Opening up our capital markets through free trade in securities is one of the best opportunities for another win-win situation in Canada/U.S. relations.

The potential for increased business between the two countries that this would represent is huge. One need only consider how trade in goods and services has increased since 1988, when the Canada/U.S. free trade agreement was signed. At the time, trade between the two countries was US$152 billion a year; by the end of 2005, it reached US$500 billion, exceeding trade between the U.S. and the 25 European Union countries.

Capital markets involve much larger amounts of money. Last year, the value of trading in the shares of 205 Canadian-based companies listed on U.S. exchanges and 106 U.S.-based firms listed on TSX Group Inc. exchanges, 311 issuers in all, hit US$1.3 trillion.

It is important to note that the US$1.3 trillion in trading did not take place because of free trade in securities; rather, it took place despite its lack. Yet, the potential gains of free trade are even greater. We have more than 3,700 issuers on TSX Group’s two exchanges, the Toronto Stock Exchange and the TSX Venture Exchange, whereas the New York Stock Exchange, Nasdaq and the American Stock Exchange have some 7,000. We are talking about the efficiency gains from freely trading shares in more than 10,000 public companies across the border.

Although free trade is worthwhile for this reason alone, there are other reasons for considering it. One is consolidation, the watchword in the global exchange industry. Currently, giant, multi-asset continental exchanges are being created, led by exchanges in the U.S. (A recent example is the agreement of the New York Mercantile Exchange and the Chicago Mercantile Exchange to list New York’s important energy futures contracts on Globex, the CME’s electronic trading platform.) They are bringing whole groups of assets under the same roof — not only stocks and bonds, but also derivatives, commodities and services such as clearing and settlement.

For Canadian exchanges, this means new and intense competition for listings, trading and data sales from U.S. exchanges across all these asset classes. However, in the U.S. market, this consolidation means less competition because there are now fewer exchanges and alternative trading systems than ever.

Free trade would mean the NYSE and Nasdaq would be free to list and trade in Canada under U.S. rules and regulatory supervision, which they already do to a significant degree. We at TSX Group can live with that as long as we are free to operate in the U.S. under Canadian supervision.

We can also add competitive energy to the U.S. mix in areas in which we are strong, such as mining, oil and gas, biotechnology and serving small and mid-sized companies.

Last year, we were third in the world in initial public offering financing, right after the NYSE and the London Stock Exchange. More IPO financing was raised on TSX Group exchanges than on Nasdaq — US$12.8 billion vs US$12.2 billion.

But for U.S. investors, the real Canadian investment story has to be the oilsands — the most secure source of foreign future oil supply for the U.S. As such, the oilsands should be a good place for Americans to invest. And we need their investment dollars.

But it is costly for U.S. retail investors to buy shares in companies developing secure Canadian oil to run their cars and heat their homes. That’s because of the requirements they face when they want to buy shares in companies listed on Canadian exchanges.

They have to go through both a Canadian and a U.S. broker to buy Canadian shares, which increases costs significantly. In some states, investors can’t hold Canadian equities at all; in others, there are margin requirements for Canadian shares. All this is in the name of protecting U.S. investors.

At an earlier time, there was little interest in cross-border trading. But because technology has made it possible to invest in virtually any market almost instantaneously, that interest now exists. In this environment, “protection” is simply adding to costs.

Meanwhile, there have been a lot of improvements in Canadian market surveillance. Two international studies this year — one from the Organization for Economic Co-operation and Development involving 30 countries and one from the World Bank involving 155 countries — rate Canada’s investor protection ahead of that in the U.S.

@page_break@Investments in Canadian firms developing the oilsands are as safe for U.S. investors as Canadian oil is for U.S. consumers. Canada and the U.S. have free trade in goods and services, including free trade in oil and gas, which has been a spectacular success. We need to do the same for our capital markets. The potential is too great to ignore. If Canada and the U.S. can’t do it, who can? IE



Richard Nesbitt is CEO of TSX Group Inc. In April, he presented the case for free trade in securities at the U.S. Chamber of Commerce in Washington, D.C.