VANCOUVER, British Columbia (Reuters) - A drop in trading volumes in its flagship interest rate contract helped knock 16 percent off the Montreal Exchange Inc's MXX.TO fourth-quarter earnings but there are signs activity is picking up, executives at the derivatives exchange said on Monday.
Open interest, the number of contracts that have not expired, been exercised or fulfilled by delivery, in its three-month Canadian Bankers' Acceptance futures contract, the BAX, is coming back, exchange President and Chief Executive Luc Bertrand said.
Montreal Exchange, which has agreed to be bought by Toronto Stock Exchange operator TSX Group (X.TO), has blamed the drop in interest on the freezing up of Canada's nonbank asset-backed commercial paper market. Investors fled this corner of the country's money market in August on fears the securities were invested in U.S. subprime mortgages.
The biggest investors in nonbank ABCP are busy hammering out a repair plan, which is expected to be in place by the end of March.
"Our view is that as the situation becomes fully resolved ... we will come back to a more normally functioning money market here in Canada," Bertrand said on a conference call.
He added, however, that there was still "a lot of unease" in the market.
Year-to-date, trading activity on the Montreal Exchange was up some 10 percent, Bertrand said, although this was largely driven by equity options and index derivatives dealings, not interest-rate products.
Earlier on Monday, Montreal Exchange reported net earnings of C$6.3 million ($6.3 million), or 21 Canadian cents a share, for the three months ended December 31, down from C$7.5 million, or 27 Canadian cents a share, in the same quarter of 2006.
Core fourth quarter earnings, or those excluding TSX merger costs, were 23 Canadian cents, according to Dundee Capital Markets' John Aiken, who had expected the exchange to report earnings of 21 Canadian cents a share.
Fourth-quarter revenue was C$19.6 million, up slightly from C$19.5 million in the same quarter of 2006.
Average daily trading volume fell 8 percent to 152,458 contracts in the fourth quarter, the exchange said. In particular, volumes in the BAX contract slid 30 percent, while volume for the 10-year government of Canada bond futures contract, CGB, dropped 8 percent.
Expenses for the quarter increased C$2.2 million to C$14.2 million.
The contribution from the Boston Options Exchange increased to C$900,000 from C$400,000 due to a 75 percent surge in BOX's average trading volume. Montreal Exchange agreed in December to increase its stake in BOX to 53.2 percent from 31.4 percent.
TSX Group, which runs the Toronto Stock Exchange and the junior TSX Venture Exchange, offered in December to buy Montreal Exchange after months of speculation about a possible combination.
Shareholders will vote on the cash-and-stock offer from TSX Group, now valued at about C$1.1 billion, on Wednesday.
"Despite the declining market volumes, we do not see any material risk to the transaction with TSX Group being completed," analyst Aiken said in a February 8 research note.
Provincial regulators in Quebec must approve TSX Group's takeover of Montreal Exchange, and they have scheduled a public hearing on the matter for late March. Montreal Exchange said it expects the deal to close in the first part of the second quarter.
Reporting by Nicole Mordant; Editing by Peter Galloway