Former Quebec premier seeks conditions on TMX takeover

“But I think it has to be improved so that Montreal remains at the very heart of the trade in derivatives in Canada,” Parizeau said after addressing a hearing by the Autorité des marchés financiers, the Quebec securities regulator.

Derivatives are an important type of security that are mainly traded by investment professionals. The MX currently lists equity and currency options as well as index, interest rate and energy derivatives.

In a rationalization of Canada’s stock market industry several years ago, the Montreal Exchange became the country’s primary derivatives market while stock trading was primarily conducted through the Toronto Stock Exchange and its affiliated TSX Venture Exchange.

In 2007, with a non-compete agreement about to expire, the Montreal market was acquired in a $1.3-billion takeover by the Toronto company now called TMX Group (TSX:X). The Montreal Exchange retains some of its individual identity and is the TMX Group’s main derivatives market.

Parizeau said that Quebec’s financial capital must also be able to exercise real power over the Boston Options Exchange so that the Montreal Exchange has “at least a little autonomy with respect to new products or new links with other exchanges of derivatives.”

Quebec’s stocks regulator, L’Autorite des marches financiers, has the power to veto the $3.8 billion transaction, which would make a group of pensions, banks and other financial companies the dominant owners of Canada’s stock exchanges.

Among the members of the Maple Group is the Caisse de depot et placement du Quebec, one of the country’s largest pension fund managers. Historically, the Caisse has not only been responsible for investing funds on behalf of Quebec’s public-sector unions but also as a bastion of the province’s economy.

Parizeau told hearings in Montreal that the regulator should exercise this power to ensure Montreal doesn’t become a shell for derivatives.

TMX deal ‘makes sense’, Maple tells AMF

He addressed the regulator as part of a delegation by the shareholder rights group MEDAC, which fears that the current transaction could weaken Quebec.

It proposes a series of recommendations including ownership limits by any group and representation by Quebec residents on the board.

Also appearing was Michel Nadeau, executive director of a Quebec institute of governance, who said the regulator should ensure that small and medium sized shareholders have a place on the TMX board.

He said one-third of the 15-member board members should be represented by retail investors and large pension funds such as the Caisse.

Banks and insurance companies should be represented by five independent members, while the other seats include issuers and the board chairman.

Nadeau also said the CDCC and CDS clearing settlement systems should be not-for-profit organizations.

“They should not be under the TMX and Maple control because otherwise banks and insurers will control everything in Canada. That’s too much,” he said in an interview.

Nadeau said he agreed with Parizeau that conditions need to be in place to ensure that Montreal can grow the derivatives business.

The pace of growth hasn’t matched other jurisdictions because banks have had an interest in seeing investors put their money in stocks and bonds, he added.

There are about 230 people employed by the Montreal Exchange, the same number as five years ago, even though derivative markets are growing everywhere else in the world.

“The cash market is really a cash cow for the banks so we should change that by an extended use of derivative products.”

On Thursday, TMX Group and the consortium proposing to take over the stock exchange operator told the hearings they won’t make any new commitments to Montreal.

Luc Bertrand, Maple Group’s lead spokesman — and formerly the Montreal Exchange’s chief executive when it negotiated the takeover by the TMX — said the commitments already made to the city could not be stronger.

“What we have proposed, with the support of TMX Group, is a plan that makes sense — a plan that serves all market participants and Canada’s capital markets overall,” said Bertrand, who is also deputy chairman of National Bank (TSX:NA).

He said the plan has “tremendous potential value” for Montreal and the Quebec financial community.

TMX Group chief executive Tom Kloet added he did not foresee job losses in the city following the transaction.

In order to continue growing, the Montreal Exchange would have to continue to expand its activities outside Quebec, Bertrand and Kloet added. It recently opened an office in London.

The Quebec regulator is the first in Canada to conduct hearings on the proposed takeover. The Ontario Securities Commission holds hearings next week.