Maple bid for TMX moves a step closer with OSC orders

The proposed orders set terms and conditions of the Maple transactions that aim to consolidate and vertically integrate the trading and clearing businesses in Canada; recognizing Maple and TMX as exchanges, and CDS as a clearing agency.

The OSC notes that it has not yet developed a proposed recognition order for Alpha Exchange Inc., which Maple also aims to acquire, but says that the recognition order for Alpha will mirror the orders for Maple, TMX Group and TSX.

These orders move the proposed deal closer to reality, as last week Maple and the TMX said that the Competition Bureau (which also has to approve the deal) has indicated that its concerns may be substantially mitigated by the conditions being imposed by the OSC. The deal also needs approval from securities regulators in Alberta and British Columbia (Quebec’s regulator has already indicated that it intends to approve the deal). Earlier this week, Maple extended the deadline for its offer for TMX, and said that it has reached agreements to acquire Alpha and CDS.

Last year, the OSC held a policy hearing into the proposed transaction, while also soliciting written comments, that raised a variety of issues, including access, fairness, fees, conflicts of interest in listing regulation, governance, and the conversion of CDS to a for-profit model, among other things. Today’s proposed orders aim to address those concerns with a variety of conditions, and enhanced oversight measures, but would also allow Maple to pursue its fundamental objectives of remaking the trading and clearing business in Canada.

The OSC notes that, in response to comments raised through the comment process and at the policy hearing, Maple has substantially revised key aspects of its proposal, and these revisions have been incorporated into the proposed recognition orders. The changes include proposed board composition requirements; it has dropped proposed non-competition and non-preferencing agreements; and it will enter into a standstill agreement with each investor restricting them from increasing their ownership percentage in Maple for five years following its acquisition of TMX Group, Alpha, and CDS.

In its proposed orders, the OSC is proposing a variety of governance conditions, including: that the boards of Maple, TMX and TSX include one director representing an independent investment dealer; and, that it have a chair that’s both independent and unrelated to the original Maple shareholders. It also imposes requirements for the mandate and composition of Maple’s governance committee and its regulatory oversight committee, which would consider conflicts of interest arising due to increased concentration of ownership under Maple, and the inherent conflict between Maple’s profit-making objective and its public interest responsibilities, among other things.

To address concerns that Maple may act anti-competitively in the pricing of its trading-related services, the recognition orders provide for prior OSC approval of any new fees or fee models and impose restrictions on volume-based discounts or incentives that may discriminate between market participants. The orders also require prior approval before implementing any internal cost allocation model, and any policies regarding the allocation of costs or transfer of prices. A review of both the fees and the governance structure would be required three years after the deal closes.

For CDS, a new term and condition is imposed that would explicitly require prior OSC approval of changes in the
ownership structure of the agency. It also imposes governance requirements on CDS; sets conditions requiring fees (which incorporates a pricing model for CDS’ core services that was proposed by Maple in response to public comments); and introduces provisions to address the concerns that Maple may act anti-competitively in determining access to CDS. Its terms and conditions relating to risk control have been revised too.

Additionally, the OSC is proposing an enhanced oversight program to ensure that it has all the information and the regulatory tools needed to be able to address any risks to the public interest, in light of the fact that the Maple proposal represents a fundamental change to the delivery of trading, clearing, settlement, and depository services in Canada.

“The commission has thoroughly reviewed the regulatory issues raised by Maple’s proposal and developed measures necessary to ensure that the public interest is protected,” said Howard Wetston, chair and CEO of the OSC. “Public consultation has been a fundamental part of our review process and we will carefully consider the further input we receive on these orders when making our final determination.”

Comments on the proposed recognition orders is due by June 4.

AMF seeks comments on governance, pricing

The Autorité des marchés financiers also published its decisions approving Maple’s acquisition of TMX Thursday, and initiated a consultation on the proposed acquisition of CDS.

The AMF says that, in the wake of the changes made to Maple’s initial proposal, it’s necessary to subject the latest plans to public consultation before issuing any decision about recognizing CDS, TMX Group and Maple as a clearing agency.

Specifically, it is seeking comments on the corporate governance measures, and new pricing model proposed by Maple. Comments are due June 4.