The financial services industry’s concerns regarding the proposed merger of Toronto-based TMX Group Inc. and Britain-based London Stock Exchange Group PLC were on display in a series of hearings before an all-party legislative committee in Ontario last month. Indeed, the hearings revealed some stark differences of opinion within the industry on the merits of the proposed transaction.

Somewhat unusually, the biggest players in the financial services industry are divided over the proposed merger; so much so that traditionally vocal industry lobbyists either haven’t said anything about the deal (the Canadian Bankers Association) or haven’t taken a definitive position on it (the Investment Industry Association of Canada).

Even the Toronto Financial Services Alliance, a partnership of representatives from the financial services industry and various levels of government that advocates Toronto being considered a global financial centre, has expressed uncertainty. Speaking before the legislative committee, Janet Ecker, the TFSA’s president and former Ontario finance minister, said the TFSA is approaching the deal from the perspective of whether the merger helps build Toronto as a global financial hub or puts that status at risk. And there’s no clear consensus on that.

Ecker said that most of the people whom the TFSA has consulted within the industry believe that if the merger’s benefits are realized, the deal could help expand the financial services sector in Toronto and lead to greater efficiencies. Supporters also say that, without the deal, Toronto could be left behind at a time when exchanges in other parts of the world are consolidating.

“However,” Ecker noted, “others are passionately concerned that this deal is the wrong deal and that it threatens to diminish our role as a global hub.”

The deal’s detractors question whether globalization really is much of a threat, and wonder whether there’s a better deal to be had for TMX.

Some of those doubts are coming from the big banks. This is not one of those contentious issues that divides industry players along traditional lines, such as large firms vs small ones or banks vs independents. Rather, opinion is divided in all sorts of ways.

Among the banks, representatives from both Royal Bank of Canada (Barb Stymiest, group head of strategy, treasury and corporate services at RBC, and former head of TMX) and Bank of Montreal (Eric Tripp, president of BMO Capital Markets Corp.) appeared at the hearings to speak in favour of the deal. However, BMO and RBC both had a hand in advising the exchanges on the deal, which makes it tough for them to appear independent.

On the other side, both TD Se-curities Inc. CEO Bob Dorrance and Luc Bertrand, former head of the Bourse de Montréal Inc. and now vice chairman of National Bank of Canada, appeared before the committee to speak against the deal. They argued that TMX is already successful at raising capital for companies and from investors in the global market. “Being part of London really adds nothing to this,” Dorrance said, “and perhaps reduces our role in the future.”

Dorrance also expressed concerns about the possible loss of regulatory control. Although the operating exchanges would remain locally regulated, the holding company would be based in Britain and regulated there. “The ramifications of this,” he said, “need to be understood fully.”

As well, Dorrance warned that both corporate influence and regulatory control would be diluted by future mergers as the combined firm seeks to grow by acquisition: “The benefits of this deal will fade away, both with time and with every new acquisition.”

The result, Dorrance warned, could be lost jobs. Over time, if business units that are currently located in Canada are shifted elsewhere and if listings migrate from Canada to Britain, Canadian jobs are likely to drift away too.

Although proponents of the deal worry that Toronto will be left behind without this kind of international connection, Dorrance said, TD and National Bank take a different position. Their view, he said, is that “Toronto is a global financial services centre, the headquarters to strong institutions that weathered the financial crisis and home to the world’s leading resources exchange. As such, it is well positioned to compete globally. We do not believe this takeover offers the right solution to creating a globally sustainable exchange, nor would it allow Canada to achieve the benefits of globalization offered.”

Some of these concerns were echoed by the IIAC. Its vice chairman, Roman Dubczak, who is also vice chairman, managing director and head of equity capital markets with CIBC World Markets Inc. , indicated that the financial services industry understands the pull of globalization, industry consolidation and the drive to generate cost savings. Said Dubczak: “It’s just that the particular terms of this transaction are such that there’s enough that is left unanswered for everyone to [who wants to] put their hand on their heart and say, ‘Yeah, that actually makes sense. It’s a good deal’ — I think that’s what we’re wrestling with.”@page_break@The IIAC notes that some in Canada’s financial services industry are worried about whether the prospect of more interlisting between the two exchanges will improve capital formation and trading liquidity or erode domestic trading and financing activity. There are also worries about technology disruptions (such as the LSE recently experienced).

And if the supposed benefits fail to materialize or if markets drop off, there’s some fear that this could lead to businesses that are currently rooted in Canada being shuttered or shunted elsewhere.

The IIAC cited regulatory concerns, too, suggesting that the need to regulate market data fees becomes more important with a combined exchange.

Philip Smith, chairman of the IIAC and deputy head of global investment banking at Scotia Capital Inc. , also noted that there are concerns with the prospect of regulatory harmonization between Canada and Britain over the long term. And, Smith suggested, there are also worries about TMX’s self-regulatory function (its control over listing rules) within the combined company.

This last concern was echoed by the Canadian Foundation for Advancement of Investor Rights (FAIR Canada), the investor advocacy group. Its executive director, Ermanno Pascutto, told the legislative committee that FAIR Canada’s primary concern is TMX’s self-regulatory role. FAIR Canada has long argued this role puts the exchange in a fundamental conflict of interest. “We do not believe that the TMX is properly discharging its regulatory responsibilities,” Pascutto said, “and this will only be exacerbated by a merger with the LSE.”

Pascutto also argued that there are no clear benefits to the Canadian market from the deal: “There are benefits to the TMX shareholders and the LSE shareholders. They’ll be able to reduce a lot of their costs, and that probably means their profits will increase and their share price will go up. But in terms of investors, listed issuers in Canada and our markets, I just don’t see any benefits.”

FAIR Canada believes that if the TMX/LSE deal is to get the go-ahead, TMX should address the conflict inherent in its self-regulatory function — possibly by giving that job to another regulator, such as the Investment Industry Regulatory Organization of Canada.

Perhaps ominously for TMX’s shareholders, neither of its main rivals that appeared at the hearing — Alpha Trading Systems LP and the Canadian National Stock Exchange — fundamentally oppose the deal. This suggests that they don’t fear any great benefit materializing for TMX, either, although there are a couple of competitive concerns.

In testimony to the committee, Jos Schmitt, CEO of Alpha, the alternative trading system owned by a group of large investment dealers that is applying for recognition as an exchange, suggested that TMX’s listing and trading businesses should not be considered strategic assets and should be allowed to merge with the LSE.

Instead, he argued, the TMX assets that should be considered strategic include its index business and its clearing and settlement functions. Alpha maintains that TMX should be required to divest the index and clearing parts of its business before a merger or the regulation in these areas must be revisited to ensure they remain under local control.

Another prospective exchange merger — between Australia’s ASX Ltd. and Singapore Exchange Ltd. — is going through the same process. In that case, the exchanges recently renegotiated some of the terms of the combined company’s governance structure in an effort to assuage political and regulatory concerns.

Approval for the TMX/LSE deal looks to be a long way off. The legislative committee is slated to deliver its report on April 7.

The deal also faces a federal review, which may be complicated by a looming election. The merger needs regulatory approvals as well, which will require another round of public hearings in both Ontario and Quebec at the minimum, which have yet to be scheduled.

A spokesman for Quebec’s Autorité des marchés financiers says the AMF’s hearings are likely to be held in May or June. IE