TMX Group Limited (X) Earnings Call Transcript & Summary

Okay. Great. All right. So thanks, everyone, for joining us. So for our next presentation here, we are very delighted to have the CFO from TMX Group, David Arnold, with us today. So for those of you who don't know the TMX story, this is the leading exchange in Canada in trading equities and derivatives as well as being -- as well as in listings and providing capital formation for Canadian companies. It's changed quite dramatically over its 170-year history, adding asset classes and new businesses over time as well as diversifying internationally. And today, about half of the company's revenue is recurring in nature and nearly 1/3 of it is from actually from outside of Canada. David came to TMX just a year ago. And I think today is actual your 1 year anniversary, is that right? Happy anniversary.

Exactly.

So you came to TMX after a 20-year period at CIBC, where you held senior positions in finance and administration and most recently headed up their enterprise programs, technology and operations and advancing that transformation and simplification of processes across the firm. So welcome to your comments here.

Thanks for having me, Brian.

Good to be in person again.

Yes, it's good to be -- it's very good to be in person again, yes.

So maybe just to start out, what attracted you to TMX at this stage of your career? And then having been with the firm for a year now, what areas have surprised you in terms of the range of businesses, the growth opportunities and maybe the corporate culture as well?

Sure. So a couple of things, Brian, the first one really were the people. We run a technology business, clearly, but it's about the human interaction. Joining during the pandemic was an interesting experience. I got to tell you. But many people did, Brian, during the pandemic move into different roles. So the first thing for me was during the process, I met with John McKenzie, who was the previous CFO, who became the CEO at TMX. And it was really important to me that John and I got along and that we were able to work shoulder-to-shoulder. But what was also important is John enabled me to meet with all of the executive team prior to committing and many of the Board members too. So that really helped because I wanted to make sure that I was working with folks that I would; A, see eye-to-eye with on many topics, but also they'd respect my difference of opinion. And that really shone through that process. So number one was the people. The second one was, as you said right, being on this side of capital markets and having been on the other side for 20-plus years, and it really was fascinating to me to actually delve into the myriad of businesses that the TMX Group has and really how we support that entire capital markets ecosystem in Canada and now with some of our businesses abroad. So John would talk to me a lot about the evolution of the business and the culture and that really attracted me. It's a very tech-centric field. If you come into our offices, whether they be the ones in London or Toronto, Montreal, Vancouver or Calgary, you get a very interesting youthful feel, which is somewhat different from other more traditional capital markets kind of environments. And then the third and lastly is its where the size that I feel like I can make a real difference, right? And so that is something that really, at the end, was a tipping point for me is. And especially when it comes to things, we might chat about it later, ESG, environmental, social and governance. That was something that was an attraction to me too.

Well, that's empowering, yes. And then so thinking about that and what are your strategic priorities as CFO?

So first and foremost is enabling and accelerating our growth strategy. But it's really a 2-pronged approach, Brian. So first is how we're going to grow organically. We have a steeped history at TMX of innovating. We were one of the first exchanges to go completely digital and we continue to leverage that kind of DNA in our culture in terms of innovation, so the same space and ETFs leading the frontier with that. A lot of talk in the U.S. about SPACs, well, in Canada it's called the CPC and we've been in that marketplace for years. So for me, that was the one is how do we actually continue to fuel the organic growth. But then we have a very, very strong balance sheet. We have the capacity to acquire and -- but we're very disciplined, right? Acquisitions need to come because it's an acceleration of our existing growth strategy. And so that, to me, is #1 priority as the CFO is helping accelerate and enabling growth. The second thing is, as the CFO, one of the things I also oversee is our real estate portfolio. And the company was effectively, as many companies, where we're an in-office first culture prior to the pandemic. Pandemic hits and pretty much everyone becomes a remote work, work-from-home culture with the odd roles that are deemed critical that you get kind of the local health department to agree that people can go to offices. And now we're really faced with what's going to be the new reality, which is the hybrid work. So that's the second priority for me is how do we navigate that because that is fought with, if the pandemic was 2 months, Brian, it would have been a much easier transition back. Going 2.5 years, a lot of people have come up with new routines at home. And now this will be a bit of a change. So that's the second one. And the last one is advancing our long-term sustainability, whether it be on the environmental side, the social or the governance side. Those are really 3 top priorities for me.

And we'll dive into these in a little bit more -- some of them in a little bit more detail. Maybe I just want to start out with the trading backdrop first and then get into some of those. But what is your view on the future growth in equity trading in Canada. It's impossible to predict volumes, obviously. But where do you see like the new normal of equity trading landing, particularly in the venture exchange, which is definitely is a little bit more volatile in its ups and downs and then the surge in volumes that we had earlier last year. But do you think interest in trading from retail was in a bubble period or do you think there's a new normal sort of a longer-term secular growth story in retail trading?

So it's a great question. Had you asked me that a month or 2 ago because what we've seen in the last 2 months, there's a lot more talk about inflation, recessionary impacts and stuff. So that will impact disposable income for retail investors. So prior to this more recent development, I would have said retail volumes will come off. We saw, for example, north of 45% of our equity volume in Q1 of 2021 was really retail driven. And that would be way outside of the norm. That was a lot of people at home, a lot of people with some disposable income and an ability to trade on their own account. We saw this quarter that just ended on March 31, that number more in the 30% range of total volumes being more retail. So that is still elevated to pre-pandemic levels. So somewhere between that and pre-pandemic levels will be the new norm. If you want to call it a year ago quarter, a bit of a bubble, your words, not mine. But I would say that those were elevated. This is now more normal, but I still think it's going to settle down. The important step for me often, though, Brian, is that equity volumes on all of our exchanges. If you look at the last 25 years, it's been about a 9% growth. But it continues to, as you see, flat lining and abating, which is why when we look at that side of our business. We think more of the low single-digit kind of growth in that space.

Yes people like to describe like a GDP type of growth rate, even that's not always the fair comparison. But really on the retail side, we're seeing here in the U.S., I mean, if you -- people call it a bubble back in 1Q '21 and even during 2020, you do get some retail traders that have -- are more permanent after that. And so the level of overall usage goes up as long as they're not losing a lot of money, which is always a question mark. Maybe just talk about, sticking with equities trading, but the view of competition in Canadian equity trading, I mean, in the U.S., obviously, it's been a hypercompetitive environment for a long time. But in talking about like new automated entrants that have come in over time, NASDAQ has been at it for a while, in Canada CBOE is now going into it with another acquisition on top of its MATCHNow deal. Do you see price competition evolving as a component of this or do you think it's pretty much everyone can really participate without?

So a couple of things, right, pricing is regulated in this space. So I see the competition less so in terms of pricing. It will be more associated with where the flow goes. But if you think about it, I mean, I and our entire management team, we welcome the NASDAQs and the CBOEs because we just want a level playing field, right? At the end of the day, in the equity marketplaces, as long as all of the issuers are regulated in the same manner and fashion, the better. And it's no secret that the smaller market entrants are maybe less regulated than maybe the larger participants. So we'd like to see a level playing field there and we welcome that. We still maintain 2/3 market share, right, which is really, really important for us. And one of the things we look at, which is really valuable is it's all about liquidity. And if you look at the composite index, we over 90% of the time have the best bid offer spread in that. So welcome the competition, welcome a level playing field, we're all regulated, held to the same standard. And because pricing is regulated, it will be what it will be.

Do you think actually the competition will effectively bring more volume? In other words, it could be -- change?

Possible, yes.

Maybe switching to derivatives. The Montreal Exchange has, of course, been the leader in Canada and futures and options trading with an especially long history of interest rate futures. Maybe can we first touch on your outlook for growth in rate futures volumes? I know we just had the hike today. And given where we are in that rate cycle and then we can talk about -- if you can also talk about a separate question about new products that are coming out on MX?

Okay. So we'll deal with the new products. Let me talk about growth, right? We see growth in this space as we speak about publicly high single-digit growth in the interest rate derivatives and space, volatility is really productive. And if the volatility is something that at least the market participants can sort of anticipate. The volatility that comes that is a complete surprise to many market participants, tends to see some money sit on the sidelines. I mean that could hurt the volumes. But we haven't seen that. And as I said, high single-digit growth for the interest rate derivatives is really the way we see the business.

Okay. And then on new product development for that -- because I know this at the single-stock futures, we could probably talk about -- I do want to get into crypto a little bit later because it's a little bit of a different product, but maybe just talk about the single-stock futures?

Sure. So equity options have been strong for us. Single stock futures, very strong most recently. Most recent statistic, which was in April, was slightly softer on single stock. But generally speaking, if you look at the entire equity options, it's been really, really positive and strong. What's also been really good is how we built out the yield curve, right, on the interest rate side. So that's really helped us. And some of these were products that we had in the marketplace many years ago, they were thinly traded. And if you're going to displace over-the-counter interest rate derivatives, so folks can manage the interest rate risk across the curve, you really need to make sure that those agreements or those derivatives are traded. And so in many cases, you partner with institutions to either be a market maker or a liquidity provider. So we re-launched many of those through 2018, through those recent years as the fall of 2021. And the volumes have been really, really good. So fingers crossed so far. We continue to innovate in the product space, and we'll talk a little bit about crypto as well.

Yes, and just a word on the yield curve side, do you see -- versus OTC markets, do you see institutions like hedging their OTC risk on exchange effectively. So is there a magnification effect?

So there's 2 parts, right. It's there is some semblance to that. Hard to necessarily get line of sight as to why they are actually participating. But I think you are right, there's an element of that. The second piece is very little speculation, if you will, right, on the interest rate side. A lot of this is just hedging on various different points of the yield curve, whether it be asset managers and/or financial institutions doing asset liability management.

Yes, that makes sense. Maybe shifting over to crypto, I mean, this is something, obviously, that's evolving. Maybe just talk about your plans there. Is this more of a future risk, obviously future is risky, but is it something that you think you can develop in a more longer-term fashion and evolve into other digitized NFT type or?

Another good question, Brian. Look, we haven't gone full bore on crypto trading. We've taken a very different approach. The primary thing that we did is we were the first to list an ETF for Bitcoin and an ETF for Ether. That then also then helped us on the derivative trading side. We then launched some options on those, right. And so one of the things we continue to work on this year is crypto futures because we see a demand for that. And to the extent we continue to see demand from the Canadian institutions where the retail clients are requesting a safe harbor way of trading in SWAT crypto. That is something that we will continue to look into. But there's nothing on the immediate horizon to report.

And then on the crypto futures, just talk about the regulatory process in terms of approval for them?

So all of our crypto futures over here that are either on ETFs, follow just the standard regulatory process. And the same would be the case for any of these auctions.

Right, right, okay. And then the launch timing of those?

The crypto futures, we're targeting towards the end of 2022.

Okay.

So the end of this year.

End of this year, yes, okay. Constantly evolving, so I'm sure on the earnings calls, we'll probably -- we'll have more and more questions on that, I would imagine. Maybe just real quick on the Boston Options Exchange, BOX, which we call BOX obviously, you have a majority voting stake. To what extent might you seek to compete more aggressively in the U.S. options landscape? So I don't know if that's an answer to competition coming up into Canada. You actually have a very good exchange here in the U.S. Does that influence your decision and how to compete in that?

So let's step back a little bit there, right. So the first thing for me, Brian, is through the Montreal Exchange, which really was the provider of the technology that started the Boston Options Exchange. We've had a longstanding relationship clearly with the management team there and the other investors. We switched from equity accounting, technical equity accounting to a consolidation simply because there was a transaction in the public domain where the entity bought back some shares from 2 of the shareholders that we're buying back. And part of the SEC rule is a couple of the broker-dealers can't have more than 20% of the voting rights. So effectively, their voting rights were pro rata given to the others, and that pushed us to above 50%. So we continue to maintain 3 board seats and that can vote 52%, but it's technical accounting control. The day-to-day running of the business is done by the management team. They have the strategic plans. Our representatives on the Board are obviously part of the governance process. But I wouldn't read into this as a beachhead penetration for options in the U.S. We continue to be a investors, owners and active participants, but the day-to-day running is really done by the local management.

Yes, but you're participating in a good market?

Absolutely.

I mean, the retail option side has been extremely healthy in the U.S. market. So that's definitely -- it's beaten my expectations in those quarters, so.

So long may it last. But some recent data that I saw some of the volumes are starting to abate. Once again, what's going on with inflation, what's going on with recessionary pressures, who knows what positions people are taking, what risk on or risk off strategies people are putting in place. So let's stay tuned, but fingers crossed it continues to.

Yes, we'll be watching it. Yes. Maybe just switching to the capital formation business. So this is, I think, about 22% of your revenue, if I'm not mistaken. Maybe a couple of different angles of this. Maybe start with the IPO process. Obviously in the U.S., it's shifted back a bit given the markets, but the U.S. exchanges are talking about the pipeline being fairly strong. So maybe talk about your pipeline and then also a secondary question on that is, international listings, your strategy there in terms of getting more international listings?

So let's talk pipeline first and then I'll do international second. So the pipeline continues to grow. So we would speak early parts of last year about our pipeline being around 1,500. The pipeline now is north of 1,600. And we look at it through 2 lenses, Brian, which is actually quite interesting. The first lens is how much of the pipeline is companies outside of Canada and over 50% are companies outside of Canada, which is really, really good. And it's primarily coming from Israel, parts of the U.S., more in California, Cupertino kind of area, Australia and so forth. And that then gets me to the second lens we look at the pipeline, right, which is what percentage of that pipeline is by various sectors. And so the innovation sector is greater than 50% of that pipeline. So -- and that then are used -- just mentioned Israel and obviously Cupertino, California and stuff like that, Silicon Valley. That's where a lot of that innovation is coming from and they tend to then migrate to our venture exchange because, A, it's -- if you're a U.S. potential lister, you don't have to worry about Sarbanes-Oxley because that's not part of our regulatory regime. But also it's a great kind of place to go other than private capital. And one of our great success stories is 20% of our S&P Composite Index are graduates from the venture exchange to the senior exchange. So when you're an innovative company based out of Israel and you're looking to be the next unicorn or home run, you see that as a wow. So 1 in 5 have actually been able to do that. So that's very, very powerful. Talking a little bit about the volumes and international listings for us last year, Brian, were about 46. So that was good, of IPOs, brings our total international listings about 250, which is still very, very powerful. The thing that we have seen a fall off of this year is what we would call our additional listings revenue, right? So the IPOs are the initial public offerings. That revenue then turns into the sustaining fee each year as the company goes into its second and third and fourth year, and we market based on the market cap of the business on December 31. But then they come to the market for secondary capital raises, right. And that was lower in the first quarter this year than the record numbers we saw a year ago. Q1 of 2021 was beyond anyone's wildest dreams.

Right and that's more market sensitive?

Correct.

The markets are strong and they can raise capital. And then just on the international side, are there -- is there a component of dual-listings at all where they would list on the venture exchange and also list on, say, NASDAQ or some other exchange?

So tend to see more of that at the senior exchange, but that's a great question, Brian. I don't have that statistic as to -- are there any venture companies that are dual listed. But my guess would be it's more in the senior exchange.

So I bring this up because we had CBOE here earlier, and we're just talking about different strategies, but like the New York Exchange that they're buying has a small listings business, and they're looking to obviously get ETP listings there, and they talked about dual listings as a possibility there as well. So yes, to what extent, I guess, is that?

It's fair. I think the challenge that one will find is if you're going to dual list in the U.S. and you're on our venture exchange, there is a step-up in terms of SOX compliance and stuff that's required to do that, whether it be on either New York Stock Exchange or NASDAQ. So depending on where you are in the venture exchange, if you're a true early-stage company, that might be a bridge too far. You might need to mature as a business, grow as a business, migrate to the senior exchange and then be better positioned to deal with that extra administrative and regulatory burden.

And see better access, I guess, to U.S. investors?

Exactly.

On that graduation to the venture exchange, how long does that typically take or is there no rule of thumb on that?

There's no real rule of thumb. It's about growth and sustained profitability of those enterprises and then also their need for capital, so getting into a bigger pool.

So if they're successful, then that obviously creates that?

Of course.

Yes. Let's talk about the TSX Trust business, it's a tongue twister, especially with the AST acquisition, leverage to higher rates, there is some on the deposit base on that. Any view on -- now that we have the 50 basis point hike, for example, I guess, we'll see that in the next half of a quarter of results. But any rule of thumb on revenue per, say, 25 basis points?

So one of the things we do disclose is that for a 25 basis point increase in rates, it would roughly mean CAD 2.7 million for us. But we caveat that number. That number is based on the existing balances and volumes. So there could be a multiplier effect on the upside or potential on the downside, so if balances rise and rates rise, that's a multiplier north of CAD 2.7 million. But if rates rise and balances tend to shrink, less corporate actions, less trust activity, then that would obviously be less than the CAD 2.7 million, depending on how it flow. But you're right, if we keep balances constant, it will be about CAD 2.7 million.

And these deposit balances are transaction-oriented, right? So they're not -- it's not as though someone is parking money somewhere and they take it from there. It's as long as the transactions are there creates the -- it's 1 or 2-day float on average, correct?

Exactly. So think about it as the classic -- the vanilla corporate action is quarterly dividend declarations, money gets put into the account and our job is to disperse it and make sure it makes it way to all of the shareholders for that period of time. There's obviously interest paid to the issuer and we earn interest on the depository institution we placed the fund with.

Right. Okay. Maybe let's switch to Trayport and the Global Solutions, Insights and Analytics, another tongue twister, with GSI, as you call, GSIA. This is a major portion of your recurring revenue. Accounts for, I think, nearly 1/3 of your revenue overall. And Trayport is about half of that GSIA business? So Trayport clearly is benefiting right now from the elevated volatility in energy products globally, especially being in Europe. Do you think that's -- obviously, again, impossible to predict future volumes. But do you see this environment sort of transitory or do you see this environment stimulating more permanent demand for that usage at that pipeline?

I would say if boxed into those 2 choices, it's the latter, more permanent demand. But one of the things that we often have to remind folks of is we're a subscription-based site license typically at business. So we don't profit in any meaningful way on the volume of trading that is done through the platform. So for us, it's really important that when there's tons of trading activity in Europe, with the energy crisis and so forth, that isn't a direct correlation to us. What's more relevant for us is, are we adding to the product suite? Are trading houses adding more users to their site license as they come up for renewal and/or are there new entrants into the marketplace, therefore, would like our service? And typically, entrants in the marketplace that are coming in brand-new, they would tend to have to either build this in-house and therefore it's much better buying it from us. But we also see established brands saying, you know what, IT department, it's just too much work right now to continue to maintain these custom screens for us. Let's move over to the Trayport platform, effectively shutting down that in-house development and moving to us. So it's definitely not transitory, but it isn't directly correlated to energy trading volume.

Right, right, but, I mean, that's obviously creating more of a need potentially, I guess. I mean what do you think about the addressable market for that? So how in-house platforms that might just completely outsource to you, new entrants into the market, I guess, that's sort of -- it's a little bit more crystal ball like. But if the situation in Europe, either from a geopolitical angle or if we just think about the energy transition in general, which is going to create a much multi-decade need for hedging?

So there are a couple of things there, right? I think when we look at our Trayport business, we look at it through 3 lenses to really drive growth. One is adding functionality, right. And we've done that with almost over half of our team over there, Brian, are software developers, and they are developing our platform and our product, the dual platform, if you will, and adding functionality just enriches the offering and the value proposition for our clients. We've also done that through some inorganic transactions, like, VisoTech and Tradesignal added for us charting and algorithmic capabilities and stuff. So that was important. The second piece for us is really going into new asset classes. And I can touch on a little bit there, right? So for me, when we talk about it, we look at, for example, the most recent thing, which is trading in voluntary carbon credits, right. You're trading in energy, many of those organizations are looking to become net neutral, either through their own actions or purchasing offsets. We're now creating a marketplace for folks to do that. We're partnering with IncubEx to do that, and we've already had some trades through the platform. In fact, TMX, we did our trade through that platform to enable us to be net neutral in 2021 and 2020. So that's the second piece. And the third piece which is important for me is the geographic expansion. We think there's opportunities in the U.S. and Canada, but also in Asia as well, and specifically Japan.

And right now what portion of your business is U.S. traders or U.S. subscribers would you say? I mean, I'm sorry, not U.S., I mean Europe?

Yes. So Europe right now is the predominance of our business. The expansion into these other geographic areas is at its early stages. So we see lots of upside in this.

This could be potentially a double-digit type of annual, the Trayport side of that.

As my late father used to say, from your mouth to god's ears.

Right, but it's certainly at least at a high single-digit base?

Yes, we continue to low double digits, quite frankly, right, is what we are doing. We shoot for high singles, but we've had in that 10, 11, 12 range which has been really, really powerful. But if we do those 3 things, we stick to our netting, Brian, there's upside for us in this business.

Yes, that will be exciting to watch as well. Maybe just switching over to the financial outlook. How do you view TMX's ability to generate positive operating leverage over time? So I always want to invest in the business and organically, but how do you engineer an annual -- first of all, do you look at that on an annual basis or you consider it on an annual basis? And if that's possible, how would you engineer that given volumes can move around?

So I like the question because I do get asked it every quarter. And we definitely don't manage the operating leverage on a quarter-to-quarter basis. But one of the things I do as the CFO and my colleagues around the senior management team do is we never want to put together a financial plan for the year that has negative operating leverage, right? It's kind of for me, it's -- we need to go back to the well. We need to figure out, we can't have a plan. So -- but we don't also then manage it purely on an annual. It's really more through the cycle because there might be opportunities for some meaningful investments that we need to make organically. And so we leave ourselves that option. But generally speaking, it's not managed quarter-to-quarter. But as CFO, I never want to strike a financial plan that is negative operating leverage.

And you don't know how volumes are going to trade at. So you kind of have a view on a range of volumes, make your plan based on that view. Of course, it could be different depending on the…

Exactly. So we have classic rate volume variances all the time. And a lot of that's often driven by mix, right. But we're anticipating because not all of our traded products, as an example, whether it be on the equity side or on the derivative side, yield the same amount. On the equity side, there's different yields depending on if you're in the market on close, market on open or during just regular daylight hours. So -- and then the same when you get into derivatives, right. So that for me is often why, Brian, when you and I talk on a quarterly basis, we might see volumes increase, but revenue only going up a percentage of that. And it might be that there was just more volume in lower-yielding products. So when we do the forecast and when we're doing the budgeting, that's an art, not a science. And so we're constantly looking at our rate volume variances all the time. And as you know, we have so many of our products are regulated from a pricing perspective. That isn't an immediate easy lever unlike, for example in Trayport, where it's an unregulated business, we contract with many of our clients to build in consumer price index inflationary adjustments, right. So that's all gets factored in when we do the financial plan. And then we do have discretionary investments, and that's always a lever that we can as a management team, either pull back on or release more funding if things are going better than planned.

Yes, no, that makes sense. We talked about pricing on the equity side. On the futures side, do you feel you have more pricing power? I mean, typically in the futures industry, and generally at least in the U.S. there's been a better, I won't call it pricing power, but pricing is less of the factor in why people trade.

Yes, I think that's generally a fair statement. I think what's really more applicable for us is when we're bringing, for example, those interest rate derivatives to the market, really need to have them be liquid. And hence we need either financial institutions to be market makers or liquidity providers in that space until they really get mature, right, and then we can actually sunset those agreements. And so while those agreements are in place, that also is an element of pricing that you're giving away because you're really sharing in the economics with someone to help ensure that those derivatives have the liquidity. Then when you get to a mature point, there's a time for us to actually sunset those and that will obviously then result in pricing power add back to us.

Right, right, yes, that's typical environment. I want to leave it open for any questions that anyone has as well. But I can keep on going here, so the M&A framework. And obviously you're going to be central to this as CFO. Just remind us of your requirements for acquisitions in terms of what your policies are on financial hurdles. Obviously strategic merit has a big component. Maybe what types of things you're looking for from a -- either a business mix or a revenue mix?

So let's start off with the strategic part of it, right, rather than the boring financial hurdles kind of one. For us, it's really about does any kind of acquisition, whether it be a 100% acquisition or a minority stake all the way down. Does it help accelerate the strategy, right? And so there are a couple of things that we've been doing recently. So for example, we announced recently a minority investment in ETFLogic, so LOGICLY. Once again, that was to help accelerate an existing relationship we had with LOGICLY in our Datalinx business in the ETF space, right, to really help individuals, fund managers and really get behind the ETFs and actually understand all of the underlying exposures, so really, really powerful. So we announced a minority investment there because we bring a lot to the table. They bring a lot to the table and we want to grow with them. And then on the other side, there could be strategic acceleration by buying 100% of the business. Quite frankly, one of our strategic tenants was to really become a #1 player in the trust business, right? So the AST Canada acquisition moved us from a solid 3 with the addition of AST Canada to a solid #2, right behind Computershare. So that really is part of it. So those 2 are examples of strategic acceleration. But the next couple of layers are about geographic diversification. Obviously when you look at our listings business, sure, there are companies being listed from outside of Canada, but it's all Canadian dollar revenue. Our trading business is primarily Canadian dollar revenue. So really how do we diversify ourselves and get more revenue outside of Canada? So assets that have the geographic diversification angle are more attractive to us. The second is assets that have a higher recurring revenue than, let's say, transactional revenue have a higher attraction to us. And then third and not least, are those businesses that are more in the global solutions, insights and analytics side of the business, right? So less appealing to us when you go through our strategic merits is buying another exchange or another large trading engine. It's really what can we do that actually leverages our businesses, scales them and really check marks the geographic diversification, more recurring revenue and then obviously more technology/data/subscription type businesses are attractive to us.

So as you look at the landscape of potential opportunities, and it seems that you can potentially bolt on to, treated the Trayport business or Datalinx or even new areas. Are there -- are you confident that there's plenty of opportunities and it's more about particular fit or pricing or whether they're available or not or do you see as this is like just once in a while?

All of the above.

All of the above.

There's been in the earlier part of 2020 and 2021, some pricing that was just didn't make sense to us. So that started to abate. I'm not sure all of the founders have got to the same place, but they will, at some stage, I hope. So it is all of the above. Honestly it's a strategic fit, can we scale it is very, very important. And then also if it's data, is it a unique dataset that we're actually creating or is it just -- because what doesn't have a lot of value for us, Brian, is something that is a product that is just screen scraping a lot of data and putting it together because over time, you know that that's going to be disintermediated, right? So what is the strategic advantage that makes the data proposition highly valuable and highly sticky? So finding those businesses is hard. I think if you were to talk to any of the exchange CFOs, they would tell you that those are the kinds of businesses they're looking for. And as a result, they're more competitive and they're more expensive. The one thing we do, do a lot of though, is incubate relationships in the early stage space. So we just spoke about ETFLogic is one of those. That's something that's different from our risk posture in the past. We maybe have been more mature company investors. We're prepared to actually take these smaller minority stakes if we can help accelerate our strategy and actually work with them to accelerate their strategy, thereby as they get bigger and more meaningful, we might increase our stake in them and maybe one day even take them out. So that's an interesting part.

Does your window into the venture companies that come on, give you sort of…

Absolutely. And a lot of our partners in our ecosystem are now that they understand that we are open to that, ideas are flowing, especially and it's ramping up. So if I had 5 ideas 7 months ago, I'm getting 12 ideas now. It's kind of purchase, bringing a lot more to the table. And as with all M&A stuff, you look at a lot more than you consummate. It's just the truth of it, but we are open for early stages.

Do you see people getting more reasonable on pricing it or is that still we need -- the market needs to be…

Starting to.

Starting to, yes.

Starting to. I don't think it's all yet where it needs to be.

Yes. Okay. Fair enough. And just the capacity to do these deals or how do you feel about your balance sheet flexibility right now, willing to take on more debt or?

Yes. So look, we have sufficient capacity right now on our balance sheet, north of $1 billion, if you do the math. That really would put us north of 3x leverage, south of 4x. So 4x is kind of where our current rating from DBRS is pegged. Why I'm actually comfortable going to that type of leverage of 3 to 3.5 is we've proven when we acquired Trayport, right, over a very short period of time we brought our leverage, which is north of 3 down to 1.6, 1.7. So we have the ability with our free cash flow generation quarter-by-quarter to actually roll down our debt at a rapid pace. But it needs to be strategically aligned to what we're trying to do. And also not scared of something larger, right? If it means we need to raise some equity, we would consider doing that too. We have a shelf prospectus, which has been filed that we've -- just it's another thing in our treasury arsenal, in our corporate development arsenal to have, waiting and waiting in case the right opportunity arrives.

Yes, then you never know.

Right, you never know. Yes.

Maybe just I wanted -- maybe like 3 minutes left, but just to focus on ESG. It's been a big, big initiative at TMX for a long time, John, the CEO, talking to -- prior CFO.

And as CFO he was passionate about it too.

He was, yes. And he talked about a lot then. So a couple of different angles of this. So first of all, what do you see your role as a listing exchange in helping companies advance their ESG agendas? And how do you help them do that?

Yes. So when we see the big issuers on the Toronto Stock Exchange, the insurers, the telcos, the banks, they don't need a lot of our help to be really blunt, right? But on our venture exchange, our small and medium-sized enterprise clients, typically, their corporate secretary could be also the general counsel, could be also in charge of facilities. And also when that person has 5 minutes of their day, the ESG mandate, right? So we've invested heavily in an ESG 101 website and portal and tons of tools to really help primarily our venture issuers. What we've started to notice is some of the senior exchange members of either risk management teams or whatever, they're accessing that data too, right. And so if you're in a risk management team at a big bank, nothing stopping you from going to the website and actually benefiting from all of the great content. So that's one. The other thing is how we can lead by example, right? We are an issuer ourselves, right? And so -- and we're focused very much across the entire spectrum of sustainability. So very much everyone starts talking on ESG about the E, right, climate, climate, climate. But we're spending as much time on that as we are in sustainability or social, should I say, and then on governance. And so we won't bore you with all the details, we've press released a bunch of it, but we've done a lot of work on the ED&I space. We have some things to come clean on in Canada as it relates to the early days of Canada. And so we're sponsoring a number of those initiatives. We continue to be huge advocates for truth and reconciliation as an example. And so the ED&I space is important for us and then governance too. We continue to lead the charge on the governance space because we realize you need to walk the talk. And so our ESG reporting, we do follow both SASB as well as also TCFD, right? We really want to make sure. And that's one thing that I do hopeful, Brian, is that in the world of the tomorrow, it kind of goes the way of IFRS. We can get standardization because right now it's hard. And then you get things out there like green-washing and all sorts of other things that get thrown out. But we're excited about this space. I think there's also opportunity for some innovative products down the road. But we're really leading with first education, training and then walking the talk ourselves, the products will come later. The most notable one that has come in is trading voluntary carbon with IncubEx as our partner on the Trayport platform, and that's going nice and well.

Yes, it has been asked for the commercial side. I mean it's interesting. I mean, on the -- I think what you're doing and that it bolsters the value of your listings business because you're adding this whole great functionality to it. And at the same time, there's a huge commercial opportunity across a wide range of ESG initiatives for companies that -- even that I follow, whether it's asset management or even in the exchange space. So is that more of an afterthought and right now you just really kind of want to provide those?

So I wouldn't want to leave you with it to complete afterthought. It is front and center. It's just -- it's on the middle burner. We just need to see a few more things come into sharper focus in the marketplace to enable the ideas to be really, really crisp. But for sure, creating more transparent, auditable voluntary carbon market like we're doing with IncubEx, on Trayport, is an example of that. And that didn't happen overnight, right? That was on the front burner. It took a lot of time and effort to get done. But there's stuff that can be done in the derivative space. And on the ETF stuff, we already started the ETF space doing that, but there's just so much more that can be done. And it's more about I want to see where things settle before we commit huge financial resources on debts as to what the future hold.

Right, yes. It's an evolving landscape. And there's a long runway of ideas, I'm sure. But I think we are out of time. Why don't we stop there?

Thank you, Brian.

And thank you for joining and thank you, David.

My pleasure. Thanks for having me, Brian.