Deep doubts about the takeover of TMX

Securities regulators in Ontario, Quebec, British Columbia and Alberta that must sanction the deal have taken steps to do so. And the federal Competition Bureau, which was seen to be the hardest sell among the regulatory authorities, has said that it will probably be satisfied by the conditions that the Ontario Securities Commission (OSC) is proposing as part of its approval – measures designed to address concerns about governance, access, fairness and fees.

However, serious doubts remain within the capital markets sector, even though various changes have been made to satisfy regulatory concerns, including: promises of continued rebates and fee reductions for the exchange’s clearing customers; provisions to prevent Maple Group member firms from unfairly driving trading volume to Maple Group-owned markets; and vows of enhanced regulatory oversight. Maple Group also has made commitments to the Autorité des marchés financiers and the B.C. Securities Commission (BCSC) to keep certain businesses in their respective provinces.

Comments submitted to both the OSC and the BCSC pertaining to their respective draft recognition orders for Maple Group reveal that a number of sector players aren’t persuaded by the concessions the consortium has made to regulators so far. (The BCSC’s comment period is open until June 22, after Investment Executive‘s deadline.)

Some firms are worried the conflicts can’t be managed adequately and that the rest of the market will suffer, believing the deal will benefit primarily the large institutions that belong to Maple Group.

Many of these concerns revolve around the proposed acquisition of clearing house CDS Ltd. and its conversion into a for-profit entity. But there also are fears for competition in the equities-trading business, as well as for the fate of TMX rival Alpha Group (whose acquisition also is part of the proposed deal). Some comments question the independence of the negotiations for the acquisition of CDS, as well as the intentions behind the acquisition of Alpha Group, which, some say, has not been adequately explained.

The objections are largely coming from small players that believe the current system is working relatively well. However, a couple of the larger firms that aren’t part of Maple Group – Canada’s biggest bank, Royal Bank of Canada (RBC), and the country’s largest independent dealer, Canaccord Genuity Corp. – also have substantial concerns.

Canaccord’s comment reads: “While there are significant improvements over the original proposal submitted by Maple, we remain unconvinced the proposed transaction will generate sufficient benefits to outweigh the inherent conflicts that will result from the creation of a for-profit monopoly that is owned by a small group of powerful industry participants.”

RBC’s submission says that while the bank generally supports the deal, RBC is concerned about the regulation of fees that will be required. Specifically, the RBC comment paper says that the OSC should not use the Toronto Stock Exchange’s (TSX’s) existing trading and market data fee models as the starting point for regulated pricing; that the OSC should facilitate industry and public oversight of those fees; and that the regulator must realize that it will have to increase its capacity and capabilities to regulate fees adequately.

Indeed, there are widespread concerns about the bigger role that will be demanded of regulators, and the added cost this will entail. Several comments indicate that if regulatory costs do rise as a result of the Maple Group deal, these costs should be borne solely by the consortium.

There’s also the question of whether the regulators should be taking on the job of controlling fees at all, which is something regulators have traditionally avoided.

As well, groups such as the Canadian Foundation for Advancement of Investor Rights (a.k.a. FAIR Canada) stress that the regulators still haven’t dealt adequately with the existing conflict between the regulatory functions of the TSX and its business operations. FAIR Canada maintains that the listings regulation structure should be brought up to international standards before the Maple Group transaction is approved.

And, for firms that make their living in the venture market, there’s a big fear that their interests will be ignored. The comment from Vancouver-based investment dealer PI Financial Corp., says the creation of a for-profit CDS will be particularly negative for venture markets, as it is likely to threaten the viability of smaller dealers in the venture market: “PI trusts that the BCSC will provide a forum for sober second thought on the Maple bid for CDS. If approved, the impact on venture markets will be extremely negative, and there will be no turning back.”

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