TMX Says Derivatives on Exchanges May Align Buffett, Greenspan

By Doug Alexander

May 14 (Bloomberg) -- Over-the-counter derivatives contracts should clear on exchanges to improve transparency and reduce risk in the financial system, the head of Canada’s main bourse said.

“Almost all of the problems that relate to the economic crisis” stem from OTC derivatives, TMX Group Inc. Chief Executive Officer Thomas Kloet said in an interview yesterday in New York. “Listed derivatives are actually part of the solution, not part of the crisis.”

Kloet joins U.S. Treasury Secretary Timothy Geithner in calling for over-the-counter derivatives markets to be moved onto regulated exchanges and trading platforms. Transactions in this $684 trillion market are now typically conducted over the phone between banks and customers. Toronto-based TMX gets about 16 percent of its revenue from derivatives trading.

The shift may also create common ground between Warren Buffett and Alan Greenspan, Kloet, 51, said. Buffett, Berkshire Hathaway Inc.’s chairman and CEO, once called derivatives “financial weapons of mass destruction.”

In his annual letter to shareholders released in February he said that increased transparency won’t solve the problems derivatives pose. Carrie Kizer, Buffett’s assistant, didn’t immediately respond to an e-mail seeking comment.

“We think the derivative markets as they evolved have done more public damage than public benefit,” said Berkshire Vice Chairman Charles Munger, in a Bloomberg Television interview earlier this month.

Greenspan, the former U.S. Federal Reserve chairman, said for years that derivatives -- contracts used to bet on everything from bond prices to weather patterns -- reduce risk.

Closes Gap

“I actually do” think it bridges the gap in the views held by Buffett and Greenspan because over-the-counter derivatives cleared through exchanges are less risky, said Kloet.

Bank trading in unregulated markets such as over-the- counter derivatives was singled out by Geithner yesterday as he promised a more conservative oversight regime.

“The regulatory authorities have a unique window of opportunity to clean this mess up,” Kloet said. “I think the U.S. Fed very quietly gets it.”

TMX is in talks with the Bank of Canada to allow it to clear over-the-counter contracts such as interest-rate repurchase agreements and interest-rate swaps on its own platform, Kloet said. TMX operates the Toronto Stock Exchange, Canada’s main equities market, and the country’s derivatives market in Montreal.

Rates Swaps

“It’s a natural edge onto our fixed-income derivative markets,” Kloet said.

TMX may provide clearing of repurchase agreements within the year, followed by interest-rate swap contracts by 2011, he said. TMX is unveiling a new clearing system by the end of this month, which will allow it to handle these contracts, Kloet said.

The move to exchange-traded contracts would add transparency, increase liquidity and may help avoid the problems sparked by the subprime-mortgage collapse in the U.S., said John Aiken, a financial services analyst at Dundee Securities Corp. in Toronto.

“From a TMX standpoint, it’s definitely a positive because you’re putting one more product through the system,” Aiken said.

U.S. Expansion

TMX may also develop a new exchange in the U.S., modeled after the Toronto-based TSX Venture Exchange, a junior marketplace for 2,269 companies. This would allow TMX to attract more listings from U.S. companies, while adding more trading from foreign investors, he said.

“That kind of approach would make sense in an American exchange,” Kloet said. “That’s something we’ll continue to look at.”

Kloet expects to see more consolidation among global stock exchanges and that his bourse may expand through acquisitions.

“We would consider anything that adds a strategic niche to the organization and helps us with our overall strategy,” Kloet said in an interview on Bloomberg Television.

TMX has diversified from equity trading in the past year after buying a 20 percent stake in London Stock Exchange Group Plc’s derivatives market, acquiring majority ownership in Boston Options Exchange and spending about C$1.1 billion ($940 million) for the Montreal Exchange.

Kloet, who took over as CEO 10 months ago, said the investment with the London bourse isn’t necessarily the first step toward a merger of the two companies.

“We’re going to walk before we run,” he said. “Getting big just to get big doesn’t make a whole lot of sense.”

“The institution’s not for sale and not actively on the prowl” for mergers, he said.

To contact the reporter on this story: Doug Alexander in Toronto at dalexander3@bloomberg.net.