TSX Group Inc. CEO, Richard Nesbitt, today fired a warning shot across the bow of the Montreal Exchange, promising the Toronto Stock Exchange will get into the derivatives business in 2009.

Speaking at the Economic Club of Toronto, Nesbitt noted that derivatives are the fastest growing sector in global financial markets. However, Canadians lag notably in derivatives trading.

“We’re far smaller than we should be given the dynamism of our cash markets,” he said. “Since the volumes of financial derivatives that wash around the world every year are measured not in millions, billions or even trillions but quadrillions of dollars, our under performance in this area represents a missed opportunity of gargantuan proportions.”

The TSX is currently prevented from getting into the derivatives business under the restructuring of the stock exchanges that occurred in 1999, when all stock trading went to Toronto, and Montreal took the derivatives business.

Nesbitt noted the most successful global markets – such as Deutsche Boerse and Euronext – combine cash and derivatives trading under the same roof. “There are compelling reasons for this – the customers in the cash and derivative markets are the same people. They want to be able to trade derivative and cash products side by side. So that is what we intend to provide for them, once we are free to do so in 2009,” he said. “We intend to launch our own combined cash-derivatives business that replicates the best global market models, building on the elements we are now putting in place.”

Nesbitt conceded the 2009 date may not be the most satisfactory for Canadian markets, “But it is the solution available to us and we will work to ensure we can ramp up our derivatives business quickly four years from now.”

Nesbitt also said that Canada is lagging in electronic fixed-income trading, noting that barely 5% of Canadian trading is done electronically. In the U.S., 30% of bond trading is now done electronically, and that is expected to reach 60% in 2007. “Being slow off the mark on electronic trading in bonds, in fact, explains a good deal of why Canada shows up in the statistics as having lower productivity in financial services,” he said.

Nesbitt said solutions to the problem lie within the industry grasp. “We need to get on with it. This market – many times the size of equity markets – is absolutely fundamental to our future capacity to finance Canadian investments in plant, equipment and innovation. And much wider use of electronic trading is necessary to fully develop the derivative trading that is also so fundamental to the future efficiency of our market and our capacity to manage financial risk.”

For its part, TSX Group is working with Standard and Poor’s, CIBC World Markets and RBC Capital Markets to create the S&P/TSX Canadian Bond Index. “It will be the first, independent fixed income index and it will provide the basis for eventual new investment vehicles linked to the index – for derivative products in other words,” he added.