Maple Group Acquisition Corp., which recently bid $3.6 billion for Toronto-based TMX Group Inc., is betting that consolidation of Canada’s domestic stock exchange business is a better way to create value than the global consolidation envisioned by the proposed merger between TMX and London Stock Exchange Group PLC.

Maple Group — a consortium of four bank-owned dealers (CIBC World Markets Inc., National Bank Financial Ltd., Scotia Capital Inc. and TD Securities Inc. ) and five pension funds (Alberta Investment Management Corp., Caisse de dépôt et placement du Québec, Canada Pension Plan Investment Board, Fonds de solidarité des travailleurs du Québec and the Ontario Teachers’ Pension Plan Board) — suggests that TMX could be merged with rival Alpha Group (largely owned by the same banks and pension funds). The consortium also envisions that TMX could also absorb the clearing and settlement firm, CDS Clearing and Depository Services Inc. (also mostly owned by the same players), to create a vertically integrated trading and clearing business.

Speaking on behalf of Maple Group, Luc Bertrand, NBF’s vice chairman, says the marriage of trading with clearing would be a big benefit for the Canadian securities industry: “The opportunity here for Canadian broker dealers is very, very significant.”

The Maple Group bid turns on the idea that housing trading, derivatives and clearing functions within a single entity could make Canada’s financial services industry more efficient and cost-effective. For example, Bertrand suggests, an integrated exchange could free up capital for dealers by allowing cross-margining between derivatives and cash positions.

Building a single platform will create more flexibility for dealers, reduce the frictional costs inherent in the trading and clearing continuum and, says Bertrand, make the interface between the exchange and its users “a lot better, a lot smoother.”

In turn, this should lead to a higher valuation for TMX, the Maple Group bid suggests, pointing to other integrated exchanges, such as Hong Kong Exchanges and Clearing Ltd. and the Australian Securities Exchange, as venues having fatter margins that trade at higher multiples than stand-alone exchanges. The hope is that by following a similar path in Canada, a stronger global competitor could be created.

The Investment Industry Association of Canada hasn’t taken a position on the merits of the Maple Group proposal (or the TMX/LSE deal), but IIAC president and CEO Ian Russell says he believes the consortium’s bid could serve to enhance the Canadian securities industry’s competitive position globally.

Although this proposal is designed to trump a deal that would have made TMX part of a bigger global player, Russell suggests that consolidating the domestic industry arms it to be a stronger global competitor — and may allow TMX to be a buyer in the global exchange consolidation game.

“It doesn’t abrogate the global opportunity and, in some ways, it gives them more leverage and more buying power,” he says. “In a sense, it puts the Canadian market more in the driver’s seat.”

In addition, Russell says, linking trading and clearing capabilities will also enable TMX to provide more timely, detailed market information — about both who is trading and who is holding certain securities — driving more business through improved transparency. As a result, he believes that an integrated model will also be more attractive to foreign inves-tors such as hedge funds, luring them to trade more often in Canada. And, he adds, it should also draw more global listings.

Of course, many mergers and acquisitions fail to live up to the initial hype. And although Maple Group’s proposed deal eliminates any political worries about losing control over the Canadian capital markets, it also creates several new concerns.

In terms of execution, there’s the question of how well TMX and Alpha would mesh. Maple Group’s proposal isn’t contingent on the merging of TMX, Alpha and CDS, but it is contingent on getting regulatory approval to do so.@page_break@In addition, although there may be some frictional costs to be wrung out by putting trading and clearing together under one roof, it’s not clear just how big that opportunity is. In fact, CDS recently published the results of a study it had commissioned to look at pricing for clearing and settlement services, which found that CDS ranked second among the markets studied (trailing only the U.S.). The only area in which CDS’s prices were found to be uncompetitively high was in basic custody services.

The bigger question is whether prices would stay competitive in a firm with a near-monopoly on trading and clearing. Rolling together TMX and Alpha would give the combined firm more than 80% of the value traded — and almost 90% of the volume.

“Although attractive, we believe that there may be a significant number of hurdles that this counteroffer would have to clear,” notes a report by Stephen Boland, an analyst with GMP Securities LP in Toronto, “the biggest of which would be surrounding anti-competition challenges.”

Indeed, Nasdaq OMX Group Inc. and Intercontinental Exchange Inc. recently abandoned their hostile bid for NYSE Euronext after it became clear that U.S. competition regulators weren’t going to approve that deal.

Bertrand says the Canadian situation is much different from the one in the U.S. For one thing, the major anti-trust concern in the U.S. involved listings; Alpha doesn’t currently offer listings — although it has applied for recognition as an exchange to do just that.

Bertrand also notes that Canada has a different regulatory environment than in the U.S. (in terms of both securities regulation and competition law) and many aspects of TMX’s business, including access and fees, are subject to public-interest oversight.

However, to date, securities regulators have been reluctant to do much to regulate fees. Yet, Russell insists, regulatory oversight of trading, data and clearing fees would have to be much more rigorous in an environment in which one firm has a virtual monopoly. The IIAC has long complained about rising data fees, and concern about these costs will only increase in the face of an overwhelming market power.

Some industry-watchers may also have concerns about the ownership structure of the proposed new entity. Maple Group’s plan would see 25% of the new entity owned by the four bank-owned dealers, 35% controlled by the pension funds and 40% remaining in public hands. No single firm would own more than 10%, thus avoiding a breach of the 10% restriction that applies to TMX, but the arrangement would still leave a small group of dealers controlling a big stake in a firm that would dominate the trading business. So, some dealers would like to see a more broadly diversified ownership group.

Maple Group would welcome other dealers to take a stake in the company, Bertrand says. The four that are part of the original proposal would initially hold a collective 25%, and they have committed to maintaining a 22.5% stake for four years. But Bertrand indicates Maple Group could accommodate other dealers — the most obvious candidates being holdout bank-owned dealers RBC Capital Markets and BMO Capital Markets Corp. , which are currently excluded by virtue of their role advising on the TMX/LSE deal.

Fees, ownership and monopoly are some of the main issues the Maple Group proposal will face if it seeks regulatory approval. For now, Susan Greenglass, director of market regulation with the Ontario Securities Commission in Toronto, notes that the only application the OSC has received is the one seeking approval for the TMX/LSE merger: “Maple Group has acknowledged the need for regulatory approval of its proposal. In the meantime, and in the absence of an application, we are moving forward with the public consultation we have initiated.” (The OSC and Quebec’s Autor-ité des marchés financiers both have scheduled public hearings in July to review the TMX/LSE deal, which also faces Industry Canada’s approval process.)

It’s not clear whether public hearings will be required for Maple Group’s bid, or if regulators can review it without going to such lengths. The Competition Bureau will have to sign off on the deal and, Bertrand suggests, it will be late autumn before that could happen. IE