TMX Group Ltd

TSX:X

Earnings Call Transcript 2019-Q3

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the TMX Group Third Quarter 2019 Financial Results Call. [Operator Instructions] I would now like to hand the conference over to your speaker for today, Paul Malcolmson. Please go ahead, Mr. Malcolmson.

[Paul Malcolmson]

Thank you, Jack, and good morning, everyone. Thank you for joining us today for the Third Quarter 2019 Conference Call for TMX Group. As you know, we announced our third quarter results last evening. A copy of our press release is available on the website, tmx.com under Investor Relations. This morning, we have with us Lou Eccleston, our Chief Executive Officer; and John McKenzie, our Chief Financial Officer. Following opening remarks from Lou and John, we will have a question-and-answer session. Just before we start, I want to remind you that certain statements we make on the call today may be considered forward-looking, and 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 Lou.

[Lou Eccleston, Former CEO & Director]

Thank you, Paul. Good morning, everyone, and thanks for dialing in. As Paul mentioned, we reported results for the third quarter last night. In Q3 2019, TMX once again turned in a solid performance. Despite continued headwinds in some key drivers including secondary financing activity among our Toronto Stock Exchange issuer base, TMX delivered year-over-year 2% growth in revenue and 7% growth in earnings per share on a diluted basis. The ability to achieve positive results, as we did in the third quarter with both top and bottom line growth in the midst of a turbulent macroeconomic environment, is the core objective of our long-term strategy as we work to identify and capitalize on what we call seculars trend to generate growth. Results for the third quarter also served to highlight some of TMX's important early-stage successes in addressing these secular trends in capital formation with new international and domestic listings as well as global energy with Trayport and derivatives with Montr?al Exchange. As John stated in our press release last evening, this was our third best quarter in terms -- our best third quarter, sorry, best third quarter in terms of highest revenue, diluted earnings per share and adjusted diluted earnings per share. John will tell you more about it as he takes you on a deeper dive into the numbers in a moment, but I do want to steal some of his thunder at the outset and just briefly discuss the 6% increase in TMX's quarterly dividend that we also announced last night. The increase from $0.62 to $0.66 per common share is the second increase of 2019 and the fifth TMX Group dividend increase in 3 years. In fact, our dividend has grown 65% since 2016 when TMX's strategic transformation returned the organization to profitable growth. The increase in our dividend over the past 3 years clearly demonstrates TMX's ability to generate value for clients and shareholders alike. We've also achieved our stated goal of aligning our payout ratio with that of our global peers. At Investor Day just about 1 year ago now, we laid out our road map for growth, our plans to capitalize on evolving market trends around the world in our core business as well as in new areas of strength and expanded capabilities. This year, we have made considerable headway executing against our road map. And as a result, TMX has evolved from a regional company with global aspirations into a truly global business. One key tenet of our global growth strategy is Trayport, our London-based network and platform for global wholesale energy markets. Trayport revenue from the core subscriber business, including VisoTech, continued to grow in the third quarter, up 17% in sterling over Q3 2018, including a 9% increase in the average revenue per user. Trayport also continues to make progress in its strategy to seize on structural energy market trends including globalization and digitization of markets. The liquid natural gas market is a prime example of a market in transition. In fact, the nature of LNG transactions has completely changed. Increased generation and the transition of LNG from a regional to global fuel has led to shorter-term contracts. These more tradable products have spurred interest from traders and LNG portfolio players and contributed to a pronounced increase in liquidity. Volumes in the signature European and Asian benchmark gas contracts, accessible through Trayport's system, increased significantly year-over-year. 2019 volume in the TTF contract through the end of August was up 53% compared with 2018, and the JKM set an all-time high in Q3 in terms of volume. Brokers using Trayport are a substantial source of liquidity in this market and execute a majority of the volume. In a year marked thus far by operational success, organic growth and high performance, Trayport's 2019 will be remembered for strategic execution and accelerated growth. In the spring, the acquisition of VisoTech added advanced algorithmic trading capabilities to Joule, Trayport's core trading screen. Implementation is on track for launch in the next few months. And just last week, Trayport announced another very important step forward in its global expansion strategy, entering into an agreement with Nodal Exchange, a Washington, D.C.-based derivatives exchange serving commodities markets. Under the agreement, U.S. energy contracts will now be added to Trayport screens, and the Joule network will expand to include trading participants of Nodal Exchange. This is a good strategic fit for Trayport and for TMX and establishes an entry point into the U.S. energy markets for Trayport. Across our business, TMX's international presence continues to grow as we target areas to apply our expertise and depth of capabilities to add value for existing and prospective clients. In derivatives, taking advantage of global pent-up demand for Canadian products, Montr?al Exchange's extended hours initiative has been a success, serving the broadened investor exposure to key Canadian benchmarks while enhancing MX's profile as a globally competitive market and boosting activity. Volumes traded during extended hours now represent approximately 5% of overall volume, and that's up from 3% in the first quarter of the year. Overall, MX and CDCC third quarter revenue was up 16% compared to last year, driven by higher volumes in our signature products, and that includes the BAX, the CGB and the SXF as well as higher revenue from repo clearing. Going forward, Montr?al Exchange will continue its global expansion as it seeks to capitalize on key trends such as a growing global buy-side demand and OTC derivatives reform initiatives that push more products towards electronic and centrally-cleared models. Turning now to our Capital Formation business. While market conditions and volatility continued to weigh on results in the third quarter and over the first 9 months of the year, our long-term strategy remains on track. Capital knows no borders. The global mobility of capital is an irreversible trend aided by technology and market infrastructure developments and an increase in regulatory support for growth companies. In targeted areas around the world, our business development teams are pitching the merits of listing with TSX and TSXV to entrepreneurs and companies with a heavy focus on the innovation sector in Silicon Valley, Israel, the U.K. and Latin America. A closer look inside the numbers indicates our sustained effort has been paying off. Although financing transactions in dollars raised through the first 9 months of the year are down compared with last year, our markets still were #2 in new international listings and #2 in new listings overall among our global peers. TMX's innovation franchise continues to gain momentum as well with TSX and TSXV gaining a reputation among issuers and investors as an international innovation center. For the overall number of new innovation listings on our markets on a global basis, we're ahead of last year with 8 new international innovation listings as of the end of September compared to 7 in the entire year of 2018. The sector continues to outperform major benchmarks as well. Through the end of September, the S&P/TSX Tech Index was up 50% from the start of the year, which represents an attractive return for any investor and also for any companies considering a listing here. And despite market volatility impacting the current IPO market, particularly in terms of timing, we are confident that the global pipeline remains strong. As we look to build on that strength and facilitate growth for issuers of all sizes and across all sectors, we're proud to recognize listing of Hut 8 Mining Corp., a Toronto-based cryptocurrency company and blockchain infrastructure company, which began trading on Toronto Stock Exchange last month. Hut 8 is not only the first cryptocurrency company on TSX and a TSX Venture graduate, but it's also the first company to be listed under our new TSX Sandbox program, which we launched earlier this year. TSX Sandbox is a new tailored solution intended to help widen the existing channels for companies to access public markets and expand the scope of our engagements with issuers and potential issuers. Within a new progressive framework, our senior market listings team work directly with companies who have high-growth potential, but who may not necessarily meet all traditional criteria required for TSX listing. Sandbox is consistent with the adaptive approach and long-term mindset TMX has adopted to serving our markets in recognition of evolving trends and emerging paradigms. At TMX, in everything we do across our enterprise and in every business area, we are focused on growth: helping our clients grow, growing TMX and growing the value we deliver to shareholders and stakeholders. I thank you for your attention, and I look forward to your questions. And with that, I'm going to turn the call over to John.

[John D. McKenzie, CEO & Director]

Well, thank you very much, Lou, and good morning, everyone. Now as Lou just mentioned recently, we were really pleased to report our best third quarter in terms of revenue, diluted EPS and adjusted diluted EPS. Our revenue for the quarter was up 2% year-over-year and operating expenses were down 2% year -- over last year, leading to a 7% increase in diluted earnings per share and a 5% increase in adjusted diluted earnings per share as compared with Q3 of '18. The higher revenue in Q3 was largely due to an increase in revenue from Derivatives Trading and Clearing, Trayport and CDS. These increases were partially offset by decreases in Capital Formation as well as in Equities and Fixed Income Trading revenues. The increase in Derivatives Trading and Clearing revenue was driven by a 16% increase in revenue from MX and CDCC. There was a 7% increase in volumes on MX as well as an increase in revenue from repo clearing, and reduced rebates from the MX and CDCC in the third quarter as compared with last year also contributed to the increased revenue. The increases were somewhat offset by a decrease in revenue from BOX following the expiry of our agreement at the end of 2018 to provide solar technology and services to BOX, although we are continuing to provide transition services to BOX over the near term. Trayport continued to deliver exceptionally strong results in its core business. Year-over-year, revenue at Trayport was up 5%, which included a full quarter of revenue from VisoTech. The increase was somewhat offset by the unfavorable impact of a stronger Canadian dollar relative to the sterling. Revenues in the core subscriber business excluding Contigo, which was sold in November 2018 and including VisoTech, grew by 17% in sterling. Trayport's other key metrics also continued to be strong. Year-over-year, trader subscriptions were up 12%, total subs increased by 7% and the revenue per user was up 9%. Revenue from GSIA excluding Trayport was essentially unchanged from last year. There was higher revenue from data feeds, co-location and a favorable impact from a weaker Canadian dollar relative to the U.S. dollar in Q3 '19 compared to Q3 '18. However, these increases in revenue were essentially offset by a decrease in revenue from benchmarks and indices versus Q3 2018 where there was a onetime increase from this source of revenue. While the number of real-time market data subscriptions was down 1% year-over-year for TSX and TSX Venture, subscriptions were up about 5% for MX data. CDS also reported a strong quarter with a 7% increase in revenue, reflecting revisions to our fee schedule for issuer services and increased international revenues. Now as I said earlier, the revenue increases were partially offset by a decrease in Capital Formation revenue, reflecting lower initial listing fee revenue. Sustaining listing fee revenue was also down year-over-year, reflecting the lower capitalization of our listed issuers at the end of last year. In Q3, we did notice an improvement in the additional listing fee revenue with only a slight decline in the quarter compared to last year. While the number of transactions billed on the TSX was essentially flat from Q3 '18 to Q3 '19, there was a 29% decline in the number of transactions billed at the maximum fee. This decrease was largely offset by higher additional listing fees on TSX Venture where there was an increase in total financing dollars raised. TSX Trust was also slightly lower than in 2018, reflecting decreased revenue from transfer agent fees and activity, somewhat offset by higher margin income. There was a 6% decrease in Equities and Fixed Income Trading revenue in the quarter, which was in line with the 7% decrease in overall equity trading volumes. Now turning to operating expenses. Operating expenses in the third quarter were down 2% from last year, reflecting continued disciplined cost management. The decrease in costs was largely related to lower project spending including amounts paid to external consultants as well as lower short-term employee performance incentive plan and severance costs. These decreases were partially offset by an increase of approximately $3.6 million in long-term employee performance incentive plan costs, driven by the increase in our share price. Now looking at our results as compared with Q2. Revenue was $196.3 million in Q3 '19, down $14 million from Q2 '19, reflecting sequential decreases in all segments including Capital Formation, driven by lower additional listing fees, Equity and Fixed Income Trading and Clearing and Global Solutions, insights Analytics, though this is not unexpected as Q3 is generally a softer quarter. Operating expenses decreased as well in Q3 '19 versus Q2 '19, reflecting a reduction in strategic realignment expenses, a decrease in project spending and fees as well as an increased recoverable expenses. These decreases were somewhat offset by an increase of approximately $3.9 million in the long-term employee performance incentive plan costs I mentioned earlier, driven by that increase in our share price. Income from operations decreased from Q2 '19 to Q3 '19 due to the lower revenue and partially offset by these lower expenses. Now to comment on our balance sheet. We reduced our commercial paper by almost $50 million from the end of 2018, and our leverage as defined by our debt-to-adjusted EBITDA ratio was 2.2x as of September 30, down from 2.3x at June 30. We also held over $240 million in cash and marketable securities at September 30, over $70 million in excess of $170 million we target to retain for regulatory and credit facility purposes. Last night, our Board declared a quarterly dividend of $0.66 per common share to be paid on December 6 to shareholders of record on November 22. Our solid ongoing financial performance gave us the confidence to announce a second increase in the quarterly dividend for 2019. And with this $0.04 or 6% increase in our dividend, our dividend payout ratio is 53% in the quarter or 47% over the past 4 quarters, in line with our targeted payout range of 40% to 50% of adjusted diluted EPS over the long term. Now at this point, I will turn the call back to Paul for the question-and-answer session.

[Paul Malcolmson]

Thanks, John. Jack, could you please outline the process for the question-and-answer session?

[Operator]

[Operator Instructions] Jeremy Campbell with Barclays.

[Jason Brandon Weber, Research Analyst]

This is Jason Weber on for Jeremy Campbell. Lou, I want to touch on the Montr?al Exchange and some of the opportunities for derivatives trading you see there? I know cannabis and ESG have been areas of interest. But with CME's expected launch of ESG Futures later in the month, could you help us frame if ESG would still be an area of potential expansion going forward? Or if there are any other upcoming launches you want to highlight?

[Lou Eccleston, Former CEO & Director]

Yes. Sure, Jason. I mean it certainly could be. What we're doing right now is spending a lot of time talking to the market participants and understanding where the greatest demand is. But certainly, in our future as we continue expansion and look at moving into Asia for 2021, part of the transformation of growth of the Montr?al Exchange is to move from, as we have, from a regional exchange to a regional exchange operating globally. Now the next step is we start to add benchmarks that have broader constituents, not just Canadian constituents, as we move out to be a true global player operating in global markets. So we're looking at -- obviously, there's a lot of demand in cannabis. There's demand for ESG. But trying to get exactly what are the constituents, what are clients looking for, what's the right makeup of those benchmarks, so we're working right now to try and address those things and figure out exactly what the market wants, what's the greatest demand. But certainly, when you look out over the next 1 to 2 years, we intend to launch benchmarks with global constituents that can drive new futures contracts.

[Operator]

Jaeme Gloyn with National Bank Financial.

[Jaeme Gloyn, Analyst]

Yes, I'm just -- first question, just on the Nodal Exchange relationship. Can you just speak to the strategy, how that relationship came about, why Nodal? And is this something that we should expect from Trayport going forward with other exchanges?

[Lou Eccleston, Former CEO & Director]

Yes, Jaeme. I mean this is totally consistent with our approach and the existing model for Trayport. We've mentioned in the past how we're looking at obviously the U.S. market, you want to be in there. There's other developing markets like Japan and others. So there's a pretty healthy list of both new markets and new asset class that we've targeted. This is a classic example of how our people -- our folks at Trayport are out talking to participants in the market. They find a need. And this is exactly the kind of entry point we want because once we've got this agreement now up and running with Nodal, this gives us a chance to go out to brokers. You'll automatically get a group of traders that are Nodal clients. So that's what seeds your marketplace. So Nodal is the first exchange. You'll get a group of traders from Nodal. But then also, it gives us a chance to go out to the brokers in the U.S. and add other constituents, just like we do in every other market. And this is -- it was exciting for us because I think we have been able to get into the U.S. market even a little ahead of when we had hoped for. So it's a great entry point for us and a chance to build out the Trayport model in the U.S. And we're hopeful that other markets won't be far behind.

[Jaeme Gloyn, Analyst]

Yes. And just following up still on that front. The -- your kind of the secret sauce of Trayport is the relationships with exchanges and running the sort of the background, back-office functions and getting all that data. Is that going to be the case with Nodal as well for these contracts? Or is this a little bit of a different relationship than what we're typically used to?

[Lou Eccleston, Former CEO & Director]

No. I think it's consistent, but I will point out that our relationships with all of our venue participants is critical. I mean the value we provide to all the participants, exchanges, traders, brokers, remember, one of the biggest highlights so far of 2019 has been to roll out Joule for brokers and giving them the digital tools they need to compete in markets that went from long-term contract-based to spot trading-based. You've got to have new tools to be able to do that. So Joule for traders has been out now for a while, and you see the results of that as the trader client base keeps growing. So we've got to have a value-add relationship with all the participants on this system. But this is very consistent with how we have built up our business in other markets.

[Jaeme Gloyn, Analyst]

Okay. And last one on this topic for those of us not as familiar with Nodal. Can you just sort of speak to their market share and growth over the last -- or I guess, let's just say over recent periods?

[Lou Eccleston, Former CEO & Director]

I don't have market share numbers in front of me on that, but Nodal is part of a larger network. It's owned by the Deutsche B?rse Group. And it's a growing business, it's one of the newer exchanges. We can go back and get you some data around that, follow up with you, Jaeme, to do that, but I don't have all their market share and growth numbers in front of me. But we can certainly get you that.

[Jaeme Gloyn, Analyst]

Okay. And then shifting gears just to the dividend increase this quarter, can you just speak to some of the parameters that you were looking at that drove the increase for Q3? Is this something that we should expect on a more regular basis, this kind of 3 quarters, recent quarters' timing? Just a little bit more color around that.

[John D. McKenzie, CEO & Director]

Well, Jaeme, I mean, the whole point of the 3-quarter timing is to make it so you can't guess which quarter by quarter. Just -- all joking aside, what we're trying to do is ensure that shareholders are participating in the profitable growth of the organization. And so as we've gone through the year and demonstrated continued profitable growth even despite of strong market conditions, it gave us the confidence to make another change and really push to the top of our guidance range. And as an analyst who looks at us, you'll know that our cash flow capability, our free cash flow capability, there's a lot of flexibility there to pay out at the top end of the range. So that's the thinking that went into it. We're not giving new direction around timing going forward other than the expectation is we're going to want to continue to have shareholders enjoy in participating in the profitable growth of the organization.

[Operator]

Nik Priebe with BMO Capital Markets.

[Nikolaus Priebe, Former Diversified Financials (Canada) Analyst]

Sorry about that. I wanted to start with a question on the IPO market. There's clearly been a dearth in corporate IPO activity this year. We had one problem with a candidate who pulled their plans to go public very recently. I was wondering if I could just ask to get your read on what you're seeing in the IPO pipeline and what you're hearing from prospective candidates in terms of their interest in pursuing a public listing.

[Lou Eccleston, Former CEO & Director]

Yes. Our pipeline, for starters, remains very strong. And I think we've got to be careful not to paint the entire IPO market with some large potential IPOs that get a lot of attention and a lot of news. There's still a very robust IPO market. And in fact, we've been saying in prior quarters that we were very encouraged by the continued strength in our IPO. As we said, they're on par with prior years. That hasn't dropped. And in fact, we believe that some of the -- what John mentioned in terms of the pickup in secondary financings on Venture is because there have been continued IPOs and that's actually a pipeline for secondary financings. So I think that the challenge that we see across-the-board in the IPO market is with larger private companies not getting the valuations they hoped for. But that doesn't necessarily exist in every -- at every level of a private company looking to raise public money. So there's still a very strong pipeline. It continues to grow, actually. And as I mentioned in my remarks, we are second again globally in international things. So our team that's out on the ground in places like Silicon Valley and in London and in Tel Aviv continues to build pipeline and bring in listings. On the other hand, there is an issue, obviously, in the marketplace with companies that get very big and stay private for a long time and then getting the same public valuation that they've got privately or expect, that's a challenge, but it doesn't exist through the entire IPO market.

[Nikolaus Priebe, Former Diversified Financials (Canada) Analyst]

Yes, yes. Fair enough. Okay. And then with the leverage ratio continuing to move lower towards 2, just wondering if you could give us a bit of an update on what you're seeing on the M&A front? Are you seeing some bolt-on opportunities out there that might look attractive? And should we expect to see you transact over the next 6 to 12 months?

[John D. McKenzie, CEO & Director]

Yes, we've been actually quite active looking at a number of things that are both bolt-on size and larger in terms of, again, as we've talked in the past, pieces that would drive the strategic growth areas for the firm. So the team has been active, the business folks, the M&A folks, in terms of looking at those things. We've seen some things come to market as well. What we found with a couple that we've seen so far is that the investor metrics in terms of the quality of the asset or in the price that the market wants for them wouldn't have created value for our shareholders. So we are looking for those right opportunities. So I would expect, Nik, for us to continue to be active but disciplined in the choices that we make.

[Nikolaus Priebe, Former Diversified Financials (Canada) Analyst]

Got it. Okay, that's helpful. And then just one last one. Very strong performance of Canadian equities on a year-to-date basis. I was wondering how sensitive we should expect sustaining listing fees to be in 2020 just given the strong run in equities. I understand there's a cap, which kind of reduces the sensitivity of total sustaining fees to equity values. But if Canadian equities are up 17%, should we expect the growth rate of sustaining fees to be about half of that? Or is there a better rule of thumb to use there?

[John D. McKenzie, CEO & Director]

There isn't a rule of thumb because it does depend on the mix of where the companies are creating value. If you -- the best thing I would guide you to is to look at some of the past performance in terms of how did overall market value increases translate into sustaining fee changes on a year-by-year basis in the past. And certainly, about -- as we get into the next quarter and we report at the end of this year, we'll actually give you more guidance because we'll know where the actual market values have landed and what it looks like for direction around sustaining fees. But to give you just a bit more in terms of data points, about 15% to 20% of the TSX companies are at that cap, so that market value increase you're seeing across the remainder of them does translate into the rest of the fee structure.

[Operator]

Graham Ryding with TD Securities.

[Graham Ryding, Research Analyst of Financial Services]

Just on that -- sorry to cut you off. Just on that last question there, what's generally the mix between sustaining fees from TSX versus TSX Venture? Is it a 75-25 split? Is that roughly accurate?

[John D. McKenzie, CEO & Director]

Yes. That's roughly accurate. And I believe that -- and we disclosed that in more detail in the annual MDA.

[Graham Ryding, Research Analyst of Financial Services]

Okay. Perfect. Trayport, the growth number of 17% in British pounds, that includes VisoTech. Is the organic growth number closer to 10% if you adjust for Contigo, take that out of the numbers?

[John D. McKenzie, CEO & Director]

Yes. Those are largely a wash so that'd be a good estimate.

[Graham Ryding, Research Analyst of Financial Services]

10%. Okay, great. Bigger picture, what's driving the demand for higher LNG trading globally? Can you put your finger on that?

[Lou Eccleston, Former CEO & Director]

Well, the biggest issue is the ability now to have it be mobile. The idea that you can ship a molecule anywhere in the world has made it a much more mobile market and not the kind of thing where I've got a -- it doesn't have to be produced locally every place. But generally, the technology to ship those molecules all over the world is one of the major drivers. And that drives the ability then to trade it on a much more frequent basis, which translates into Trayport obviously being able to provide the tools for brokers and traders to trade more frequently.

[Graham Ryding, Research Analyst of Financial Services]

Okay, that makes sense. Shifting to the listing side of your business. Just secondary financing, can I get your perspective on -- there's -- it feels like there's some traditional sectors in Canada that might be going under some secular change, and that's an impact on your secondary financing activity. Is that your view at all? Or are you viewing this sort of trough level of financing activity more cyclical in nature?

[John D. McKenzie, CEO & Director]

We've seen it as being more cyclical and more reactive to volatility in the marketplace. We've done some long-term studies in terms of how the different sectors have been impacted. And for the majority of the sectors you're seeing strong activity or return activity, you're seeing some strength returning into the mining sector as deals start to get done again. Clearly, one of the weaker areas has been around Canadian energy, but that has been not -- that's been unique to Canada, that's not a global trend. So that's why we look at it being potentially more cyclical. And as those businesses continue to see value in terms of where their valuations are, I think the general Street perspective is you're going to start to see financing and spending in that sector again because the values of those companies now make them really quite attractive. So we do see it as being more cyclical than secular and we continue to push. And that's why, even though we've continued to push on the other end, which is the companies that we bring in, which create the long-term opportunity for new financing is also more broad-based, so tech sector, global issues as well, get much more diversified around just being impacted by 1 sector like that.

[Graham Ryding, Research Analyst of Financial Services]

Yes. That's fair. And then my last question would be on the trust side of your business. There was some mention of approval from IIROC for your Trust business. Does that actually make a material increase in your market opportunity? Can you speak to that?

[John D. McKenzie, CEO & Director]

Yes. It does. What -- it does a couple of things for us. So being an IIROC-approved trust company allows other dealers to utilize or recommend TSX Trust to their clients where they wouldn't have been able to before because it's about having the right capital behind it to be able to do business. It also allows TSX Trust to act as trustee for broker-dealers. So for dealers that have to hold their client assets in trust, we can now bid on that book of business, which was something that wasn't part of our market opportunity before.

[Operator]

Paul Holden with CIBC.

[Paul David Holden]

Want to go back to the discussion around the Nodal relationship. I guess, first off, help me understand exactly what this means in terms of relationships with broker-traders? Like is this -- you have to go out to the broker-traders that are using Nodal today and convince them to sign up for the service? Or are you getting some broker-traders right off the bat plugging into Trayport platform?

[Lou Eccleston, Former CEO & Director]

Well, you'll get -- the beginning of this all will be that Nodal will bring on traders that are their customers for the Nodal Exchange. That seeds the marketplace, the screen. It puts content on the screen so that then others will want to be there. So as we've talked about in the past, Paul, the key to this is getting a critical mass enough to launch Trayport, which means enough participants and prices on the screen to have it be a meaningful marketplace to want to be there. So what this does is seed that by Nodal will bring on a certain number of traders, and that's part of the agreement that we've got with them. So -- and that's like every other model everywhere else in the world and every other exchange. The exchange actually pays for a certain number of their clients to come on -- of the traders to come on. Then we go out, as part of our sales efforts, and bring on other participants, brokers and others onto the screen, other traders, other brokers. So the key though is to get the market seeded, and that's why we said this is a great entry point for us into the U.S. because you've got to get that screen populated for others to want to be on it.

[Paul David Holden]

Got it. Understood. And then as part of your agreement, does it allow you to plug into other exchanges in North America similar to how you set up in Europe?

[Lou Eccleston, Former CEO & Director]

Yes. Yes. The model is consistent, yes.

[Paul David Holden]

Yes. Okay, okay. And final question on this one. Is it related to both power and natural gas in terms of...

[Lou Eccleston, Former CEO & Director]

Well, again, it's not -- it will start with where Nodal's strengths are, right? But then it's not restricted upon any other asset classes depending on who the other participants are that we bring on to the platform.

[Paul David Holden]

Okay. And Nodal's strengths are in which commodities?

[Lou Eccleston, Former CEO & Director]

Right now, mainly power, for their strengths. But again, as you bring on other brokers, they'll post prices on their asset classes where they trade. So that's -- again, it's the entry point. So today, it's where Nodal is strong to start but then as you bring on other participants, they'll take -- they'll post prices on the asset class that they trade.

[Paul David Holden]

Got it. Yes, okay. This is interesting. Okay. Second line of questioning, I guess, on growth from clearing. This isn't the first quarter we've seen it, but I guess I want to understand better the sustainability of the revenue growth in clearing. So you cited 2 factors, the repo and the lower rebates. Some of the lower rebates are probably more transitory in nature, but maybe the repo clearing is more sustainable. Can you talk a little bit more about that growth driver?

[John D. McKenzie, CEO & Director]

Yes. I mean this is particularly with clearing in the CDCC. So first of all, the #1 growth driver in there also continues to be the volume increases on MX because that flows right through to CDCC. So that 7% growth in volumes, you're seeing that on the clearing side as well. The other 2 components you talked about, the repo is a continued growth in participant use of that product. So that was up about 60% in terms of the year-over-year impact, and these are still single-digit million numbers, so they're still small numbers but large percentage changes and it's as more participants continue to use that product to deal with their OTC activities. The rebate component, as we've talked in previous calls, one of the ways to seed liquidity and jump-start new products is with stronger rebates upfront. And so when you look at the comparison year-over-year, it was a stronger rebate regime in Q3 of last year in terms of getting some products started that have been worked their way off. So then you're seeing the upside in the revenue this year as we're not paying the same level of rebate. And we'll continue to see that in the future as we bring on new products. We've talked in the past about the work we've done to really build the liquidity in the 5-year product. That has a strong rebate regime associated with it. When it gets to a different level, we'll look to see whether or not that makes sense going forward. But that's a good example of a product that program has worked really well on that we've now gone from being small dollars in terms of volume traded to over 40,000 contracts a day.

[Paul David Holden]

And for my benefit, how do I think about your ability to continue to drive higher volumes in that repo market?

[John D. McKenzie, CEO & Director]

It's about product fit of what the industry needs. So the work that we've done to date in terms of building out the product set, building it out from a sell-side. And if you remember, the recent change in last year was that we modified the products and brought on key buy-side players, so the buy-side players in terms of large pension fund and asset managers. That model is one that continue to -- can continue to expand to bring on other large clients as they see the value in the product. But as it matures well, you can actually use it more frequently. So it's -- at this point, it's hard to give a lot of good indication in terms of where that can go. But we'll think about that for the future if there's better indicators we can give to you on that.

[Lou Eccleston, Former CEO & Director]

Yes. But just to add to that, I mean, in general, you've got still an early-stage market here. And so it's both greater use of the existing participants, but you still be more participants to come. So you still don't have everybody participating in this market. So it's both more volume from existing participants and more participants.

[Paul David Holden]

Got it. Okay. Final line of questioning to me is on the Hut 8 that's also interesting. Can you kind of talk about the -- what the fundraising mechanism was in that situation? I'm not familiar with it. And how it may be different, if at all, from how TMX traditionally collect fees on listings?

[John D. McKenzie, CEO & Director]

So in terms of the fundraising side or the fee side, it looks exactly like any other public offering on the exchange or graduate on the exchange in this case. What's unique about the model in terms of the TSX Sandbox model that Lou talked about is, if you think about the rule set that a company needs to comply with to do a public offering in terms of all the different requirements in terms of company size, disclosure pieces, prospectus items, things like that, and sometimes when you've got new emerging industries or issues, they don't fit exactly into the historical mold from a rule standpoint. So the team is able to identify what are some of those rules within the rule set that we often have to give a waiver for as we go through our diligence on a company to help them with their capital raising activity. And that's what the TSX Sandbox concept is, is recognizing that there are some things in the rule set that are not fit-for-purpose for kind of next-generation companies. And rather than just give a waiver each time, we build out capacity to take them on as public companies. And over time, we either modify or they work into a way where they can comply with that rule set. That's what Hut 8 does in terms of how it looks from a capital raising standpoint for the firm itself or from a fee model standpoint, it looks exactly like any other public offering.

[Operator]

Jeremy Campbell with Barclays.

[Jason Brandon Weber, Research Analyst]

This is Jason again. Just a quick one on Trayport. I know trading clients make up about half the revenue here. And if I back into sort of like an estimated revenue per trading client, this has increased about like 5% since the beginning of the year. Is this mostly due to like seasonality, add-on offerings or is it something with pricing? Just trying to get a little bit more color on the dynamic here.

[Lou Eccleston, Former CEO & Director]

I think the important thing is to look at what's happened with revenue per user. And we've -- we're coming with new products. You've got, as I mentioned, the Joule for trading screens now for traders. But I think you're looking at more growth globally. The average revenue per user is a big one, too. I think that's up 9%. So it's not a seasonal issue, this is organic growth from being out there and adding more products and actually just out selling more services on top of the core subscription.

[Operator]

Jaeme Gloyn with National Bank Financial.

[Jaeme Gloyn, Analyst]

I feel like it's been a while since we've had these conversations. Just want to make sure we -- just around what's going on in the U.S. and the Members Exchange getting set to launch LTSE. I think there's another, Miami one as well. Talk about the dynamic of new exchanges and what they're really positioning for. Is it against the data fees issue in the U.S.? Talk about that and Canada, please?

[Lou Eccleston, Former CEO & Director]

Yes. It's not -- as we talked about, it's not the same situation by any means. We have not been in a situation where we've been consistently raising rates on market data by any -- in any stretch of the imagination. It's a very different situation here. I think here in Canada, the issue is much more around what drives fees artificially like is -- are the order protection limits appropriate? Do I really need to go to a venue that's got such a tiny market share and pay for that? And so those are the things that we look at. What's driving the actual cost overall because our fees are pretty consistent, they're highly regulated. And again, you can see on our website how we compare ourselves on an apples-to-apples basis to other markets and we're a very inexpensive market, relatively speaking. So it's not the same free-for-all, I think, that you see in the U.S. And it's a different market. It's a different size market. So that kind of fragmentation in the Canadian markets is only going to raise costs even higher, not the other way around.The bigger issue for us in equity market data is trying to find ways to provide clients that are under pressure in pricing. And you see that, that's a much more important issue for us is worrying about the clients. We don't have all the same issues that you see in the U.S. So we're squarely focused on how do we provide value. We've talked about we're out trying to put forth a new enterprise model that will make it easier and more amenable to clients to use more market data. So that's where we're really focused on, Jaeme, not really on what's going on in the U.S., just -- it's not the same situation.

[Jaeme Gloyn, Analyst]

Great. And one other follow-up here just on the derivatives on the MX trading volumes. I'm looking at the last 3 quarters and we seem to be running around the sort of $29 billion, I guess, level here. Fairly flatlined, still good growth over 2018. But I'm just wondering, I would have expected to maybe see some sequential growth as well or more meaningful sequential growth. I'm just wondering if you can talk to some of the dynamics or -- between some of the contracts, what's going to get that sequential growth going higher?

[John D. McKenzie, CEO & Director]

Yes. Jaeme, it's a really good question. And you've seen a different mix in terms of activity so when you look at that kind of sequential, the last couple of quarters being relatively flat but strong, as you said year-over-year, that mix has been changing because what you're actually seeing is what otherwise would have been softness in the rates regime. As you know, as interest rates got announced to stay flat, that took some of the volatility out of that. So you saw some actual step-down in terms of the trading of the long-term rate. But that's getting offset by the product growth and the new products that Lou talked about, the expansion and the international interest from Europe, the expansion and the growth in the 5-year. So it's actually the growth in the new products is offsetting some of the cyclical trends. In terms of the go-forward component, remember that our expansion into international hours is early stage still in terms of bringing in new international clients. And while we've seen growth remain at 3% to 5% of the total mix, the long-term expectation is that's still the benchmark of 15 to 30 that we've seen in other marketplaces. And with the continued expansion of that as we look to how do we build out of Europe after this, how do we then build out to take the 5-year or other products into the international domain, those are the things that are going to create more the long-term growth that will get away from any of the cyclical impacts you're seeing quarter-to-quarter this year.

[Operator]

[Operator Instructions]

[Paul Malcolmson]

Well, thank you, Jack. Just before we close, I want to welcome Julie Park who recently joined the Investor Relations team. Julie is going to be filling in for Amanda while she is on maternity leave. And speaking of Amanda, we just had some wonderful news before the call started. Last night, Amanda had a baby boy, Isaac, weighing 7 pounds 2 ounces. So a big congratulations to Amanda and Victor from all of us here at TMX. And finally, thank you for listening today. The contact information for Media as well as Investor Relations is in our press release, and we'd be happy to take questions throughout the day. Have a great day and a wonderful weekend. Thank you.

[Operator]

This concludes the TMX Group Third Quarter 2019 Financial Results Call. We thank you for your participation. You may now disconnect.