Clearing members and participants and Liquidity Risk - Credit and liquidity facilities - Clearing operations. 2019 Annual Report 52 TMX Group Limited Page 45 Commercial Paper TMX Group maintains a Commercial Paper Program to offer potential investors up to $500.0 million (or the equivalent U.S. dollars) of Commercial Paper to be issued in various maturities of up to one year from the date of issue. The Commercial Paper bears interest rates based on the prevailing market conditions at the time of issuance. The Commercial Paper Program is supported by the Credit Agreement. The Commercial Paper issued represents an unsecured obligation and ranks equally with all other senior unsecured obligations of TMX Group. The Commercial Paper has been assigned a rating of “R-1 (low)” with a Stable trend by DBRS. The Commercial Paper is subject to market risk and liquidity risk. For a description of these risks, please refer to Market Risk – Interest Rate Risk - Commercial Paper and Debentures, Market Risk - Foreign Currency Risk and Liquidity Risk - Commercial Paper, Debentures and Credit Facility. Debentures TMX Group has the following Debentures outstanding: a $250-million Series B Debentures with a 4.461% coupon and a 10-year term, a $300.0-million principal amount Series D Debentures with a 2.997% coupon and a 7-year term, and a $200.0-million Series E Debentures with a 3.779% coupon and a 10-year term. The Debentures received and maintain a credit rating of A (high) with a Stable trend from DBRS. The fair value of the Debentures was obtained using market prices as inputs. The Debentures are subject to market risk and liquidity risk. For a description of these risks, please refer to Market Risk – Interest Rate Risk - Commercial Paper and Debentures and Liquidity Risk - Commercial Paper, Debentures and Credit Facility. 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 the RSUs and DSUs. We have classified our series of TRSs as fair value through profit and loss and mark to market the fair value of the TRSs as an adjustment to income. We also simultaneously mark to market the liability to holders of the units as an adjustment to income. Fair value is based on the share price of our common shares at the end of the reporting period. 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. For the year ended December 31, 2019, unrealized losses and realized gains on the TRSs of $2.8 million and $10.8 million , respectively have been reflected in the consolidated income statement (2018 – unrealized losses and realized gains of $3.7 million and $6.0 million, respectively). TRSs are subject to credit risk and market risk. For a description of this risk, please refer to Credit Risk – All Other and Market Risk CRITICAL ACCOUNTING ESTIMATES Goodwill and Intangible Assets – Valuation and Impairment Testing We recorded goodwill and intangible assets valued at $5,041.2 million as at December 31, 2019, down by $13.7 million from $5,054.9 million at December 31, 2018. Management has determined that the testing for impairment of goodwill and intangible assets involves making critical accounting estimates. 2019 Annual Report 53 TMX Group Limited Page 46 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. 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 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 CGU is based on the higher of the value in use or fair value. 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. The cash flow projections cover a period of five years with the exception of Capital Formation - Listings, which covers seven years and Global Solutions, Insights and Analytics - Trayport, which covers eight years. 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 along with any related deferred income tax effects are recognized in the consolidated income statement. There was a non-cash impairment related to the goodwill associated with Shorcan of $18.0 million for 2019 (see RESULTS OF OPERATIONS - Impairment Charge). Considerable judgement is required to predict future operating performance and to estimate cash flows. Economic weakness due to macroeconomic factors moderating activity and heightening risks may impact our business. Such factors include the U.S.-China trade conflict, softened international trade and investment, and financial market pressures. These factors could result in future impairment charges related to goodwill and intangible assets. A significant impairment charge in the future could have a significant impact on our reported net income. Capital Formation – Listings In 2019, management updated its growth projections. Management has identified three key assumptions, the pre-tax discount rate, the terminal growth rate, and the cash flow projections, that have a significant impact on the estimate of the recoverable amount. 2019 Annual Report 54 TMX Group Limited Page 47 Equities Trading In 2019, management updated its growth projections. Based on current assumptions, the recoverable amount for Equities Trading remains above carrying value, and as such no impairment has been identified. Management has identified three key assumptions, the pre-tax discount rate, the terminal growth rate, and the cash flow projections, that have a significant impact on the estimate of the recoverable amount. CDS In 2019, management updated its growth projections. Based on current assumptions, the recoverable amount for the CDS CGU remains above carrying value, and as such no impairment has been identified. Management has identified three key assumptions, the pre-tax discount rate, the terminal growth rate, and the cash flow projections, that have a significant impact on the estimate of the recoverable amount. Derivatives Trading and Clearing - MX/CDCC In 2019, management updated its growth projections. Based on current assumptions, the recoverable amount for Derivatives Trading and Clearing remains above carrying value, and as such no impairment has been identified. Management has identified three key assumptions, the pre-tax discount rate, the terminal growth rate, and the cash flow projections, that have a significant impact on the estimate of the recoverable amount. Global Solutions, Insights & Analytics - TMX Datalinx In 2019, management updated its growth projections. Management has determined that the TMX Datalinx CGU may be subject to a reasonably possible change to one or more of the key assumptions used to determine the recoverable amount, which could cause this CGU to become impaired. Management has identified three key assumptions, the pre-tax discount rate, the terminal growth rate, and the cash flow projections, that have a significant impact on the estimate of the recoverable amount. Changes in these assumptions that would cause the carrying value to equal the recoverable amount are a 3.8% reduction in the terminal growth rate or a 18.1% decrease in cash flow. Global Solutions, Insights & Analytics - Trayport In 2019, management updated its growth projections. Based on current assumptions, the recoverable amount for Trayport remains above carrying value, and as such no impairment has been identified. Management has identified three key assumptions, the pre-tax discount rate, the terminal growth rate, and the cash flow projections, that have a significant impact on the estimate of the recoverable amount. Other - Shorcan At December 31, 2019, we determined that the fair value of the Shorcan CGU was lower than its carrying amount. This fair value of Shorcan had declined below the carrying value primarily due to lower revenue projections for the business. This resulted in a non-cash impairment charge of $18.0 million. In making this assessment of the fair value of Shorcan, we utilized a value in use calculation. The value in use for Shorcan was determined using a discounted cash flow methodology based on management's best estimate of the forecasted cash flows. 2019 Annual Report 55 TMX Group Limited Page 48 Select Annual Information (in millions of dollars except per share amounts) 2019 2018 2017 Revenue Net income from continuing operations Net income $ 806.9 $ 820.7 $ 247.6 247.6 286.0 286.0 668.9 191.2 368.0 Total assets (as at December 31) Non-current liabilities (as at December 31) 32,359.7 1,707.6 31,657.9 1,615.7 25,624.8 1,433.3 Earnings per share - from continuing operations Basic Diluted Earnings per share: Basic Diluted Adjusted earnings per share:36 Basic Diluted Cash dividends declared per common share 2019 compared with 2018 4.42 4.38 4.42 4.38 5.36 5.31 2.52 5.14 5.10 5.14 5.10 5.20 5.16 2.24 3.46 3.43 6.66 6.60 4.69 4.65 1.95 (See RESULTS OF OPERATIONS and LIQUIDITY AND CAPITAL RESOURCES - Year ended December 31, 2019 (2019) compared with Year ended December 31, 2018 (2018)) 2018 compared with 2017 Revenue Revenue was $820.7 million in the year ended December 31, 2018, up $151.8 million or 23% compared with $668.9 million in the year ended December 31, 2017. There was an increase in Global Solutions, Insights and Analytics revenue reflecting approximately $111.7 million in revenue from Trayport in 2018 compared with approximately $4.5 million in 2017 (acquired on December 14, 2017), partially offset by $8.6 million decrease in revenue from TMX Atrium (sold on April 30, 2017). With increased revenue in all operating segments, our organic revenue growth in 2018 was 8% (based on revenue of $820.7 million less Trayport revenue of $111.7 million and TMX FTSE revenue of $1.0 million for 2018, and revenue of $668.9 million for 2017 less Trayport revenue of approximately $4.5 million for Q4/17, TMX Atrium revenue of $8.6 million to April 30, 2017 and TMX FTSE revenue of $2.3 million). Net income, Earnings per share and Adjusted earnings per share Net income in the year ended December 31, 2018 was $286.0 million, or $5.14 per common share on a basic basis and $5.10 per common share on a diluted basis, compared with net income of $368.0 million, or $6.66 per common share on a basic and $6.60 on a diluted basis, for the year ended December 31, 2017. Net income for 2017 included a gain of $157.8 million from the sale of NGX and Shorcan Energy as well as a gain on FX forwards relating to the Trayport acquisition. In addition, net income for 2017 included income of $19.1 million, net of tax, from January 1, 2017 to December 14, 2017 for 36 See discussion under the heading "Non-IFRS Financial Measures". 2019 Annual Report 56 TMX Group Limited Page 49 NGX and Shorcan Energy. However, net income for 2017 was reduced by acquisition costs on the purchase of Trayport and non-cash income tax adjustments relating to a change in the B.C. and U.S. corporate income tax rates. Net income for 2018 included a before and after tax gain on the sale of TMX FTSE of $26.8 million, an after tax gain of $0.9 million on the reduction in our shareholding in CanDeal, and an after tax gain of $2.3 million on the sale of Contigo. In 2018, there was also a net income tax recovery on the gain on sale of NGX, which increased net income. From an operational perspective, the net decrease in net income described above was partially offset by the impact from higher revenues across each operating segment of our business, which included $111.7 million related to Trayport (acquired December 14, 2017). The increase was partially offset by higher operating expenses, including $70.5 million related to Trayport. The overall decrease in basic and diluted earnings per share was also due to an increase in the number of weighted-average common shares outstanding in 2018 compared with 2017 and higher net finance costs. Adjusted diluted earnings per share37 increased by 11% from $4.65 in the year ended December 31, 2017 to $5.16 in the year ended December 31, 2018. The increase in adjusted diluted earnings per share38 reflected higher revenue which included $111.7 million related to Trayport (acquired December 14, 2017). The increase in revenue was partially offset by higher operating expenses which included $70.5 million related to Trayport. The increase in adjusted diluted earnings per share39 was partially offset by the impact from an increase in the number of weighted-average common shares outstanding in the year ended December 31, 2018 compared with the year ended December 31, 2017, and higher net finance costs. Total assets Our consolidated balance sheet as at December 31, 2018 includes outstanding balances on open REPO agreements within Balances with Participants and Clearing Members. These balances have equal amounts included within Total Liabilities. The increase in Total Assets of $6,033.1 million from December 31, 2017 reflected higher balances in CDCC at December 31, 2018 partially offset by lower investments in equity accounted investees (sale of our interest in TMX FTSE on April 12, 2018 and reduction in our shareholding in CanDeal on October 26, 2018). Non-current liabilities Non-current liabilities as at December 31, 2018 were $182.4 million higher than as at December 31, 2017. The increase was largely driven by the issuance of $200.0 million of Series E Debentures in June, 2018. 37 See discussion under the heading "Non-IFRS Financial Measures". 38 See discussion under the heading "Non-IFRS Financial Measures". 39 See discussion under the heading "Non-IFRS Financial Measures". 2019 Annual Report 57 TMX Group Limited Page 50 QUARTERLY FINANCIAL INFORMATION (in millions of dollars except per share amounts - unaudited) Dec 31 2019 Sep 30 2019 Jun 30 2019 Mar 31 2019 Dec 31 2018 Sep 30 2018 Jun 30 2018 Mar 31 2018 Capital Formation $42.6 $43.7 $52.6 $41.8 $45.4 $45.1 $57.8 $50.4 Equities and Fixed Income Trading Equities and fixed Income - clearing, settlement, depository and other services (CDS) Derivatives Trading & Clearing Global Solutions, Insights and Analytics Other Revenue 22.7 23.5 25.6 26.2 28.6 25.1 25.8 29.3 28.4 21.8 23.0 22.3 26.3 20.3 21.0 21.8 33.3 33.5 33.8 32.6 35.1 30.2 33.3 31.3 75.9 (0.1) 73.6 75.6 74.6 73.8 72.1 70.7 72.7 0.2 (0.3) — 2.0 — 0.9 1.7 202.8 196.3 210.3 197.5 211.2 192.8 209.5 207.2 Operating expenses 106.3 104.7 106.2 107.3 114.2 106.3 119.7 111.5 Income from operations Net income Earnings per share40 Basic Diluted 96.5 47.5 0.85 0.84 91.6 61.7 1.10 1.09 104.1 77.2 1.38 1.37 90.2 61.2 1.10 1.09 97.0 69.8 1.25 1.24 86.5 57.5 1.03 1.02 89.8 95.6 1.72 1.71 95.7 63.1 1.14 1.13 Q4/19 compared with Q4/18 • Revenue was $202.8 million in Q4/19, down $8.4 million or 4% from $211.2 million in Q4/18 largely attributable to decreases in revenue from Capital Formation, Equities and Fixed Income Trading, Derivatives Trading and Clearing as well as Other revenue, somewhat offset by an increase in Trayport and CDS revenue. • Operating expenses in Q4/19 were 106.3 million, down $7.9 million or 7%, from $114.2 million in Q4/18. The decrease in costs was largely related to lower short term and long term employee performance incentive plan costs of $7.2 million. Offsetting this decrease, certain recoverable costs related to CDS's clearing operation, previously netted, are now included in both CDS revenue and Selling, general and administration expenses. The amounts reclassified to Selling, general and administration expenses were $5.3 million for Q4/19 and $3.6 million for Q4/18. • Net income in Q4/19 was $47.5 million, or $0.85 per common share on a basic and $0.84 on a diluted basis, compared with a net income of $69.8 million, or $1.25 per common share on a basic and $1.24 on a diluted basis, for Q4/18. The decrease in net income and earnings per share was driven by a non-cash impairment charge of $18.0 million related to Shorcan and lower revenue largely offset by lower operating expenses. The decrease in diluted earnings per share was also driven by an increase in the number of weighted-average common shares outstanding in Q4/19 compared with Q4/18. 40 Earnings per share information is based on net income. 2019 Annual Report 58 TMX Group Limited Page 51 • • • In Q4/19, Cash flows from operating activities increased compared with Q4/18 reflecting an increase in cash related to trade and other receivables, and prepaid expenses, other assets and liabilities as well as trade and other payables. The increases were somewhat offset by an increase in income taxes paid. In Q4/19, Cash flows used in financing activities decreased from Q4/18 to Q4/19. In Q4/18, we used $400.0 million of cash to repay our Series A Debentures. There was also a decrease of $5.0 million in interest paid from Q4/18 to Q4/19. However, during Q4/19 there was a net increase in cash of $348.0 million used in financing activities to redeem Commercial Paper. In Q4/19, Cash flows used in investing activities were higher than in Q4/18 when we generated cash from investing activities. There was a decrease in cash of $32.5 million in Q4/19 compared with Q4/18 related to the net purchase of marketable securities. In addition, during Q4/18, we received proceeds from the sale of investments and businesses of $13.5 million. Q4/19 compared with Q3/19 • Revenue was $202.8 million in Q4/19, up $6.5 million from Q3/19 reflecting increases increases in CDS and Global Solutions, Insights and Analytics revenue. Certain recoverable costs related to CDS's clearing operation, previously netted, are now included in both CDS revenue and Selling, general and administration expenses. The amount reclassified to CDS revenue in Q4/19 was $5.3 million. The increases were partially offset by decreases in Capital Formation, and Equities and Fixed Income Trading revenue. • Operating expenses increased from Q3/19 to Q4/19. Certain recoverable costs related to CDS's clearing operation, previously netted, are now included in both CDS revenue and Selling, general and administration expenses. The amount reclassified to Selling, general and administration expenses in Q4/19 was $5.3 million. There was also an increase in operating costs related to Selling, general and administration expenses, including project spending and fees, as well as staffing costs. These increases were largely offset by a decrease in short term and long term employee performance incentive plan costs of approximately $2.3 million and approximately $8.0 million, respectively. The latter costs decreased by approximately $4.0 million due to the decrease in our share price between Q3/19 and Q4/19 as well as the reversal of an accrual of approximately $4.0 million relating to long term employee performance incentives that were forfeited upon the execution of an agreement on January 10, 2020 in respect of the CEO's retirement. • Income from operations increased from Q3/19 to Q4/19 due to the higher revenue, which was partially offset by the higher operating expenses. • Net income in Q4/19 was $47.5 million, or $0.85 per common share on a basic and $0.84 on a diluted basis, compared with net income of $61.7 million, or $1.10 per common share on a basic and $1.09 on a diluted basis in Q3/19. The decrease in net income was largely driven by impairment charges of $18.0 million in Q4/19 related to Shorcan. Q3/19 compared with Q2/19 • Revenue was $196.3 million in Q3/19, down $14.0 million from Q2/19 reflecting decreases in all segments including Capital Formation driven by lower additional listing fees, Equities and Fixed Income Trading & Clearing, and Global Solutions, Insights and Analytics. • Operating expenses decreased in Q3/19 compared with Q2/19 reflecting a reduction in Strategic re-alignment expenses, a decrease in project spending and fees as well as increased recoverable expenses. The decreases were somewhat offset by an increase of approximately $3.9 million in long term employee performance incentive plan costs driven by the increase in our share price. • Income from operations decreased from Q2/19 to Q3/19 due to lower revenue partially offset by lower operating expenses. • Net income in Q3/19 was $61.7 million, or $1.10 per common share on a basic and $1.09 on a diluted basis, compared with net income of $77.2 million, or $1.38 per common share on a basic and $1.37 on a diluted basis in Q2/19. There were lower revenues in Q3/19 compared with Q2/19 partially offset by lower operating expenses. 2019 Annual Report 59 TMX Group Limited Page 52 Q2/19 compared with Q1/19 • Revenue was $210.3 million in Q2/19, up $12.8 million from Q1/19 reflecting increases in Capital Formation driven by higher additional listing fees, Derivatives Trading & Clearing, and Global Solutions, Insights and Analytics driven by Trayport. • Operating expenses were down in Q2/19 compared with Q1/19 reflecting lower strategic re-alignment costs, reduced payroll taxes and pension adjustments as well as lower Deprecation and Amortization costs. The decreases were largely offset by higher severance costs, project spending, long-term employee performance incentive plan costs as well as expenses and transaction costs related to VisoTech (acquired May 15, 2019). • Income from operations increased from Q1/19 to Q2/19 largely reflecting the higher revenue and also the lower operating expenses. • Net income in Q2/19 was $77.2 million, or $1.38 per common share on a basic and $1.37 on a diluted basis, compared with net income of $61.2 million, or $1.10 per common share on a basic and $1.09 on a diluted basis in Q1/19. There were significantly higher revenues and also lower operating expenses in Q2/19 compared with Q1/19. There was also a gain on sale of interest in Bermuda Stock Exchange of approximately $2.0 million after tax (4 cents per basic and diluted share) and a deferred income tax recovery of $4.3 million related to a decrease in the Alberta corporate income tax rate (8 cents per basic and diluted share) in Q2/19. Q1/19 compared with Q4/18 • Revenue was $197.5 million in Q1/19, down $13.7 million from Q4/18 reflecting decreases in Capital Formation, Equities and Fixed Income Trading & Clearing, Derivatives Trading & Clearing, and Other partially offset by an increase in Global Solutions, Insights and Analytics driven by Trayport. Certain recoverable costs related to CDS's clearing operation, previously netted, were included in both CDS revenue and Selling, general and administration expenses for Q4/19 and Q4/18. The amount reclassified to CDS revenue in Q4/18 was $3.6 million. • Operating expenses were down in Q1/19 compared with Q4/18 reflecting a decrease of $1.1 million related to Contigo (sold November 30, 2018), lower employee performance incentive plan costs of $1.7 million, lower severance costs of $2.5 million, lower project spend of $2.5 million, and lower Information and trading systems spend of $2.5 million. These decreases were somewhat offset by increased payroll taxes of $3.5 million and strategic re-alignment expense of $3.3 million in Q1/19. In addition, certain recoverable costs related to CDS's clearing operation, previously netted, were included in both CDS revenue and Selling, general and administration expenses for Q4/19 and Q4/18. The amount reclassified to Selling, general and administration expenses in Q4/18 was $3.6 million. • Income from operations decreased from Q4/18 to Q1/19 due to lower revenue partially offset by lower operating expenses. • Net income in Q1/19 was $61.2 million, or $1.10 per common share on a basic and $1.09 on a diluted basis, compared with net income of $69.8 million, or $1.25 per common share on a basic and $1.24 on a diluted basis in Q4/18. Overall, there was lower revenue partially offset by lower operating expenses in Q1/19 compared with Q4/18. There was a gain on sale of Contigo of approximately $2.3 million after tax (4 cents per basic and diluted share), and a gain on reduction in our shareholding in CanDeal of $0.9 million after tax (2 cents per basic and diluted share) in Q4/18. In addition, there was a net income tax recovery on gain on sale of NGX resulting in a tax benefit of approximately $2.0 million (4 cents per basic and diluted share) in Q4/18. Q4/18 compared with Q3/18 • Revenue was $211.2 million in Q4/18, up $18.4 million from Q3/18 reflecting increases in all operating segments. Certain recoverable costs related to CDS's clearing operation, previously netted, were included in both CDS revenue and Selling, general and administration expenses for Q4/19 and Q4/18. The amount reclassified to CDS revenue in Q4/18 was $3.6 million. 2019 Annual Report 60 TMX Group Limited Page 53 • Operating expenses were up $7.9 million in Q4/18 compared with Q3/18. There were higher Information and trading systems expenses, as well as higher recoverable expenses related to increased revenues in Q4/18 compared with Q3/18. In addition, certain recoverable costs related to CDS's clearing operation, previously netted, were included in both CDS revenue and Selling, general and administration expenses for Q4/19 and Q4/18. The amount reclassified to Selling, general and administration expenses in Q4/18 was $3.6 million. • Income from operations increased in Q4/18 from Q3/18 reflecting higher revenue partially offset by higher operating expenses. • Net income in Q4/18 was $69.8 million, or $1.25 per common share on a basic and $1.24 on a diluted basis compared with net income of $57.5 million, or $1.03 per common share on basic and $1.02 on a diluted basis in Q3/18. There was a gain on the sale of Contigo of approximately $2.3 million after tax (4 cents per basic and diluted share), and a gain on reduction in our shareholding in CanDeal of $0.9 million after tax (2 cents per basic and diluted share) in Q4/18. In addition, there was a net income tax recovery on gain on sale of NGX resulting in a tax benefit of approximately $2.0 million (4 cents per basic and diluted share) in Q4/18. Q3/18 compared with Q2/18 • Revenue was $192.8 million in Q3/18, down $16.7 million from Q2/18 reflecting decreases in Capital Formation and Derivatives Trading and Clearing revenue as well as declines in Equities and Fixed Income Trading and CDS revenue. The decreases were partially offset by an increase in Global Solutions Insights and Analytics revenue. Trayport's revenue was essentially unchanged from Q2/18 to Q3/18. • Operating expenses were down $13.4 million in Q3/18 compared with Q2/18. In Q2/18 we recorded a commodity tax provision of $7.6 million and a lease termination payment of $4.5 million. • Income from operations decreased from Q2/18 to Q3/18 due to the lower revenue partially offset by the lower operating expenses. • Net income in Q3/18 was $57.5 million, or $1.03 per common share on a basic and $1.02 on a diluted basis compared with net income of $95.6 million, or $1.72 per common share on a basic and $1.71 per share on a diluted basis in Q2/18. In Q2/18, there was a gain on the sale of our interest in TMX FTSE of $26.8 million before and after income tax (48 cents per basic and diluted share). In addition, during Q2/18, there was a decrease in income tax expense, which reduced our effective tax rate for Q2/18, relating to realizing and utilizing a capital loss. We realized a capital loss on the wind up of a limited partnership, resulting in a tax benefit of approximately $11.8 million. This capital loss was applied to eliminate income tax otherwise payable of $3.8 million on the sale of our interest in TMX FTSE in Q2/18 and reduce the income tax of $8.0 million on our sale of NGX in 2017. Also, the non-taxable portion of the capital gain on the sale of our interest in TMX FTSE resulted in a tax benefit of approximately $3.3 million. Net income also declined due to the decrease in income from operations from Q2/18 to Q3/18. Q2/18 compared with Q1/18 • Revenue was $209.5 million in Q2/18, up $2.3 million from Q1/18 reflecting increases in Capital Formation and Derivatives Trading and Clearing revenue largely offset by declines in Equities and Fixed Income Trading, CDS and Global Solutions Insights and Analytics revenue. • Operating expenses were up $8.2 million in Q2/18 compared with Q1/18 reflecting a commodity tax provision of $7.6 million (10 cents per basic and diluted share), a lease termination payment of $4.5 million (6 cents per basic and diluted share) and higher fees related to liquidity facilities. The increases were partially offset by a decrease in severance costs of approximately $2.0 million and a decrease in payroll taxes of approximately $2.1 million. • Income from operations decreased from Q1/18 to Q2/18 due to higher operating expenses partially offset by higher revenue. • Net income in Q2/18 was $95.6 million, or $1.72 per common share on a basic and $1.71 on a diluted basis compared with net income of $63.1 million, or $1.14 per common share on a basic and $1.13 on a diluted basis in Q1/18. There was a gain on the sale of our interest in TMX FTSE of $26.8 million before and after income tax (48 cents per basic and diluted share). In addition, during Q2/18, there was a decrease in income tax expense, which reduced our effective 2019 Annual Report 61 TMX Group Limited Page 54 tax rate for Q2/18, relating to realizing and utilizing a capital loss. We realized a capital loss on the wind up of a limited partnership, resulting in a tax benefit of approximately $11.8 million. This capital loss was applied to eliminate income tax otherwise payable of $3.8 million on the sale of our interest in TMX FTSE in Q2/18 and reduce the income tax of $8.0 million on our sale of NGX in 2017. Also, the non-taxable portion of the capital gain on the sale of our interest in TMX FTSE resulted in a tax benefit of approximately $3.3 million. These increases in net income were somewhat offset by the decrease in income from operations from Q1/18 to Q2/18. ENTERPRISE RISK MANAGEMENT Executive Summary TMX Group provides essential services to the Canadian capital and global commodity markets and effectively managing objective certainty risk is fundamental to our ability to execute on our enterprise and business strategies. The purpose of enterprise risk management (ERM) is to facilitate and support the businesses in their pursuit of their objectives to ensure the outcomes of these activities across the enterprise are transparent and understood, consistent with our risk appetite, appropriately balance risk and reward, and serve as inputs into the enterprise strategy formulation process. We have identified a number of principles which guide our management of risks, including the following: • We promote and maintain an enterprise-wide ethical culture that values the importance of effective risk management in day-to-day business activities and decision making, and encourages frank and open communication. • Our business units and corporate functions own the objectives, and therefore risks, assumed in their activities and are accountable for the effective management of those risks, supported by the risk management and internal audit functions. TMX uses Five Lines of Accountability (see below) which enhances the Three Lines of Defence model while recognizing the role of senior management and the Board in risk management. We adequately define these roles and responsibilities and associated levels of authority for risk-taking across the enterprise. • We employ effective and consistent risk management processes across the enterprise to ensure that objectives and risks are transparent, well understood, and remain within an accepted and approved level of risk appetite. • We employ sufficient resources and effective tools, methods, models and technology to support our risk management processes. • Our ERM framework reflects industry standards and legal and regulatory requirements, and is regularly reassessed. The management of risk is essential to the successful execution of our Strategic Plan. Consequently, we have adopted an Objective Centric Risk Management (“OCRM”) approach to risk management. Rather than managing our risks in isolation, we use OCRM to address opportunities, uncertainties and threats to the successful achievement of our objectives. An OCRM approach to risk management does not change the risks faced by our organization. Instead, it ties the process to our objectives which ensures the proper allocation of resources across the enterprise. As illustrated in the diagram below, using OCRM requires senior management, under the supervision of the Board, to (i) clearly define roles across the businesses; (ii) explicitly specify risk and assurance requirements; and (iii) determine the business objectives that warrant more formal and visible risk assessment processes. This ensures the integration of the enterprise's objectives, risks, risk treatments, and performance. The Board has established a set of enterprise objectives and the Strategy and Risk Committee (“SRC”), a management committee of TMX Group, determines the key risks to the successful achievement of our objectives, identifies new or emerging risks, evaluates our execution strategy and allocates resources as required. 2019 Annual Report 62 TMX Group Limited Page 55 Key risks identified are: Competition: We compete with other exchanges domestically and internationally on listings, cash equities and equity option trading. Muted capital markets activity has created a headwind for raising capital. Market and Macroeconomic Risk: A significant portion of our revenue comes from trading revenue. Similar to other exchanges, this is highly sensitive to macro conditions. Canada is our largest geographic concentration of revenue. Given the majority of business is conducted domestically, macroeconomic factors such as GDP growth, regulations, interest rates, volatility, and market activity, can impact our business. Execution Risk: We are exposed to the risk that we lack capabilities or fail to prioritize initiatives to deliver against our strategy and objectives in an efficient and effective manner. Cyber Risk: Our processes and networks and those of our third-party service providers may be vulnerable to information risks, including unauthorized access, computer viruses, denial of service attacks, and other security issues. Concentration Risk: A large portion of the Canadian economy is based in natural resources and energy related business and as such, we are exposed to downturns in these sectors as they can impact capital formation business and the trading and clearing activity. Key Person Risk: Should key senior management positions become vacant there could be a risk in executing our strategy. Page 56 2019 Annual Report 63 TMX Group Limited These risks and uncertainties are further expanded upon below. The risks and uncertainties discussed in this section are not the only ones facing TMX Group. Additional risks and uncertainties not presently known to us or that we currently believe to be 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 adversely affected. Competition Risk We are exposed to the risk that established and new competitors, including disruptive technology providers, will challenge our business model and objectives. Our Capital Formation business competes with other exchanges and other financing platforms We compete for listings with North American exchanges in a broad range of sectors and also internationally, particularly for resource companies and SMEs. We also face competition from North American and international exchanges for Canadian listings. Domestically, we currently compete for listings with two other exchanges. While some Canadian issuers seek a listing on another major North American or international exchange, historically, the vast majority of these issuers also list on TSX or TSXV and do not bypass our markets. We also compete with institutions and various market participants that offer alternative forms of financing including private equity, venture capital and various forms of debt financing. TSX, TSXV and TSX Alpha Exchange face competition from other exchanges, other marketplaces and trading mechanisms We face competition for business from other exchanges, especially those in the U.S. as investing becomes more global. In particular, these competitors could look to attract Canadian issuers that are listed on one of our exchanges. For example, one of our U.S.-based competitors operates a Canadian market. It is possible that this competitor could, in addition to competing for listing and trading of Canadian issuers, enter into other business areas in which we currently operate. In addition, the variety of other marketplaces and trading venues in the U.S. that trade Canadian securities, including dark markets and internalization facilities, places increasing competitive pressure on our business. For example, some market participants in the U.S., known as wholesalers, are currently able to pay our customers for order flow under U.S. securities laws and regulations. This practice is not permitted in Canada, and therefore puts us at a competitive disadvantage. IIROC published guidance and a technical notice to clarify the requirements for investment dealers when orders in Canadian- listed securities are executed away from Canadian markets, an important step in IIROC’s approach to addressing concerns about the routing of orders to the U.S. If we are unable to continue to provide competitive trade execution, the volume traded in all interlisted issuers on our equity exchanges could decrease in the future and adversely affect our operating results. Our combined market share (including TSX, TSXV, and Alpha) of the total volume traded in Canadian based interlisted issues was approximately 31% in 2019, up from 30% in 2018. Our cash equities sales team is focused on attracting more foreign participants and order flow by raising the level of awareness of the benefits of trading on TSX, TSXV and Alpha. Domestic competition in our cash equities trading business has intensified since the establishment of ATSs in Canada. Technological advances have lowered barriers to entry and have created a multiple marketplace environment for trading TSX and TSXV listed securities. There are currently 15 Canadian equity marketplaces which trade TSX and/or TSXV listed securities, including dark and visible trading venues. There are also sophisticated mechanisms to internalize order flow, liquidity aggregators and smart order routers that facilitate trading on other venues. New market entrants have fragmented domestic equities market share and we continue to face significant competitive pressure from existing venues, and potential Page 57 2019 Annual Report 64 TMX Group Limited new entrants. Excluding intentional crosses, in the issues we trade, our combined domestic equities trading market share was 65%41 in 2019, down from 67% 2018 We only trade securities that are listed on TSX or TSXV. Excluding intentional crosses, in all listed issues in Canada, our combined domestic equities trading market share was 57% in 2019, down from 58% 2018. These trading venues may, among other things, respond more quickly to competitive pressures, develop similar or alternative products and services to those that TSX, TSXV and Alpha offer that are preferred by customers, develop and expand their network infrastructures and offerings more efficiently, adapt more swiftly to new or emerging technologies and changes in customer requirements, and adopt better, more user friendly and reliable technology. If these trading venues attract significant order flow, or other market structure changes occur in the marketplace which negatively impacts our ability to effectively compete, our listing, trading and GSIA revenue could be materially adversely affected. There is also intense price competition in the cash equities markets where competitors may price their trading and data products more attractively. 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. Some competitors may seek to increase their share of trading by reducing their transaction fees, by offering larger liquidity payments, by offering inverted pricing and/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. MX and CDCC face competition from other venues While MX is the only Canadian financial derivatives exchange offering standardized products and CDCC the only clearing house headquartered in Canada clearing such products, their various component activities are exposed. MX already competes with, among others, options and other derivatives exchanges as well as the OTC market. This competition exists particularly in the US, but also in Europe and Asia. For example, in the U.S., MX competes for market share of trading single stock options and share futures on Canadian-based inter-listings, or dual listings. However, options and share futures traded in the U.S. are not fungible with those traded in Canada. In addition, OTC regulatory reform that is underway in Canada could encourage the entry of new competition within the Canadian clearing space. OTC inter- dealer and dealer-to-client trading platforms represent increased competitive risk to MX with their lookalike and substitute products. We may, in the future, also face competition from other Canadian marketplaces. These competitors may, among other things, respond more quickly to competitive pressures, develop similar products to those MX offers that are preferred by customers or they may develop alternative competitive products. Furthermore, 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 products which could materially adversely affect our business and operating results. The Canadian clearing services market may become more competitive as some competitors receive recognition or exemption orders from regulators to operate as clearing agencies. Provincial regulators have also exempted from recognition in their respective province a number of foreign clearing agencies, allowing those exempted clearing agencies to provide clearing services to participants in the province under the terms of the applicable exemption orders, including Eurex Clearing AG and Chicago Mercantile Exchange Inc. Increasing regulatory requirements imposed upon banks through higher capital requirements imposed under the Basel regulatory framework, which increase the costs of acting as a futures clearing agent on behalf of end customers may make clearing services more challenging for end customers to obtain, which could limit growth in the futures clearing business. Other major competitors may gain some of this business as they have started to offer clearing services 41 Source: IIROC Page 58 2019 Annual Report 65 TMX Group Limited directly to end customers, eliminating challenges end customers may face in obtaining clearing agent services from banks. 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. Shorcan faces 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 business and operating results. Global Solutions, Insights and Analytics We face competition in market data and analytics, from other trading venues and vendors. Market data is generated from trading activity and the success of certain data products is linked to maintaining order flow. Economic Risk We are exposed to the risk that the macroeconomic and industry conditions (among others, the commodity cycle and economic growth) will challenge our business model and objectives. We depend on the economy of Canada Our financial results are, and continue to be affected by the Canadian economy, including by commodity prices in the resource sector, especially fluctuations in the price for crude oil. Any prolonged economic downturn could have a significant negative impact on our business. We have increased our focus on the innovation sector. However capital raised may not equal that of the energy sector. 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. A prolonged economic downturn may have a negative impact on investment performance, which could materially adversely affect the number of issuers and new listed issuers, the market capitalization of our listed issuers, additional securities being listed or reserved, trading volumes across our markets, the number of transactions related to our equity and fixed income clearing and settlement, depository, custodial and entitlement services and market data sales. Our operating results may be adversely impacted by global economic conditions The economic and market conditions in Canada, the United States, Europe, China and the rest of the world impact the different aspects of our business and our revenue drivers. In particular, lower commodity prices, including fluctuations in the price for crude oil, can, and has, negatively impacted our business. Changes in the economic and political climate in the United States and Asia Pacific, including changes relating to trade agreements, could impact our business. In addition, increased uncertainty in Europe, including the impact of Brexit and the possibility of sovereign defaults on debt, may also impact our business, including Trayport. Political and civil uncertainty in Hong Kong as well as the trade war between China and the United States may impact growth plans in Asia in the short term. Because listing, initial and additional financing, trading and clearing activities are significantly affected by economic, political and market conditions and the overall level of investor confidence, they 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 face higher credit costs associated with complying with margining regimes which could result in lower volumes. 2019 Annual Report 66 TMX Group Limited Page 59 Global market and economic conditions have fluctuated in recent years and we have witnessed both high and low levels of volatility. While higher volatility in markets can generate increased transaction volume, when coupled with prolonged negative economic conditions higher volatility 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 which, in turn, could adversely affect our business, financial condition, and operating results. A low-volatility environment can result in lower levels of trading, particularly for derivative products, placing downward pressure on operating results. We depend on market activity that is outside of our control Our revenue is highly dependent upon the level of activity on our exchanges and clearing houses, 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 markets; the number and market capitalization of listed issuers; the number of new listings; the number of active traders and brokerage firms; the number of transactions related to our equity and fixed income clearing and settlement, depository services; and the number of subscribers to market data and Trayport services. We do not have direct control over these variables. Among other things, these variables depend upon the relative attractiveness of securities listed and traded on our exchanges and the relative attractiveness of our exchanges as a place to list and 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, China, and in the world in general (especially growth levels, political stability and debt crisis); broad trends in business and corporate finance, including trends in the exchange industry, capital market trends and the mergers and acquisitions environment; the economic health of the resource sector; the level and volatility of interest rates and resulting attractiveness of alternative asset classes; the regulatory environment for investment in securities, including the regulation of marketplaces and other market participants, both in Canada and other jurisdictions; the relative activity and performance of global capital markets; investor confidence in the prospects and integrity of our listed issuers, and the prospects of Canadian-based listed issuers in general; pricing volatility of global commodities and energy markets; and changes in tax legislation that would impact the relative attractiveness of certain types of securities, or listing in certain countries. We may be able to indirectly influence the volume of trading by providing efficient, reliable and low-cost trading; maximizing the availability of timely, reliable information upon which research, advice and investment decisions can be based; and maximizing the ease of access to listings and trading facilities. However, those activities may not have a positive effect on or effectively counteract the factors that are outside of our control. We face a risk that regulators may impose higher burdens on our clients that could impinge on their ability to invest. Strategic Risk We are exposed to the risk of attaining sub-optimal enterprise business performance due to: 2019 Annual Report 67 TMX Group Limited Page 60 Opportunity Cost Risk: failure to develop, assess and select optimal pathways for portfolio-level success in context of enterprise capabilities, resources, and the external environment Implementation Risk: failure to commit to chosen pathways and translate them into clear actions and goals Execution Risk: failure to execute committed plans Change Management Risk: failure to identify changes in the strategic context of the business with sufficient foresight, and to develop, select and execute effective responses Our strategic planning processes may not enable us to identify and properly respond to opportunities or threats resulting in our inability to develop new products and services that meet clients’ evolving needs Our strategic planning process includes a thorough analysis of the business context in which we operate as well as significant peer and competitive analysis. While we regularly test the key assumptions underlying our strategic plan, it is possible that we may not identify or respond to opportunities or threats in our industry despite the investment of time and resources in this process. Execution Risk We are exposed to the risk that we lack capabilities or fail to prioritize initiatives to deliver against our strategy and objectives in an efficient and effective manner. It is possible that our capital allocation decisions may not be optimal. We may not be successful in executing our strategy We invest significant resources in the development and execution of our corporate strategy to grow profitability and maximize shareholder value. We may not succeed in executing our strategies effectively because of, among other things, increased global competition, inability to mobilize or co-ordinate internal resources on a timely basis, difficulty developing and introducing products or regulatory restrictions. 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 our Commercial Paper Program, Debentures, Credit Facility, Recognition Orders and under our regulatory oversight agreements. While we have established process and tools for effective and rigourous oversight of our key initiatives, any of these factors could materially adversely affect the successful execution of our strategies. Inadequate succession planning could slow the successful execution of our strategy. The execution of our strategy could also be impacted if we failed to respond quickly to a changing landscape. 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 unique challenges that we may not be able to meet We continue to expand our operations internationally, including making acquisitions, opening offices and acquiring distribution, technology and other systems in foreign jurisdictions, and 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, but are not limited to: Page 61 2019 Annual Report 68 TMX Group Limited • • • • • • restrictions on the use of trading terminals or the contracts that may be traded; reduced protection for intellectual property rights; 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. In many cases, the additional costs related to compliance can be substantial, and could outweigh the potential benefits. 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. Integration/Divestitures Risk We are exposed to the risk that we fail to integrate acquisitions to achieve the planned economics or divest under- performing businesses effectively. We face risks associated with integrating the operations, systems, and personnel of 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. In addition, pursuant to the Final Recognition Orders42, prior regulatory approval is required before TMX Group can implement significant integration, combination or reorganization of businesses, operations or corporate functions among TMX Group entities. The requirement to obtain these approvals may restrict or delay TMX Group’s ability to make planned changes to these aspects of its operations in the future which could have a material adverse effect on TMX Group’s business, financial condition and results of operations. If an investment, acquisition or other transaction does not fulfill expectations, we may have to write down its value in the future and/or sell at a loss. We face risks associated with not being able to divest under-performing businesses As part of our normal course of operations and strategic review processes, we may from time to time identify under performing assets or businesses that we choose to divest. 42 Recognition orders issued by the securities regulators with respect to the Maple Transaction. Page 62 2019 Annual Report 69 TMX Group Limited Similar to integration risks, we also face the risks of not divesting under-performing businesses in a timely and effective manner to enable better utilization of our capital and other resources. Operational Risks Technology Risk We are exposed to the risk that our technology and underlying IT processes do not enable us to develop and/or deliver our products and services effectively. We depend heavily on information technology, which could fail or be subject to disruptions We are extremely dependent on our information technology systems. Trading and data on our cash equities markets, data on energy markets, trading, clearing and data on our derivatives markets and clearing, settlement and depository activity for equities and fixed income securities are conducted exclusively on an electronic basis. We have incident and disaster recovery and contingency plans as well as back-up procedures to mitigate the risk of an interruption, failure or disruption, including those due to cyber attacks on our critical information technology including that of TSX, TSXV, Alpha, MX, Trayport, CDCC and CDS. We also test and exercise our disaster recovery plans. 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, derivatives trading and clearing, and market data information technology systems may not effectively or efficiently support our changing business requirements. We are heavily invested in a Post Trade Modernisation project; the significant delay or failure of which may impact investor confidence and expose us to system reliability issues. We are continually improving our information technology systems so that we can handle increases and changes in our trading, clearing, settlement and depository 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. System changes may introduce risk; while we have and follow, standard deployment processes for managing and testing these changes, we cannot entirely eliminate the risk of a system failure or interruption. If the TMX Quantum XA trading enterprise, the SOLA derivatives trading enterprise, the SOLA Clearing platform, or CDS's CDSX system fail to perform in accordance with expectations, our business, financial condition and operating results may be materially adversely affected. Information Security and Privacy Risk We are exposed to the risk that information security breaches will adversely affect the operations, intellectual property and reputation of TMX Group. Our processes and networks and those of our third-party service providers may be vulnerable to data security risks, including cyber attack Our processes and networks and those of our third-party service providers, our POs and approved participants and our customers may be vulnerable to information risks, including unauthorized access, computer viruses, theft of data, denial of service attacks, 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 Page 63 2019 Annual Report 70 TMX Group Limited 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. Geopolitical & External Disruption Risks We are exposed to the risks that geopolitical upheavals (e.g. a terrorist attack) or non-political external events (e.g. extreme weather) will affect the provision of our critical services. Geopolitical, climate change 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 and political, or other types of external disruptions, including human error, climate change, natural disasters, extreme weather, 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, both data centres and office space, to provide redundancy and back-up both in terms of technology and staffing to reduce the risk and recovery time of system disruptions for key systems. However, not all systems are duplicated, and any major disruption may affect our existing and back-up facilities. Any interruption in our key services could impair our reputation, damage our brand name, and negatively impact our financial condition and operating results. Talent Management Risk We are exposed to the risk that we are unable to attract and/or retain talented employees, which adversely affects the achievement of our objectives. 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 other 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 which could negatively affect our business and results of operations. Insider Threat Risk We may be exposed to a threat where an authorized employee may take bad faith actions towards our technology, information or operations. We conduct background checks prior to the offer of employment and throughout the individual's employment; the frequency of which is based on their level of access. Access levels are reviewed on a regular basis and all access changes/terminations are communicated in a timely manner. All access is monitored by Security on a continuous basis. 2019 Annual Report 71 TMX Group Limited Page 64 Our trading, clearing and depository businesses could be exposed to loss due to operational failures 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 clearing services, CDS’ clearing, settlement and depository services, as well as the transition 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, or BOX’s operations for the for the period in which we provide transition services . This could undermine confidence in our exchanges and clearinghouses, materially adversely affect our reputation or operating results, and may lead to customer claims, litigation and regulatory sanctions. Failure of CDS’ systems could also affect other systemically important financial infrastructures such as the Large Value Transfer System operated by Payments Canada. CDS holds securities on behalf of its participants in safe keeping. A small portion of this securities inventory is held in physical form. This risk is mitigated through layers of physical security arrangements as well as insurance coverage. However, CDS may be exposed to the risk of the loss or theft of these securities. The operational processes at CDS and CDCC which provide clearing and central-counterparty services, are subject to the risk of failure for which they may be held liable. These process failures may result in material financial losses. To mitigate this risk, CDS and CDCC have instituted a comprehensive set of internal controls, which are audited by an external party on at least an annual basis. CDS and CDCC are the sole clearers for the transactions they process. Operations Risk relating to Transfer Agent and Corporate Trust Services Business Our transfer agent and corporate trust services business could be exposed to losses due to operational risks The principal risks associated with the services and products offered by TSX Trust are operational in nature as TSX Trust does not lend money or trade in marketable securities. The most significant operational risks include securities issuance and transfers, corporate actions processing, disbursements, escrows, corporate trust and segregated accounts reconciliation activities. To mitigate these risks, its management has instituted a comprehensive set of internal controls, which are audited by an external party on at least an annual basis. Model Risk We are exposed to the risk that our clearing and settlement risk models used within our clearing houses are not designed or operating effectively, thereby exposing us to systemic failure. We are dependent on the accuracy and effective implementation of risk models CDS and CDCC use financial models to estimate risk exposures and the value of margin and collateral to mitigate those exposures. These models are subject to risks including the incorrect use of variables input into the models, the misspecification of the model or errors in the implementation and/or use of models and their results which could result in the risks resulting from a clearing member failure being inadequately collateralized. The model risks are mitigated through model testing prior to implementation and the existence of a risk management framework with necessary governance to regularly assess the adequacy of the models. In addition, our clearinghouse risk models are subject to independent vetting and validation thereby ensuring that those models continue to perform as they were originally designed to do. Failure of the models may result in under or over estimation of financial risk exposures and may create systemic risks. Third Party Risk We are exposed to the risk that the use of third party vendors or outsourcing service providers for technology and/or business processes will result in loss of critical business data and/or compromise controls. Page 65 2019 Annual Report 72 TMX Group Limited We depend on third-party suppliers and service providers We depend on a number of third parties, such as IIROC, cloud services, data processors, software and hardware suppliers, communication and network suppliers, suppliers of electricity, and many other vendors, for elements of our businesses including trading, clearing, 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. We have established a central procurement function focused on vendor selection and management. However, 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. Client Concentration Risk We depend on an adequate number of clients 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. 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 and clearing operations depend primarily on a small number of clients During 2019, approximately 76% of our trading and related revenue, net of rebates, on TSX and approximately 56% of our trading and related revenue on TSXV were accounted for by the top ten POs on each exchange based on volumes traded. Approximately 58% of CDS’s revenue, net of rebates, in 2019 was accounted for by the top ten customers (excluding securities regulators). Approximately 69% of MX and CDCC’s trading and clearing revenue, net of rebates, in 2019 was accounted for by the top ten participants based on volume of contracts traded. If there was a significant decrease in revenue from several of these customers, there would be a negative impact on our business. Legal & Regulatory Risk Regulatory Climate & Compliance We are exposed to the risks that are associated with the complexity and unpredictability of our legal and regulatory environment, including legislation and regulations that impact our listed issuers. Our response to regulatory requirements could result in higher operating costs. Moreover, we are also exposed to the risk that we fail to comply with laws and regulations, resulting in financial and reputational loss. Cost of Regulation We incur costs to comply with the regulatory requirements that are imposed pursuant to the Recognition Orders. 2019 Annual Report 73 TMX Group Limited Page 66 For more information on the regulatory impact on our business, please see the TMX Group Annual Information Form, dated March 28, 2019. We operate in a highly regulated industry and are subject to extensive regulation and could be subject to increased regulatory scrutiny in the future 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. Regulators in Canada, as well as regulators in other jurisdictions where we do business, such as the U.S., regulate us, our exchanges, our clearing houses and certain of our other businesses. Regulators in other jurisdictions may regulate our future operations. Canadian regulators propose changes, including amendments to National Instruments, on an ongoing basis. Our regulators have broad powers over the entities they regulate to audit, investigate and enforce compliance with applicable regulations and impose sanctions for non-compliance. Our regulators are vested with broad powers to prohibit us from engaging in certain business activities and to suspend or revoke existing approval to engage in certain business activities, including exchange, clearing agency and SRO related activities. In the case of actual or alleged non-compliance with legal or regulatory requirements, our regulated entities could be subject to investigations and administrative or judicial proceedings that may result in substantial penalties, including the suspension or revocation of approval to act as an exchange, clearing agency or 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. The regulation of our businesses may impose barriers or constraints which limit our ability to build an efficient, competitive organization and may also limit our ability to expand global operations. Securities and other regulators also impose financial and corporate governance restrictions on us and our equity and derivatives exchanges and clearing agencies and operations. Some of our regulators must approve or review our regulated entities’ listing rules, trading rules, clearing, settlement and depository 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. We could be subject to increased regulatory scrutiny in the future. The multi-market environment in Canada and the impact of global economic conditions continue to lead to more aggressive regulation of our businesses by securities and other regulatory agencies in Canada, the U.S. and abroad and could extend to areas of our businesses that to date have not been regulated. There may be a conflict of interest, real or perceived, between our regulatory responsibilities and our own business activities. While we have implemented stringent governance measures and have and will continue to put into place policies and procedures to manage such conflicts, any failure to diligently and fairly manage such conflicts may significantly harm our reputation, prompt regulatory action and could materially adversely affect our business, financial condition and results of operations. New regulatory requirements may make it more costly to comply with relevant regulation, to operate our existing businesses or to enter into new business areas A number of regulatory initiatives and changes have been identified or proposed or are being implemented by regulators, including in Canada, the U.S. and Europe. We cannot be certain whether, or in what form, regulatory changes will take place, and cannot predict with certainty the impact of such changes on our businesses and operations. Changes in, and additions to, the rules affecting our exchanges and clearing houses could require us to change the manner in which we and our customers conduct business or govern ourselves. For example, impacts of Brexit on our exchanges, clearing houses and Trayport, as well as our clients, remain uncertain. Failure to make the required changes and comply on a timely basis could result in material reductions to activity or revenue, sanctions and/or restrictions by the applicable regulatory authorities. Page 67 2019 Annual Report 74 TMX Group Limited Unexpected and new regulatory requirements could make it more costly to comply with relevant regulations and for affected entities 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. CDS Clearing and CDCC operate financial market infrastructures, including central counterparties for cash and derivative markets, commodity markets, securities settlement systems and central securities depositories that are subject to the CPMI-IOSCO Principles for Financial Market Infrastructure (PFMIs) for these types of services, which are reflected in the requirements of such entities’ regulators and applicable securities law including National Instrument 24-102 Clearing Agency Requirements. The ongoing implementation of PFMIs by regulators on these businesses will continue to impact the cost of regulatory compliance. European energy market regulatory changes could potentially affect the structure of these markets and hence the number of trading venues supported by Trayport. Our Recognition Orders impose significant regulatory constraints Under the Recognition Orders, we are subject to extensive regulation and regulatory oversight with respect to, among other things, fees, fee models, discounts and incentives. The Recognition Orders also impose significant regulatory constraints on our ongoing business. The additional regulatory and oversight provisions provided for in the Recognition Orders provide the applicable regulators with broad powers that could, depending on how such powers are exercised in the future, impose barriers or constraints that limit our ability to build an efficient, competitive organization, which could have a material adverse effect on our business, financial condition and results of operations. With respect to the fees charged by all of our equity exchanges (TSX, Alpha, and TSXV), the Recognition Orders impose restrictions or prohibitions on certain types of fee discounts or incentives that such exchanges may provide, including discounts or incentives that are accessible only to a particular marketplace participant or class of marketplace participants. Such prohibitions and restrictions may limit the ability of our equity exchanges to introduce new products in the future or to introduce them on a timely basis, which could materially adversely affect the success of our future strategies, financial condition and results of operations. In addition, under the Recognition Orders the OSC has the right to require TSX and Alpha to submit a fee, fee model or incentive that has previously been approved by the OSC for re-approval. In such circumstances, if the OSC decides not to re-approve the fee, fee model or incentive, it must be revoked. We have incurred increased costs to comply with the additional regulatory requirements that are imposed pursuant to the Recognition Orders. In addition, we and certain of our businesses are subject to participation and activity fees imposed by provincial securities regulators. The overall scope of the additional regulatory costs may have a material adverse effect on our business, financial condition, and results of operations. Pursuant to the Recognition Orders, prior regulatory approval is also required before we can implement changes to a number of aspects of our operations. This includes prior regulatory approval of (a) changes to internal cost allocation models and any transfer pricing between affiliated entities, (b) significant integration, combination or reorganization of businesses, operations or corporate functions between TMX Group entities, (c) non-ordinary course changes to TSXV’s operations, and (d) any outsourcing of key services or systems by a marketplace. The requirement to obtain approvals may restrict or delay our ability to make planned changes to these aspects of our operations in the future which could have a material adverse effect on our business, financial condition and results of operations. Our Recognition Orders impose ownership restrictions on our voting shares Under the OSC and AMF Recognition Orders, 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 TMX Group without prior approval of the OSC and the AMF. Should a person or combination of persons, acting jointly or in concert, beneficially own or exercise control or direction over more than 10% of any class or series of voting shares of TMX Group without prior approval of the OSC and the AMF, their respective voting rights will be limited to no more than 10% until such time as approval has been granted by the OSC and the AMF. 2019 Annual Report 75 TMX Group Limited Page 68 Litigation/Legal Proceedings Risk We are exposed to the risk that litigation or other legal proceedings are launched against us. We are subject to risks of litigation and other legal proceedings Some aspects of our business involve risks of litigation. Dissatisfied customers or vendors, among others, may make claims with respect to, among other things, the manner in which we operate or they may challenge our regulatory actions, decisions or jurisdiction. Although we may benefit from certain contractual indemnities and limitations on liabilities, these rights may not be sufficient. In addition, with civil liability for misrepresentations in our continuous disclosure documents and statements and for the failure to make timely disclosures of material changes in Ontario and certain other jurisdictions, dissatisfied shareholders have a statutory right to 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. Intellectual Property Risk We are exposed to the risk that we fail to protect our intellectual property resulting in material financial loss to us. We are exposed to the risk that an infringement claim may be asserted against us. We may be unable to protect our intellectual property To protect our intellectual property rights, we rely on a combination of trademark 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 rights. We may not be able to detect the unauthorized use of, or take adequate steps to enforce, our intellectual property rights. If we are unable 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 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 are subject to risks of intellectual property claims 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. We may also be subject to claim alleging that we are infringing on a third party's intellectual property rights without 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 we are successful. Financial Risks Operational Risk 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. We are exposed to the risk that we fail to develop, implement and maintain the appropriate corporate finance model and capital structure. The Trust Indentures governing the Debentures impose various restrictions on TMX Group and its subsidiaries, including restrictions on the ability of TMX Group and each of its material subsidiaries (as defined in the Trust Indentures) to create a lien on these entities’ assets, limitations on the ability of material subsidiaries of TMX Group to enter into certain types of indebtedness, and requirements to repurchase outstanding Debentures on change of control of TSX Inc. or MX coupled Page 69 2019 Annual Report 76 TMX Group Limited with a triggering event (i.e., rating of the Debentures is lowered to below investment grade). Notwithstanding our treasury and capital allocation programs which include leverage ratio and dividend payout ratio analysis, some, or all, of these restrictions could limit our flexibility to change our capital structure. Our Credit Agreement requires us to satisfy and maintain an interest coverage ratio and a leverage ratio, among other covenants, including the timely payment of principal and interest when due. It is important that we meet all of the terms under our Credit Facility since it provides a 100% backstop to our Commercial Paper Program. Based on the current level of operations and anticipated growth, we believe that our cash flows from operations and our available cash are adequate to meet our current liquidity needs. However, we cannot guarantee that our businesses will generate sufficient earnings or cash flows from operations or that anticipated growth will be realized or that we will be able to control our expenses in an amount sufficient to enable us to satisfy the financial ratios and other covenants, or pay our indebtedness or fund our other liquidity needs. If we do not have sufficient funds, we may be required to renegotiate the terms of, restructure, or refinance all or a portion of our indebtedness on or before our stated maturity, reduce or delay capital investments and acquisitions, reduce or eliminate our dividends, or sell assets. Our ability to renegotiate, restructure, or refinance our indebtedness would depend on the condition of the financial markets and our financial condition at that time. Failure to comply with the financial ratios as well as covenants of the Credit Agreement could result in a default under the Trust Indentures, which, if not cured or waived, could result in TMX Group being required to repay outstanding borrowings under both the Credit Agreement and the Debentures before their due dates. In addition, an event of default under the Trust Indentures governing the Debentures that would result in an acceleration of maturity of the applicable series of Debentures could lead to an acceleration of the maturity of the Credit Agreement. In addition, if we fail to comply or are reasonably likely to fail to comply with any financial covenant or ratio contained in any Final Recognition Order, such failure could result in a default under the Credit Agreement as well, if a governmental authority issues a decision or orders restrictions on us or any of our subsidiaries as a result of the non- compliance where a requisite majority of the lenders determine that the restrictions have or will have a material adverse effect as defined in the Credit Agreement. It will also be a default under the Credit Agreement if a governmental authority issues a decision or orders restrictions on our or any of our subsidiaries’ ability to move cash or cash equivalents among TMX Group and our subsidiaries, where a requisite majority of the lenders determine that the restrictions have or will have a material adverse effect. If these events of default under the Credit Agreement were to result in an acceleration of maturity under the Credit Agreement, the event(s) could constitute an event of default under the Trust Indentures, which in turn would result in the acceleration of maturity of the outstanding Debentures. If we are forced to refinance these borrowings on less favourable terms or cannot refinance these borrowings, our business, results of operations, and financial condition would be adversely affected. Borrowings under the Commercial Paper Program and Credit Agreement incur interest at variable rates and expose us to interest rate risk. If interest rates increase, our debt service obligations on our variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income and cash flows, including cash available for servicing the indebtedness, would correspondingly decrease. TMX Group has an issuer rating of A (high) from DBRS with a Stable trend. Our Debentures, have the same credit rating from DBRS with a Stable trend. The Commercial Paper has been assigned a rating of “R-1 (low)” with a Stable trend by DBRS. DBRS regularly evaluates and monitors the rating of our Commercial Paper and the rating of our Debentures outstanding. A downgrade from our existing rating could adversely affect our cost of borrowing and/or our ability to access sources of liquidity and capital and reduce financing options available to us. Credit Risk Credit risk is the risk of loss due to the failure of a borrower, counterparty, clearing member or participant to honour their financial obligations. It arises principally from the clearing operations of CDS Clearing and CDCC, the operations of TSX Trust, the brokerage operations of Shorcan, cash and cash equivalents, restricted cash and cash equivalents, marketable securities, trade receivables, interest rate swaps and total return swaps. 2019 Annual Report 77 TMX Group Limited Page 70 Credit Risk – Clearing Houses Credit Risk - CDS CDS Clearing is exposed to the risk of loss due to the failure of a Participant in CDS Clearing’s clearing and settlement services to honour its financial obligations. To a lesser extent, CDS Clearing is exposed to credit risk through the performance of services in advance of payment. Through the clearing and settlement services operated by CDS Clearing, credit risk exposures are created. During the course of each business day, transaction settlements can result in a net payment obligation of a Participant to CDS Clearing or the obligation of CDS Clearing to pay a Participant. The potential failure of the Participant to meet its payment obligation to CDS Clearing results in payment risk, a specific form of credit risk. Payment risk is a form of credit risk in securities settlement whereby a seller will deliver securities and not receive payment, or that a buyer will make payment and not receive the purchased securities. Payment risk is mitigated by delivery payment finality in CDSX, CDS' multilateral clearing and settlement system, as set out in the CDS Participant Rules. In the settlement services offered by CDS Clearing, payment risk is transferred entirely from CDS Clearing to Participants who accept this risk pursuant to the contractual rules for the settlement services. This transfer of payment risk occurs primarily by means of Participants acting as extenders of credit to other Participants through lines of credit managed within the settlement system or, alternatively, by means of risk-sharing arrangements whereby groups of Participants cross-guarantee the payment obligations of other members of the group. Should a Participant be unable to meet its payment obligations to CDS Clearing, these surviving Participants are required to make the payment. Payment risk is mitigated on behalf of Participants through the enforcement of limits on the magnitude of payment obligations of each Participant and the requirement of each Participant to collateralize its payment obligation. Both of these mitigants are enforced in real time in the settlement system. The risk exposure of CDS Clearing in its central counterparty services is mitigated through a daily mark-to-market of each Participant’s obligations as well as risk-based collateral requirements calculated daily. These mitigants are intended to cover the vast majority of market changes and are tested against actual price changes on a regular basis. This testing is supplemented with analysis of the effects of extreme market conditions on a collateral valuation and market risk measurements which are used to determine additional collateral requirements of Participants to a default fund established in 2015. Should the collateral of a defaulter in a central counterparty service be insufficient, either because the value of the collateral has declined or the loss to be covered by the collateral exceeded the collateral requirement, the surviving participants in the service are required to cover any residual losses. Credit Risk – CDCC CDCC is exposed to loss in the event that Clearing Members fail to satisfy any of the contractual obligations as stipulated within CDCC’s rules. CDCC is exposed to the credit risk of its Clearing Members since it acts as the central counterparty for all transactions carried out on MX’s markets and on certain OTC markets which are serviced by CDCC. As such, in the event of a Clearing Member default, the obligations of those defaulting counterparties would become the responsibility of CDCC. The first line of defense in CDCC's credit risk management process is the adoption of strict membership criteria which include both financial and regulatory requirements. In addition, CDCC performs on-going monitoring of the financial viability of its Clearing Members against the relevant criteria as a means of ensuring the on-going compliance of its Clearing Members. In the event that a Clearing Member fails to continue to satisfy any of its membership criteria, CDCC has the right through its rules, to impose various sanctions on such Clearing Members. One of CDCC’s principal risk management practices with regards to counterparty credit risk 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 settlements and/or daily margin calls or otherwise not honour its obligations under open futures, options contracts and REPO agreements, margin deposits would be seized and would then be available to apply against the potential losses incurred through the liquidation of the Clearing Member’s positions. 2019 Annual Report 78 TMX Group Limited Page 71 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 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% and is meant to ensure that Clearing Member leverage in the clearing activities does not exceed the value of the firm. CDCC also has additional margin surcharges to manage the risk exposures associated with certain idiosyncratic risks. These include: concentration charges for Clearing Members that are overly concentrated in certain positions, wrong-way risk charges for those Clearing Members holding positions which are highly correlated with their own credit risk profile, mismatched settlement surcharges which are meant to mitigate the risk of cherry-picking by a potential defaulter in the settlement process. Credit Risk – Shorcan Shorcan is exposed to credit risk in the event that customers fail to settle on the contracted settlement date. This 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 has the right to withdraw its normal policy of anonymity and advise the two counterparties to settle directly. Credit Risk – All Other We manage our exposure to credit risk on our cash and cash equivalents and restricted cash and cash equivalents by holding the majority of our cash and cash equivalents with major Canadian chartered banks or in Government of Canada and provincial treasury bills and US treasury bills. We manage exposure to credit risk arising from investments in marketable securities by holding investment funds that actively manage credit risk or by holding high-grade individual fixed income securities with credit ratings of A/R1-low or better. 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. Due to the bilateral nature of the TRSs, we are exposed to the counterparty credit risk. To manage this credit risk, we only enter into the TRSs with major Canadian chartered banks. TSX Trust is exposed to credit risk on foreign exchange transactions processed for clients in the event that either the client or the financial counterparty fails to settle contracts for which foreign exchange rates have moved unfavourably. The risk of a financial counterparty failing to settle a transaction is considered remote as TSX Trust deals only with reputable financial institutions comprised of major Canadian chartered banks. Market Risk Market risk is the risk of loss due to changes in market prices and rates such as equity prices, interest rates and foreign exchange rates. We are exposed to market risk relating to equity prices when we grant DSUs, RSUs and PSUs to our directors and employees, as our obligation under these arrangements are partly based on our share price. We have entered into TRSs as a partial fair value hedge to the share appreciation rights of RSUs and DSUs. We are exposed to market risk on interest earned on our cash, cash equivalents and marketable securities. This risk is partially mitigated by having variable interest rates on our short-term debt (Commercial Paper). We are exposed to market risk relating to interest paid on our Commercial Paper. Other Market Price Risk – CDS, CDCC, TSX, TSX Venture and Shorcan We are exposed to market risk factors from the activities of CDS Clearing, CDCC, and Shorcan if a Participant, Clearing Member, or Client, as the case may be, fails to take or deliver either securities or derivatives products on the contracted settlement or delivery date where the contracted price is less favourable than the current market price. 2019 Annual Report 79 TMX Group Limited Page 72 CDS CDS is exposed to market risk through its CCP function in the event a participant defaults as it becomes the legal counterparty to all of the defaulters' novated transactions and must honor the financial obligations that arise from those novated transactions. Adverse changes to market prices and rates would expose CDS to credit risk losses. The principal mitigation of this credit risk exposure post default is the default management process. CDS has developed default management processes that would enable it to neutralize the market exposures via open market operations within prescribed time periods. Any losses from such operations would be set-off against the collateral contributions of the defaulting participant to the Participant Fund and Default Fund for the CCP service, thereby minimizing credit losses. CDCC CDCC is exposed to market risk through its CCP functions in the event of a Clearing Member default as it becomes the legal counterparty to all of the defaulter's novated transactions and must honor the financial obligations that arise from those novated transactions. Adverse changes to market prices and rates would expose CDCC to credit risk losses. The principal mitigation of this credit risk exposure post default is the default management process. CDCC has developed detailed default management processes that would enable it to neutralize the market exposures through either its auction process or via open market operations within prescribed time periods. Any losses from such operations would be set-off against the margin and clearing fund (if necessary) collateral that are pre-funded by all Clearing Members for these purposes, thereby minimizing the credit losses. TSX and TSX Venture Exchange We are exposed to market price risk on a portion of our sustaining services revenue, which is based on quoted market values of listed issuers as at December 31 of the previous year. Shorcan Shorcan’s risk is limited by its status as an agent, in that it does not purchase or sell securities or commodities for its 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. Foreign Currency Risk We are exposed to foreign currency market risk on revenue and expenses where we invoice or procure in a foreign currency, principally in U.S. dollars. We do not currently employ currency hedging strategies with respect to our operating activities, and therefore significant moves in exchange rates, specifically a strengthening of the Canadian dollar against the U.S. dollar and GBP can have an adverse effect on the value of our revenue or assets in Canadian dollars. Settlements in the clearing and settlement services offered by CDS occur in both Canadian and U.S. dollars. Market risk relating to foreign exchange rates could be created if there is a default and the currency of the payment obligation is different from the currency of the collateral supporting that payment obligation. This risk is mitigated by discounting the collateral value of securities where these mismatches occur. Based on 2019 revenue and operating expenses, the approximate impact of a 10% rise or a 10% decline in the Canadian dollar compared with the U.S. dollar on revenue, net of operating expenses, is approximately $7.7 million. Based on Trayport's 2019 revenue and operating expenses, the approximate impact of a 10% rise or a 10% decline in the Canadian dollar compared with Great British Pounds (GBP) on revenue, net of operating expenses, is approximately $4.3 million. 2019 Annual Report 80 TMX Group Limited Page 73 We are also exposed to market risk relating to foreign currency rates applicable to our cash and cash equivalents, trade receivables and trade payables, principally denominated in U.S. dollars. At December 31, 2019, cash and cash equivalents and trade receivables, net of current liabilities, include US$15.8 million, which are exposed to changes in the US-Canadian dollar exchange rate (2018 – US$14.2 million), £0.7 million which are exposed to changes in the GBP- Canadian dollar exchange rate (2018 - £0.7 million), and €0.1 million which are exposed to changes in the Euro- Canadian dollar exchange rate (2018 - €0.1 million). The approximate impact of a 10% rise or a 10% decline in the Canadian dollar compared with the U.S. dollar, GBP and Euro on these balances as at December 31, 2019 is a $2.2 million decrease or increase in income before income taxes, respectively. Liquidity Risk - Operations Liquidity risk is the risk of loss due to the inability of TMX Group or its borrowers, counterparties, Clearing Members, or Participants to meet their financial obligations in a timely manner or at reasonable prices. 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 Debentures, Commercial Paper as well as credit and liquidity facilities. In clearing and depository services, liquidity risk results from the requirement to convert collateral to cash in the event of the default of a participant/customer. Cash and cash equivalents and restricted cash and cash equivalents consist of cash and highly liquid investments. Our investment policy will only allow excess cash to be invested within money market securities or fixed income securities. Individual fixed income securities held have credit ratings of A/R1-low or better and are highly liquid. Liquidity Risk - Clearing Houses The margin deposits of CDCC and CDS and clearing fund margins of CDCC 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 the Bank of Canada. Non-cash margin deposits and non-cash clearing fund deposits pledged to CDCC under irrevocable agreements are in government securities and other securities and are held with approved depositories. Cash collateral from CDS’ participants, which is recognized on the consolidated balance sheet, is held by CDS at the Bank of Canada and NSCC/DTC. Non-cash collateral, which is not recognized on the consolidated balance sheet, pledged by participants under Participant Rules is held by CDS in liquid government and fixed income securities. CDS The design of CDS' New York Link service does not apply strict limits to a Participant's end-of-day payment obligation, creating the potential for unlimited liquidity risk exposure if a user of the service were to default on its obligation. CDS manages this risk through active monitoring of payment obligations and a committed liquidity facility which covers the vast majority of potential Participant default scenarios. CDS maintains two secured standby liquidity facilities that can be drawn in either U.S. or Canadian currency. These arrangements are available to support processing and settlement activities in the event of a participant default in either the CNS or NYL service lines. Borrowings under the secured facilities are obtained by pledging securities that are settled through CNS or NYL services or providing collateral pledged by participants primarily in the form of debt instruments issued or guaranteed by federal, provincial and/or municipal governments in Canada or U.S. treasury instruments. As a designated FMI, CDS has access to the Emergency Lending Assistance (ELA) program offered by the Bank of Canada and is meant to provide emergency funding in the event of liquidity shortfalls at CDS that may occur under market stress events. The ELA is offered at the full discretion of the Bank of Canada and is meant to be fully collateralized by SLF- eligible assets. CDCC The syndicated revolving standby liquidity facility for a total of $400.0 million is also in place to provide end of day liquidity in the event that CDCC is unable to clear the daylight liquidity facilities to zero as well as to provide a source of overnight funding for securities that are not eligible to be pledged at the Bank of Canada or for emergency liquidity needs in the event of a Clearing Member default. Advances under the facility will be secured by collateral in the form of 2019 Annual Report 81 TMX Group Limited Page 74 securities that have been received by CDCC. The syndicated REPO facility is also in place to provide end of day liquidity in the event that CDCC is unable to clear the daylight liquidity facilities to zero or for emergency liquidity needs in the event of a Clearing Member default. It will provide liquidity in exchange for securities that have been pledged to or received by CDCC. As a designated FMI CDCC has access to the Emergency Lending Assistance (ELA) program offered by the Bank of Canada and is meant to provide emergency funding in the event of liquidity shortfalls at CDCC that may occur under market stress events. The ELA is offered at the full discretion of the Bank of Canada and is meant to be fully collateralized by SLF-eligible assets. Commercial Paper Program We rely on our Commercial Paper Program, Debentures and Credit Facility as a source of financing. The specific liquidity risk related to Commercial Paper is that we are unable to borrow under a new Commercial Paper issuance in order to pay for Commercial Paper that is coming due because of a lack of liquidity or demand for our Commercial Paper in the market. To mitigate this risk, we maintain a Credit Agreement that provides 100% coverage or backstop to the Commercial Paper Program. Accounting and Control Matters Changes in accounting policies The following new IFRS standards and amendments were effective for TMX Group from January 1, 2019: • • IFRS 16, Leases; IFRIC 23, Uncertainty over Income Tax Treatments; and • Annual improvements 2015-2017 cycle. There was no impact on the financial statements as a result of their adoption, except for IFRS 16 as discussed below. TMX Group has applied IFRS 16, Leases, from January 1, 2019 using the modified retrospective approach and therefore comparative information has not been restated, and continues to be reported under IAS 17, Leases, and IFRIC 4, Determining Whether an Arrangement Contains a Lease. On transition to IFRS 16, TMX Group elected to apply the practical expedient to grandfather the assessment of which contracts are leases. TMX Group only applied IFRS 16 to contracts that were previously identified as leases. Contracts that were previously not identified as leases were not reassessed. Therefore, the definition of a lease under IFRS 16 has been applied only to contracts entered into or changed on or after January 1, 2019. In the comparative period, as a lessee, TMX Group classified leases that transfer substantially all of the risks and rewards of ownership as finance leases. Assets held under other leases were classified as operating leases and were not recognized on TMX Group's balance sheet. At inception of a contract, TMX Group assesses whether a contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. TMX Group allocates the consideration in the contract to each lease and non-lease component on the basis of their relative stand-alone prices. As a lessee, TMX Group recognizes a right-of-use asset and a lease liability at the lease commencement date. The right-of- use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and any estimated costs to dismantle and remove the underlying asset or to restore the underlying asset or the site on which it is located, less any lease incentives received. The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the end of the lease term and is reduced for any impairment losses and adjusted for certain remeasurements of the lease liability. Page 75 2019 Annual Report 82 TMX Group Limited TMX Group applies judgement in determining the lease term for some lease contracts in which there is a renewal option. Lease payments included in the measurement of the lease liability comprise the following: • Fixed payments, including in-substance fixed payments which may contain variability but are unavoidable; and • Variable payments that depend on an index or a rate, are initially measured using the index or rate as at the commencement date. Variable payments based on usage or performance are not included in the measurement of the lease liability. The lease liability is measured at amortized cost using the effective interest method. The lease liability is subsequently increased by the interest cost and decreased by lease payments made, over the term of the lease. It is remeasured when there is a change in future lease payments arising from a change in an index or rate, a change in the estimate of the amount expected to be payable under a residual value guarantee, or as appropriate, changes in the assessment of whether a purchase or extension option is reasonably certain to be exercised or a termination option is reasonably certain not to be exercised. When a lease liability is remeasured, a corresponding adjustment is also made to the carrying amount of the right-of-use asset. Short-term leases and leases of low-value assets TMX Group has elected to not recognize right-of-use assets and lease liabilities for short-term leases that have a lease term of 12 months or less, and leases of low-value assets. TMX Group continues to recognize the lease payments associated with these leases as an expense over the term of the lease on a straight-line basis. ADOPTION OF IFRS 16 Substantially all of TMX Group's identified leases are premise leases. At transition, lease liabilities were measured at the present value of the remaining lease payments, discounted at TMX Group's incremental borrowing rate as at January 1, 2019. Right-of-use assets are measured at an amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments. TMX Group has applied judgment in determining the lease term for some lease contracts in which there is a renewal option or termination option. TMX Group applied the following practical expedients when applying IFRS 16 to leases previously classified as operating leases under IAS 17: • • • • applied a single discount rate to a portfolio of leases with similar characteristics; applied the exemption not to recognize right-of-use assets and liabilities for leases with less than 12 months of lease term; used hindsight when determining the lease term if the contract contains options to extend or terminate the lease; and relied on TMX Group's assessment of whether leases were onerous applying IAS 37, Provisions, Contingent Liabilities and Contingent Assets, which was made immediately before the date of initial application as an alternative to performing an impairment review. Impact on Balance Sheet On transition to IFRS 16, TMX Group recognized $94.9 million of right-of-use assets and $103.2 million of lease liabilities, of which $8.2 million was classified as current lease liabilities and recorded in "Other current liabilities". The difference between right-of-use assets and lease liabilities is attributable to previously accrued lease payments. When measuring lease liabilities, TMX Group discounted lease payments using its incremental borrowing rate, which is derived from an indicative credit spread as at January 1, 2019. TMX Group applied a weighted average incremental borrowing rate of 3.4%. Impact on Income Statement For 2019, the following is an estimate of the impact of implementing IFRS 16: 2019 Annual Report 83 TMX Group Limited Page 76 $ increase / (decrease) in net income (in millions of dollars) Depreciation and amortization expense Net finance costs Selling, general and administration expenses (related to occupancy costs) Income tax expense Overall impact on Net Income Year ended December 31, 2019 (9.8) (3.5) 10.3 0.7 (2.3) Future changes in accounting policies The following new standards and amendments to standards and interpretations are not yet effective for the year ending December 31, 2019, and have not been applied in the preparation of the financial statements. These new and amended standards and interpretations are required to be implemented for financial years beginning on or after January 1, 2020, unless otherwise noted: • • IFRS 3, Business Combinations - Amendments clarify that while businesses usually have outputs, outputs are not required for an integrated set of activities and assets to qualify as a business. To be considered a business, an acquired set of activities and assets must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. We do not expect the amendments to have a material impact on our financial statements. IAS 1, Presentation of Financial Statements, and IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors - Amendments are intended to make the definition of material in IAS 1 easier to understand and are not intended to alter the underlying concept of materiality in IFRS standards. The concept of "obscuring" material information with immaterial information has been included as part of the new definition. The threshold for materiality influencing users has been changed from "could influence" to "could reasonably be expected to influence". The definition of material in IAS 8 has been replaced by a reference to the definition of material in IAS 1. We do not expect the amendments to have a material impact on our financial statements for years after 2019. • Amendments to conceptual framework - On March 29, 2018 the IASB issued a revised version of its Conceptual Framework for Financial Reporting that underpins IFRS Standards. The IASB also issued Amendments to References to the Conceptual Framework in IFRS Standards to update references in IFRS Standards to previous versions of the Conceptual Framework. We do not expect the amendments to have a material impact on our financial statements for years after 2019. Disclosure Controls and Procedures and Internal Control over Financial Reporting Disclosure Controls and Procedures TMX Group’s disclosure controls and procedures (DCP), as defined in National Instrument 52-109 – Certification of Disclosure in Issuers’ Annual and Interim Filings (NI 52-109) 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 Chief Executive Officer (CEO) and Chief Financial Officer (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 DCP as of December 31, 2019. Based on this evaluation, the Interim CEO and CFO has concluded that our DCP were effective as of December 31, 2019. 2019 Annual Report 84 TMX Group Limited Page 77 Internal Control over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting (ICFR), as defined in NI 52-109. ICFR 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 IFRS, 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 IFRS, 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 ICFR can only provide reasonable assurance and may not prevent or detect misstatements due to error or fraud. Our management, including the interim CEO and CFO, conducted an evaluation of the effectiveness of our ICFR as of December 31, 2019 using the Committee of Sponsoring Organizations of the Treadway Commission (COSO) framework (2013). Based on this evaluation, the Interim CEO and CFO has concluded that our ICFR were effective as of December 31, 2019. Changes in Internal Control over Financial Reporting There were no changes to internal control over financial reporting (ICFR) during the quarter and year ended December 31, 2019 that materially affected, or are reasonably likely to materially affect, our ICFR. Related Party Relationships and Transactions Parent The shares of TMX Group are widely held and, as such, there is no ultimate controlling party of TMX Group. Under the OSC and AMF Recognition Orders, 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 TMX Group without prior approval of the OSC and the AMF. Key management personnel compensation Compensation for key management personnel, including TMX Group’s Board of Directors, was as follows for the year: (in millions of dollars) Salaries and other short-term employee benefits, and termination benefits Post-employment benefits Share-based payments 2019 $9.7 0.6 17.0 27.3 2018 $14.1 0.6 12.2 26.9 2019 Annual Report 85 TMX Group Limited Page 78 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. Examples of forward-looking information in this MD&A include, but are not limited to, growth objectives; the ability to integrate VisoTech into Trayport and the expected impact of the VisoTech acquisition on TMX Group's results; the proposed relaunch of the Two–Year Government of Canada Bond Futures; our target dividend payout ratio; the ability of TMX Group to de-leverage and the timing thereof; the modernization of clearing platforms, including the expected cash expenditures related to the modernization of our clearing platforms and the timing of the modernization; other statements related to cost reductions; the impact of the market capitalization of TSX and TSXV issuers overall (from 2018 to 2019) on TMX Group's revenue; future changes to TMX Group's anticipated statutory income tax rate for 2019; factors relating to stock, and derivatives exchanges and clearing houses and the business, strategic goals and priorities, market conditions, pricing, proposed technology and other initiatives, financial results or 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 conditions or uncertainties including changes in business cycles that impact our sector; 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, including cyber-attacks; failure to properly identify or implement our strategies; regulatory constraints; constraints imposed by our level of indebtedness, risks of litigation or other proceedings; dependence on adequate numbers of customers; failure to develop, market or gain acceptance of new products; failure to effectively integrate acquisitions to achieve planned economics, or divest underperforming businesses; currency risk; adverse effect of new business activities; adverse effects from business divestitures; 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 common shares; inability to protect our intellectual property; adverse effect of a systemic market event on certain of our businesses; risks associated with the credit of customers; cost structures being largely fixed; the failure to realize cost reductions in the amount or the time frame anticipated; dependence on market activity that cannot be controlled; the regulatory constraints that apply to the business of TMX Group and its regulated subsidiaries, costs of on exchange clearing and depository services, trading volumes (which could be higher or lower than estimated) and revenues; future levels of revenues being lower than expected or costs being higher than expected. 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 exchange rates from Canadian dollars to the U.S. dollar or GBP), commodities prices, 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 and 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 Page 79 2019 Annual Report 86 TMX Group Limited 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. In addition to the assumptions outlined above, forward looking information related to long term revenue cumulative average annual growth rate (CAGR) objectives, and long term adjusted earnings per share CAGR objectives are based on assumptions that include, but not limited to: • • TMX Group's success in achieving growth initiatives and business objectives; continued investment in growth businesses and in transformation initiatives including next generation post-trade systems; no significant changes to our effective tax rate, recurring revenue, and number of shares outstanding; • • moderate levels of market volatility; • • • • • • level of listings, trading, and clearing consistent with historical activity; economic growth consistent with historical activity; no significant changes in regulations; continued disciplined expense management across our business; continued re-prioritization of investment towards enterprise solutions and new capabilities; and free cash flow generation consistent with historical run rate. 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. 2019 Annual Report 87 TMX Group Limited Page 80 Financial Statements 2019 Annual Report 88 TMX Group Limited Management Statement Management is responsible for the preparation, integrity and fair presentation of the consolidated financial statements (the financial statements), management’s discussion and analysis, and other information in this annual report. The financial statements were prepared in accordance with International Financial Reporting Standards and, in the opinion of management, fairly reflect the financial position, financial performance and changes in the financial position of TMX Group Limited. Financial information contained throughout this annual report is consistent with the financial statements, unless otherwise specified. Acting through the Finance and Audit Committee, comprised of non-management directors, all of whom are independent directors within the meaning of National 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 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 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. John D. McKenzie Interim Chief Executive Officer and Chief Financial Officer TMX Group Limited February 10, 2020 2019 Annual Report 89 TMX Group Limited 2019 Annual Report 90 TMX Group Limited KPMG LLPTelephone (416) 777-8500Chartered Professional AccountantsFax (416) 777-8818Bay Adelaide Centre Internet: www.kpmg.ca 333 Bay Street, Suite 4600Toronto ON M5H 2S5KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. KPMG Canada provides services to KPMG LLP INDEPENDENT AUDITORS’REPORTTo the Shareholders of TMX Group Limited OpinionWe have audited the consolidatedfinancial statements of TMX Group Limited (the “Company”), which comprise:•the consolidatedbalance sheets as at end of December 31, 2019 and 2018•the consolidatedincome statements for the years then ended•the consolidatedstatements of comprehensive income for the years then ended•the consolidatedstatements of changes in equity for the years then ended•the consolidatedstatements of cash flows for the years then ended•and notes to the consolidatedfinancial statements, including a summary of significantaccounting policies(Hereinafter referred to as the “financial statements”).In our opinion, the accompanying financial statements present fairly, in all material respects, the consolidatedfinancial position of the Company as at December 31, 2019 and 2018, and its consolidatedfinancial performance and its consolidatedcash flows for the years then ended in accordance with International Financial Reporting Standards (IFRS).Basis for OpinionWe conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the “Auditors’Responsibilities for the Audit of the Financial Statements” section of our auditors’report. We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in Canada and we have fulfilled our other ethical responsibilities in accordance with these requirements.We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.KPMG LLPTelephone (416) 777-8500Chartered Professional AccountantsFax (416) 777-8818Bay Adelaide Centre Internet: www.kpmg.ca 333 Bay Street, Suite 4600Toronto ON M5H 2S5KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. KPMG Canada provides services to KPMG LLP INDEPENDENT AUDITORS’REPORTTo the Shareholders of TMX Group Limited OpinionWe have audited the consolidatedfinancial statements of TMX Group Limited (the “Company”), which comprise:•the consolidatedbalance sheets as at end of December 31, 2019 and 2018•the consolidatedincome statements for the years then ended•the consolidatedstatements of comprehensive income for the years then ended•the consolidatedstatements of changes in equity for the years then ended•the consolidatedstatements of cash flows for the years then ended•and notes to the consolidatedfinancial statements, including a summary of significantaccounting policies(Hereinafter referred to as the “financial statements”).In our opinion, the accompanying financial statements present fairly, in all material respects, the consolidatedfinancial position of the Company as at December 31, 2019 and 2018, and its consolidatedfinancial performance and its consolidatedcash flows for the years then ended in accordance with International Financial Reporting Standards (IFRS).Basis for OpinionWe conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the “Auditors’Responsibilities for the Audit of the Financial Statements” section of our auditors’report. We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in Canada and we have fulfilled our other ethical responsibilities in accordance with these requirements.We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.2019 Annual Report 91 TMX Group Limited Other InformationManagement is responsible for the other information. Other information comprises:•the information included in Management’s Discussion and Analysis filed with the relevantCanadian Securities Commissions.•Information, other than the financial statements and the auditors’report thereon, included ina document likely to be entitled “Annual Report”.Our opinion on the financial statements does not cover the other information and we do not and will not express any form of assurance conclusion thereon. In connection with ouraudit of the financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the auditand remain alert for indications that the other informationappears to be materially misstated.We obtained the information included in Management’s Discussion and Analysis filed with the relevant Canadian Securities Commissions as atthe date of this auditors’report. If, based on the work we have performed on this other information, we conclude that there is a material misstatement of this other information, we are required to report that fact in the auditors’ report. We have nothing to report in this regard.Information, other than the financial statements and the auditors’report thereon, included in a document likely to be entitled “Annual Report” is expected to be made available to us after the date of this auditors’report. If, based on the work we will perform on this other information, we conclude that there is a material misstatement of this other information, we are required to report that fact to those charged with governance. Responsibilities of Management and Those Charged with Governance for the Financial StatementsManagement is responsible for the preparation and fair presentation of thefinancial statements in accordance with IFRS, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.In preparing the financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Companyor to cease operations, or hasno realistic alternative but to do so.Those charged with governance are responsible for overseeing the Company‘s financial reporting process.2019 Annual Report 92 TMX Group Limited Auditors’Responsibilities for the Audit of the FinancialStatementsOur objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error andare considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of thefinancial statements.As part of anaudit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout theaudit. We also:•Identify and assess the risks of material misstatement of the financial statements, whetherdue to fraud or error, design and perform audit procedures responsive to those risks, andobtain audit evidence that is sufficient and appropriate to provide a basis for our opinion.•The risk of not detecting a material misstatement resultingfrom fraud is higher than for oneresulting from error, as fraud may involve collusion, forgery, intentional omissions,misrepresentations, or the override of internal control.•Obtain an understanding of internal control relevant to theaudit in order to design auditprocedures that are appropriate in the circumstances, but not for the purpose of expressingan opinion on the effectiveness of the Company's internal control.•Evaluate the appropriateness of accounting policies used and the reasonableness ofaccounting estimates and related disclosures made by management.•Conclude on the appropriateness of management's use of the going concern basis ofaccounting and, based on the audit evidence obtained, whether a material uncertainty existsrelated to eventsor conditions that may cast significant doubt on the Company's ability tocontinue as a going concern. If we conclude that a material uncertainty exists, we arerequired to draw attention in our auditors’report to the related disclosures in the financialstatements or, if such disclosures are inadequate, to modify our opinion. Our conclusions arebased on the audit evidence obtained up to the date of our auditors’report. However, futureevents or conditions may cause the Company to cease to continue as agoing concern.2019 Annual Report 93 TMX Group Limited •Evaluate the overall presentation, structure and content of the financial statements, includingthe disclosures, and whether the financial statements represent the underlying transactionsand events in a manner that achieves fair presentation.•Communicate with those charged with governance regarding, among other matters, theplanned scope and timing of the audit and significant audit findings, including any significantdeficiencies in internal control that we identify during ouraudit.•Provide those charged with governance with a statement that we have complied with relevantethical requirements regarding independence, and communicate with them all relationshipsand other matters that may reasonably be thought to bear on our independence, and whereapplicable, related safeguards.•Obtain sufficient appropriate audit evidence regarding the financial information of the entitiesor business activities within the Companyto express an opinion on the financial statements.We are responsible forthe direction, supervision and performance of the group audit. Weremain solely responsible for our audit opinion.Chartered Professional Accountants, Licensed Public AccountantsThe engagement partner on the audit resulting in this auditors’ report is JamesNewton.Toronto, CanadaFebruary 10, 2020TMX GROUP LIMITED Consolidated Balance Sheets (In millions of Canadian dollars) Assets Current assets: Cash and cash equivalents Restricted cash and cash equivalents Marketable securities Trade and other receivables Balances with Participants and Clearing Members Other current assets Non-current assets: Goodwill and intangible assets Right-of-use assets Other non-current assets Deferred income tax assets Total Assets Liabilities and Equity Current liabilities: Trade and other payables Participants’ tax withholdings Balances with Participants and Clearing Members Debt Credit and liquidity facilities drawn Other current liabilities Non-current liabilities: Debt Lease liabilities Other non-current liabilities Deferred income tax liabilities Total Liabilities Equity: Share capital Contributed surplus Retained earnings Accumulated other comprehensive income Total Equity Commitments and contingent liabilities Total Liabilities and Equity Note December 31, 2019 December 31, 2018 15 $ 15 15 16 10 23 17 22 23 9 $ 19 $ 15 10 12 12 23 12 22 23 9 26 24 149.0 $ 151.5 80.4 105.3 26,588.9 30.1 27,105.2 5,041.2 93.0 96.7 23.6 32,359.7 $ 102.7 $ 151.5 26,588.9 239.6 8.2 62.1 27,153.0 747.1 95.4 64.1 801.0 28,860.6 2,965.1 12.1 512.9 9.0 3,499.1 175.1 131.4 55.6 105.9 25,991.4 25.9 26,485.3 5,054.9 — 92.6 25.5 31,658.3 110.2 131.4 25,991.4 319.5 — 109.3 26,661.8 746.8 — 54.0 814.9 28,277.5 2,938.0 12.3 409.0 21.5 3,380.8 21 & 22 $ 32,359.7 $ 31,658.3 See accompanying notes which form an integral part of these consolidated financial statements. Approved on behalf of the Board of Directors on February 10, 2020: /s/ Charles Winograd Chair /s/ William Linton Director TMX GROUP LIMITED 2019 Annual Report 94 TMX Group Limited 7 TMX GROUP LIMITED Consolidated Income Statements (In millions of Canadian dollars, except per share amounts) Consolidated Financial Statements For the year ended December 31 Revenue REPO and collateral interest: Interest income Interest expense Net REPO and collateral interest Total revenue Compensation and benefits Information and trading systems Selling, general and administration Depreciation and amortization Strategic re-alignment expenses Total operating expenses Income from operations Share of income from equity accounted investees Impairment charges Other income Finance income (costs): Finance income Finance costs Net finance costs Income before income tax expense Income tax expense Net income Earnings per share: Basic Diluted Note 2019 5 $ 806.9 $ 353.2 (353.2) — 806.9 207.9 51.9 81.4 79.6 3.7 424.5 382.4 3.8 (18.0) 2.3 4.1 (39.7) (35.6) 334.9 87.3 247.6 $ 4.42 $ 4.38 $ 22 4 18 17 18 7 7 9 $ 8 $ 8 $ 2018 820.7 208.3 (208.3) — 820.7 220.1 52.4 108.9 70.3 — 451.7 369.0 3.0 — 30.7 3.8 (44.2) (40.4) 362.3 76.3 286.0 5.14 5.10 See accompanying notes which form an integral part of these consolidated financial statements. TMX GROUP LIMITED 2019 Annual Report 95 TMX Group Limited 8 TMX GROUP LIMITED Consolidated Statements of Comprehensive Income (In millions of Canadian dollars) Consolidated Financial Statements Note For the year ended December 31 2018 2019 Net income $ 247.6 $ 286.0 Other comprehensive income (loss): Items that will not be reclassified to the consolidated income statements: Actuarial (loss) gain on defined benefit pension and other post- retirement benefit plans (net of tax benefit of $0.9, 2018 – tax cost of $(0.3)) 25 Total items that will not be reclassified to the consolidated income statements Items that may be reclassified subsequently to the consolidated income statements: Unrealized (loss) gain on translating financial statements of foreign operations Reclassification to net income of foreign currency translation differences Total items that may be reclassified subsequently to the consolidated income statements Total comprehensive income $ See accompanying notes which form an integral part of these consolidated financial statements. (2.4) (2.4) (12.5) — (12.5) 232.7 $ 0.9 0.9 21.3 (2.7) 18.6 305.5 TMX GROUP LIMITED 2019 Annual Report 96 TMX Group Limited 9 Consolidated Financial Statements TMX GROUP LIMITED Consolidated Statements of Changes in Equity (In millions of Canadian dollars) Note Share capital Contributed surplus For the year ended December 31, 2019 Accumulated other comprehensive income Retained earnings Total equity Balance at January 1, 2019 $ 2,938.0 $ 12.3 $ 21.5 $ 409.0 $ 3,380.8 Net income Other comprehensive income (loss): Foreign currency translation differences Actuarial losses on defined benefit pension and other post-retirement benefit plans, net of taxes Total comprehensive income (loss) Dividends to equity holders Proceeds from exercised share options Cost of exercised share options Cost of share option plan 25 28 24 — — — — — 24.4 2.7 — — — — — — — (2.7) 2.5 — 247.6 247.6 (12.5) — (12.5) — (2.4) (2.4) (12.5) 245.2 232.7 — — — — (141.3) (141.3) — — — 24.4 — 2.5 Balance at December 31, 2019 $ 2,965.1 $ 12.1 $ 9.0 $ 512.9 $ 3,499.1 See accompanying notes which form an integral part of these consolidated financial statements. TMX GROUP LIMITED 2019 Annual Report 97 TMX Group Limited 10 Consolidated Financial Statements TMX GROUP LIMITED Consolidated Statements of Changes in Equity (In millions of Canadian dollars) For the year ended December 31, 2018 Note Share capital Contributed surplus Accumulated other comprehensive income Retained earnings Total equity Balance at January 1, 2018 $ 2,915.5 $ 11.8 $ 2.9 $ 252.6 $ 3,182.8 Adjustment on initial application of IFRS 15 5 — — Adjusted balance at January 1, 2018 2,915.5 11.8 Net income Other comprehensive income (loss): Foreign currency translation differences Reclassification to net income of foreign currency translation differences Actuarial gains on defined benefit pension and other post-retirement 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 25 28 24 — — — — — — 20.1 2.4 — — — — — — — — (2.4) 2.9 — 2.9 — 21.3 (2.7) — 18.6 — — — — (5.8) (5.8) 246.8 3,177.0 286.0 286.0 — — 21.3 (2.7) 0.9 0.9 286.9 305.5 (124.7) (124.7) — — — 20.1 — 2.9 Balance at December 31, 2018 $ 2,938.0 $ 12.3 $ 21.5 $ 409.0 $ 3,380.8 See accompanying notes which form an integral part of these consolidated financial statements. TMX GROUP LIMITED 2019 Annual Report 98 TMX Group Limited 11 TMX GROUP LIMITED Consolidated Statements of Cash Flows (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 Impairment charges Other income Net finance costs Share of income from equity accounted investees Cost of share option plan Unrealized foreign exchange (gains) losses Trade and other receivables, and prepaid expenses Trade and other payables Provisions Deferred revenue Other assets and liabilities Income taxes paid Cash flows (used in) from financing activities: Interest paid Net settlement on derivative instruments Repayment of lease liabilities Proceeds from exercised options Dividends paid to equity holders Credit facility and debt financing fees Repayment of debenture Proceeds from issuance of debenture Net movement of Commercial Paper Credit and liquidity facilities drawn, net Cash flows (used in) from investing activities: Interest received Dividends received Additions to premises and equipment and intangible assets Acquisition of VisoTech, net of cash Proceeds from sales Proceeds from reduction/sale of equity accounted investees Marketable securities, net Increase (decrease) in cash and cash equivalents Cash and cash equivalents, net, beginning of the period Unrealized foreign exchange (gain) losses on cash and cash equivalents held in foreign currencies 17 18 24 7 22 28 12 12 3 18 15 Consolidated Financial Statements Note For the year ended December 31 2018 2019 $ 334.9 $ 362.3 79.6 18.0 (2.3) 35.6 (3.8) 2.5 1.5 (0.2) (14.1) (4.2) (2.4) 9.2 (110.3) 344.0 (38.4) 0.4 (8.2) 24.4 (141.3) — — — (79.9) 8.2 (234.8) 4.1 2.8 (57.6) (23.6) 3.8 — (24.8) (95.3) 13.9 135.3 (0.2) 149.0 $ 70.3 — (30.7) 40.4 (3.0) 2.9 1.4 (11.2) 24.4 6.1 (0.2) (2.5) (113.1) 347.1 (43.4) 0.6 — 20.1 (124.7) (1.1) (400.0) 200.0 (76.6) — (425.1) 3.8 8.2 (58.8) 5.8 5.7 78.2 (5.5) 37.4 (40.6) 175.0 0.9 135.3 Cash and cash equivalents, net, end of the period 15 $ See accompanying notes which form an integral part of these consolidated financial statements. TMX GROUP LIMITED 2019 Annual Report 99 TMX Group Limited 12 TMX GROUP LIMITED Notes to the Consolidated Financial Statements (In millions of Canadian dollars, except per share amounts) NOTE 1 – GENERAL INFORMATION TMX Group Limited is a company domiciled in Canada and incorporated under the Business Corporations Act (Ontario). The registered office is located at 100 Adelaide Street West, Toronto, Ontario, Canada. The audited annual consolidated financial statements as at and for the year ended December 31, 2019 and 2018 (the “financial statements”), comprise the accounts of TMX Group Limited and its subsidiaries (collectively referred to as the “Company”), and the Company’s interests in equity accounted investees. TMX Group Limited controls, directly or indirectly, a number of entities which operate exchanges, markets, and clearinghouses primarily for capital markets in Canada and provides select services globally, including: • TSX Inc. (“TSX”), which operates Toronto Stock Exchange, a national stock exchange serving the senior equities market; TSX Venture Exchange Inc. (“TSX Venture Exchange”), which operates TSX Venture Exchange, a national stock exchange serving the public venture equity market; and Alpha Exchange Inc. ("Alpha"), which also operates an exchange for the trading of securities; • Montréal Exchange Inc. ("MX"), Canada’s national derivatives exchange, and its subsidiaries, including Canadian Derivatives Clearing Corporation (“CDCC”), the clearing house for options and futures contracts traded at MX and certain over-the-counter (“OTC”) products and fixed income repurchase (“REPO”) agreements. MX also holds an investment in BOX Holdings Group LLC ("BOX Holdings"), which wholly-owns BOX Options Market LLC (“BOX”). BOX provides a market for the trading of United States ("US") equity options. The Company accounts for its investment in BOX Holdings using the equity method (note 18); • • • • The Canadian Depository for Securities Limited and its subsidiaries ("CDS"), including CDS Clearing and Depository Services Inc. (“CDS Clearing”), which operates the automated facilities for the clearing and settlement of equities and fixed income transactions and custody of securities in Canada; Trayport Holdings Limited and its subsidiaries, and Trayport Inc. (collectively "Trayport"), a world-leading provider of technology solutions for energy traders, brokers and exchanges based in London, UK. On May 15, 2019, Trayport Limited completed the acquisition of Vienna-based VisoTech, a leading provider of European short-term energy trading solutions (note 3); Shorcan Brokers Limited ("Shorcan"), a fixed income inter-dealer broker and registered exempt market dealer; and TSX Trust Company ("TSX Trust"), a provider of corporate trust, registrar, transfer agency and foreign exchange services. NOTE 2 – BASIS OF PREPARATION (A) BASIS OF ACCOUNTING The financial statements have been prepared by management in accordance with International Financial Reporting Standards (“IFRS”) and IFRS Interpretations Committee (“IFRIC”) interpretations, as issued by the International Accounting Standards Board (“IASB”). The financial statements were approved by the Company’s Board of Directors on February 10, 2020. The Company's significant accounting policies have been applied consistently to all periods presented in the financial statements, unless otherwise indicated. Similarly, the accounting policies have been applied consistently by all the Company's entities. The Company has applied its judgement in presenting its significant accounting policies together with related information in the notes to the consolidated financial statements. The Company has also ordered its notes to the consolidated financial statements to emphasize the areas that are most relevant to the Company's financial performance and financial position, as viewed by management. (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: • • • Certain financial instruments (note 14); Liabilities arising from share-based payment plans (note 24); and Legal obligations associated with the restoration costs on the retirement of premises and equipment (note 21). TMX GROUP LIMITED 2019 Annual Report 100 TMX Group Limited 13 Notes to the Consolidated Financial Statements For the year ended December 31, 2019 and 2018 The Company uses a fair value hierarchy to determine disclosure and to categorize the inputs used in its valuation of assets and liabilities carried at fair value. Fair values are categorized into: Level 1 – to the extent of the Company’s use of unadjusted quoted market prices; Level 2 – valuation using observable market information as inputs; and Level 3 – valuation using unobservable market information. (C) JUDGEMENTS AND ESTIMATES 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. Judgements made in applying accounting policies that have the most significant effects on the amounts recognized in these financial statements are included in the following notes: • • Revenue recognition - Identification of performance obligations and determination of the timing of when performance obligations are satisfied, either at a point in time or over time, requires judgement (note 5). Valuation of goodwill and indefinite life intangible assets - Purchased intangibles are valued as at the acquisition date using established 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 17). Information about assumptions and estimate uncertainties that have a significant risk of resulting in a material adjustment in these financial statements is included in the following notes: • • Fair values of assets acquired and liabilities assumed – for the acquisition of VisoTech, the fair values under the acquisition method are based on management’s best estimates using established methodologies of the fair value of the assets and liabilities acquired and disposed (note 3); Impairment of goodwill and indefinite life intangible assets – impairment tests are completed using the higher of fair value less costs of disposal, 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 (note 17); • Measurement of defined benefit obligations for pensions, 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 the Company’s external actuary (note 25); • • • • Provisions and contingencies – management judgement is required to assess whether provisions and/or contingencies should be recognized or disclosed, and at what amount. Management bases its decisions on past experience and other factors it considers to be relevant on a case by case basis (note 21); Share-based payments – the liabilities associated with the Company’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 for the Company (note 24); Income taxes – the accounting for income taxes requires estimates to be made, such as the recoverability of deferred tax assets and assessment of tax uncertainties. Where differences arise between estimated income tax provisions and final income tax liabilities, an adjustment is made when the difference is identified (note 9); and Classification of financial assets - the Company has exercised judgment in the assessment of the business model within which the assets are held and in the assessment of whether the contractual terms of the financial asset are solely payments of principal and interest on the principal amounts outstanding to determine the classification of financial assets (note 14). (D) BASIS OF CONSOLIDATION Subsidiaries are entities controlled by the Company, and they are consolidated from the date on which control is transferred to the Company until the date that control ceases. Balances and transactions between the Company’s subsidiaries have been TMX GROUP LIMITED 2019 Annual Report 101 TMX Group Limited 14 Notes to the Consolidated Financial Statements For the year ended December 31, 2019 and 2018 eliminated on consolidation. On loss of control of a subsidiary, the Company derecognizes the assets and liabilities of the entity. Any gain or loss is recognized in the consolidated income statement and any retained interests measured at fair value at the date of loss of control. Changes in the Company's interest that do not result in a loss of control are accounted for as equity transactions. Equity accounted investees are entities in which the Company 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. (E) FUNCTIONAL AND PRESENTATION CURRENCY Items included in the financial statements of each of the Company’s entities are measured using the currency of the primary economic environment in which the entity operates (the “functional currency”). The financial statements are presented in Canadian dollars, which is the Company’s functional and presentation currency. The assets and liabilities of the Company’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 daily exchange rates. The resulting unrealized exchange gain or loss is included in accumulated other comprehensive income within equity. Revenues earned, expenses incurred and 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 other revenue in the consolidated income statement for the period. (F) LEASES The Company has applied IFRS 16, Leases, from January 1, 2019 using the modified retrospective approach and therefore comparative information has not been restated, and continues to be reported under International Accounting Standards ("IAS") 17, Leases, and IFRIC 4, Determining Whether an Arrangement Contains a Lease. On transition to IFRS 16, the Company elected to apply the practical expedient to grandfather the assessment of which contracts are leases. The Company only applied IFRS 16 to contracts that were previously identified as leases. Contracts that were previously not identified as leases were not reassessed. Therefore, the definition of a lease under IFRS 16 has been applied only to contracts entered into or changed on or after January 1, 2019. In the comparative period, as a lessee, the Company classified leases that transferred substantially all of the risks and rewards of ownership as finance leases. Payments made under operating leases and any lease incentives received were recognized in the consolidated income statement on a straight-line basis over the term of the lease. Leases under IFRS 16 are discussed in note 22. (G) COMPARATIVE FIGURES Certain comparative figures in these financial statements have been reclassified in order to conform with the financial presentation adopted in the current year. NOTE 3 – ACQUISITION OF VISOTECH On May 15, 2019, the Company completed the acquisition of VisoTech for €17.2 ($25.9). The acquisition has been accounted for as a business combination with the Company consolidating 100% of the results of its operations from the date of acquisition. The assets and liabilities of VisoTech are included in the consolidated financial statements. The allocation of the purchase price will be finalized within twelve months following the acquisition date. The Company estimates that the majority of the purchase price relates to goodwill and intangible assets. VisoTech is included in the Global Solutions, Insights & Analytics operating segment (note 6). NOTE 4 – STRATEGIC RE-ALIGNMENT EXPENSES For the year ended December 31, 2019, the Company incurred costs of $3.7, related to onerous contracts, as well as severance as a result of certain organizational changes. TMX GROUP LIMITED 2019 Annual Report 102 TMX Group Limited 15 Notes to the Consolidated Financial Statements For the year ended December 31, 2019 and 2018 NOTE 5 – REVENUE Revenue is recognized when performance obligations have been satisfied. The identification of performance obligations and the determination of the timing of when performance obligations are satisfied, either at a point in time or over time, require judgement. Substantially all of the Company's revenues are considered to be revenues from contracts with customers. The related accounts receivable balances are recorded in the balance sheets as trade receivables and generally have terms of 30 days. The majority of deferred revenue represents contract liabilities related to initial listing fees and sustaining fees. The majority of the Company's contracts are short–term in nature and therefore the Company has elected to apply the practical expedient to not disclose the remaining performance obligations in contracts with an expected duration of 12 months or less. Contracts that have an expected duration of 12 months or longer are recognized on an 'as–invoiced' basis and the Company has chosen to apply the practical expedient to not disclose revenue related to the remaining performance obligations in these contracts. These contracts also include variable consideration related to usage that are constrained and not included in the transaction price and thus not included in the remaining performance obligation disclosure. The Company's primary contracts from customers are disaggregated by major products and service lines below, and categorized by operating segments as identified and disclosed in note 6. For the year ended December 31, Global Solutions, Insights & Analytics Trayport Subscribers and usage Other Capital Formation Initial listing fees Additional listing fees Sustaining fees Other issuer services Derivatives Trading & Clearing Equities and Fixed Income Trading & Clearing Equities and fixed income trading Equities and fixed income clearing, settlement, depository and other services (CDS) Other Total Revenue $ 2019 119.6 $ 94.0 86.1 299.7 11.0 72.7 68.9 28.1 180.7 133.2 98.0 95.5 193.5 (0.2) $ 806.9 $ 2018 111.7 96.6 81.0 289.3 13.4 84.6 71.0 29.7 198.7 129.9 108.8 89.4 198.2 4.6 820.7 (A) GLOBAL SOLUTIONS, INSIGHTS AND ANALYTICS Global solutions, insights and analytics revenue includes real time data, other market data products, data delivery solutions and technology solutions. Real time market data revenue is recognized at the point in time the performance obligation is satisfied, based on estimated usage as reported by customers and vendors. The Company conducts periodic audits of the information provided to determine any adjustments to estimated revenue. However, the amounts owing from the audits cannot be estimated as they are dependent on factors outside of the Company's control, and the results of each audit have limited predictive value for future audits. TMX GROUP LIMITED 2019 Annual Report 103 TMX Group Limited 16 Notes to the Consolidated Financial Statements For the year ended December 31, 2019 and 2018 Trayport revenue includes subscriber fees, which are paid on a monthly basis for access to the platform. Subscriber revenue is recognized over time as the performance obligation is satisfied. Performance obligations for other global solutions, insights and analytics contracts are satisfied, and revenue is recognized, when the services are provided. (B) CAPITAL FORMATION Capital formation revenue includes revenue from listings services and other issuer services. Listings services revenue includes revenue generated from initial listings, additional listings and sustaining services. Revenue from new issuers include the initial listing fee and the first-year sustaining fee. These fees, either billed upfront or when the listing occurs, contain a single performance obligation. When the initial fee creates a material right, it is deferred and recognized over 12 months. Sustaining services for new issuers are recognized on a straight-line basis over the remainder of the year as those services are provided. Performance obligations for additional listings are satisfied at a point in time, and revenue is recognized when the additional listing occurs, which is also when the fee is billed. Sustaining services for existing issuers are billed during the first quarter of the year and the related performance obligation is satisfied on a straight-line basis over the year. Other issuer services include revenue from registrar and transfer agency services and corporate trust services which is recognized as the services are provided. Margin income from funds held and administered on behalf of clients is also included in other issuer services revenue. Other issuer services have separate performance obligations, that are satisfied at a point in time, which is when the services are provided to the customer. (C) DERIVATIVES TRADING AND CLEARING Derivatives trading and clearing revenue includes revenue from trading and clearing activities. Trading and related revenues for derivatives markets contain one performance obligation related to trade execution, which mostly occurs instantaneously. Revenue is recognized in the month in which the trades are executed or when the related services are provided. Performance obligations associated with derivatives clearing are satisfied within a short period of time. Trade execution and novation occur either instantaneously, or within a short period of time. Rebates are allocated and recorded as a reduction in revenue in the consolidated income statement in the period to which they relate. As part of its REPO clearing service, CDCC earns interest income and incurs interest expense on all REPO transactions that clear through CDCC. The interest income and interest expense are equal; however as CDCC does not have a legal right to offset these amounts, they are recognized separately on the consolidated income statement. The interest income is earned, and the interest expense incurred, over the term of the REPO agreements. (D) EQUITIES AND FIXED INCOME TRADING AND CLEARING Equities and fixed income trading and clearing revenue includes revenue from equities and fixed income trading, clearing, settlement, and depository services. Trading and related revenues for equities and fixed income contain one performance obligation related to trade execution, which occurs instantaneously. Revenue is recognized in the month in which the trades are executed or when the related services are provided. Revenues related to equities and fixed income clearing, settlement and depository services are recognized as follows: • • • Clearing services include the reporting and confirmation of all trade types within the multilateral clearing and settlement system referred to as CDSX. Clearing services also include the netting and novation of exchange trades through CDS’s Continuous Net Settlement (“CNS”) service prior to settlement. The Company has identified two performance obligations related to the clearing and settlement and allocates the transaction price on the basis of relative stand–alone selling prices. These are generally satisfied at a point in time and recognized in the month in which the services are provided. Clearing services and the related settlement occur within a short period of time. Other clearing related fees are recognized when services are performed. Depository fees are charged for custody of securities, depository related activities and processing of entitlement and corporate actions and are recognized when the services are performed. Under the CDS recognition orders granted by the Ontario Securities Commission (“OSC”) and the Autorité des marchés financiers (“AMF”), CDS is required to share any annual revenue increases on clearing and other core CDS Clearing TMX GROUP LIMITED 2019 Annual Report 104 TMX Group Limited 17 Notes to the Consolidated Financial Statements For the year ended December 31, 2019 and 2018 services, as compared to revenues for the twelve-month period ended October 31, 2012, on a 50:50 basis with Participants. Beginning January 1, 2015 and subsequent years, CDS also shares with Participants, on a 50:50 basis, any annual increases in revenue applicable to the New York Link/Depository Trust Company Direct Link Liquidity Premium. These amounts are calculated and recorded on a monthly basis as a reduction of revenue, which results in the recognition of revenue at the amount to which the Company is entitled. • • • On behalf of Participants, CDS Clearing incurs certain facility fees, which are reimbursed by the Participants. Since CDS acts as the principal, offsetting revenue and expense amounts related to these facility fees are recognized upon satisfaction of performance obligations. The Company records an equal amount of interest income and interest expense on Participant cash collateral balances. As the Company does not have a legal right to offset these amounts, they are recognized separately on the consolidated income statement. Rebates are allocated and recorded as a reduction in revenue in the consolidated income statement in the period to which they relate. NOTE 6 – SEGMENT INFORMATION The Company has four operating segments. An operating segment is a component of the Company 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 the Company’s other components and for which discrete financial information is available. Operating segments are reported in a manner consistent with the internal reporting provided to the Chief Operating Decision Maker (“CODM”). The CODM, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Chief Executive Officer. (A) INFORMATION ABOUT REPORTABLE SEGMENTS The Company has four reportable segments: • • • • Global Solutions, Insights & Analytics: to deliver integrated data sets to fuel high-value proprietary and third party analytics to help clients make better trading and investment decisions. The Company's operations included in the Global Solutions, Insights & Analytics segment are TMX Datalinx, TMX Insights, Trayport and VisoTech. Capital Formation: to energize and expand the "capital market community" to better facilitate capital raising for issuers of all types at all stages of their development and to provide access to alternative sources of capital. The Company's operations included in the Capital Formation segment are: Toronto Stock Exchange, a national stock exchange serving the senior equities market; TSX Venture Exchange, a national stock exchange serving the public venture equity market, and TSX Trust, a provider of corporate trust, registrar, transfer agency and foreign exchange services. Derivatives Trading & Clearing: to intensify new product creation and leverage our unique market position to benefit from increasing demand for derivatives products both in Canada and globally. The Company's operations included in the Derivatives Trading and Clearing segment are Montréal Exchange, a national derivatives exchange; and Canadian Derivatives Clearing Corporation ("CDCC"), a clearinghouse for options and futures contracts and certain over-the-counter products and fixed income repurchase agreements. Equities and Fixed Income Trading & Clearing: to operate innovative, efficient, reliable, fast, easy to use platforms for equities trading and clearing. The Company's operations included in the Equities and Fixed Income Trading & Clearing segment are the trading operations of Toronto Stock Exchange, TSX Venture Exchange, and TSX Alpha Exchange; CDS Clearing and Depository Services Inc. ("CDS Clearing"), an automated facility for the clearing and settlement of equities and fixed income transactions and custody of securities in Canada and Shorcan Brokers Limited, a fixed income inter- dealer broker. The Company has certain revenue and corporate costs not allocated to the operating segments. Revenue related to foreign exchange gains and losses and other services are presented in the other segment. Costs and expenses related to the amortization of purchased intangibles, along with certain consolidation and elimination adjustments, are also presented in the other segment. Information related to each reportable segment is as follows: TMX GROUP LIMITED 2019 Annual Report 105 TMX Group Limited 18 Notes to the Consolidated Financial Statements For the year ended December 31, 2019 and 2018 For the year ended December 31, 2019 Revenue (external) Inter-segment revenue Total revenue Income from operations Selected items: Depreciation and amortization Impairment charges $ $ $ $ $ Global Solutions Insights & Analytics Capital Formation Derivatives Trading & Clearing Equities and Fixed Income Trading & Clearing Other 299.7 $ 180.7 $ 133.2 $ 193.5 $ (0.2) $ 0.3 — — 1.6 (1.9) 300.0 $ 180.7 $ 133.2 $ 195.1 $ (2.1) $ 193.0 $ 96.8 $ 59.3 $ 85.8 $ (52.5) $ 8.2 $ — $ — $ — $ 0.8 $ — $ 0.5 $ 70.1 $ 18.0 $ — $ Total 806.9 — 806.9 382.4 79.6 18.0 For the year ended December 31, 2018 Revenue (external) Inter-segment revenue Total revenue Income (loss) from operations Selected items: Depreciation and amortization $ $ $ $ Global Solutions Insights & Analytics Capital Formation Derivatives Trading & Clearing Equities and Fixed Income Trading & Clearing Other 289.3 $ 0.5 289.8 $ 198.7 $ — 198.7 $ 129.9 $ — 129.9 $ 198.2 $ 1.6 199.8 $ 4.6 $ (2.1) 2.5 $ Total 820.7 — 820.7 173.4 $ 111.3 $ 57.3 $ 83.5 $ (56.5) $ 369.0 6.2 $ — $ 0.3 $ 0.5 $ 63.3 $ 70.3 The CODM assesses the performance of the operating segments based on income from operations, which is not a term defined within IFRS. This measure of profit excludes share of income from equity accounted investees, impairment charges, acquisition costs and other costs and expenses that relate to individual events of an infrequent nature. Income from operations is an important indicator of the Company's ability to generate liquidity through operating cash flow to fund future working capital needs, service outstanding debts, and fund future capital expenditures. Impairment charges includes impairment of goodwill and intangibles originating from acquisitions and is not considered an operating item. The intent of this performance measure is to provide additional useful information to investors and analysts; however, it should not be considered in isolation. (B) INFORMATION ABOUT GEOGRAPHICAL AREAS The Company’s revenue by geography is as follows: For the year ended Canada US UK Other December 31, 2019 542.4 $ 115.9 62.4 86.2 806.9 $ $ $ December 31, 2018 557.3 121.0 61.7 80.7 820.7 Revenue is allocated based on the country to which customer invoices are addressed. No single customer generates revenues greater than ten percent of the Company's total revenues. TMX GROUP LIMITED 2019 Annual Report 106 TMX Group Limited 19 The Company’s non-current assets by geography is as follows: As at Canada UK US Other Notes to the Consolidated Financial Statements For the year ended December 31, 2019 and 2018 December 31, 2019 4,166.5 $ 1,014.1 45.0 0.9 5,226.5 $ $ $ December 31, 2018 4,118.4 999.1 24.3 — 5,141.8 Non-current assets above are primarily comprised of goodwill and intangible assets, investments in equity accounted investees, right-of-use assets and other assets and excludes both accrued employee benefit assets and deferred income tax assets. NOTE 7 – FINANCE INCOME AND FINANCE COSTS Finance income comprises interest income on funds invested, realized gains on foreign currency forward contracts, and changes in the fair value of marketable securities. Finance costs comprise interest expense on borrowings and lease liabilities. Any realized gains or losses on interest rate swaps are also included within net finance costs in the consolidated income statement. Net finance costs for the year is as follows: For the year ended Finance income Interest income on funds invested Finance costs Interest expense on borrowings, including foreign exchange and amortization of financing fees (note 12) Interest expense on lease liabilities (note 22) Other expenses Net finance costs NOTE 8 – EARNINGS PER SHARE December 31, 2019 December 31, 2018 $ $ 4.1 $ 4.1 (35.9) (3.5) (0.3) (39.7) (35.6) $ 3.8 3.8 (44.1) — (0.1) (44.2) (40.4) Basic earnings per share is determined by dividing net income by the weighted average number of common shares outstanding during the reporting period. Diluted earnings per share is determined by dividing the net income by the weighted average number of common shares outstanding during the reporting period, adjusted for the effects of all potential dilutive common shares arising from share options granted to employees. Basic and diluted earnings per share for the period are as follows: For the year ended Net income 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 December 31, 2019 December 31, 2018 247.6 $ 286.0 56,045,211 525,458 56,570,669 4.42 $ 4.38 $ 55,635,123 458,420 56,093,543 5.14 5.10 $ $ $ TMX GROUP LIMITED 2019 Annual Report 107 TMX Group Limited 20 Notes to the Consolidated Financial Statements For the year ended December 31, 2019 and 2018 NOTE 9 – INCOME TAXES (A) INCOME TAX EXPENSE RECOGNIZED IN THE CONSOLIDATED INCOME STATEMENT 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. Income tax expense recognized in the consolidated income statement for the period is as follows: For the year ended Current income tax expense: Income tax for the current period Adjustments in respect of prior years Deferred income tax expense: Origination and reversal of temporary differences Adjustments in respect of prior years Changes in substantively enacted income tax rates Write-down of deferred income tax assets Total income tax expense December 31, 2019 December 31, 2018 $ $ $ 97.9 $ 0.3 (6.4) $ (0.4) (4.3) 0.2 87.3 $ 98.2 (0.2) (21.9) — — 0.2 76.3 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 the Company operates and any adjustments to income tax payable in respect of previous years. Uncertain income tax positions are recognized in the financial statements using management’s best estimate of the amount expected to be paid. On January 1, 2019, the Company adopted IFRIC 23, Uncertainty over Income Tax Treatments. The interpretation provides guidance on the accounting for current and deferred tax liabilities and assets in circumstances in which there is uncertainty over income tax treatments. The interpretation did not have a material impact on the Company's consolidated financial statements. 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. Income tax expense attributable to income differs from the amounts computed by applying the combined federal and provincial income tax rate of 26.5% (2018 – 26.5%) to income before income taxes as a result of the following: For the year ended Income before income tax expense Computed expected income tax expense Non-deductible expenses Write-down of deferred income tax assets Capital loss recognized on internal reorganizations Rate differential due to various jurisdictions Sale of subsidiaries Adjustments in respect of prior years Changes in substantively enacted income tax rates Impairment charges (note 17) Other Income tax expense December 31, 2019 334.9 $ December 31, 2018 362.3 88.7 $ 1.5 0.2 — (4.8) — (0.1) (4.3) 4.8 1.3 87.3 $ 96.0 1.5 0.2 (13.9) (4.1) (3.3) (0.2) — — 0.1 76.3 $ $ $ During the year ended December 31, 2019, the Alberta general corporate income tax rate decreased to 11% from 12% (effective July 1, 2019). The Alberta general corporate tax rate will further decrease to 10% effective January 1, 2020, 9% effective January 1, 2021, and 8% effective January 1, 2022. The Company recognized a decrease in net deferred income tax liabilities and a corresponding decrease in income tax expense of $4.3 as a result of the rate changes, which became substantively enacted on May 28, 2019. TMX GROUP LIMITED 2019 Annual Report 108 TMX Group Limited 21 Notes to the Consolidated Financial Statements For the year ended December 31, 2019 and 2018 (B) DEFERRED INCOME TAX ASSETS AND LIABILITIES The Company recognizes a deferred income tax asset 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. Deferred income tax assets (liabilities) as of December 31 are attributable to the following: Premises and equipment Cumulative eligible capital / intangible assets Tax loss carry-forwards Employee future benefits Share-based payments Other Deferred income tax assets (liabilities) Set off of tax Net deferred income tax assets (liabilities) $ $ $ 2019 4.1 $ 16.8 17.5 4.8 13.5 7.6 64.3 $ (40.7) Assets 2018 5.7 $ 20.0 16.9 4.3 11.2 8.6 66.7 $ (41.2) 2019 (0.6) $ (839.7) — (1.1) — (0.3) (841.7) $ 40.7 Liabilities 2018 (0.7) $ (853.7) — (1.5) — (0.2) (856.1) $ 41.2 2019 3.5 $ (822.9) 17.5 3.7 13.5 7.3 (777.4) $ — Net 2018 5.0 (833.7) 16.9 2.8 11.2 8.4 (789.4) — 23.6 $ 25.5 $ (801.0) $ (814.9) $ (777.4) $ (789.4) 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 the Company intends to settle them on a net basis or where the income tax assets and liabilities will be realized simultaneously. Movements in the deferred income tax balances in the year are as follows: Premises and equipment Cumulative eligible capital/ intangible assets Tax loss carry- forwards Employee future benefits Share-based payments Other Total Balance at January 1, 2018 Recognized in net income $ 5.3 $ (0.4) Recognized through acquisition of Trayport Recognized in other comprehensive income Recognized in equity Effect of movements in exchange rates Balance at December 31, 2018 Recognized in net income Recognized in other comprehensive loss Effect of movements in exchange rates — — — 0.1 5.0 (1.6) — 0.1 (837.8) $ 6.1 $ 2.9 $ 10.6 $ 3.5 $ (809.4) 8.9 (3.3) (0.6) — (0.9) (833.7) 10.5 — 0.3 9.4 — — — 1.4 16.9 0.7 — (0.1) 0.2 — (0.3) — — 2.8 — 0.9 — 0.6 — — — — 11.2 2.3 — — 3.0 — — 2.1 (0.2) 8.4 (1.0) — (0.1) 21.7 (3.3) (0.9) 2.1 0.4 (789.4) 10.9 0.9 0.2 Balance at December 31, 2019 $ 3.5 $ (822.9) $ 17.5 $ 3.7 $ 13.5 $ 7.3 $ (777.4) As at December 31, 2019, $10.9 and $6.6 of the above deferred income tax assets related to tax losses incurred in Canada and the US, respectively (2018 – $9.7 and $7.2, respectively). Recoverability of these assets is dependent upon the availability of future taxable profits within these legal entities. The Company believes that these losses will be recoverable. Deferred income tax assets have not been recognized in respect of the following temporary differences: As at Tax losses Other deductible temporary differences December 31, 2019 36.0 $ 178.4 214.4 $ December 31, 2018 29.4 156.9 186.3 $ $ At December 31, 2019 and December 31, 2018, $27.6 of the above income tax losses will expire by 2037 with the remainder not subject to expiry. Deferred income tax assets have not been recognized in respect of these items as it is not probable that future taxable profit will be available against which the Company can utilize the tax losses. The Company will however continue to pursue tax planning strategies to utilize the tax losses where possible. At December 31, 2019 and December 31, 2018, deferred income tax liabilities for temporary differences of $0.4 relating to investments in certain foreign subsidiaries were not recognized as the Company 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. TMX GROUP LIMITED 2019 Annual Report 109 TMX Group Limited 22 Notes to the Consolidated Financial Statements For the year ended December 31, 2019 and 2018 Temporary differences relating to the remaining domestic subsidiaries have not been recognized as the temporary difference can be settled without tax consequences. NOTE 10 – BALANCES WITH PARTICIPANTS AND CLEARING MEMBERS Balances with Participants and Clearing Members on the consolidated balance sheets are comprised of: As at Balances with Participants Balances with Clearing Members Clearing Members cash collateral Balances with Participants and Clearing Members December 31, 2019 December 31, 2018 $ $ 658.6 $ 24,333.6 1,596.7 26,588.9 $ 702.0 24,110.4 1,179.0 25,991.4 There is no net impact on the consolidated net assets as an equivalent amount is recognized in both assets and liabilities. (A) CDS CLEARING, SETTLEMENT AND PARTICIPANT BALANCES Balances with Participants includes the cash collateral pledged and deposited with CDS Clearing and cash dividends, interest and other cash distributions awaiting distribution (“entitlements and other funds”) on securities held under custody in the depository. Cash collateral is held by CDS Clearing at the Bank of Canada and National Securities Clearing Corporation (“NSCC”)/Depository Trust Company (“DTC”) and is recognized as an asset and an equivalent and offsetting liability is recognized as these amounts are ultimately owed to the Participants. Entitlements and other funds Participants cash collateral Balances with Participants December 31, 2019 December 31, 2018 $ $ 13.9 $ 644.7 658.6 $ 20.1 681.9 702.0 The margin deposits of CDS Clearing are held in liquid instruments. CDS Clearing's New York Link ("NYL") service does not apply strict limits to a Participant's end-of-day payment obligation, creating the potential for unlimited liquidity risk exposure if a user of the service were to default on its obligation. CDS Clearing manages this risk through active monitoring of payment obligations and a committed liquidity facility which covers the vast majority of potential Participant default scenarios. Residual liquidity risk in excess of CDS Clearing’s liquidity facility is transferred to surviving Participant users of the NYL service and as a result CDS Clearing’s liquidity risk exposure is limited to a maximum of its available liquidity facility. At December 31, 2019, as a result of calculations of Participants’ exposure, the total amount of collateral required by CDS Clearing was $5,568.6 (2018 – $6,081.1). The actual collateral pledged to CDS Clearing at December 31 is summarized below: Cash (included within Balances with Participants on the consolidated balance sheet) Treasury bills and fixed income securities Total collateral pledged December 31, 2019 December 31, 2018 $ $ 644.7 $ 6,021.1 6,665.8 $ 681.9 6,609.8 7,291.7 Treasury bills and fixed income securities collateral are not included in the Company’s consolidated balance sheets. (B) CDCC CLEARING, SETTLEMENT AND CLEARING MEMBER BALANCES Balances with Clearing Members includes balances with clearing members of CDCC (“Clearing Members”) as follows: • • Daily settlements due from, and to, 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 net impact on the consolidated net assets as an equivalent amount is recognized in both assets and liabilities. At December 31, 2019, the gross amount of daily settlements due from, and to, Clearing Members was $105.8 and $105.8, respectively (2018 – $147.8 and $147.8). These balances are then netted by Clearing Member at the balance sheet date, for cash to be paid or received on mark-to-market on futures, options premium and cash margin shortage or excess. Net amounts receivable/payable on open REPO agreements – OTC REPO agreements between buying and selling Clearing Members are novated to CDCC whereby the rights and obligations of the Clearing Members under the REPO agreements are cancelled and replaced by new agreements with CDCC. Once novation occurs, CDCC becomes the counterparty to both the buying and selling Clearing Member. As a result, the contractual right to receive and return the principal amount of the REPO as well as the contractual right to receive and pay interest on the REPO is thus transferred to CDCC. TMX GROUP LIMITED 2019 Annual Report 110 TMX Group Limited 23 Notes to the Consolidated Financial Statements For the year ended December 31, 2019 and 2018 These balances represent outstanding balances on open REPO agreements. At December 31, 2019, the gross amount of open REPO contracts receivable and payable was $67,791.4 and $67,791.4 (2018 – 44,086.0 and $44,086.0). These contracts when broken down by Clearing Member give rise to gross receivable and gross payable positions. As allowed under CDCC rules, receivable and payable balances outstanding with the same Clearing Member are offset when they are in the same currency and are to be settled on the same day, as CDCC has a legally enforceable right to offset and the intention to net settle. The balances include both the original principal amount of the REPO and the accrued interest, both of which are carried at amortized cost. As CDCC is the central counterparty, an equivalent amount is recognized in both the Company’s assets and liabilities. The following table sets out the carrying amounts of Balances with Clearing Members that are subject to offsetting, enforceable master netting arrangements and similar arrangements: As at Asset/(Liability) Financial assets Daily settlements due from Clearing Members Net amounts receivable on open REPO agreements Financial liabilities Daily settlements due to Clearing Members Net amounts payable on open REPO agreements Net amount As at Asset/(Liability) Financial assets Daily settlements due from Clearing Members Net amounts receivable on open REPO agreements Financial liabilities Daily settlements due to Clearing Members Net amounts payable on open REPO agreements Net amount Gross asset or (liability) for counterparties in a net asset / (net liability) position Liabilities / (assets) offset against net assets/(net liabilities) by counterparties Net amounts presented in the consolidated balance sheet December 31, 2019 $ $ 91.3 $ 43,511.5 43,602.8 (96.7) (48,531.2) (48,627.9) (5,025.1) $ (9.0) $ (19,260.2) (19,269.2) 14.4 24,279.9 24,294.3 5,025.1 $ 82.3 24,251.3 24,333.6 (82.3) (24,251.3) (24,333.6) — Gross asset or (liability) for counterparties in a net asset / (net liability) position Liabilities / (assets) offset against net assets/(net liabilities) by counterparties December 31, 2018 Net amounts presented in the consolidated balance sheet $ $ 146.0 $ 30,977.1 31,123.1 (147.7) (37,073.0) (37,220.7) (6,097.6) $ — $ (7,012.7) (7,012.7) 1.7 13,108.6 13,110.3 6,097.6 $ 146.0 23,964.4 24,110.4 (146.0) (23,964.4) (24,110.4) — For the year ended December 31, 2019, the largest daily settlement amount due from a Clearing Member was $168.3 (2018 – $287.5), and the largest daily settlement amount due to a Clearing Member was $164.2 (2018 – $222.7). These settlement amounts do not reflect net amounts from open REPO agreements, which are also due from Clearing Members. Clearing Members’ cash collateral are comprised of cash margin deposits and cash clearing fund deposits from Clearing Members which are held by CDCC with the Bank of Canada. Cash collateral, either as margin against open positions or as part of the clearing fund, are held by CDCC and are 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 net impact on the consolidated net assets as an equivalent amount is recognized in both assets and liabilities. The actual collateral pledged to CDCC at December 31 is summarized below: December 31, 2019 December 31, 2018 Cash collateral held: Clearing Members’ cash margin deposits Clearing fund cash deposits $ $ 1,359.0 $ 237.7 1,596.7 $ TMX GROUP LIMITED 2019 Annual Report 111 TMX Group Limited 939.5 239.5 1,179.0 24 Notes to the Consolidated Financial Statements For the year ended December 31, 2019 and 2018 Non-cash margin deposit and non-cash clearing fund deposit collateral pledged to CDCC under irrevocable agreements is held in government securities, put letters of guarantee and equity securities with approved depositories. Clearing Members may also pledge escrow receipts directly with CDCC. The non-cash collateral pledged to CDCC at December 31 is summarized below: Non-cash collateral pledged: Non-cash margin deposits Non-cash clearing fund deposits December 31, 2019 December 31, 2018 $ $ 9,495.0 $ 1,431.9 10,926.9 $ 8,183.0 1,257.5 9,440.5 Non-cash collateral is not included in the Company’s consolidated balance sheets. (C) TSX TRUST ASSETS UNDER ADMINISTRATION TSX Trust administers various segregated funds, representing amounts held on behalf of clients in connection with corporate trust and similar services. The actual assets under administration by TSX Trust at December 31 are summarized below: Cash Treasury bills and fixed income securities Total assets under administration $ $ December 31, 2019 150.9 $ 587.7 738.6 $ December 31, 2018 199.5 565.6 765.1 Since these amounts are not controlled by TSX Trust or by the Company, assets under administration are not included in the consolidated balance sheet. NOTE 11 – FINANCIAL RISK MANAGEMENT The Company 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 loss due to the failure of a borrower, counterparty, Clearing Member, or Participant to honour their financial obligations. It arises principally from the Company’s clearing operations of CDS Clearing and CDCC, the operations of TSX Trust, the brokerage operations of Shorcan, cash and cash equivalents, restricted cash and cash equivalents, marketable securities, trade receivables, and total return swaps. (i) Clearing and/or brokerage operations The Company is exposed to credit risk in the event that Participants, in the case of CDS Clearing; Clearing Members, in the case of CDCC; and clients, in the case of TSX Trust and Shorcan, fail to fulfill their financial obligations. CDS Clearing CDS Clearing is exposed to the risk of loss due to the failure of a Participant in CDS Clearing’s clearing and settlement services to honour its financial obligations. To a lesser extent, CDS Clearing is exposed to credit risk through the performance of services in advance of payment. Through the clearing and settlement services operated by CDS Clearing, credit risk exposures are created. During the course of each business day, transaction settlements can result in a net payment obligation of a Participant to CDS Clearing or the obligation of CDS Clearing to pay a Participant. The potential failure of the Participant to meet its payment obligation to CDS Clearing results in payment risk, a specific form of credit risk. Payment risk is a form of credit risk in securities settlement whereby a seller will deliver securities and not receive payment, or that a buyer will make payment and not receive the purchased securities. Payment risk is mitigated by delivery payment finality in CDSX, CDS Clearing’s multilateral clearing and settlement system, as set out in the CDS Clearing Participant Rules. In the settlement services offered by CDS Clearing, payment risk is transferred entirely from CDS Clearing to Participants who accept this risk pursuant to the contractual rules for the settlement services. This transfer of payment risk occurs primarily by means of Participants acting as extenders of credit to other Participants through lines of credit managed within the settlement system or, alternatively, by means of risk-sharing arrangements whereby groups of Participants cross-guarantee the payment obligations of other members of the group. Should a Participant be unable to meet its payment obligations to CDS Clearing, these surviving Participants are required to make the payment. Payment risk is TMX GROUP LIMITED 2019 Annual Report 112 TMX Group Limited 25 Notes to the Consolidated Financial Statements For the year ended December 31, 2019 and 2018 mitigated on behalf of Participants through the enforcement of limits on the magnitude of payment obligations of each Participant and the requirement of each Participant to collateralize their payment obligation. Both of these mitigants are enforced in real time in the settlement system. Through NYL and DTC Direct Link (“DDL”), credit risk exposures at CDS Clearing are created. During the course of each business day, settlement transactions by the NSCC/DTC can result in a net payment obligation from NSCC/DTC to CDS Clearing or the obligation of CDS Clearing to make a payment to NSCC/DTC. As a corollary result, CDS Clearing has a legal right to receive the funds from sponsored Participants in a debit position or has an obligation to pay the funds to sponsored Participants in a credit position. The potential failure of a Participant to meet its payment obligation to CDS Clearing in the NYL or DDL services results in a payment risk. To mitigate the risk of default, CDS Clearing has in place default risk mitigation mechanisms to minimize losses to the surviving Participants as set out in the CDS Clearing Participant Rules. The process includes Participants posting collateral with CDS Clearing and NSCC/DTC (note 10). The risk exposure of CDS Clearing in these central counterparty services is mitigated through a daily mark-to-market of each Participant’s obligations as well as risk-based collateral requirements calculated daily. These mitigants are intended to cover the vast majority of market changes and are tested against actual price changes on a regular basis. This testing is supplemented with analysis of the effects of extreme market conditions on a collateral valuation and market risk measurements which are used to determine additional collateral requirements of Participants to a Default Fund established in 2015. Should the collateral of a defaulter in a central counterparty service be insufficient, either because the value of the collateral has declined or the loss to be covered by the collateral exceeded the collateral requirement, the surviving Participants in the service are required to cover any residual losses. Cash collateral is held by CDS Clearing at the Bank of Canada and NSCC/DTC and non-cash collateral pledged by Participants under Participant Rules is held by CDS Clearing (note 10). CDS Clearing also holds $1.0 of its cash and cash equivalents and marketable securities to contribute pre-funded resources to its CNS default waterfall. This Default Fund of $1.0 would be accessed following the exhaustion of a suspended Participant's CNS Participant Fund and Default Fund contribution. CDS Clearing may receive payment from securities issuers for entitlements, for example, maturity or interest payments, prior to the date of payment to the Participants holding those securities. In rare circumstances, due to the timing of receipt of these payments or due to market conditions, these funds may be held with a major Canadian chartered bank. As a result, CDS Clearing could be exposed to the credit risk associated with the potential failure of the bank. CDCC CDCC is exposed to risk of loss in the event that Clearing Members fail to satisfy any of the contractual obligations as stipulated within CDCC’s rules. CDCC is exposed to the credit risk of its Clearing Members since it acts as the central counterparty for all transactions carried out on MX’s markets and on certain OTC markets which are serviced by CDCC. As such, in the event of a Clearing Member default, the obligations of those defaulting counterparties would become the responsibility of CDCC. The first line of defence in CDCC's credit risk management process is the adoption of strict membership criteria which include both financial and regulatory requirements. In addition, CDCC performs on-going monitoring of the financial viability of its Clearing Members against the relevant criteria as a means of ensuring the on-going compliance of its Clearing Members. In the event that a Clearing Member fails to continue to satisfy any of its membership criteria, CDCC has the right through its rules, to impose various sanctions on such Clearing Members. One of CDCC’s principal risk management practices with regard to counterparty credit risk is the collection of risk-based margin deposits in the form of cash, equities, liquid government securities and escrow receipts. Should a Clearing Member fail to meet settlements and/or daily margin calls or otherwise not honour its obligations under open future, option contracts and REPO agreements, margin deposits would be seized and would then be available to apply against the potential losses incurred through the liquidation of 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 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% and is meant to ensure that Clearing Member leverage in the clearing activities does not exceed the value of TMX GROUP LIMITED 2019 Annual Report 113 TMX Group Limited 26 Notes to the Consolidated Financial Statements For the year ended December 31, 2019 and 2018 the firm. CDCC also has additional margin surcharges to manage the risk exposures associated with specific business related risks. These include: concentration charges for Clearing Members that are overly concentrated in certain positions, wrong-way risk charges for those Clearing Members holding positions which are highly correlated with their own credit risk profile, mismatched settlement surcharges which are meant to mitigate the risk of cherry-picking by a potential defaulter in the settlement process. Global regulatory requirements for central-counterparties (CCPs), like CDCC, have highlighted the need for CCPs to have a component of their capital at risk in the default management process. CDCC holds $10.0 of its cash and cash equivalents and marketable securities to cover the potential loss incurred due to Clearing Member defaults. This $10.0 would be accessed in the event that a defaulting Clearing Members’ margin and clearing fund deposits are insufficient to cover the loss incurred by CDCC. The $10.0 is allocated into two separate tranches. The first tranche of $5.0 is intended to cover the loss resulting from the first defaulting Clearing Member. If the loss incurred is greater than $5.0, and as such the first tranche is fully depleted, CDCC will fully replenish the first tranche using the second tranche of $5.0. This second tranche is in place to ensure there is $5.0 available in the event of an additional Clearing Member default. CDCC’s cash margin deposits and cash clearing fund deposits are held at the Bank of Canada thereby alleviating the credit risk CDCC would face with deposits held at commercial banks. 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 (note 10). This collateral may be seized by CDCC in the event of default by a Clearing Member. TSX Trust TSX Trust is exposed to credit risk on foreign exchange transactions processed for clients in the event that either the client or the financial counterparty fails to settle contracts for which foreign exchange rates have moved unfavourably. The risk of a financial counterparty failing to settle a transaction is considered remote as TSX Trust deals only with reputable financial institutions comprised of Canadian major chartered banks. Shorcan Shorcan is exposed to credit risk in the event that customers fail to settle on the contracted settlement date. This 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 has the right to withdraw its normal policy of anonymity and advise the two counterparties to settle directly. (ii) Cash and cash equivalents and restricted cash and cash equivalents The Company manages its exposure to credit risk on its cash and cash equivalents and restricted cash and cash equivalents by holding the majority of its cash and cash equivalents with major Canadian chartered banks or in Government of Canada and provincial treasury bills and US treasury bills. (iii) Marketable securities The Company manages its exposure to credit risk arising from investments in marketable securities by holding investment funds that actively manage credit risk or by holding high-grade individual fixed income securities or term deposits with credit ratings of A/R1-low or better. In addition, when holding individual fixed income securities, the Company will limit its exposure to any non-government security. The investment policy of the Company will only allow excess cash to be invested in money market securities or fixed income securities; however the majority of the portfolio is held within bank deposits, notes, Government of Canada and provincial treasury bills, and US treasury bills. (iv) Trade receivables The Company’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. The Company 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, or data access privileges and other services. (v) Total return swaps The Company limits its exposure to counterparty credit risk on its total return swaps by contracting with major Canadian chartered banks. TMX GROUP LIMITED 2019 Annual Report 114 TMX Group Limited 27 Notes to the Consolidated Financial Statements For the year ended December 31, 2019 and 2018 (B) MARKET RISK Market risk is the risk of loss due to changes in market prices and rates, such as foreign exchange rates, interest rates, commodity prices and equity prices. (i) Foreign currency risk The Company is exposed to foreign currency risk on revenue and expenses where it invoices or procures in a foreign currency. It is also exposed to foreign currency risk on cash and cash equivalents, trade receivables and trade payables denominated in foreign currencies, principally in US dollars. As at December 31, 2019, cash and cash equivalents and trade receivables, net of current liabilities, include US$15.8, which are exposed to changes in the US-Canadian dollar exchange rate, £0.7, which are exposed to changes in the British Pound Sterling-Canadian dollar exchange rate, and €0.1, which are exposed to changes in the Euro-Canadian dollar exchange rate (2018 – US$14.2, £0.7 and €0.1). In addition, net assets related to Trayport and other foreign operations are denominated in US dollars, Euros (“EUR”) and British Pound Sterling ("GBP"), and the effect of foreign exchange rate movements on the Company’s share of these net assets is included in accumulated other comprehensive income in the consolidated balance sheet. The Company does not currently employ currency hedging strategies with respect to its operating activities, and therefore significant moves in exchange rates, specifically a strengthening of the Canadian dollar against the US dollar could have an adverse effect on the value of the Company's net income or net assets in Canadian dollars. Settlements in the clearing and settlement services offered by CDS Clearing occur in both Canadian and US dollars. Foreign exchange risk could be created if there is a default and the currency of the payment obligation is different from the currency of the collateral supporting that payment obligation. This risk is mitigated by discounting the collateral value of securities where these mismatches occur. (ii) Interest rate risk The Company is exposed to interest rate risk on its marketable securities, credit and liquidity facilities, debentures and Commercial Paper. At December 31, 2019, the Company held $80.4 in marketable securities, all of which were held in treasury bills (2018 – $55.6, all of which were held in treasury bills). The Company also has $239.6 of Commercial Paper (note 12) outstanding at December 31, 2019. (iii) Equity price risk The Company is exposed to equity price risk arising from its share-based payments, as the Company’s obligation under these arrangements are partly based on the price of the Company’s shares. The Company has entered into TRSs as a partial economic hedge to the share appreciation rights of these share-based payments. (iv) Other market price risk The Company is exposed to market risk factors from the activities of CDCC, CDS Clearing and Shorcan, if a Clearing Member, Participant or client, as the case may be, fails to take or deliver either derivative products or securities on the contracted settlement date where the contracted price is less favourable than the current market price. CDCC CDCC is exposed to market risk through its CCP function in the event of a Clearing Member default as it becomes the legal counterparty to all of the defaulters’ novated transactions and must honor the financial obligations that arise from those novated transactions. The principal mitigation of the market risk exposure post default is the default management process. CDCC has developed detailed default management processes that would enable it to neutralize the market exposures through either its auction process or via open markets operations within prescribed time periods. Any losses from such operations would be set-off against the margin and clearing fund (if necessary) collateral that are pre-funded by all Clearing Members for these purposes. CDS Clearing CDS Clearing is exposed to market risk through its CCP function in the event of a Participant default as it becomes the legal counterparty to all of the defaulters’ novated transactions and must honor the financial obligations that arise from those novated transactions. TMX GROUP LIMITED 2019 Annual Report 115 TMX Group Limited 28 Notes to the Consolidated Financial Statements For the year ended December 31, 2019 and 2018 The principal mitigation of the market risk exposure post default is the default management process. CDS Clearing has developed detailed default management processes that would enable it to neutralize the market exposures via open market operations within prescribed time periods. Any losses from such operations would be set-off against the collateral contributions of the defaulting participant to the Participant Fund and Default Fund for the CCP service. Replacement cost risk exposure of CDS Clearing in these central counterparty services is mitigated through a daily mark- to-market of each participant’s obligations as well as risk-based collateral requirements calculated daily. These mitigants are intended to cover the vast majority of market changes and are tested against actual price changes on a regular basis. This testing is supplemented with analysis of the effects of extreme market conditions on collateral valuation and market risk measurements which are used to determine additional collateral requirements of Participants to a Default Fund established in 2015. Should the collateral of a defaulter in a central counterparty service be insufficient, either because the value of the collateral has declined or the loss to be covered by the collateral exceeded the collateral requirement, the surviving participants in the service are required to cover any residual losses. Settlements in the clearing and settlement services occur in both Canadian and US dollars. Foreign exchange risk is created when the currency of the payment obligation is different from the valuation currency of the collateral supporting that payment obligation. This risk is mitigated by discounting the collateral value of securities where these mismatches occur. TSX and TSX Venture Exchange The Company is exposed to market price risk on a portion of its sustaining services revenue, which is based on quoted market values of listed issuers as at December 31 of the previous year. Shorcan Shorcan's risk is limited by their status as an agent, in that they do not purchase or sell securities 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. (v) Market risk sensitivity summary Change in underlying factor Impact on income before income taxes Impact on equity Foreign currency USD, EUR and GBP currency USD, EUR and GBP currency Interest rates Marketable securities Marketable securities Commercial Paper Commercial Paper Equity price PSUs, RSUs and DSUs PSUs, RSUs and DSUs TRS TRS +10.0% $ -10.0% +1.0% $ -1.0% +1.0% -1.0% +25.0% $ -25.0% +25.0% -25.0% 2.2 $ (2.2) 92.3 (92.3) (0.2) 0.2 (0.4) 0.4 (14.1) 16.6 6.3 (6.3) n/a n/a n/a n/a n/a n/a n/a n/a TMX GROUP LIMITED 2019 Annual Report 116 TMX Group Limited 29 Notes to the Consolidated Financial Statements For the year ended December 31, 2019 and 2018 (C) LIQUIDITY RISK Liquidity risk is the risk of loss due to the inability of the Company to meet its, or of the Company's borrowers, counterparties, Clearing Members, or Participants to meet their obligations in a timely manner or at reasonable prices. The Company 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 debentures, credit and liquidity facilities and Commercial Paper (note 12) and capital (note 13). The contractual maturities of the Company’s financial liabilities are as follows: As at Less than 1 year Between 1 and 5 years Greater than 5 years December 31, 2019 $ Participants’ tax withholdings* Accrued interest payable Other trade and other payables Provisions Lease liabilities Balances with Participants and Clearing Members* Total return swaps Commercial Paper Debentures 151.5 $ 3.8 61.0 7.9 8.3 26,588.9 1.1 239.6 — — $ — — 8.2 32.2 — — — 548.2 — — — — 63.2 — — — 198.9 *The above financial liabilities are covered by assets that are restricted from use in the ordinary course of business. NOTE 12 – DEBT, CREDIT AND LIQUIDITY FACILITIES The Company is exposed to liquidity risk through its clearing operations and capital structure (note 11). To manage this risk, the Company has arranged various liquidity and credit facilities, Commercial Paper and debentures as a source of financing. If the Company is unable to meet its covenants under the trust indentures, the terms of the Commercial Paper program or the credit facilities, the Company may be required to seek potentially less favourable sources of financing. (A) DEBT The Company has the following debt outstanding at December 31: Interest rate Maturity date(s) Principal/ Authorized 4.461% 2.997% 3.779% Oct 3, 2023 Dec 11, 2024 June 5, 2028 250.0 $ 300.0 200.0 1.84% - 2.00% Jan 3 - Feb 28, 2020 500.0 1 month B.A./LIBOR + 122.5 bps May 2, 2021 500.0 $ 2019 Carrying amount 2018 Carrying amount 249.6 $ 298.6 198.9 747.1 239.6 239.6 — — 986.7 (239.6) 747.1 $ 249.5 298.4 198.9 746.8 319.5 319.5 — — 1,066.3 (319.5) 746.8 Series B Debentures Series D Debentures Series E Debentures Debentures Commercial Paper Commercial Paper TMX Group Limited credit facility Credit facility Total debt Less: current portion of debt Non-current debt (i) Debentures The Company maintains debentures, which are direct, senior, unsecured and unsubordinated obligations of the Company and rank equally with all other senior unsecured and unsubordinated indebtedness. The debentures have received a rating of A (high) with Stable trend from DBRS Limited ("DBRS"). TMX GROUP LIMITED 2019 Annual Report 117 TMX Group Limited 30 Notes to the Consolidated Financial Statements For the year ended December 31, 2019 and 2018 The Company has the right, at its option, to redeem, in whole or in part, each of the Series B , Series D and Series E Debentures at any time prior to their respective maturities. The redemption price is equal to the greater of the applicable Canada Yield Price (as defined in the relevant Indenture) and 100% of the principal amount of the debentures being redeemed, together with accrued and unpaid interest to the date fixed for redemption. If redeemed on or after the date that is three months prior to the maturity date for the Series B and Series E, or two months prior to the maturity date for the Series D Debentures, the redemption price is equal to 100% of the aggregate principal amount outstanding on the series being redeemed, together with accrued and unpaid interest to the date fixed for redemption. The debentures are carried at amortized cost and are measured using the effective interest rate method. For the year ended December 31, 2019, the Company recognized interest expense on its Series B, Series D and Series E debentures of $11.3, $9.2 and $7.6, respectively (2018 – $11.3, $9.1 and $4.4, respectively). For Series A debentures, which matured on October 3, 2018, the Company recognized interest expense of $10.1 for the year ended December 31, 2018. (ii) Commercial paper The Company has a commercial paper program to offer potential investors up to $500 (or the equivalent US$) of Commercial Paper to be issued in various maturities of no more than one year. The Commercial Paper bears interest rates based on the prevailing market conditions at the time of issuance. The Commercial Paper issued are unsecured obligations of TMX Group Limited and rank equally with all other senior unsecured obligations of the Company. The Commercial Paper has been assigned a rating of R-1 (low) with Stable trend by DBRS. The Commercial Paper is carried at amortized cost and measured using the effective interest rate method. During the year ended December 31, 2019, the Company issued and repaid Commercial Paper with a cumulative amount of $1,858.6 and $1,938.5, respectively (2018 – $1,973.4 and $2,050.0, respectively). (iii) TMX Group Limited credit facility The Company has entered into a credit agreement (the “TMX Group Limited credit facility”) with a syndicate of lenders to provide 100% backstop to the commercial paper program as well as for general corporate purposes. The credit agreement is to mitigate the Company's exposure to specific liquidity risk should it be unable to borrow under a new Commercial Paper issuance in order to pay for Commercial Paper that is coming due because of a lack of liquidity or demand for the Company's Commercial Paper in the market. The amount available to be drawn under the TMX Group Limited credit facility is limited to $500 less the aggregate amount of: (i) Commercial Paper outstanding (December 31, 2019 – $239.6); and (ii) inter-company notes payable to CDS Limited, CDS Clearing and CDCC and Shorcan Brokers Limited (December 31, 2019 – $43.2). MX has an outstanding letter of guarantee for $0.5 issued against the TMX Group Limited credit facility. 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 (note 25). TMX GROUP LIMITED 2019 Annual Report 118 TMX Group Limited 31 (B) OTHER CREDIT AND LIQUIDITY FACILITIES The Company has the following other credit and liquidity facilities drawn and outstanding at December 31: Notes to the Consolidated Financial Statements For the year ended December 31, 2019 and 2018 CDS Limited operating demand CDS Clearing unsecured overdraft CDS Clearing operating demand CDS Clearing secured standby liquidity facility CDS Clearing overnight loan facility CDS Clearing secured standby liquidity facility CDCC syndicated revolving standby liquidity facility CDCC daylight liquidity facilities CDCC syndicated REPO facility Shorcan overdraft facility Total credit and liquidity facilities Interest rate† Maturity date(s) n/a n/a n/a – – – – March 24, 2020 n/a Authorized 5.0 5.0 15.0 2,000.0 US$5.5 – – March 24, 2020 US$720.0 February 28, 2020 n/a – – February 28, 2020 n/a – 400.0 600.0 18,102.0 50.0 $ 2019 Carrying amount — — — 2018 Carrying amount — — — — — — 8.2 — — — 8.2 $ — — — — — — — — †The interest rate charged on borrowings under the credit and liquidity facilities vary as the actual rate will be based on the prevailing market rates at the time of draw. (i) CDS facilities CDS maintains unsecured operating demand loans totaling $5.0 to support short-term operating requirements. To support processing and settlement activities of Participants, an unsecured overdraft facility of $5.0, demand loan of $15.0 and an overnight facility of US$5.5 are available. The borrowing rates for these facilities, if drawn, are the Canadian prime or the US base rate, depending on the currency drawn. CDS Clearing maintains a secured standby liquidity facility of US$720.0, or Canadian dollar equivalent, that can be drawn in either United States ("US") or Canadian currency. On March 25, 2019, CDS Clearing extended the maturity date to March 24, 2020. The facility is available to support processing and settlement activities in the event of a Participant default with the New York Link Service and The Depository Trust Company Direct Link Service. The facility will allow the Company to increase the amount available by an additional US$600, or Canadian equivalent, with approval of the lenders. Borrowings under the secured facility are obtained by pledging or providing collateral pledged by Participants primarily in the form of debt instruments issued or guaranteed by federal, provincial and/or municipal governments in Canada, or US treasury instruments and equity instruments. Depending upon the currency drawn, the borrowing rate for the secured standby liquidity facility is the US base rate plus 150 bps or the Canadian prime rate plus 150 bps. CDS Clearing also has a secured standby liquidity facility of $2,000, or US equivalent, that can be drawn in either Canadian or US currency. On March 25, 2019, CDS Clearing extended the maturity date to March 24, 2020. This arrangement is available to support settlement activities in the event of a Participant default with CDS Clearing’s Continuous Net Settlement service. The facility will allow the Company to increase the amount available by an additional $500, or US equivalent, with approval of the lenders. Borrowings under the secured facility are obtained by pledging or providing collateral pledged by Participants primarily in the form of debt and equity instruments. Depending upon the currency drawn, the borrowing rate for the secured standby liquidity facility is the Canadian prime rate plus 150 bps or the US base rate plus 150 bps. In addition, CDS has signed agreements that would allow the Bank of Canada to provide emergency last-resort liquidity to CDS at the discretion of the Bank of Canada. This liquidity facility is intended to provide end of day liquidity for payment obligations arising from CDSX, and only in the event that CDS Clearing is unable to access liquidity from its standby liquidity facility or in the event that the liquidity under such facilities is insufficient. Use of this facility would be on a fully collateralized basis. As at December 31, 2018, CDS Clearing had $39.8 in bank overdraft, which was recorded in "Other current liabilities" and which resulted in net cash and cash equivalents of $135.3 on the consolidated statement of cash flows. The overdraft cleared on January 2, 2019. TMX GROUP LIMITED 2019 Annual Report 119 TMX Group Limited 32 Notes to the Consolidated Financial Statements For the year ended December 31, 2019 and 2018 (ii) CDCC facilities CDCC maintains daylight liquidity facilities for a total of $600.0 to provide liquidity on the basis of collateral in the form of securities that have been received by, or pledged to, CDCC. The daylight liquidity facilities must be cleared to zero at the end of each day. CDCC maintains a $18,102.0 REPO uncommitted facility (December 31, 2018 - $13,788.0) that is in place to provide end of day liquidity in the event that CDCC is unable to clear the daylight liquidity facilities to zero. On March 1, 2019, CDCC extended this facility to February 28, 2020. During the year, CDCC also amended the amount to $18,102.0. The facility would provide liquidity in exchange for securities that have been received by, or pledged to, CDCC. Effective January 10, 2020, the amount was further amended to $20,622.0. CDCC also maintains a $400.0 syndicated revolving standby liquidity facility to provide end of day liquidity in the event that CDCC is unable to clear the daylight liquidity facilities to zero. Advances under the facility are secured by collateral in the form of securities that have been received by, or pledged to, CDCC. On February 28, 2019, CDCC extended this facility to February 28, 2020. As at December 31, 2019, CDCC had drawn $8.2 to facilitate a failed REPO settlement. The amount is fully collateralized by liquid securities included in cash and cash equivalents and was fully repaid subsequent to the reporting date. In addition, CDCC has signed an agreement that would allow the Bank of Canada to provide emergency last-resort liquidity to CDCC at the discretion of the Bank of Canada. This liquidity facility is intended to provide end of day liquidity only in the event that CDCC is unable to access liquidity from the revolving standby liquidity facility and the syndicated REPO facility or in the event that the liquidity under such facilities is insufficient. Use of this facility would be on a fully collateralized basis. (iii) Shorcan facility Shorcan maintains an overdraft facility with a major chartered bank to provide end of day liquidity to cover any shortfalls due to timing of payments and receipts associated with the brokerage of trades. Use of this facility is secured by collateral in the form of securities. (iv) TMX Group Limited Support Agreement In 2016, in compliance with the Principles for Financial Market Infrastructures and additional Canadian regulatory and oversight guidance, CDS Clearing and CDCC each adopted a recovery plan, to be applied in the event that the entity is unable to provide defined critical operations and services as a going concern. These recovery plans were filed with their respective Canadian regulators. On January 1, 2017, in connection with the recovery plans, and if certain funding conditions are met, TMX Group Limited agreed to provide certain limited financial support to CDS Clearing and CDCC, if necessary, in the context of a recovery. (C) RECONCILIATION OF LIABILITIES ARISING FROM FINANCING ACTIVITIES The table below details changes in the Company's liabilities arising from financing activities, including both cash and non-cash changes. Liabilities arising from financing activities are those for which cash flows were, or future cash flows will be, classified in the Company's consolidated statement of cash flows from financing activities. Debentures Commercial Paper CDCC syndicated revolving standby liquid facility Total return swaps Lease liabilities Balance at January 1, 2018 Financing cash flows Other (non-cash) Balance at December 31, 2018 $ $ 947.3 $ (201.1) 0.6 746.8 $ Recognition of leases under IFRS 16 (non-cash) Financing cash flows Other (non-cash) — — 0.3 395.3 $ (76.6) 0.8 319.5 $ — (79.9) — — $ — — — $ — 8.2 — 0.1 $ 3.8 — 3.9 $ — (2.8) — — $ — — — $ 111.4 (8.2) 0.5 Total 1,342.7 (273.9) 1.4 1,070.2 111.4 (82.7) 0.8 Balance at December 31, 2019 $ 747.1 $ 239.6 $ 8.2 $ 1.1 $ 103.7 $ 1,099.7 TMX GROUP LIMITED 2019 Annual Report 120 TMX Group Limited 33 Notes to the Consolidated Financial Statements For the year ended December 31, 2019 and 2018 NOTE 13 – CAPITAL MAINTENANCE The Company’s primary objectives in managing capital, which it defines as including its cash and cash equivalents, marketable securities, share capital, debentures, Commercial Paper, and various credit facilities, include: • Maintaining sufficient capital for operations to ensure market confidence and to meet regulatory requirements and various facility requirements. Currently, the Company targets to retain a minimum of $185 in cash, cash equivalents and marketable securities. This amount is subject to change; • Maintaining a credit rating in a range consistent with the Company’s current A (high) and R1-low credit ratings from DBRS; Using excess cash to invest in and continue to grow the business; Returning capital to shareholders through methods such as dividends paid to shareholders and purchasing shares for cancellation pursuant to normal course issuer bids; and Reducing the debt levels to be below the total leverage ratios as discussed in (a) below, which decrease over time. • • • The Company aims to achieve the above objectives while managing its capital subject to capital maintenance requirements imposed on the Company and certain subsidiaries as follows: a. In respect of the TMX Group Limited credit facility (note 12) that require the Company to maintain: i. ii. an interest coverage ratio of more than 4.0:1; a total leverage ratio of not more than: 1 2 3.75:1 until December 31, 2018; and 3.50:1 on January 1, 2019 and thereafter. b. In respect of TSX, as required by the OSC to maintain certain financial ratios on both a consolidated and non-consolidated basis, as defined in the OSC recognition order, as follows: a current ratio of greater than or equal to 1.1:1; a debt to cash flow ratio of less than or equal to 4.0:1; and a financial leverage ratio of less than or equal to 4.0:1. i. ii. iii. c. In respect of Alpha Exchange Inc., as required by the OSC to maintain certain financial ratios as defined in the OSC recognition order, as follows: i. ii. iii. a current ratio of greater than or equal to 1.1:1; a debt to cash flow ratio of less than or equal to 4.0:1; and a financial leverage ratio of less than or equal to 4.0:1. d. e. In respect of TSX Venture Exchange, as required by certain provincial securities commissions, to maintain sufficient financial resources to perform its functions. In respect of MX, as required by the AMF, to maintain certain financial ratios as defined in the AMF recognition order, as follows: i. ii. iii. a working capital ratio of more than 1.5:1; a cash flow to total debt outstanding ratio of more than 20%; and a financial leverage ratio of less than 4.0. f. In respect of CDCC, to maintain certain amounts, as follows: i. ii. iii. iv. maintain sufficient financial resources as required by the OSC and AMF; $5.0 cash and cash equivalents or marketable securities 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; sufficient cash, cash equivalents and marketable securities to cover 12 months of operating expenses, excluding amortization and depreciation; and $30.0 total shareholder's equity. TMX GROUP LIMITED 2019 Annual Report 121 TMX Group Limited 34 Notes to the Consolidated Financial Statements For the year ended December 31, 2019 and 2018 g. In respect of CDS and CDS Clearing, as required by the OSC and the AMF to maintain certain financial ratios as defined in the OSC recognition order, as follows: i. ii. a debt to cash flow ratio of less than or equal to 4:1; and a financial leverage ratio of less than or equal to 4:1. In addition, the OSC requires CDS and CDS Clearing to maintain working capital to cover 6 months of operating expenses (excluding, in the case of CDS, the amount of shared services fees charged to CDS Clearing). CDS is required to dedicate a portion of its own resources in the CNS default waterfall for the CNS function. The Company maintains $1.0 in cash and cash equivalents or marketable securities to cover potential losses incurred as a result of a Participant default. h. In respect of Shorcan: i. ii. iii. by IIROC which requires Shorcan to maintain a minimum level of shareholders’ equity of $0.5; by the National Futures Association ("NFA") which requires Shorcan to maintain a minimum level of net capital; and by the OSC which requires Shorcan to maintain a minimum level of excess working capital. i. In respect of TSX Trust: i. ii. as required by the Office of the Superintendent of Financial Institutions, to maintain the following minimum capital ratios: 1. 2. 3. common equity tier 1 capital ratio of 7%; tier 1 capital ratio of 8.5%; and total capital ratio of 10.5%. as required by IIROC, to maintain in excess of $100.0 of paid up capital and surplus on the last audited balance sheet for the acceptable institution designation. As at December 31, 2019, the Company complied with each of these externally imposed capital requirements. NOTE 14 – FINANCIAL INSTRUMENTS Financial assets are recognized on the trade date at which the Company 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 the Company 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 liabilities are initially recognized on the trade date at which the Company becomes a party to the contractual provisions of the instrument. The Company 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. Financial assets and liabilities are offset and the net amount presented in the consolidated balance sheet only when the Company 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. Derivatives are recognized initially at fair value. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are accounted for as described below. • Cash flow hedges – For cash flow hedges, the effective portion of the changes in the fair value of the hedging derivative, net of taxes, is recognized in other comprehensive income while any ineffective portion is recognized immediately in the consolidated income statement within net finance costs. Interest arising on the derivative is transferred from accumulated other comprehensive income within equity to net settlement on interest rate swaps within finance costs in the consolidated income statement as it is incurred. • Other derivatives – The Company holds total return swaps which, while providing a partial economic hedge against its share price exposure on its cash-settled share-based compensation plans (note 24), 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. (A) FINANCIAL INSTRUMENTS Financial assets and liabilities are classified as fair value through profit and loss ("FVTPL"), amortized cost, or fair value through other comprehensive income ("FVTOCI"). The Company has exercised judgement in its assessment of the business TMX GROUP LIMITED 2019 Annual Report 122 TMX Group Limited 35 model within which the assets are held and in its assessment of whether the contractual terms of the financial assets are solely payments of principal and interest on the principal amounts outstanding to determine the classification of financial assets. The table below illustrates the classification of the Company's financial assets: Notes to the Consolidated Financial Statements For the year ended December 31, 2019 and 2018 Total return swaps Interest rate swaps Marketable securities Cash and cash equivalents Restricted cash and cash equivalents Trade and other receivables Clearing Members cash collateral Balances with Clearing Members Balances with Participants FVTPL FVTPL FVTPL Amortized cost Amortized cost Amortized cost Amortized cost Amortized cost Amortized cost (B) FINANCIAL INSTRUMENTS – CARRYING AMOUNTS AND FAIR VALUES The Company classifies its non-derivative financial assets in the following categories, depending on the purpose for which they were acquired: • Financial assets as FVTPL are measured at fair value at the end of each reporting period, with any fair value gains or losses recognized in profit or loss. The net gain or loss recognized in profit or loss includes any dividend or interest earned on the financial asset and is presented as finance income or cost in the consolidated income statement. • Financial assets carried at amortized cost is the amount at which the financial asset is measured at initial recognition minus the principal repayments, plus the cumulative amortization using the effective interest method of any difference between that initial amount and the maturity amount, adjusted for any loss allowance. On the other hand, the gross carrying amount of a financial asset is the amortized cost of a financial asset before adjusting for any loss allowance. The classification of the Company’s financial instruments, along with their carrying amounts and fair values are as follows: TMX GROUP LIMITED 2019 Annual Report 123 TMX Group Limited 36 Assets at fair value through profit or loss Marketable securities Interest rate swaps Fair value through other comprehensive income Investment in privately-owned company Amortized cost Cash and cash equivalents Restricted cash and cash equivalents Trade and other receivables Promissory note Clearing Members cash collateral Balances with Clearing Members Balances with Participants Liabilities at fair value through profit or loss Total return swaps Amortized cost Other trade and other payables Bank overdraft Accrued interest payable Participants’ tax withholdings Clearing Members cash collateral Balances with Clearing Members Balances with Participants Credit and liquidity facilities drawn Commercial Paper Debentures Notes to the Consolidated Financial Statements For the year ended December 31, 2019 and 2018 December 31, 2019 Fair value Carrying amount December 31, 2018 Fair value Carrying amount 80.4 $ — 80.4 — — 149.0 151.5 105.3 5.0 1,596.7 24,333.6 658.6 26,999.7 80.4 $ — 80.4 — — 55.6 $ 0.5 56.1 0.8 0.8 149.0 151.5 105.3 5.0 1,596.7 24,333.6 658.6 26,999.7 175.1 131.4 105.9 5.0 1,179.0 24,110.4 702.0 26,408.8 55.6 0.5 56.1 0.8 0.8 175.1 131.4 105.9 5.0 1,179.0 24,110.4 702.0 26,408.8 (1.1) (1.1) (1.1) (1.1) (3.9) (3.9) (3.9) (3.9) (61.0) — (3.8) (151.5) (1,596.7) (24,333.6) (658.6) (8.2) (239.6) (747.1) (27,800.1) $ (61.0) — (3.8) (151.5) (1,596.7) (24,333.6) (658.6) (8.2) (239.6) (784.9) (27,837.9) $ (57.1) (39.8) (3.9) (131.4) (1,179.0) (24,110.4) (702.0) — (319.5) (746.8) (27,289.9) $ (57.1) (39.8) (3.9) (131.4) (1,179.0) (24,110.4) (702.0) — (319.5) (761.7) (27,304.8) $ $ The carrying amount of the Company’s financial instruments approximate their fair values at each reporting date, with the exception of the debentures. The fair values of the debentures were obtained using Level 2 observable market prices as inputs. (C) FAIR VALUE MEASUREMENT The categories within the fair value hierarchy of the Company’s financial instruments carried at fair value are as follows: As at Asset/(Liability) Marketable securities Total return swaps $ Level 1 80.4 $ — Fair value measurements using: Level 3 Level 2 December 31, 2019 — $ (1.1) — $ — 80.4 (1.1) TMX GROUP LIMITED 2019 Annual Report 124 TMX Group Limited 37 As at Asset/(Liability) Marketable securities Total return swaps Interest rate swaps Investment in privately-owned company $ Level 1 55.6 $ — — — There were no transfers during the periods between any of the levels. Notes to the Consolidated Financial Statements For the year ended December 31, 2019 and 2018 Fair value measurements using: Level 3 Level 2 December 31, 2018 — $ (3.9) 0.5 — — $ — — 0.8 55.6 (3.9) 0.5 0.8 NOTE 15 – CASH AND CASH EQUIVALENTS, RESTRICTED CASH AND CASH EQUIVALENTS AND MARKETABLE SECURITIES (A) CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AND CASH EQUIVALENTS Cash and cash equivalents, and restricted cash and cash equivalents are comprised of: As at Cash Term and other deposits Treasury bills Overnight money market Regulatory surplus Cash and cash equivalents Bank overdraft (note 12) Cash and cash equivalents, net Restricted cash and cash equivalents – CDS Clearing Restricted cash and cash equivalents December 31, 2019 December 31, 2018 $ $ $ $ 35.8 $ 51.4 56.3 1.0 4.5 149.0 $ — 149.0 $ 151.5 151.5 $ 69.6 51.2 45.0 5.0 4.3 175.1 (39.8) 135.3 131.4 131.4 Cash and cash equivalents consist of cash and highly liquid investments having an original maturity of three months or less and 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. The surplus of this regulatory division has an equivalent and off- setting amount included in trade and other payables. Restricted cash and cash equivalents contains tax withheld by CDS Clearing on entitlement payments made by CDS Clearing on behalf of CDS Clearing Participants. The restricted cash and cash equivalents related to this withheld tax is ultimately under the control of CDS Clearing; however, the amount is payable to various taxation authorities within a relatively short period of time and so is restricted from use in normal operations. An equivalent and off-setting amount is included in the consolidated balance sheet as a current liability under the caption Participants’ tax withholdings. (B) MARKETABLE SECURITIES Marketable securities are comprised of: As at Treasury bills Marketable securities December 31, 2019 $ $ 80.4 $ 80.4 $ December 31, 2018 55.6 55.6 The Company has designated its marketable securities as fair value through profit and loss, with changes in fair value being recorded within finance income in the consolidated income statement in the period in which they occur. Fair values have been determined based on quoted market prices or are based on observable market information. TMX GROUP LIMITED 2019 Annual Report 125 TMX Group Limited 38 NOTE 16 – TRADE AND OTHER RECEIVABLES Trade and other receivables are comprised of: As at Trade receivables, gross Less: Allowance for doubtful accounts Trade receivables, net Other receivables Trade and other receivables Notes to the Consolidated Financial Statements For the year ended December 31, 2019 and 2018 December 31, 2019 96.9 $ (2.8) 94.1 11.2 105.3 $ December 31, 2018 99.2 (2.8) 96.4 9.5 105.9 $ $ Loss allowances for trade and other receivables are measured at an amount equal to lifetime expected credit losses. The expected credit losses on trade and other receivables are calculated using historical credit loss experience taking into account current observable data at the reporting date to reflect the effects of any relevant current and forecasts of future conditions. Trade receivables generally have terms of 30 days. Loss allowances for trade receivables are measured at an amount equal to lifetime expected credit losses ("ECL"). Trade receivables that are more than three months past due are considered to be impaired and the impairment approximates the lifetime ECL. Allowances for ECL are recorded within selling, general and administration costs in the consolidated income statement. Other specific trade receivables are also provided against as considered necessary. The aging of the trade receivables was as follows: As at Not past due Past due 1-90 days More than 90 days past due Trade receivables $ $ December 31, 2019 Allowance — $ — 2.8 2.8 $ Gross 64.3 $ 27.5 5.1 96.9 $ December 31, 2018 Allowance — 0.1 2.7 2.8 Gross 60.6 $ 33.3 5.3 99.2 $ The movement in the Company’s allowance for doubtful accounts is as follows: Balance at January 1 Allowance recognized in the year, net of allowance released Receivables written off as uncollectible Balance at December 31 No allowance for impairment is considered necessary for other receivables. December 31, 2019 $ $ 2.8 $ 1.1 (1.1) 2.8 $ December 31, 2018 2.7 1.4 (1.3) 2.8 TMX GROUP LIMITED 2019 Annual Report 126 TMX Group Limited 39 Notes to the Consolidated Financial Statements For the year ended December 31, 2019 and 2018 NOTE 17 – GOODWILL AND INTANGIBLE ASSETS (A) GOODWILL AND INDEFINITE LIFE INTANGIBLE ASSETS Goodwill is recognized at cost on acquisition less any subsequent impairment in value. Intangible assets such as trade names, derivative products, regulatory designations and structured products are considered to have indefinite lives as management believes that there is no foreseeable limit to the period over which these assets are expected to generate net cash flows. A summary of the Company’s goodwill and indefinite life intangible assets is as follows: Balance at January 1, 2018 Acquisition of Trayport Sale of Contigo Effect of movements in exchange rates Balance at December 31, 2018 Acquisition of VisoTech (note 3) Impairment Effect of movements in exchange rates Balance at December 31, 2019 Goodwill Trade names Derivative products Regulatory designations 1,661.6 $ (18.0) (2.2) 7.2 1,648.6 26.2 (18.0) (7.1) 1,649.7 $ 283.3 $ — — 0.5 283.8 — — (0.4) 283.4 $ 632.0 $ — — — 632.0 — — — 632.0 $ 1,407.3 $ — — — 1,407.3 — — — 1,407.3 $ Total 3,984.2 (18.0) (2.2) 7.7 3,971.7 26.2 (18.0) (7.5) 3,972.4 $ $ The Company 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. The Company 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 the Company incurs in connection with a business combination are expensed as incurred. (B) DEFINITE LIFE INTANGIBLE ASSETS Definite life 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, The Company intends to complete the asset for use or sale, The Company will be able to use the asset once completed, The asset will be useful and is expected to generate future economic benefits for the Company, The Company has adequate resources available to complete the development of and to use the asset, and The Company 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 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. Amortization is provided over the following useful lives of definite life intangible assets: Asset Customer relationships Technology Basis Straight-line Straight-line Rate 17 – 34 years 1 – 10 years TMX GROUP LIMITED 2019 Annual Report 127 TMX Group Limited 40 A summary of the Company’s definite life intangible assets is as follows: Technology Customer relationships Open interest Total Notes to the Consolidated Financial Statements For the year ended December 31, 2019 and 2018 Cost: Balance at January 1, 2018 Additions through general operations Acquisition of Trayport Adjustments Effect of movements in exchange rates Balance at December 31, 2018 Additions through general operations Acquisition of VisoTech (note 3) Adjustments Effect of movements in exchange rates Balance at December 31, 2019 Accumulated amortization: Balance at January 1, 2018 Charge for the year Adjustments Effect of movements in exchange rates Balance at December 31, 2018 Charge for the year Acquisition of VisoTech (note 3) Adjustments Effect of movements in exchange rates Balance at December 31, 2019 Net book values: At December 31, 2018 At December 31, 2019 (C) IMPAIRMENT OF ASSETS $ $ $ $ $ $ 131.0 $ 35.3 — (16.8) 0.8 150.3 48.9 0.3 (3.2) (0.4) 195.9 $ 64.7 $ 15.6 (17.2) 0.4 63.5 15.8 0.2 (3.0) 0.1 76.6 $ 86.8 $ 119.3 $ 1,191.5 $ — 19.4 (6.7) 4.0 1,208.2 — — — (3.3) 1,204.9 $ 174.4 $ 44.0 (6.7) 0.1 211.8 43.7 — — (0.1) 255.4 $ 996.4 $ 949.5 $ 2.0 $ — — — — 2.0 — — — — 2.0 $ 2.0 $ — — — 2.0 — — — — 2.0 $ — $ — $ 1,324.5 35.3 19.4 (23.5) 4.8 1,360.5 48.9 0.3 (3.2) (3.7) 1,402.8 241.1 59.6 (23.9) 0.5 277.3 59.5 0.2 (3.0) — 334.0 1,083.2 1,068.8 The carrying amounts of the Company’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 is the greater of its value-in-use and its fair value less costs of disposal. 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, which is the higher of the asset’s fair value less costs of disposal and its value-in-use. Impairment losses recognized in respect of a CGU are allocated first to reduce the carrying amount of any goodwill allocated to the CGUs, and then to reduce the carrying amounts of the other assets in the CGU on a pro rata basis. Impairment losses are recognized in the consolidated income statement. TMX GROUP LIMITED 2019 Annual Report 128 TMX Group Limited 41 Notes to the Consolidated Financial Statements For the year ended December 31, 2019 and 2018 For the year ended December 31, 2019, the Company determined that the Shorcan CGU, included in Other, had a recoverable amount that was lower than its carrying amount. As a result, the Company recognized an impairment charge of $18.0 related to goodwill in the consolidated income statement. An impairment loss in respect of goodwill cannot 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 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. At December 31, the carrying values of goodwill and indefinite life intangible assets allocated to each CGU, after the impairment charges described above, are as follows: As at Listings TMX Datalinx Trayport Equities Trading MX/CDCC CDS Other $ $ Goodwill 13.3 $ 707.7 628.0 5.1 159.4 89.5 46.7 1,649.7 $ December 31, 2019 Indefinite life intangibles 1,273.9 $ 81.4 39.3 238.7 663.9 22.0 3.5 2,322.7 $ December 31, 2018 Indefinite life intangibles 1,305.7 79.2 39.7 209.2 663.8 22.0 3.5 2,323.1 Goodwill 13.3 $ 707.7 608.9 5.1 159.4 89.5 64.7 1,648.6 $ 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 5 to 8 years, depending on the CGU, along with a terminal value. The terminal value is the value attributed to the CGUs’ operations beyond the projected time period. The terminal value for the CGUs is determined using estimated long-term growth rates of 2.0% for all significant CGUs, except for MX/CDCC and Trayport, which used 4.5%. The estimated long-term growth rate is based on the Company’s estimates of expected future operating results, future business plans, economic conditions and a general outlook for the industry in which the CGU operates. In calculating the recoverable amount of these CGUs, a pre-tax discount rate is used. The pre-tax discount rate applied was 9.2% to 12.5%, which was set considering the weighted average cost of capital of the Company and certain risk premiums, based on management’s past experience. These assumptions are subjective judgements based on the Company’s experience, knowledge of operations and knowledge of the economic environment in which it operates. If future cash flow projections, long-term growth rates or pre-tax discount rates are different to those used, it is possible that the outcome of future impairment tests could result in a different outcome with a CGU’s goodwill and/or intangible assets being impaired. At December 31, 2019, the Company has determined that the TMX Datalinx CGU may be subject to a reasonably possible change to one or more of the key assumptions used to determine the recoverable amount, which could cause this CGU to become impaired. A decrease of 3.8% in the terminal growth rate or a decrease of 18.1% in annual cash flows could cause the recoverable amount to equal the carrying value. NOTE 18 – INVESTMENTS IN EQUITY ACCOUNTED INVESTEES Investments in equity accounted investees are comprised of: As at Investment in BOX Holdings Other Investments in equity accounted investees December 31, 2019 22.1 $ 5.3 27.4 $ December 31, 2018 22.5 5.2 27.7 $ $ For the year ended December 31, 2019, the Company recognized $3.8 from its share of income from equity accounted investees (2018 – $3.0). Also for the year ended December 31, 2019, the Company earned $4.9 from services rendered to equity accounted investees (2018 – $9.6). In 2018, the Company recorded a gain of $26.8 in "Other income" from its sale of its interest in FTSE TMX Global Debt Capital markets Limited. The Company received $70.4 in proceeds from the sale. TMX GROUP LIMITED 2019 Annual Report 129 TMX Group Limited 42 Notes to the Consolidated Financial Statements For the year ended December 31, 2019 and 2018 BOX HOLDINGS GROUP LLC The Company holds an interest of 41.33% in BOX Holdings. The investment in BOX Holdings is accounted for in its functional currency of USD using the equity method. Summary financial information for BOX Holdings in USD is as follows: As at Current assets Non-current assets Current liabilities Non-current liabilities Net assets (100%) Revenue Net income and comprehensive income (100%) Share of income and comprehensive income (41.33%) December 31, 2019 24.8 US$ 4.5 (2.5) (0.1) 26.7 US$ December 31, 2018 23.3 5.3 (3.1) (0.1) 25.4 For the year ended December 31, 2019 For the year ended December 31, 2018 22.8 US$ 6.5 2.7 US$ 19.2 2.5 1.0 US$ US$ US$ US$ For the year ended December 31, 2019, the Company recognized $3.6 from its share of income in the consolidated income statements and a loss of $1.0 from translation of the foreign operation in the consolidated statements of comprehensive income (for the year ended December 31, 2018 – income of $1.4 and gain of $1.7, respectively). NOTE 19 – TRADE AND OTHER PAYABLES Trade and other payables are comprised of: As at Trade payables and accrued expenses Sales taxes payable Employee and director costs payable Accrued interest payable Regulatory surplus Other Trade and other payables December 31, 2019 December 31, 2018 $ $ 44.9 $ 3.2 45.7 3.8 4.5 0.6 102.7 $ 39.2 4.8 57.4 3.9 4.3 0.6 110.2 The fair value of trade and other payables is approximately equal to their carrying amount given their short term until settlement. Short-term payables with no stated interest rate are measured at the original transaction amounts where the effect of discounting is immaterial. 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. A liability is recognized for the Company’s annual short-term incentive plan if a present legal or constructive obligation to pay an amount exists as a result of past service provided by the employee, and the obligation can be estimated reliably. NOTE 20 – DEFERRED REVENUE Deferred revenue is comprised of: As at Listings Technology solutions Other Current deferred revenue Other Non-current deferred revenue TMX GROUP LIMITED 2019 Annual Report 130 TMX Group Limited December 31, 2019 December 31, 2018 $ $ $ 8.3 $ 6.2 2.0 16.5 $ 0.4 0.4 $ 9.4 4.2 2.1 15.7 0.6 0.6 43 Notes to the Consolidated Financial Statements For the year ended December 31, 2019 and 2018 Listings deferred revenue is mainly comprised of initial and additional listings fees for TSX Venture Exchange, which are paid in advance for the services being provided, and initial listings fees for TSX. Initial listings are deferred over a 12-month period from the date of listing, while additional listings are recognized when the additional listing occurs. Technology solutions deferred revenue includes annual information services subscription sales from Trayport and CDS and fees for network and infrastructure solutions and risk management software. NOTE 21 – PROVISIONS AND CONTINGENCIES (A) PROVISIONS A provision has been recognized if, as a result of a past event, the Company 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. A summary of the Company’s provisions is as follows: Balance at January 1, 2018 Provisions recognized during the period Provisions used or reversed during the period Balance at December 31, 2018 Current Non-current Balance at December 31, 2018 Provisions recognized during the period Provisions used or reversed during the period Balance at December 31, 2019 Current Non-current Balance at December 31, 2019 (B) CONTINGENT LIABILITIES Decommissioning liabilities Commodity tax Other Total $ $ $ $ $ $ $ 6.8 $ 0.5 (0.1) 7.2 $ — $ 7.2 7.2 $ 1.0 — 8.2 $ — $ 8.2 8.2 $ 1.0 $ 9.3 (0.3) 10.0 $ 10.0 $ — 10.0 $ — (5.3) 4.7 $ 4.7 $ — 4.7 $ 4.8 $ 1.1 (4.1) 1.8 $ 1.7 $ 0.1 1.8 $ 4.6 (3.2) 3.2 $ 3.2 $ — 3.2 $ 12.6 10.9 (4.5) 19.0 11.7 7.3 19.0 5.6 (8.5) 16.1 7.9 8.2 16.1 From time to time in connection with its operations, the Company or its subsidiaries are named as a defendant in actions, including those for damages and costs sustained by plaintiffs, or as a respondent in proceedings challenging the Company’s or its subsidiaries’ regulatory or other actions, decisions or jurisdiction. The outcomes of such matters are subject to future resolution that includes uncertainties of litigation or other proceedings. Based on information currently known to the Company, management believes that any material payment or other obligation in respect of any such action or proceeding is remote. NOTE 22 – COMMITMENTS AND LEASE OBLIGATIONS (A) LEASES ACCOUNTING POLICY APPLICABLE FROM JANUARY 1, 2019 At inception of a contract, the Company assesses whether a contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The Company allocates the consideration in the contract to each lease and non-lease component on the basis of their relative stand-alone prices. As a lessee, the Company recognizes a right-of-use asset and a lease liability at the lease commencement date. The right-of- use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments TMX GROUP LIMITED 2019 Annual Report 131 TMX Group Limited 44 Notes to the Consolidated Financial Statements For the year ended December 31, 2019 and 2018 made at or before the commencement date, plus any initial direct costs incurred and any estimated costs to dismantle and remove the underlying asset or to restore the underlying asset or the site on which it is located, less any lease incentives received. The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the end of the lease term and is reduced for any impairment losses and adjusted for certain remeasurements of the lease liability. The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company's incremental borrowing rate. The Company applies judgement in determining the lease term for some lease contracts in which there is a renewal option. Lease payments included in the measurement of the lease liability comprise the following: • • Fixed payments, including in-substance fixed payments which may contain variability but are unavoidable; and Variable payments that depend on an index or a rate, are initially measured using the index or rate as at the commencement date. Variable payments based on usage or performance are not included in the measurement of the lease liability. The lease liability is measured at amortized cost using the effective interest method. The lease liability is subsequently increased by the interest cost and decreased by lease payments made, over the term of the lease. It is remeasured when there is a change in future lease payments arising from a change in an index or rate, a change in the estimate of the amount expected to be payable under a residual value guarantee, or as appropriate, changes in the assessment of whether a purchase or extension option is reasonably certain to be exercised or a termination option is reasonably certain not to be exercised. When a lease liability is remeasured, a corresponding adjustment is also made to the carrying amount of the right-of-use asset. Short-term leases and leases of low-value assets The Company has elected to not recognize right-of-use assets and lease liabilities for short-term leases that have a lease term of 12 months or less, and leases of low-value assets. The Company continues to recognize the lease payments associated with these leases as an expense over the term of the lease on a straight-line basis. ADOPTION OF IFRS 16 Substantially all of the Company's identified leases are premises leases. At transition, lease liabilities were measured at the present value of the remaining lease payments, discounted at the Company's incremental borrowing rate as at January 1, 2019. Right-of-use assets were measured at an amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments. The Company has applied judgement in determining the lease term for some lease contracts in which there is a renewal option or termination option. The Company applied the following practical expedients when applying IFRS 16 to leases previously classified as operating leases under IAS 17: • • • • applied a single discount rate to a portfolio of leases with similar characteristics; applied the exemption not to recognize right-of-use assets and liabilities for leases with less than 12 months of lease term; used hindsight when determining the lease term if the contract contains options to extend or terminate the lease; and relied on the Company's assessment of whether leases were onerous applying IAS 37, Provisions, Contingent Liabilities and Contingent Assets, which was made immediately before the date of initial application as an alternative to performing an impairment review. On transition to IFRS 16, the Company recognized $94.9 of right-of-use assets and $103.2 of lease liabilities, of which $8.2 was classified as current lease liabilities and recorded in "Other current liabilities". The difference between right-of-use assets and lease liabilities is attributable to previously accrued lease payments. When measuring lease liabilities, the Company discounted lease payments using its incremental borrowing rate, which is derived from an indicative credit spread as at January 1, 2019. The Company applied a weighted average incremental borrowing rate of 3.4%. As at December 31, 2018, the Company disclosed $145.5 in operating lease commitment for these contracts. In reconciling operating lease commitment to opening lease liabilities, the Company noted that the change is mostly attributable to interest expense on lease liabilities. TMX GROUP LIMITED 2019 Annual Report 132 TMX Group Limited 45 For the year ended December 31, 2019, the Company recognized $9.8, $3.5 and $0.7 of depreciation expense on right-of-use assets, interest expense on lease liabilities, and income tax recovery, respectively. As at December 31, 2019, $8.3 of lease liabilities were classified as current lease liabilities and recorded in "Other current liabilities". Notes to the Consolidated Financial Statements For the year ended December 31, 2019 and 2018 Cost: Balance at January 1, 2019 Additions Impairment Balance at December 31, 2019 Accumulated amortization: Charge for the year Balance at December 31, 2019 Net book value: Balance at December 31, 2019 Right-of use assets 94.9 8.1 (0.2) 102.8 9.8 9.8 93.0 $ $ $ $ The Company leases several premises. The average lease term is 6 years. The Company is also responsible for additional taxes, maintenance and other direct charges with respect to its leases. The additional amount was $12.1 for 2019 (2018 – $11.8). The figures above do not include the Company’s obligations to restore certain leased premises to their original condition (note 21). The company has other commitments in the form of long term contracts related to technology in the amount of $24.3 of which $15.5 is payable in one year. (B) CDS FEE COMMITMENTS AND REBATES Under the CDS recognition orders granted by the OSC and the AMF, fees for services and products offered by CDS Clearing will be those fees in effect on November 1, 2011 (“2012 base fees”). CDS Clearing cannot adjust fees without the approval of the OSC, AMF and the British Columbia Securities Commission (“BCSC”). In addition, CDS Clearing may only seek approval for fee increases on clearing and other core CDS Clearing services (which services are outlined in the OSC and AMF recognition orders) where there has been a significant change from circumstances existing as at August 1, 2012, the effective date of the recognition orders. Under the CDS recognition orders granted by the OSC and AMF, for the two month period starting November 1, 2012 and subsequent fiscal years starting January 1, 2013, CDS will share any annual revenue increases on clearing and other core CDS Clearing services on a 50:50 basis with Participants. Beginning January 1, 2015 and subsequent years, CDS also shares with Participants, on a 50:50 basis, any net annual increases in revenue applicable to the NYL/DDL Liquidity Premium compared to the revenues for this service earned in the twelve-month period ended December 31, 2015. For the year ended December 31, 2019, the rebate payable amounted to $6.1 (2018 – $6.3). In addition, the Company is mandated to rebate an additional amount to Participants in respect of exchange clearing services for trades conducted on an exchange or Alternative Trading System (“ATS”). This rebate gradually increased over the years to reach its maximum of $4.0 annually in October 2016. These rebates are accrued and recorded as a reduction against revenue in the year to which they relate. TMX GROUP LIMITED 2019 Annual Report 133 TMX Group Limited 46 NOTE 23 – OTHER ASSETS AND OTHER LIABILITIES (A) OTHER ASSETS Other current and non-current assets are comprised of: As at Prepaid expenses Current income tax assets Other current assets Investments in equity accounted investees (note 18) Accrued employee benefit assets (note 25) Premises and equipment Investment in privately-owned company Fair value of interest rate swaps Promissory note Other Other non-current assets (B) OTHER LIABILITIES Other current and non-current liabilities are comprised of: As at Deferred revenue (note 20) Provisions (note 21) Current lease liabilities (note 11) Total return swaps (note 24) Bank overdraft (note 12) Current income tax liabilities Other current liabilities Deferred revenue (note 20) Provisions (note 21) Long-term incentive plan and director compensation obligations (note 24) Accrued employee benefits payable (note 25) Other Other non-current liabilities NOTE 24 – SHARE–BASED PAYMENTS Notes to the Consolidated Financial Statements For the year ended December 31, 2019 and 2018 December 31, 2019 21.3 $ 8.8 30.1 $ 27.4 $ 4.1 59.2 — — 5.0 1.0 96.7 $ December 31, 2019 16.5 $ 7.9 8.3 1.1 — 28.3 62.1 $ 0.4 $ 8.2 37.3 18.2 — 64.1 $ $ $ $ $ $ $ $ $ December 31, 2018 19.4 6.5 25.9 27.7 5.7 51.7 0.8 0.5 5.0 1.2 92.6 December 31, 2018 15.7 11.7 0.1 3.9 39.8 38.0 109.3 0.6 7.3 25.1 16.3 4.7 54.0 Under the long-term incentive plan (“LTIP”), certain employees and officers of the Company will receive a mix of LTIP awards consisting of share options, time-based restricted share units ("RSUs"), and performance-based restricted share units (referred to as "PSUs"). For the year ended December 31, 2019, the Company recognized compensation and benefits expense under the following share-based payment arrangements: • • • Share option plan; Restricted share unit, performance-based restricted share unit and deferred share unit plans; and Employee share purchase plan. (A) SHARE OPTION PLAN The share option plan has options that vest in quarters over 4 years and have a maximum term of 10 years. Under the share option plan, the fair value of share options granted was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: a share price of $83.74 dollars (2018 – $76.31 dollars) and dividend yield of 2.95% (2018 – 2.62%); expected life of between 2 and 5 years (2018 – 2 and 5 years); an expected volatility of between 16.5% and 17.0% (2018 – 16.8% and 17.5%); risk-free interest rate of between 2.1% and 2.2% (2018 – 2.2% and 2.5%); and expected TMX GROUP LIMITED 2019 Annual Report 134 TMX Group Limited 47 Notes to the Consolidated Financial Statements For the year ended December 31, 2019 and 2018 forfeiture rates of between 9.4% and 22.0% (2018 – 9.4% and 22.1%). The assumptions are based on the Company’s historical share price movements and historical dividend policy and the expected life is based on the Company's past experience. The resulting weighted average fair value calculated for share options granted in 2019 was $8.49 dollars (2018 – $8.45 dollars). Options outstanding at December 31, 2019 will expire in 2021,2024,2025, 2026, 2027, 2028 and 2029. Movements in the number of share options outstanding are as follows: For the year ended Outstanding, beginning of the period Granted Forfeited Exercised Outstanding as at December 31 Number of share options December 31, 2019 Weighted average exercise price (in dollars) Number of share options December 31, 2018 Weighted average exercise price (in dollars) 1,743,134 $ 392,405 (153,998) (443,381) 1,538,160 $ 59.97 83.74 72.74 55.04 66.18 54.25 1,878,926 $ 395,254 (124,234) (406,812) 1,743,134 $ 633,557 $ 54.41 76.31 62.83 49.29 59.97 51.88 Vested and exercisable as at December 31 635,433 $ The range of exercise prices and weighted average remaining contractual life of options outstanding are as follows: As at Exercise price range (in dollars) $40.00 - $49.99 $50.00 - $59.99 $60.00 - $60.73 $70.00 - $72.23 $80.00 - $83.93 Number of share options 383,356 182,827 3,806 597,280 370,891 1,538,160 December 31, 2019 Weighted average remaining contractual life 5.6 4.0 6.6 7.6 9.2 7.1 Number of share options 610,378 264,622 3,806 864,328 — 1,743,134 December 31, 2018 Weighted average remaining contractual life 6.7 4.0 7.6 8.6 — 7.2 The Company accounts for its share option plan to eligible employees which calls 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. For the year ended December 31, 2019, the Company recognized compensation and benefits expense of $2.5 in relation to its share option plan (2018 – $2.9). According to the terms of the Company’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 the Company. At December 31, 2019, 2,267,552 common shares of the Company remain reserved for issuance upon exercise of share options granted under the plan, representing approximately 4% of the outstanding common shares of the Company. (B) RESTRICTED SHARE UNIT (“RSU”), PERFORMANCE-BASED RESTRICTED SHARE UNIT ("PSU") AND DEFERRED SHARE UNIT (“DSU”) PLANS RSUs and PSUs vest over a maximum of 35 months and are payable provided the employee is still employed by the Company at the end of the second calendar year following the calendar year in which the RSUs and PSUs were granted. In the case of the PSUs, the amount of the award payable at the end of this vesting period will be determined by a factor of total shareholder return versus the total gross return of the S&P/TSX Composite Index 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 the PSUs vest. The Company has a plan that, among other things, gives officers who have not met their equity ownership requirements the opportunity to convert all or part of their short-term incentive award into deferred share units ("DSU"s). In addition, members of the Board of Directors who do not waive their compensation or direct that it be paid to their employer are granted DSUs annually and are also given the opportunity to convert some of their annual remuneration into DSUs. These DSUs vest immediately. The amount of the award payable is based on the number of units outstanding multiplied by the 30-day volume weighted average price of the Company’s common shares at the date of the payout. The DSUs will only be paid out when the TMX GROUP LIMITED 2019 Annual Report 135 TMX Group Limited 48 Notes to the Consolidated Financial Statements For the year ended December 31, 2019 and 2018 DSU holder retires or otherwise ceases to hold any position with the Company or such of its subsidiaries as are designated from time to time. The Company records its obligation for the RSUs and PSUs, if any, over the service period in which the award is earned. The liability is measured at fair value on the date of grant and at each subsequent reporting date. As at December 31, 2019, the total accrual for the Company’s RSUs, PSUs and DSUs was $50.8, which includes $13.5 in trade and other payables and $37.3 in other non-current liabilities (2018 – $42.2, $17.1 and $25.1, respectively). The maximum amount to be paid is not known until the awards become payable and will be based on total shareholder return from the date of grant to the time of payout. The accrual is based on the 30-day volume weighted average price of the Company’s common shares at the end of the reporting period. Compensation cost attributable to these employee awards which call for settlement in cash is measured at fair value at each reporting date. 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 change in either current or non-current liabilities, depending on the period in which the award is expected to be paid. For the year ended December 31, 2019, the Company recognized compensation and benefits expense and selling, general and administration expense of $15.9 and $11.9, respectively, in relation to its RSUs, PSUs and DSUs (2018 – $13.1 and $2.9, respectively). The Company has entered into a series of total return swaps ("TRSs") which synthetically replicate the economics of the Company purchasing its shares as a partial economic hedge to the share appreciation rights of RSUs and DSUs. The Company has classified its series of TRSs as fair value through profit and loss and marks to market the fair value of the TRSs as an adjustment to income. The Company also simultaneously marks to market the liability to holders of the units as an adjustment to income. Fair value is based on the share price of the Company’s common shares at the end of the reporting period. 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. For the year ended December 31, 2019, unrealized and realized gains of $2.8 and $10.8 related to TRSs, respectively have been reflected in the consolidated income statement (2018 – unrealized losses and realized gains of $3.7 and $6.0, respectively). (C) EMPLOYEE SHARE PURCHASE PLAN The Company has an employee share purchase plan for eligible employees of the Company. Under the employee share purchase plan, contributions by the Company and by eligible employees will be used by the plan administrator, to make purchases of common shares of the Company on the open market. Each eligible employee may contribute up to 10% of the employee's salary to the employee share purchase plan. The Company will contribute to the plan administrator the funds required to purchase one common share of the Company for each two common shares purchased on behalf of the eligible employee, up to a maximum annual contribution of $2,500 dollars per year. The Company accounts for its contributions as compensation and benefits expense when the amounts are contributed to the plan. For the year ended December 31, 2019, compensation and benefits expense related to this plan was $2.1 (2018 – $1.9). NOTE 25 – EMPLOYEE FUTURE BENEFITS The Company has registered pension plans with both a defined contribution tier and a defined benefit tier covering substantially all employees, as well as supplementary income plans ("SIP") for senior management. The costs of these programs are being funded currently, except for the MX SIP, where a portion is guaranteed by a letter of guarantee. The Company also provides other post-retirement and post-employment benefits, such as supplementary medical and dental coverage, which are funded on a cash basis by the Company, and contributions from plan members in some circumstances. (A) DEFINED CONTRIBUTION PLANS For defined contribution plans, the expense is charged to compensation and benefits expense in the consolidated income statement as it is incurred. The total expense recognized in respect of the Company’s defined contribution plans for the year ended December 31, 2019, was $7.5, which represents the employer contributions for the period (2018 – $7.3). (B) DEFINED BENEFIT PLANS The Company 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 plan TMX GROUP LIMITED 2019 Annual Report 136 TMX Group Limited 49 Notes to the Consolidated Financial Statements For the year ended December 31, 2019 and 2018 for funding purposes was as at December 31, 2017, and the next required valuation is as at December 31, 2020. For the TSX SIP plans, the most recent actuarial valuations for funding purposes were as at December 31, 2018, and the next required valuations are as at December 31, 2019. For the CDS SIP plan, the funding valuation is performed annually with the most recent actuarial funding valuation completed as of January 1, 2019 and the next required valuation is at January 1, 2020. Lastly, for the non-pension post-retirement plan, the valuation date was May 1, 2018 and the next required valuation is at May 1, 2021. The accrued benefit assets and accrued benefit obligations related to the Company’s defined benefit pension and non- pension post-retirement plans are included in the Company’s consolidated balance sheet at December 31 as follows: Accrued employee benefit assets Accrued employee benefits payable Pension and SIP plans 2018 2019 4.1 $ (0.5) 3.6 $ 5.7 $ (0.4) 5.3 $ $ $ 2019 Other post-retirement benefit plans 2018 — (14.4) (14.4) (16.4) (16.4) $ — $ Accrued employee benefits payable on the consolidated balance sheet also includes the obligation under the post- employment benefit plan of $1.3 (2018 – $1.5). The Company’s net obligation in respect of pension and SIP 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 and the fair value of any plan assets are deducted. The benefits are based upon earnings and years of service. The Company’s net obligation in respect of the post-retirement and post-employment benefit 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. Under all these plans, the discount rates used are based on Canadian AA- rated 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. If the calculation results in a surplus, accounting standards require that a limit is placed on the amount of this surplus that can be recognized as an asset. The total amount of defined benefit asset that can be recognized by the Company is limited to the present value of economic benefits available by way of future refunds of plan surplus and/or reductions in future contributions to the plan. In the determination of the economic benefit, minimum funding requirements resulting from the most recent actuarial funding valuations are also taken into consideration. An economic benefit is considered available to the Company if it is realizable during the life of the plan or on settlement of the plan obligations. The accrued benefit assets and accrued benefit liabilities are comprised of: Accrued benefit obligation: Balance, beginning of the year Current service cost Interest cost Benefits paid Employee contributions Actuarial losses (gains) Balance at December 31 Plan assets: Fair value, beginning of the year Interest income Employer contributions Employee contributions Benefits paid Plan administration cost Actuarial gains (losses) Fair value at December 31 Accrued benefit asset (liability) at December 31 Pension and SIP plans 2018 2019 Other post-retirement benefit plans 2018 2019 107.6 $ 1.2 4.0 (7.5) 0.1 10.6 116.0 $ 112.9 $ 4.2 1.5 0.1 (7.5) (0.3) 8.7 119.6 $ 111.7 $ 1.2 3.9 (5.0) 0.1 (4.3) 107.6 $ 118.8 $ 4.1 1.7 0.1 (4.9) (0.4) (6.5) 112.9 $ 14.4 $ 0.6 0.5 (0.5) — 1.4 16.4 $ — $ — 0.5 — (0.5) — — — $ 16.9 0.9 0.6 (0.6) — (3.4) 14.4 — — 0.6 — (0.6) — — — 3.6 $ 5.3 $ (16.4) $ (14.4) $ $ $ $ $ TMX GROUP LIMITED 2019 Annual Report 137 TMX Group Limited 50 Plan assets consist of: Asset category Equity securities Debt securities Other Notes to the Consolidated Financial Statements For the year ended December 31, 2019 and 2018 December 31, 2019 47.5 % 38.3 % 14.2 % 100.0 % Percentage of plan assets December 31, 2018 46.9 % 37.9 % 15.2 % 100.0 % MX has provided a letter of guarantee in the amount of $0.5 to the benefit of the trustee of the MX SIP (2018 – $0.5), using a part of the TMX Group Limited credit facility (note 12). 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 compensation and benefits expense in the consolidated income statement. The elements of the Company’s defined benefit plan costs recognized in the year ended December 31 are as follows: Pension and SIP plans Other post-retirement benefit plans Current service cost Net interest (income) cost Plan administration cost $ 2019 1.2 $ (0.2) 0.3 2018 1.2 $ (0.2) 0.4 2019 0.6 $ 0.5 — Net benefit plan expense recognized in the consolidated income statement $ 1.3 $ 1.4 $ 1.1 $ 2018 0.9 0.6 — 1.5 The Company recognizes all actuarial gains and losses arising from defined benefit plans and post-retirement plans immediately in other comprehensive income. For the post-employment plans, actuarial gains and losses are recognized within compensation and benefits expense in the consolidated income statement. When the benefits of a plan are amended, the portion of the change in benefit relating to past service by employees is recognized immediately in the compensation and benefits expense in the consolidated income statement. The aggregate actuarial gains and losses and effects of asset limits recognized in other comprehensive income for the year ended December 31, are as follows: Effect due to demographics Effect due to financial assumptions Effect due to experience adjustments Return on plan assets (excluding interest income) Actuarial losses (gains) recognized in other comprehensive income Pension and SIP plans Other post-retirement benefit plans 2019 — $ 10.6 0.1 (8.8) 2018 2019 — $ — $ (5.1) 0.8 6.5 1.4 — — 1.9 $ 2.2 $ 1.4 $ 2018 (0.4) (0.4) (2.6) — (3.4) $ $ The significant actuarial assumptions adopted in measuring the obligation as at December 31 are as follows: Discount rate (weighted average) Inflation rate (consumer price index) Commuted value Rate of compensation increase Pension and SIP plans Other post-retirement benefit plans 2019 3.10 % 1.25 % 2.50 % 2.75 % 2018 3.80 % 1.50 % 3.30 % 3.00 % 2019 3.10 % n/a n/a n/a 2018 3.80 % n/a n/a n/a Assumptions regarding mortality rates are based on published statistics and mortality tables. The mortality tables used in 2018 and 2019 for the pension, SIP and other post-retirement plans was the Canadian Pensioner Mortality (CPM) RPP2014 private sector table with projection scale CPM-B and CPM RPP2014 table with projection scale CPM-B for lump sum payments. The assumed health care cost trend rate at December 31, 2019 was 5.70% decreasing to 4.00% over 21 years (2018 – 5.8% decreasing to 4.00% over 22 years). TMX GROUP LIMITED 2019 Annual Report 138 TMX Group Limited 51 Reasonably possible changes to one of the relevant actuarial assumptions, holding other assumptions constant, would impact the accrued benefit obligations as follows: Notes to the Consolidated Financial Statements For the year ended December 31, 2019 and 2018 (Increase)/Decrease 50 bps decrease in the discount rate 50 bps increase in the discount rate 1 year increase in mortality rates 100 bps decrease in initial and ultimate trend rates 100 bps increase in initial and ultimate trend rates Pension and SIP plans Other post-retirement benefit plans 2019 2018 $ (7.6) $ (6.6) $ 6.7 (2.4) n/a n/a 5.8 1.9 n/a n/a 2019 (1.2) $ 1.0 (0.6) 0.6 (0.7) 2018 (1.0) 0.9 (0.5) 0.5 (0.6) In 2020, the Company expects to contribute approximately $1.6 to its pension and other post-retirement benefit plans. Additional amounts to be contributed to the Company’s SIP plans will be determined by management once the valuations have been prepared. NOTE 26 – 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 OSC and the 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 preemptive, 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 the period Options exercised Balance as at December 31 Number of common shares issued and fully paid 2019 55,790,548 443,381 56,233,929 2018 55,383,736 $ 406,812 55,790,548 $ 2019 2,938.0 $ 27.1 2,965.1 $ Share capital 2018 2,915.5 22.5 2,938.0 The Company’s shares trade on Toronto Stock Exchange under the symbol “X”. NOTE 27 – RELATED PARTY RELATIONSHIPS AND TRANSACTIONS (A) PARENT The shares of the Company are widely held and as such there is no ultimate controlling party of the Company. Under the OSC and AMF recognition orders, no person or combination of persons acting jointly or in concert is permitted to beneficially own or exercise control of direction over more than 10% of any class or series of voting shares of the Company without prior approval of the OSC and the AMF. TMX GROUP LIMITED 2019 Annual Report 139 TMX Group Limited 52 Notes to the Consolidated Financial Statements For the year ended December 31, 2019 and 2018 (B) KEY MANAGEMENT PERSONNEL COMPENSATION Compensation for key management personnel, including the Company’s Board of Directors, was as follows: For the year ended Salaries and other short-term employee benefits, and termination benefits Post-employment benefits Share-based payments December 31, 2019 9.7 $ 0.6 17.0 27.3 $ $ $ December 31, 2018 14.1 0.6 12.2 26.9 NOTE 28 – DIVIDENDS Dividends recognized and paid in the period are as follows: For the year ended December 31, 2019 December 31, 2018 Dividend paid in March Dividend paid in June Dividend paid in September Dividend paid in December Total dividends paid $ $ $ $ Dividend per share Total paid Dividend per share 0.62 $ 0.62 $ 0.62 $ 0.66 $ $ 34.6 $ 34.8 $ 34.8 $ 37.1 $ 141.3 0.50 $ 0.58 $ 0.58 $ 0.58 $ $ Total paid 27.7 32.3 32.3 32.4 124.7 On February 10, 2020, the Company’s Board of Directors declared a dividend of 66 cents per share. This dividend will be paid on March 13, 2020 to shareholders of record on February 28, 2020 and is estimated to amount to $37.1. NOTE 29 – FUTURE CHANGES IN ACCOUNTING POLICIES The following new standards and amendments to standards and interpretations are not yet effective for the year ending December 31, 2019, and have not been applied in the preparation of the financial statements. These new and amended standards and interpretations are required to be implemented for financial years beginning on or after January 1, 2020, unless otherwise noted: • • • IFRS 3, Business Combinations - Amendments clarify that while businesses usually have outputs, outputs are not required for an integrated set of activities and assets to qualify as a business. To be considered a business, an acquired set of activities and assets must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. The Company does not expect the amendments to have a material impact on its financial statements. IAS 1, Presentation of Financial Statements, and IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors - Amendments are intended to make the definition of material in IAS 1 easier to understand and are not intended to alter the underlying concept of materiality in IFRS standards. The concept of "obscuring" material information with immaterial information has been included as part of the new definition. The threshold for materiality influencing users has been changed from "could influence" to "could reasonably be expected to influence". The definition of material in IAS 8 has been replaced by a reference to the definition of material in IAS 1. The Company does not expect the amendments to have a material impact on its financial statements. Amendments to conceptual framework - On March 29, 2018 the IASB issued a revised version of its Conceptual Framework for Financial Reporting that underpins IFRS Standards. The IASB also issued Amendments to References to the Conceptual Framework in IFRS Standards to update references in IFRS Standards to previous versions of the Conceptual Framework. The Company does not expect the amendments to have a material impact on its financial statements. TMX GROUP LIMITED 2019 Annual Report 140 TMX Group Limited 53 2019 Annual Report 141 TMX Group Limited Board of Directors AS OF MARCH 3, 2020 Charles Winograd (Chair) Senior Managing Partner Elm Park Capital Management Committees: Finance and Audit, Governance, Human Resources Director since: 2012 Nicolas Darveau-Garneau Chief Strategist, Google Search Committees: Human Resources Director since: 2018 Luc Bertrand Vice Chair National Bank Financial Group Committees: Derivatives (Chair), Public Venture Market Director since: 2011 Christian Exshaw Managing Director and Head Global Markets CIBC World Markets Inc. Committees: Derivatives Director since: 2015 Marie Giguère Corporate Director Committees: Governance and Regulatory Oversight (Chair), Human Resources Director since: 2011 Martine Irman Corporate Director Committees: Derivatives, Finance and Audit, Public Venture Market Director since: 2014 Harry Jaako Executive Officer, Director and a Principal Discovery Capital Management Corp. Committees: Finance and Audit, Public Venture Market (Chair) Director since: 2012 William Linton Corporate Director Committees: Finance and Audit (Chair), Governance Director since: 2012 2019 Annual Report 142 TMX Group Limited Gerri Sinclair Managing Partner, Kensington Capital Partners Digital Technologies Consultant and Corporate Director Committees: Governance and Regulatory, Human Resources, Public Venture Market Director since: 2012 Jean Martel Corporate Director Committees: Governance and Regulatory Oversight Director since: 2012 Kevin Sullivan Corporate Director Committees: Derivatives, Public Venture Market Director since: 2012 Eric Wetlaufer Corporate Director Committees: Finance and Audit, Human Resources (Chair) Director since: 2012 2019 Annual Report 143 TMX Group Limited TMX Group Executive Committee AS OF MARCH 3, 2020 Mary Lou Hukezalie* Senior Vice President, Group Head of Human Resources TMX Group Jay Rajarathinam President of CDCC and CDS and Chief Technology and Operations Officer TMX Group John McKenzie Interim Chief Executive Officer and Chief Financial Officer TMX Group Luc Fortin President and Chief Executive Officer, Montréal Exchange and Global Head of Trading TMX Group Cheryl Graden Senior Vice President, Group Head of Legal and Business Affairs, Enterprise Risk Management and Government Relations and Corporate Secretary TMX Group 2019 Annual Report 144 TMX Group Limited *Retiring April 10, 2020. 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: TSX Trust Company 100 Adelaide St. West Suite 301 Toronto, ON M5H 4H1 T +1 416 361-0930 ext 205 +1 866 393-4891 (Toll Free) F +1 416 361-0470 tmxeinvestorservices@tmx.com Investor Contact Information T +1 416 947-4277 (Toronto Area) +1 888 873-8392 (North America) F +1 416 947-4444 tmxshareholder@tmx.com Registered Office and Head Office of TMX Group 300 - 100 Adelaide Street West Toronto, ON Canada M5H 1S3 Le rapport est également disponible en français. Dividend Information The Board of Directors of TMX Group Limited declared a dividend of $0.66 on each common share outstanding, payable on March 13, 2020 to shareholders of record at the close of business on February 28, 2020. TMX Group hereby advises that this dividend is an “eligible dividend” for Canadian income tax purposes. Shareholders with questions regarding the tax treatment of dividends should consult with their own tax advisors or contact their local office of the Canada Revenue Agency and where applicable, the provincial taxation authorities. Normal Course Issuer Bid On February 28,2020, TMX Group announced that its normal course issuer bid ("NCIB") had been accepted by Toronto Stock Exchange ("TSX"). TMX Group intends to repurchase up to 560,000 of its common shares through the facilities of the TSX, representing approximately 1% of its common shares outstanding on February 24, 2020. TMX Group will make purchases in accordance with TSX requirements and the price TMX Group will pay for any such common shares will be the market price of such shares at the time of acquisition. The purchases commenced on March 4, 2020 and will terminate on March 3, 2021, or on such earlier date as TMX Group completes its purchases. All repurchased shares will be cancelled. The Company also entered into a pre-defined plan with its designated broker to allow for the repurchase of common shares at times when the TMX Group ordinarily would not be active in the market due to its own internal trading blackout periods, insider trading rules or otherwise. A copy of our Notice of Intention to Make an NCIB may be obtained, without charge, by contacting Investor Relations as outlined above. 2019 Annual Report 145 TMX Group Limited Trademarks Groupe TMX, NEX, TMX, the TMX design, TMX Datalinx, TMX Group, Toronto Stock Exchange, TSX, TSX Sandbox, TSXV, TSX Venture Exchange, The Future is Yours to See., and Voir le futur. Réaliser l'avenir. are the trademarks of TSX Inc. BAX, Bourse de Montréal, CGB, CGF, Montréal Exchange, MX, SOLA, SXF and USX are the trademarks of Bourse de Montréal Inc. and are used under license. Alpha and Alpha Exchange are the trademarks of Alpha Exchange Inc. and are used under license. BOX is the trademark of BOX Market LLC and is used under license. Canadian Derivatives Clearing Corporation, Corporation canadienne de compensation de produits dérivés, CDCC and CCCPD are the trademarks of Canadian Derivatives Clearing Corporation and are used under license. CDS and CDSX are the trademarks of The Canadian Depository for Securities Limited and are used under license. Shorcan and Shorcan Brokers are the trademarks of Shorcan Brokers Limited and are used under license. Trayport and Joule are the trademarks of Trayport Limited and are used under license. VisoTech is the trademark of VisoTech Softwareentwicklungsges.m.b.H. and is used under license. S&P/TSX Tech Index and other S&P/TSX indices are products of S&P Dow Jones Indices LLC ("SPDJI") and TSX Inc. ("TSX"). Standard & Poor's® and S&P® are registered trademarks of Standard & Poor's Financial Services LLC ("S&P"); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC ("Dow Jones"); and TSX® is a registered trademark of TSX. SPDJI, Dow Jones, S&P and TSX do not sponsor, endorse, sell or promote any products based on the S&P/TSX Indices and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions or interruptions of the S&P/TSX Indices or any data related thereto. All other trademarks used are the property of their respective owners. Forward-Looking Information This 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. This forward-looking information should not be relied upon as representing our views as of any date subsequent to the date of this report. Please see “Caution regarding Forward- Looking Information” in the 2019 Management’s Discussion and Analysis for some of the risk factors that could cause actual events or results to differ materially from current expectations. 2019 Annual Report 146 TMX Group Limited 2019 Annual Report 147 TMX Group Limited For more information Please contact TMX Group if you have any additional questions or require further clarification. General Enquiries 300-100 Adelaide St. West Toronto, ON M5H 1S3 T +1 416 947-4277 info@tmx.com tmx.com 2019 Annual Report 148 TMX Group Limited 

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