The plan to make over the Canadian securities-trading landscape has an important new booster in Toronto-based TMX Group Inc., but the effort still faces its most daunting hurdle: winning regulatory approval.

On Oct. 31, TMX announced that its board of directors has come around and will now support a proposal from a group of 13 investment dealers and pension funds — operating as Maple Group Acquisition Corp. — to acquire TMX and subsequently buy out its main rival in the trading business, Toronto-based Alpha Group, as well as the clearing and settlement firm, the Canadian Depository for Securities Ltd., also of Toronto. If these transactions all proceed as Maple envisions, the trading business will be consolidated and integrated with the clearing function, fundamentally overhauling Canada’s capital markets.

Maple now has the TMX board and management onside. What began as a hostile bid in response to the proposed merger of TMX and the London Stock Exchange Group PLC has now turned friendly, with TMX and Maple entering into a support agreement that calls for shareholders to endorse both the proposed buyout of TMX for $3.8 billion and the subsequent deals for Alpha and CDS.

Under the terms of this agreement, the expiry date for Maple’s takeover offer has been extended to Jan. 31, 2012. The consortium also has agreed to pay TMX a $39-million “break fee” if the deal is not consummated because it fails to win regulatory approval.

Securing that approval is the next big hurdle for the deal. In early October, Maple published its application seeking approval from the provincial securities regulators in Alberta, British Columbia, Ontario and Quebec. The deal also will require the assent of the federal Competition Bureau.

In the meantime, the Autorité des marchés financiers is scheduled to hold two days of public hearings into Maple’s proposal on Nov. 24-25, and the Ontario Securities Commission has slated its own hearings for Dec. 1-2.

The hearings will focus on the fundamental changes that the Canadian capital markets will undergo if these transactions are allowed to proceed. Regulators have a long list of concerns to satisfy, including: whether to allow a single firm, controlled by a small group of market players, to control most of the trading business and all of the clearing function; and, if so, how to make sure that group doesn’t abuse its dominant market position; ensuring appropriate governance; and that the numerous conflicts between its regulatory function and corporate ambitions are managed effectively.

Maple, in securing the support of TMX’s board for its proposal, has already changed its planned governance arrangements to suit TMX, agreeing to: an independent chairman selected in consultation with TMX; a fully independent board governance committee; and other features that echo the existing governance arrangements at TMX (including a 50% independent board that also respects its existing composition of 25% residents of Quebec, 25% experts in venture markets and 25% experts in derivatives).

Although these commitments may have been necessary to get the TMX’s board onside, it remains to be seen whether regulators accept the proposed governance structure. For example, the OSC, in its notice announcing its planned review of the Maple application, indicates that it has concerns about the proper balance between shareholder interests and the public interest regarding the governance of the group — and CDS, in particular.

In addition, the approval process is complicated by the fact the regulators may not be on the same page as one another — let alone Maple — on the appropriate structure.

Indeed, although Maple and TMX may have reached a meeting of the minds, what’s really important now is satisfying the regulators. If they don’t buy into the vision, then their approval may carry terms and conditions that ultimately derail Maple’s plans. IE