The fate of TSX Group Inc.’s friendly takeover of Montreal Exchange Inc. is now in the hands of the Quebec’s Autorité des marchés financiers.

The AMF, Quebec’s financial services regulator, must approve the $1.1-billion cash-and-stock deal. It will hold two days of public hearings on the deal at the end of March. Although the transaction also needs approvals from the Ontario Securities Commission, the federal Competition Bureau and the U.S. Securities and Ex-change Commission, it’s the AMF’s position that seems to be the question mark.

Observers don’t expect the AMF to reject the deal, which won the approval of a remarkable 99.6% of MX shareholders at a special meeting in mid-February. But the AMF could ask for the merger agreement between the two exchange groups to be reopened for changes — and that could spell trouble.

After initially questioning the logic of the deal, the powerful Caisse de dépôt et placement du Québec, the province’s public pension fund manager, supported it in advance of the shareholders’ vote.

But the caisse, which owns 8% of MX stock, also called on the AMF to force TSX Group to strengthen guarantees that derivatives trading will remain in Montreal.

The caisse wants the AMF to obtain “formal undertakings” from TSX Group that all future derivatives activities, initiatives and developments anywhere in Canada or elsewhere will be managed by the Montreal operation.

In a brief, the caisse also called on the AMF to make sure promises to maintain derivatives in Montreal can’t be voided by a vote of shareholders or the board of directors.

It also wants the AMF to have the power to approve a future sale or merger of the MX, Canadian Derivatives Clearing Corp. or any of their assets.

As well, the caisse says, the board of the new TMX Group, as the merged entity will be called, should not just include Quebec directors but also require that those directors have derivatives experience and expertise.

In the merger proposal, five of 18 directors are to be appointed by the MX for the first three years following the merger, and 25% of directors will always have to be residents of Quebec. But there is no requirement for the Quebec directors to have derivatives experience.

The proposal also calls for the AMF to continue as the lead regulator of the MX and it will have to approve a change of control of more than 10% of the ownership of both the MX and TMX Group as a whole.

MX CEO Luc Bertrand told a press conference after the special shareholders’ meeting that he believes the guarantees the caisse is looking for are already in the agreement the exchanges have signed.

“The spirit of what is being asked by the caisse, in my view, is well built and reflected in what we have filed [with the AMF],” Bertrand said. “All the ingredients are there for the Montreal Exchange to continue to grow as a part of the new TMX Group.”

But Bertrand refused to be drawn into a discussion of what might happen if the AMF refuses to approve the deal. “We’re optimistic by nature,” he said. “I’m ready to work on the regulatory aspect, but we have to keep our eye on the big picture, which is very, very powerful. We have a deal that will allow Montreal to play a central role in this new company.”

Steve Kee, a spokesman for TSX Group, declined to comment on the caisse’s proposals. “We do appreciate the caisse’s support and it providing input into the process,” he says. “We look forward to discussing all comments at the hearings, and we won’t speculate on what the AMF might request.”

However, one investor who owns stock in both TSX Group and MX was irritated by the caisse’s efforts to reopen the terms of the agreement.

“If it were strictly a business investor and not a politi-cal investor, it wouldn’t be raising those issues,” says Brendan Caldwell, president of Caldwell Investment Management Ltd. in Toronto. Caldwell manages investments in Urbana Corp., a closed-end fund that owns seats or shares in 21 exchanges around the world. “Speaking as a business investor, I only care that the best business decisions get made for the companies in which I’m investing. Politics be damned. This isn’t a confederation; it’s a business.”

@page_break@Hugues Dubeau, a partner in Quebec-based investment firm Dubeau Capital & Co. Ltd. and an MX shareholder, believes the caisse’s proposals will not cause the deal to unravel.

“Exchange consolidation will continue,” he says. “It’s necessary and unavoidable. It’s either TSX Group or a foreign buyer. Quebec would certainly have less bargaining power with a foreign purchaser. So, politics, in this situation, will only go so far.”

Indeed, MX shareholders may have been enthusiastic to approve the transaction because they suspect they’re selling at the top of the market. A sharp sell-off in exchange stocks worldwide began in December, almost to the day that TSX Group and MX announced their merger. By the time MX shareholders approved the deal, the Dow Jones global exchanges index was down more than 20%.

The index had tripled over the past two years, thanks to bull markets in virtually every asset class, strong profits and growth characteristics of exchanges, and a powerful consolidation wave sweeping the industry. Derivatives exchanges such as the MX are the fastest-growing players and, as such, have been highly prized by investors.

But the MX’s financial results have been lacklustre in recent quarters, with declining volume on its flagship futures contract and disappointing earnings growth.

At the press conference, Bertrand was cagey about whether he’s in line to replace TSX Group CEO Richard Nesbitt, who resigned in January.

Betrand says his focus is on the getting the merger completed and that the choice of a CEO is a matter for the board of directors. IE