TMX Group Limited

Thank you, Chris, and good morning, everyone. Thank you for joining us this morning for the fourth quarter 2019 conference call for TMX Group.

As you know, we announced our fourth quarter results last evening. A copy of our press release is available on our website, tmx.com under Investor Relations.

This morning, we have with us John McKenzie, our Interim Chief Executive Officer and Chief Financial Officer. Following opening remarks, we will have a question-and-answer session.

Before we start, I want to remind you that certain statements we make on the call today may be considered forward-looking. I refer you to the risk factors outlined in today's press release and reports filed by TMX Group with regulatory authorities.

Now, I'd like to turn the call over to John.

Thank you, Paul, and good morning, everyone, and thanks for dialing in. As Paul mentioned, we reported results for the fourth quarter and full-year 2019 last night.

But before we get into the details of the financial results and talk about TMX Group’s 2019 performance, I want to take a moment at the outset this morning to outline the organizations key immediate term priorities. With Lou Eccleston’s retirement last month, our company is in a period of transition.

And while I have no specific update to share with you today from the board in terms of the new CEO search process, I want to emphasis that Lou’s departure in no way alters the company’s course. TMX’s senior management team and all TMX employees are forging ahead in 2020, focused on serving clients across our markets in a way they expect and deserve, and on the execution of our growth strategy.

Our mandate is simple, don’t miss a step, and I fully expect we will be successful in meeting that. Now, for this morning, I want to focus my comments on the progress we have made during the past 12 months and into the first few weeks of 2020 and setting the stage for TMX’s strategy and business plan going forward.

Following which, Paul will take you through the 2019 Q4 results in a bit more detail. Now, as many have noticed, even a quick high level look at some of the key performance indicators will tell you market conditions for 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. And while these factors have had a negative impact on some of our businesses and growth drivers, the work we have done to transform TMX over the last five years from a traditional or regional exchange into a global solutions provider has enabled us to deliver value to clients and positive results even during difficult markets.

Looking to the future, 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. Recurring revenue compromised 52% of total TMX Group revenues in 2019.

Now, turning to our 2019 results. Overall revenue in 2019 was down $13.8 million or 2% when compared with 2018 due to softer capital markets activity and particularly a decrease in financing activity on our equity exchanges and lower activity in our equity and fixed income trading products.

Helping to partially offset the decrease was solid revenue growth from Trayport, our London based network and platform for global whole sale energy markets and from our core derivatives business of Montreal Exchange and CDCC. Importantly, TMX’s financial performance also continued to reflect the benefits of consistent cost management discipline with overall expenses down 6%.

Income from operations increased in 2019 by 13.4 million from 2018 or 4%. While net income was 247.6 million for 2019, down 13% from 2018 and earnings per share was $4.38 on a diluted basis down 14% from 2018.

As these numbers included both impairment charges and gains on sales in the previous period. On an adjusted basis, net income was up 4% and earnings per share grew by 3% from 2018.

At all times, but especially in the midst of challenging markets, we must remain focused on executing our cohesive global strategy. And in 2019, we advanced our roadmap for growth.

Our enterprise strategy is centered around TMX’s growth champions. The business areas we have identified as having the highest growth potential, 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 TMX capabilities into new markets. In capital formation, we continue our global expansion efforts targeting specific regions where our unique ecosystem and sectoral expertise give TMX a competitive edge.

The ability of Toronto Stock Exchange in TSX Venture Exchange 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 and Canada’s markets from our global peers. In 2019, while one or two high profile companies who have chosen not to go public grab the media’s spotlight, a closer look at TMX’s capital formation business reveals many more significant wins.

TMX continued to build on our track record of enabling growth in the innovation sector and 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 [Tchibo].

And despite the slower financing environment, we had a number of significant capital raises in the tech sector, Descartes raised 325 million in June and Shopify raised over 900 million in September. December also marked a major secondary financing in the mining sector as well with Katanga Mining raising 7.7 billion through a rights offering.

In total, there were 146 new listings on TSX and TSX Venture in 2019, excluding 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 market exchange in North America.

TMX’s changes ranked number 2 in the world and new listings for 2019 according to the World Federation of Exchanges. And our strategic push to expand TSX and TSX Ventures footprint in targeted regions and sectors gained momentum in 2019.

Where again, we ranked Number 2 in new international listings among our peers for 2019 and Number 1 in North America. We are consistently asked by analysts and investors to discuss our listing pipeline.

The focus is not on just one or two potential new listings. Our capital formation team sees the addressable market in a different bigger way.

There are thousands of companies in all sectors and regions around the world that need what we do to achieve their growth objectives. Our long-term pipeline of over 1,500 companies is vibrant and strong and has built to compete.

Now, turning to derivatives, in derivatives we are focused on moving to capitalize on the growing demand, particularly on the buyer’s side for derivatives products and global markets by expanding MX's existing international sales network in foreign markets. We see this as a growth opportunity and Luc Fortin’s team is working with closely with our existing clients to increase investor awareness of key Canadian benchmarks and liquidity and MX's signature products.

Volume traded during our extended hours now represents approximately 4% overall volume, and we are on track to extend this into Asia in 2021. On the product front, the performance of the rebooted five-year government in Canada Bond futures contract or CGF has been a major win for MX.

Participants have responded to a new market maker program designed to develop the midpoint of the Canadian listed yield curve. Since it’s re-launch in December 2018, average daily volume on the CGF contract more than tripled and open interest was up almost 200% at year-end.

Overall, revenue from MX and CDCC was up 3%, compared to last year, driven by higher volumes in our signature products, as well as higher revenue from repo clearing. Now, while overall volumes were up for 2019, MX volumes were down in the fourth quarter when compared to 2018.

Paul will take you through the quarterly numbers in a few minutes, but I wanted to point out that despite the slow quarter to finish 2019, open interest remains strong at the end of the year, compared to 2018, and that’s an important measure to look at in terms of gauging the flow of money into the market. Open interest on December 31, 2019 was up 11% overall from the end of the previous year, including a 20% increase in the futures products.

And we are seeing encouraging signs in the derivatives markets to start 2020 with MX volumes for January, up 14% over the first month of 2019. Moving on now to Trayport, the business continued to deliver strong revenue growth during 2019.

Revenue from the core subscriber business, including VisoTech was up 15% in Sterling over 2018 with a 7% increase in the average revenue per user. Trayport also took significant step forward in a strategy to capitalize on secular trends in energy market trends – sorry in 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 marketplaces.

Brokers using Trayport are a substantial source of liquidity and the burgeoning global liquid natural gas market. Activity in the signature European and Asian benchmark LNG contracts accessible through trailer system increased significantly year-over-year with 2019 volume in the TTF contract up 39%, compared with 2018 and the JKM set an all-time high of average daily volume in November.

In the spring of 2019, Trayport acquired Vienna-based VisoTech, a leading provider of European short-term energy trading solutions. VisoTech's advanced algorithmic trading capabilities have now been integrated into Joule Trayport's core trading screen.

Trayport also established an entry point into the U.S. energy market with November's agreement with the Nodal Exchange, a Washington D.C.-based derivatives exchange serving commodities markets.

U.S. energy contracts will be available on Trayport screened this quarter and the Joule network has expanded to include Nodal's trading participants.

We have made so much progress in the last few years increasing TMX Global footprint and becoming that TMX we need to be, indispensable to clients, and valuable to investors. As announced last night, the TMX Group Board of Directors declared a dividend of $0.66 on each common shares outstanding payable on March 30, 2020 to shareholders of record at the close of business on February 28.

Our payout ratio was 50% within the range of our domestic and international peers. The board also approved a plan to repurchase up to 560,000 common shares or approximately 1% of our common shares outstanding by way of a normal course issuer bid subject to regulatory approval.

This decision reflects the high level of confidence we have in our strategy and TMX's ability to deliver solid operating results. Returning capital to shareholders by way of an NCIB will also help to offset the impact of dilution created by the exercise of share options.

We are planning to complete our filing with the Toronto Stock Exchange this quarter. With that, I will thank you for your attention and look forward to your questions later on, and turn the call back to Paul.

Thanks John. Given that John covered the full year results; I’ll focus my comments on the fourth quarter.

Diluted earnings per share in Q4 was $0.84, down from $1.24 last year reflecting a non-cash impairment charge of $0.32 per share, relating to Shorcan in Q4. Adjusted diluted EPS was in-line rate Q4 of last year at $1.31.

Revenue was $202.8 million in the fourth quarter, down 4% from Q4 of 2018, mainly due to decreases in revenue from capital formation, equities and fixed income trading, derivatives trading and clearing, as well as other revenue. These were somewhat offset by increases in Trayport and CDS revenue.

Lower revenue was largely offset by reduced operating expenses. Now turning to specific business areas.

Capital formation revenue declined by 6%, compared with Q4 of 2018. The decrease was mainly driven by the decline in addition of listing fee revenue on TSX Venture Exchange, due to a lower number of financings, as well as lower dollars raised.

In addition, the number of transactions build on Toronto Stock Exchange declined by 2% from last year. Revenue from sustaining listing fees was also down as was the case in prior quarters for 2019.

Revenue from equities and fixed income trading was down 21% in Q4 2019, compared with Q4 of last year, reflecting a 25% decrease in overall volumes on all our equity exchanges, partially offset by the impact of the favorable product mix. In looking at the comparative periods, it’s important to keep in mind that the fourth quarter of 2018 was an especially high volatility and high-volume quarter for equity trading.

In addition, there was a decrease in fixed income trading revenue in Q4 of 2019, largely due to decreased activity in government of Canada bonds. Revenue from derivatives trading and clearing decreased 5% from Q4 of 2018, driven by a 7% reduction in revenue from MX and CDCC.

MX volumes were down 9% and the impact was partially offset by the increase in revenue from repo clearing in Q4 of 2019, compared to last year. Helping to partially offset these decreases in revenue during the fourth quarter, we continue to see strong performances from both Trayport and CDS.

Revenue from Trayport's core subscriber business, which includes VisoTech was up 13% over Q4 of 2018. The number of trader subscribers grew by 10% and total traders grew by 7% over the same quarter last year.

The key average revenue per user metric or ARPU for the core subscriber business was up 6% in Q4 of 2019 over last year. CDS revenue increased by 8%, reflecting revisions to the fee schedule for issuer services, and increased international revenue.

In addition, certain recoverable costs related to CDS’ clearing operation, previously netted are now included in both CDS revenue and in selling, general, and administrative expenses. The amounts reclassified to CDs revenue were 5.3 million in Q4 2019 and 3.6 million in Q4 2018, both of these represented annual amounts.

Turning to operating expenses, overall costs were down 7% or almost $8 million, compared with Q4 of 2018. The decrease in cost was largely related to short and long-term employee performance incentive plan cost of 4.5 million and 2.7 million, respectively.

The long-term employee performance incentive plan cost increased by approximately 1.3 million, due to the appreciation in our share price. We’re more than offset by the reversal of an accrual of approximately $4 million relating to long-term employee performance incentives that were forfeited as we discussed in our press release last night.

As mentioned in offsetting these decrease recoverable costs related to CDS now included in SG&A. The year-over-year increase was 1.7 million.

Overall, income from operations was essentially unchanged from Q4 of last year. Now, just looking at our results on a sequential basis, income from operations increased from Q3 to Q4, due to the higher revenue, which was partially offset by our operating cost.

Revenue in Q4 2019 was up $6.5 million or 3% from Q3 reflecting increases in both CDs and GSIA revenue. This was mainly driven by recoverable cost of 5.3 million related to CDS, which are now included in the CDS revenue line.

The increases were partially offset by decreases in capital formation and equities and fixed income trading and clearing. Operating expenses increased from Q3 to Q4 20 of 2019 by 1.6 million, again this was driven by the re-class of the 5.3 million of CDS cost to SG&A.

It was also an increase in operating cost relating to SG&A expenses, including project spending and fees and also it increased relating to staffing cost. The increases were largely offset by a decrease in short and long-term employee performance incentive plan cost of approximately 2.3 million and 8 million respectively.

The latter cost decreased by about $4 million, due to the decrease in our share price between Q3 and Q4, as well as the reversal of the accrual of approximately $4 million relating to the long-term cost incentives that were forfeited as I mentioned a moment ago. Net income in Q4 2019 was down 23% sequentially, largely driven by the impairment charge of $18 million in Q4 related to Shorcan.

Based on current assumptions we determine that the fair value for Shorcan and was below carrying value. And therefore it took the impairment charge.

On an adjusted basis, our diluted earnings per share for Q4 was up 5% from Q3. The increase was mainly due to the increased revenue, partially offset by slightly higher operating expenses.

Now, turning to CapEx for a moment, we want to give you a brief update on the modernization of our clearing platforms, specifically on Phase II relating to CDS. So, to recap, we spent 22.5 million, up to the end of 2018, and 21.3 million in 2019 related to this Phase II.

Overall, we expect to incur between 95 million and 105 million in CapEx over the entire project. We plan to complete this project by the end of 2021 and will continue to provide updates on estimates for CapEx and timing as this project progresses.

Last December, 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.

The second change is the elimination of network connectivity fees, currently paid by participants. The elimination of rebates is being proposed to ensure that we can make this significant investment that I just mentioned to modernize CDS technology and to have adequate funding for ongoing future technology upgrades.

CDS’ proposing to permanently emanate the 50-50 rebate on core CDS services and the additional fixed rebate of $4 million annually. The total rebates where about $10 million in 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 proposed fee changes will impact participants differently, but all changes are considered as a package about a third of participants, so those paying less than a million dollars in annual CDS core fees will have an overall decrease in their CDS billings. The heavier users of core services are those paying over a million dollars will have an overall increase in fees.

All these proposals are subject to regulatory approval. Now, just to comment on the balance sheet, we reduced our debt by about 80 million from the end of 2018 to the end of 2019.

Our debt to adjusted EBITDA ratio was 2.1 at the end of 2019, down from 2.4 times at the end of 2018. We also held almost 230 million of cash and marketable securities at the end of the year.

About $45 million in excess of 185 million we target to retain for regulatory and credit facility purposes. Now, I’d like to turn the call back to Chris to outline the process for the Q&A session.

Good morning, everyone. Maybe just starting with Trayport, so we saw strong increases in number of subscribers on a sequential basis, but it seemed like the revenue kind of lagged that subscriber growth.

So, just wondering obviously, more of a timing issue or something else going on?

Yes, you’ve indicated the right answer there, which is, this is more of a timing issue in terms of when we’d sign up new contracts, the period in terms of where we have to recognize revenue from them, and there is also a sequential piece between Q3 and Q4 that some of the new clients that we brought on, particularly with things like VisoTech that would have had larger one-time revenues associated with them that don’t reflect into the revenue stream going forward. So, it’s a combination of those things both in terms of new contracts with new clients, but not seen the revenue flow through yet and that’s just a timing piece and also some one-time.

Okay great. And maybe just a quick follow-up on that, could you give us an update on the initial reception of VisoTech after the recent integration on the Joule platform, and then maybe how soon do you think you can leverage some of VisoTech’s algorithm trading strategies into other asset classes.

So, I'm actually happy to be able to say that within the last number of weeks' we’ve seen net new contracts with existing Trayport participants that now have VisoTech as an application included in them. So, that will be both enhanced service to those clients, part of the integrated offering, and an enhanced value in terms of the contract value from a Trayport standpoint.

So, we are seeing that already. I have seen two new contracts that the team was able to celebrate just this month.

With respect to the next question around using it with other asset classes, focus right now is using it and deploying it with the Trayport customer base. We are going to have a broader look in terms of how we use those analytic capabilities throughout all of TMX, but that is a longer-term peace and the focus right now again is around integration and selling to Trayport clients.

Okay, great. Thank you so much.

Okay, thanks. Just wanted to start with a question on the leverage ratio, I think as Paul alluded to in your comments, you continue to use excess cash flow to repay debt throughout 2019, you know the leverage ratio now at 2.9 and declining have you started to sort of engage in a discussion on other forms of capital return like buybacks or moving the goalposts on the payout ratio or are you just comfortable continuing to deliver, as long as the cash flow profile supports it?

Nik, it’s fair to say that we have active conversations on all those components. I will point you to the one piece that we did take through the board.

This month was to put an NCIB in place. I recognized from a user cash standpoint it’s not a large NCIB, but an initial bid of 1% at current share prices would use approximately 70 million of cash as exercise, and you know how much additional cash comes in through the exercise of options will impact the net amount of what we see in the books, but the focus really is continuing to see where can we invest to expand the business and accelerate the strategy.

So, while we are at the lower end of the leverage ratio now, our team has been active in a number of areas in terms of looking at potential investments to accelerate the business. You know, the challenge in the marketplace today is, some of the valuations we see are very high for assets that may not make sense, and so we are keeping a disciplined approach to it, but I expect us to continue to look for opportunities to use that cash generation to find ways to accelerate the strategy.

With respect to the other part of your question, we are going to continue to look at ways to enhance shareholder value. So, the launch of the NCIB this time was one of those pieces and we will continue to look at both dividend payout ratio as both our own and how we compare to appear going forward.

Okay, got it. And then just one other one from me, I just wanted to ask about what factors triggered the write-down of Shorcan in the fourth quarter, I just wonder if you could give us a little bit of color on that, I don’t know if trading volumes have been trending lower hard to assess from the public disclosures, I thought I would just ask you directly?

Yes, that’s a great question Nik and I’m going to take it back a number of years to give you the full answer on it, which is, you’ve got to go all the way back to actually the Maple Transaction in 2012, which – with that transaction all of the assets that were part of the TMX franchise at the time were written up to the market value of that deal at $50 a share. Every year, we do relook at that mix of assets and look at our strategy and see if the growth forecast continues to support the asset positions and the balances that we have on our balance sheet.

And Shorcan, while Shorcan is a really important piece of business that provides a really critical client service in the fixed-income space. It is more traditional marketplace and what we saw on our strategy and where our focus for growth is going forward is, we didn’t see the long-term growth in that business that would support the valuation that we were carrying down the balance sheet.

Where we really see the growth is on the comparable futures products, and as we saw in the discussion around MX, the strength that you're seeing on the five-year, the potential that we see have to launch the two-year this year and continue to expand the yield curve products that’s where we see the long-term growth around the fixed income products, and less so in the cash-based products on the Shorcan side. So, it’s really about reflecting it being more of a traditional cash-based marketplace and not one of the growth champions as we talked about in the call.

Okay, got it. Thanks, John.

That's it from me.

Hi, great. Thanks.

Hi, John. From what we’ve seen in the U.S.

market, you know, a fully robust rate derivative curve enables greater trading – your ability for trading the curve, as well as let big financial institutions hedge more granular, so I guess now that you’ve had some success in kind of re-launching the five-year with a lot of OI growth over the past year or so, can you give us a sense of your appetite for and maybe the potential timing of, you know, further filling out that rate derivative curve with perhaps a two-year and a seven-year contract?

Yes. I mean just in terms of my comment I was just talking with Nik, the real focus of the next launch is the two-year, so we’re strong in the short-term in the 30-day, the five-year is picking up steam and the 10-year is strong.

Now, the five-year, there's still a lot of room to grow in the five-year as it goes. You know, when you compare it to what we trade in the 10-year today in terms of average daily volume, 10-year is trading, you know, 125,000 plus transaction a day.

And so, we’re getting a lot of strength in the five-year. There’s still a multiple full increase that we can see in that from the yield curve, but the next product launch is the two-year.

I don't have the specific timing for you today, but we will follow up on that and come back to you on it.

Great. And then, maybe just a little bit on Trayport, too.

I know you’ve gotten that to hold in the U.S. market with the Nodal partnership that you guys announced last time around, but just kind of wondering if you can help us kind of think through what the optimality is of geographic expansion in the Trayport platform outside of the core European market.

Yes. So, Nodal that we announced last quarter is progressing well.

It's a matter on that and anything else that’s fairly early stages is attracting the customer, specifically the brokers, but anything like that where the product has a very fragmented market, Trayport can bring a lot of value in just – in bringing the buyers and sellers together and showing the prices all on one place, which is on the Joule screen.

Alright. Thanks a lot guys.

Thank you, good morning.

Good morning, James.

First question is related to TSX Trust, and I guess, within the other issuer services line item, there's a decline looking at 2019 versus 2018. This is a business that you're targeting for above mid-single digit growth.

I'm just wondering if you can give us a little bit more color about what happened in 2019. And why this is going to change favorably in 2020?

Yes, I’m happy to and let me start with the macro trends that we were working through, and Paul is going back me with some more of the detail points later on. What we actually saw in Trust was exactly the same impact, the impact of the overall capital formation business, which is there’s a portion of the Trust business that is recurring run rate business in terms of the agreements with clients for transformation service, but there is a piece that also is acting and supporting those companies in corporate transactions.

So, M&A transactions, new financings, IPOs, those types of things, the new offerings and that’s an area we’re very much like capital formation because the substantial downtick in terms of financing activity and related M&A transaction. Those transaction-based activities just didn't happen in the Trust business the same way they did in 2018.

When you actually look at the client base in terms of the market share of transfer aging clients under Trust, you know, we actually expanded it throughout the years. So, net wins in terms of new client adds, and Paul, correct me if I have my numbers wrong, but I believe growing to 23% in terms of total market share.

Our win rates, our new clients that is new clients that are going IPO in terms of who they choose for a transfer agent within the 75% plus range, so really strong activity measures in the terms of continues to reinforce that we believe this is a long-term double-digit growth business, but with a short-term impact because that transaction activity wasn't there. The other element that's different in Trust for other parts of our franchise around transaction activity is, we actually generate income from net income spreads from the cash that we hold on behalf of those clients.

So, those cash positions during the year were down substantially, again, related to less activity. As we continue to build the client base going forward and we see a return in those activity drivers and more cash balances that come in, I would expect all those revenue numbers to grow in the new year.

And just to, about 50% to 60% of that Trust business is recurring revenue, so similar to our own business. You still have that kind of 40%, 45% component that’s going to be dependent on the market activity that John described.

Thank you. In terms of the compensation and benefits, it was highlighted that a decrease in short-term employee performance incentive plan costs was $4.5 million.

I'm just wondering if you can describe what were the biggest drivers of a reduction in short-term employee performance incentive comp.

You know, one of the things we’ve talked in many investors around is ensuring that our performance plans and how we pay employees are consistent with the direction that we give to shareholders. So, if you go back to the long-term guidance that we talked to, Jaeme, around mid-singles on revenue, double digits on earnings, those are the same targets although – you know in terms of the details of our budget that are built into our short-term incentive plan.

So, while we had a positive year on a lot of the metrics on moving the business forward, you know, with the revenue not hitting that mid singles that directly impacted what was the formation of our incentive pool for employees. There will be a lot more disclosure on this actually when we get to the management information circular that comes out in, I believe, March, April and where we actually show the details of the scorecard metrics in terms of operating income and revenue, what the targets were and how we performance against them, but that’s the basic pieces.

You know that revenue growth in 2019 wasn't where we wanted it to be in year. We still have the same expectation on the long-term, but that’s what's driving that impact in the short-term.

Okay, great. That makes sense.

In the CDS, excuse me, even excluding that $5.3 million, the client change impacts, the revenues increased pretty solidly. One of the explanations was due to increased international sources, can you explain what's going on in CDS that's driving that huge increase, and that's ex the accounting change?

Yes. So, the two additional things that were driving revenue increases there is, there are some flow through from pricing that we took a number years ago around issuer fees, that’s now really fully in at the end of 2019, but you also picked up on the other interesting pieces.

One of the interesting services that CDS provides and is unique to CDS that other clearinghouses in the world don't provided is access to the U.S. market.

So, it allows the participants in Canada to directly act as DTCC and move positions back and forth, trade U.S. securities seamlessly between the Canadian and U.S.

clearinghouses. The pricing model for that is to charge a premium on the U.S.

fees, which charge a premium related to that service itself, but also provisioning the liquidity arrangements and the risk management function that goes around that, and what you saw in 2019 is just substantially increase in the demand or usage of those products in terms of cross-border transaction by both Canadian and U.S. clients in accessing each other’s market places.

Okay, interesting, interesting. I’ll re-queue.

Thanks, good morning. So, one quick one regarding the CEO transition because it's obviously an important topic, I mean, can you at least give us a sense of expected timing around the decision?

I mean no one liked that better than I would. With the – what I’d like to – I’ll give you the more context because the CEO transition is not something that was started just now.

It was always expected that Lou would be retiring at the end of 2020. I think if you read between the lines in terms of his contract details that went in the circular last year, you can see how the Board structured that extension with Lou.

So, the Board was already actively engaged in the process, in 2019, to prepare for CEO succession and transition in 2020 in terms of, you know, search firms in place, development programs for internal candidates, etcetera, etcetera. And so, when we hit the ground in 2020, it really was activating a plan that was already in place.

The direction that they provided publicly is the right direction, which is the Board is looking at both external and internal candidates, and given that the process was already underway, I think that can give you an indication of expectation around timing. Unfortunately, I can’t be more definitive than that.

Okay, that’s fair. That’s fine.

Thank you. In terms of the CDS, the change in accounting, can you give us a sense of the nature of those recoverable expenses that are now being included in the revenue and really I’m asking sort of help me think through how I can model it going forward because a relatively stable number, is it transaction-based, those types of things?

Yes, it’s a relatively stable number. That’s why Paul indicated that the numbers that in Q4 or annual basis.

The nature of those costs are fees that we charge to participants to pass through the cost of liquidity lines that we’ve put in place to support the products. You know, these were liquidity lines that we put in place really as it relates to the emerging PFMI principles around cover 1 liquidity, ensuring that we have enough liquidity.

if there’s any failure in the marketplace we put substantial new lines in, the cost of those lines are charged back to the participants based on how much risk they bring in to the platform, but they are largely steady-state year-after-year. There shouldn’t be material changes between them.

When we initially put them in place, we treated as a pure pass-through and then upon reflection in terms of the accounting at the end of the year, this was something that made sense to be on the actual income statement, both from a revenue and expense standpoint as opposed to just being off income statement.

And then, as you think about capital budgeting for 2020, I’m sure you’ve done more than, I think, you probably have the plan in place, but what are the major areas of investment for 2020 whether that's sort of – you know, whether it's a capitalized expense or just, you know, has incurred expense, but what are the major areas of investment?

From a capital budget standpoint, in terms of the existing business and the organic strategy, it really is the run rate CapEx that we’ve guided you to in the past, kind of, the $20 million to $30 million in terms of run rate CapEx and the only material piece outside of that is the continued investment in the post-trade modernization initiative as Paul talked to. So, we have given you – I know we've been promising it for quarters, but giving you more disclosure now in terms of what that actually looks like and the pieces that are new in there in terms of the proposal we put in the regulators in terms of how to fund it on a long-term basis.

Okay, but if I think about that $20 million or $30 million, that's just sort of sustaining CapEx, I think, more about growth related investments, and again, whether capitalized or just expensed, what do you view as your major areas of investments?

That actually includes sustaining the end growth related in an investment. So, you know, a couple to highlight in terms of the things that you’re seeing in there, both in last year and this year is we’ve done substantial internal development around our analytics products for Trayport that we expect to be live on in 2020.

I would expect in the 2020, we’ll be putting some investment into our co-location facilities. So, we can expand that for clients, which will be enhanced revenue opportunity and also enhanced service offering for clients, but it all still fits within that bucket of guidance of kind of $20 million to $30 million.

And then final one from me, looks like you may have a new competitor coming into the derivatives market in 2020, any kind of initial thoughts or comments around that and how you’re prepared for competition in that segment?

Our position is consistent as in the past. We welcome all competition in the marketplace.

It only serves to make sure that we are sharper in terms of the products and services we provide and our focus is going to be continue to execute on our derivatives growth strategy, incremental products, incremental operating hours in different regions and selling to more clients out there, so no change in strategy. We’ll just continue to push it ahead.

Okay, great. Thank you.

Hi, good morning. Just wanted to go back to the CDS, CDCC modernization, with the increased kind of price tag of implementing it, can you just remind me, I mean it’s – you know you guys have alluded to, I guess, that there was going to be probably a higher cost to it, but just in terms of what's necessarily driving it, is there going to be any sort of incremental savings?

And how to kind of think about what the payback periods on that investment is going to be?

Yes, that’s a – Geoff that’s a great question and it was – you remember some of the indicators that we were trying to give throughout 2019 was that the CapEx spend, the general – the run rate spend was indicative of what we would expect over the life of the project and that's largely consistent with the guidance we’re giving you in terms of the total CapEx expectations. The real driver in terms of kind of what's different from when we initially launch the product or the project was the level of complexity of customization in the Canadian market, the intricacy of making sure that we met the client needs in a way that was as seamless as possible and the time it takes to do that; so, in terms of really developing the right set of requirements and making the appropriate modifications to the product to do that.

So, when we look at the CapEx spend, it really is a factor of time. It is largely licensing and software development as opposed to heavy CapEx.

This isn’t a heavy capital platform that we’re building. It doesn't have any material change on the guidance we’ve given in the past around savings.

there is a component of our run rate, which is the of the operating costs of supporting this project, which we’ll also – we’ll look to wind down at the end of the project, but we’ll give more guidance to that further into the curve, but the piece that we reflected on we had a – more visibility to what it was going to take to initiate this for the marketplace, the level of complexity and the requirements we needed and the amount then of what that spend would be because of the expanded timeframe. It was the right time for us to go back and say what are the economics of the CDS business?

How do we make sure that as the enterprise, we’re getting the right return from the investments we’re making in it? And that's why we made the proposal to modify the fee schedule to take the rebates off and to give some breaks on connectivity fees to participants at the same time.

It's all around ensuring that CDS is getting the right return for the substantial investment we put into it.

But I guess, would it be fair to say then since the expected savings isn’t changing that, you know, these modernizations is kind of required in the bigger picture of trying to move this business forward, but because of the increased cost that, you know, again, whether or not from a return perspective or payback period, you know, not as quick as what was initially contemplated?

Yes, but you’ve got to look at it in context of the proposals for changing the revenue model at the same time, not just the savings piece. So, those are all part of the – I mean how the project pays back and how you fund future technology as well.

Okay. So, in terms of the fee, model may change going forward as a result of what you're trying to accomplish is that the way to…

Exactly, and it’s for all of us to remember that the service that CDS provides to the Canadian capital market is a critical service. It’s a systemically important risk system and it has to be available and modernized for the entire industry.

So, it's – it is a must-do type of initiative and the combination of the savings we expect to get from moving on to more efficient hardware, more efficient platform plus the modifications we’re looking to make around the fee model, that’s the – those are two components to provide the appropriate return around the investment.

Got it. Okay.

And just one last question, small one was just going back to the short-hand impairment, the $18 million, are you going to say like roughly, you know, ballpark how much of that – of the gross asset value, the right down represented?

Not exactly, but it’s – look at it being about less than half.

Okay, perfect. Thank you.

Yes, and just in Canada, we actually continue to carry it at a higher value than what we originally acquired it for.

Okay, thanks.

Good morning. Maybe I could start with Trayport, just to be clear, the revenue per subscriber number dropped quarter-over-quarter, is that because of bringing on the Nodal Exchange and those subscribers?

No, that wasn't related to Nodal, Graham, no.

So, what – can you give any color on what was driving the drop in revenue per subscriber?

Yes. So, I think John was alluding to that earlier when we were just talking about the change from Q3 to Q4, so really that the two factors, some of the longer dated contracts were – particularly enterprise agreements where you'll see an increase – substantial increase in the number of subscribers.

The revenue from those may not start to materialize immediately in quarter. And the second factor was just that we had more lumpiness in Q3 in some non-subscriber revenue that wasn't there in Q4, so that – those are really the two items that accounted for the decrease in sterling terms from Q3 to Q4.

You'll see in – when you – in Canadian dollar terms, we’re actually still up in Trayport from Q3 to Q4.

Okay. And the lumpiness is around VisoTech, is that correct?

That would have been part of it.

Okay.

Example, the algo trading capabilities, they are.

Okay, that’s helps. What about organic growth for Trayport after you adjust for VisoTech and also the divestiture of Contigo, if I'm saying it right, just in constant currency?

What was the organic growth at Trayport?

Right. So, Contigo that was sold in November of last year.

VisoTech came in, in May of this year. I think in our release, we did talk about what it was on a normalized – it wasn’t a significant change item to the organic growth rate.

Well, I think you disclosed 13% growth, including VisoTech. What was the growth if you took that out?

Let us come back to you [indiscernible].

Yes.

Okay.

We have it for all of GSIA, Graham. I don’t think we broke it out just for Trayport and VisoTech.

Okay, I’ll follow up with you on that one.

Yes, we will do that later.

Okay. And then, just the timing around the CDS proposal for increased fees, it sounds like you’ve got a decent argument of why you should get these higher fees, but do you have any idea on potential timing of this proposal?

It will take as long as it takes. I hate to be a big glob about it, but these are the regulatory process around material business arrangement like this is complicated.

The material we gave you and we can actually point you to the actual public commentary of the document. We actually took it to market in December because it’s a regulated entity from a fee standpoint, a change like this goes through a public commentary period for regulatory review, that period ends on the 18th of February at which point it will start the process in terms of the regulatory review, any thoughts around anything we might need to do or the timing that comes out of it.

So, I can't give you a guidance or indication of timing yet, only that we’ve been in active discussion with the multiple regulators on this for probably the last six months, and in terms of, this was our intention in terms of the right way to fund technology going forward. And we are in the process.

So, that is why that we were kind of silent on timing because we need to work through that program with the regulators and the clients.

Okay, got it. Understood.

And then on that same topic just on the regulatory front, so the CSA just recently came out with the moving forward with the trading fee rebate pilot study, I guess coming from your perspective is there concern that if this – if rebates do get prohibited, is that going to potentially impact your equity trading volumes, could those decline and then, if so how much revenue, what’s the percentage of your revenue that’s potentially exposed to this regulatory change?

So, a couple of things that I will comment on there. First of all the, what the CSA approved was going ahead with the pilot if the U.S.

goes ahead, which is one of the pieces that we push forward there is no reason why you would do that pilot in Canada. We also believe in terms of the feedback we have provided.

There was no reason why they should do it at all when you can actually observe the impact of the U.S. study rather than potentially putting at risk putting any liquidity in the Canadian marketplace.

So, that being said and we’ve got a commentary out in the public domain in terms of our views on it, we are already showing lower rebates than the U.S. market as it is.

So, we separated a couple of years ago the rebates that are provided for non interlisted companies versus the ones that are in interlisted. The interlisted ones have similar model as to what you have in the U.S., but on the non-interlisted we were already – we were in the process of – we were bringing those rebates down over time.

And we think that’s the right way to do it as you move these things over time as rather than making one large scale change. Our concern with the pilot is what the pilot ends up doing is, it ends up putting different public companies in different buckets.

So, two public companies in the same sector could have different fee arrangements around them, which could impact their liquidity. We don't think it’s appropriate to advantage or disadvantage certain companies based on what is a fee pilot with questionable necessity.

So, that’s our view on the pilot. In terms of revenue side, as you know, equity trading continues to be the smallest component of revenue less than 9% and this actually primarily affects active training.

We don't think that a change like this, if it actually came to pass to move the rebates would materially impact our economics in any way.

Okay. And then, would CDS be impacted if your equity volumes are impacted, do CDs revenue get impacted as well?

There is a component of CDS revenue that is clearing fees, but it is the smallest piece of the CDS revenue bucket. The bulk of CDS revenue deals more with the clearing of larger OTC transactions and custody fees and entitlements and corporate actions.

Okay. That's it from me.

Thank you.

And Graham just to come back to you on Trayport's, the organic revenue growth was 9% for Q4 and 12% for full year 2019.

Thanks. Just wanted to come back on GSIA revenue growth, there were some price changes implemented in H2 2019, can you explain how those price changes were?

And is this something that we should expect on an annual basis? Or is this a onetime thing?

I think what maybe you’re thinking of [Gloyn] we talked about some of the initiatives around enterprise deals as an example that would have been relatively small in terms of the impact on 2019. There would have been some price increases or changes around index products as well, but relatively small impact in terms of last year.

Okay. And then, also that, in that segment, this is excluding Trayport of course, higher revenues from recoveries related to on a reported usage real time quotes, co-location, benchmarks and indices, any of those drivers unseasonably high and if so why?

No, I wouldn’t say so. And we are moving more away from during these regular audits of customers.

So, I would say probably over time you’re going to see less noise around that in the GSIA line as well.

The other piece I indicated a little bit when we talked about potential CapEx, capital spend for this year, our intention is to expand the co-location facility. So, our co-location facility has capacity for 200 racks, it’s completely sold out, we’ve got client demand for more.

So, we are working on a strategy of expanding at roughly 25% should take us the most of this year to build that out, but then we expect to be selling that in the back half of the year.

Okay, great. Thank you.

Just a quick follow-up on the capital formation side, sustaining fees for 2020 if you’ve provided some guidance there, sorry I missed it, but do you have an outlook for how that’s going to trend?

Yes. For sustaining fees we talked about, a little bit last night, so it would be less than million dollars on the Toronto Stock Exchange and relatively flat for Venture for this year.

That sounds low, is that because there’s a large portion of your TSX-listed issuers that are at the max fee already?

Yes. There’s a couple of factors like that, so you are absolutely right, there is a mix factor in there, which is a large portion that are at the max.

A lot of new issuers beyond the corporates in 2019, there were ETFs, ETFs play a much smaller fees, so you are not seeing that same mix impact. And given just the simple challenges in the 2019 market, I think we had about 16 fewer corporate in terms of fewer listings year-over-year and some of them were large ones like WestJet taken private, that's at the MAX, things like that.

So, it’s a mixed impact and a slightly smaller issuer base on the senior market.

Okay, that’s helpful. Thank you.

Thanks Chris, and thank you everyone for listening today. The contact information for media, as well as investor relations is in today’s press release and we would be happy to take further questions.

Again, thank you for joining us and have a great day.