The Montreal Exchange has global ambitions. In a DerivSource profile, Lynn Strongin Dodds speaks to Luc Fortin, president and ceo, Montreal Exchange and global head of trading at TMX Group to learn more about how the Canadian exchange group is building an international presence in the derivatives trading industry by expanding its trading hours and product offerings.
Over the last five years, the TMX Group, home to the Toronto Stock Exchange (TSE), TSX Venture Exchange, Montreal Exchange and TSX Alpha Exchange, has made its presence known on the global bourse stage. Part of the plan is to expand its reach beyond its home borders as well as broaden MX’ derivatives offering which covers futures contracts and options on equities, indices, currencies, exchange traded funds (ETFs), energy and interest rates.
“When I joined the MX seven years ago, we were seen very much as a regional player,” said Luc Fortin, president and chief executive officer, Montreal Exchange and Global Head of Trading, TMX Group. “However, today, that is not the case. A good portion of open interest is driven by domestic pension funds but sovereign wealth funds as well as global asset managers, insurance companies and superannuation funds are also very active.”
The result, Fortin said, was to develop the business through a global lens and change the perception market participants had of the TMX as being home just for energy, mining and natural resource companies. “We had to tell them the unfiltered story and that we had a strong clean technology sector as well as a resilient financial services industry and our aim was to provide derivatives and options to give them exposure,” he adds.
The strategy also included “filling out our yield curve to offer greater liquidity and deliverables as well as the ability to do more complex trades,” said Fortin. This led to the launch of a two (CGZ) and five-year (CGF) government bond futures to sit alongside the stalwart 10-year contract. It is currently in the process of rolling out a 30-year contract, he adds.
Aligning with other regions
MX also wanted to be more aligned with other regions and has introduced an almost 24-hour trading cycle. In 2018, Europeans were able to trade Canadian derivatives during their daytime hours and three years later Asia Pacific was included. “We were the only country in the G7 that was an outlier and did not offer round the clock trading,” said Fortin. “Before we extended our houses, people had to trade within North American hours.”
This has been particularly beneficial in capturing the Asia Pacific market, which is one of the fastest growing regions for derivatives trading, according to a new report – The Growing Internationalisation of Derivatives Trading – by Acuiti on behalf of the MX.
The survey, which canvassed over 100 senior executives from buy- and sell-side firms in EMEA and Asia, found that asset managers and hedge funds within Asia were the main players fuelling demand to trade on international markets outside their local core daytime hours.
The longer hours introduced by MX have paid off especially during the spikes of volatility in March due to the collapse of Silicon Valley Bank and the government engineered sale of Credit Suisse to UBS. To date, Fortin said that Q1 2023 average daily volume (ADV) increased by 48% from Q4 2023 while in March alone, a daily average of 25,000 contracts were transacted overnight with the 10-year bond future (CGB) – its most established product – accounting for 10% of the product total volume.
As to the newest products, Fortin adds the overnight volume on the CGZ and CGF bond future represents approximately 2-3% of the daily volume although this is expected to grow as these products continue to develop in regular trading hours as well. Overall, volumes in CGZ and CGF were up 113% and 18% respectively in the first three months year on year.
Transition from CDOR to CORRA
The exchange has also heavily involved in the transition away from the Canadian Dollar Offered Rate (CDOR) to the Canadian Overnight Repo Rate Average (CORRA) futures the new leading tool for hedging short-term rates. MX developed a market-making programme for the Three-Month CORRA Futures in 2020 and the new One-Month CORRA Futures in January 2023, to enable market participants build liquidity and minimise future risks.
CDOR, which is used for a broad range of financial products, will cease being published in June 2024, as part of the global transition following the manipulation of Libor. CORRA is a market-based measure, calculated based on overnight loans between commercial banks. Read more on LIBOR cessation in Canada here.
“This transition is very important to us, and we are working closely with the industry, central bank and regulators to be a trusted advisor,” said Fortin. “We are also working on synchronising a T+1 settlement cycle with the US because we want to ensure that there is a mismatch between the Canadian and US markets when the reduction from T+2 happens next May.”
It is no wonder then that market structure is a high priority with the TMX Group’s Canadian Depository for Securities (CDS) introducing the Post Trade Modernisation (PTM) Project to deliver an integrated technology platform for its systems including clearing, settlement, depository, corporate actions, and risk. The aim is to create greater liquidity, capital efficiency, better risk management and improved margin settings, according to Fortin.
In addition, the exchange is also focusing on cloud management, post-trade, and repo for money market clients. “We’re really innovating in post-trade and making it no longer just a by-product of trading,” he said.
The crypto journey
As with many exchanges, the Canadian bourse, is exploring its option in the crypto space. Two years ago, the TMX Group listed the world’s first options on a bitcoin ETF and last year announced plans to launch a cryptocurrency futures product on MX for institutional players to help them offset the risks of trading in the relatively new asset class. However, no date has been set for the release.
“When we’re building products it’s not for the next 10 minutes. It is for the next 10 years,” said Fortin. “Hedging themselves on another marketplace led to a lack of margin offsets, the lack of a perfect hedge.” The futures contract instead uses the same index that those ETFs are using, which allows for that “perfect hedge” Margin, however, is relatively high, given the inherent risk in these products.” The product rollout is expected this year.”
Fortin is a member of the Board of Directors of the New Self-Regulatory Organisation of Canada, which, among other things, is addressing the Canadian Securities Administration’s concerns about retail-oriented crypto platforms. Self-regulatory organisations (SROs) are becoming more commonplace within countries lacking any official cryptocurrency regulation. They subject crypto platforms to the same kind of standards than any broker-dealer would in TradFi before launching their products to traditional retail. This includes know your customer and anti-money laundering as well as suitability and capitalisation.
Looking ahead, the TMX will continue to punch above its weight with a broader more diversified offering for an international clientele.
Related reading:
Digital Infrastructure: The Evolution of the Digital Asset Trade Lifecycle So Far – Derivsource
Derivatives Clearing in Europe: Wrinkles Still Need Ironing Out – Derivsource
*This article is part of our Glocal series.
