Tom Kloet has seen his share of exchanges, having worked at the CME Group and served as CEO of SGX in Singapore and now as CEO of TMX Group. He spoke with JLN editor-at-large Doug Ashburn about his exchange experiences, the next step in TMX’s M&A plans and the regulatory picture for Canada.
Q: Can you compare and contrast the Canadian and Singapore markets to your days at CME?
A: I look back on my time on the CME board as a great experience because I was there from the period where we determined that we wanted to change the institution and go through the demutualization. That was an incredibly exciting time to be at the forefront of some pretty significant changes. I vice-chaired the strategic planning committee and I was chair of the clearinghouse at the same time. We set the foundation for what is now a great institution.
Q: And the foundation for the business model that has since been widely adopted.
A: I don’t think any of us foresaw, to be frank, the success that would come – both the financial success and the marketplace success. I remember the day we found out we were not going to get the Dow Jones futures contract – how bummed we were. A bunch of people stayed up late over some pizza and beer, and came up with taking the S&P 500 and creating the e-Mini contract. What that proved was that the CME had both the ability to reinvent itself, and execution excellence. Those are things that stayed with me when I went to Singapore. Those are things we worked on when we merged the Stock Exchange of Singapore with the SIMEX and created what is now SGX. With an exchange of that size, the idea of building its own technology was not where we needed to be. So, we outsourced the technology and made it easier for people to hook up with us.
And again, in Toronto, there was the combining of the country’s derivative exchange with the Toronto Stock Exchange. I believe we are sixth in the world in terms of equity capital raised and sixth or seventh in terms of global market cap. We had a chance to build a derivatives exchange that had a good foundation but needed new products, needed to extend its distribution and needed to build out its equity derivatives platform. Last year, our volume was up 40 percent, open interest was up a similar amount, and this year we are experiencing great growth as well. We are excited about what we are developing in the equity derivatives space. Plus, we own 54 percent of BOX. We are in the process of obtaining our SRO license, which is currently out for public comment. BOX’ market share has climbed steadily, and I think we are competing very well in a very competitive market. So, TMX is doing well.
We also have an M&A thing we are going through. The Canadian banks, pension funds and an insurance company decided, when we were talking about merging with LSE, that maybe they would rather buy the company, for about a 25 percent premium over the then stock price. We got a majority of shareholders to approve, but not enough to put us over the edge on that deal. So, we took a second look at a proposal from the Maple Group, and we are working with the regulators, both the Ontario Securities Commission and the Competition Bureau on getting approval.
Q: Do you have an idea of the time frame for the deal’s approval?
A: Right now, our support agreement leads us through April 30th. So, that gives us a pretty short timetable, as we don’t even have regulatory approval yet. We are working our way through that with Maple, and I believe we are making progress with the regulators. But, consider NYSE and Deutsche Boerse – they were at it for nearly a year between when they announced and finally received a decision. We have only signed the support agreement. Despite the amount of visibility we have had through the three separate deals we have explored, we have really only been at this one since September. We are working our way through to get approval by April 30.
Q: You mentioned working with regulators. Between Dodd-Frank in the US and EMIR and MiFID in Europe, it seems that Canada tends to get lost in the shuffle. Can you give us an overview of what is happening in terms of regulatory reform?
A: Take a look at Sarbanes-Oxley from the last decade. Canada took the sensible parts of Sarbanes-Oxley and put them into practice. So, as CEO of a public company, I have to sign off on the internal controls and financial statements. For our small-cap markets – we have probably the best small-cap market in the world. We have adopted a lighter set of requirements where statement must be made that the executives are not aware of anything not being reflected in the financials. I raise that as an example of how Canada tends to look at what is going on in the rest of the world and put together a more sensible set of regulations.
We will look at Dodd-Frank, and we are active in Dodd-Frank because it is important to the Montreal Exchange and it is important to NGX, our physical market. I have been to Washington to see the commissioners several times, and we have made several presentations on it. But, what will happen in Canada is they will adopt the sensible parts of it and ignore the ones that don’t make sense, or that don’t pit the public interest solidly with commercial interests. We are supportive of the idea of OTC clearing – OTC derivatives going through multilateral clearing houses. We put out a position paper on it and are working with the Canadian banks to provide a solution for that. We started with a repo clearing solution that we introduced to the market two weeks ago. We were awarded the contract, despite the fact that they own the securities clearing house in our country. They thought that our clearing house would be better suited to support it.
I’m not a fan of the Volcker Rule. I think it is going to be hard to administer. From my period of working with SocGen, ABN Amro, and Credit Agricole, where is the line between customer facilitation and proprietary trading? Determining that line is going to be difficult to administer. I am not sure the Volcker Rule is the right answer.
Q: Going forward, how do you feel about TMX, considering massive regulatory reform and the aftermath of MF Global, which has affected us greatly here in the U.S.?
A: Much more so in the U.S. than in Canada. In fact, the volumes on our futures exchange are still up on the year relative to last year. We were not as dependent on MF Global. I am quite optimistic about where we are positioned. Of course, every CEO is going to say that, but what we are doing well across the product array and across distribution. We recently opened offices in London and New York. We are building equity options volume, both at MX and at BOX. We have the best two-tiered stock market in the world, with a small-cap market that has clearly been the world leader in financing for SMEs and early stage companies. We have graduated over 500 companies from the junior market to the senior market in the last 10 years. Almost 20 percent of our market cap for the senior market comes from companies that were on the small-cap market. I think that minor league-major league structure is really serving us well. We just need the right market conditions for people to come to the market.
We are also extending what TMX is all about by buying companies like Atrium Networks, a low-latency infrastructure provider, and Razor Risk, a risk management company. That will help us as we further develop our risk management products. So, we are continuing to look at M&A despite the fact that we are in conversation with the banks about the Maple transaction. You should expect us to be a player.