Market participants have raised objections to the planned takeover of Canadian exchange group TMX by the Maple consortium on the basis that it would stifle competition and damage the level of service offered by the exchange.
Maple, a group of 13 Canadian banks, wants to buy TMX in a C$3.8 billion (US$3.72 billion) transaction that it says would create an integrated exchange and clearing group.
The consortium also claims that the acquisition would offer members cost savings and cross margining benefits from the integration of Canadian clearer CDS into the new merged company. However since the group also plans to merge with Alpha Group, the largest alternative trading system in Canada, the merger plan has already raised concerns among some market participants about potential monopolistic behaviour.
“No evidence is offered by Maple to support the idea that the creation of a dominant, consolidated exchange and clearing conglomerate would be good for the competitiveness of the Canadian capital markets,” said Cindy Petlock, general counsel and corporate secretary at the Canadian National Stock Exchange (CNSX), in a letter to provincial regulator the Ontario Securities Commission. “We are aware of a contrary view among global market participants: the creation of a cash equity and derivative trading and clearing conglomerate owned by the largest buy- and sell-side users of the services in Canada would lead to an environment that is closed to competition, domestically and internationally.”
Maple originated as a counter-bid to the London Stock Exchange Group’s plans to enact its own merger with TMX, earlier this year. However, the London Stock Exchange deal fell apart when it failed to receive the necessary shareholder approval. Maple was widely seen as a significant factor – especially since the consortium had already offered its own deal, on better terms, directly to TMX shareholders.
The TMX board gave its official support to the Maple proposal at the end of October 2011. According to data provided by Thomson Reuters, the deal would create a single entity that would account for around 80-85% of Canada’s market share – a level clearly seen as too high by some market participants.
“Without meaningful competition in the provision of trading, listings and clearing services, it is hard to anticipate how innovation and service level improvements can be expected,” added Petlock.
Conflict
The Canadian Coalition for Good Governance, which represents the interests of Canadian institutional shareholders, argued that the deal should only be allowed on condition that TMX subsidiary the Toronto Stock Exchange introduces measures to remove the conflict of interest between its need to grow its listings business and the responsibility it has to regulate its listed issuers – a point that was also emphasised by the Canadian Foundation for Advancement of Investor Rights.
Meanwhile, the Investment Industry Regulatory Organization of Canada, the country’s national watchdog, formed its own committee to discuss the acquisition of clearer CDS by Maple, and has also opposed the deal on the grounds that “uncontrolled monopoly powers exercised by dominant marketplace participants could undermine the fair, effective and low risk system currently in place”.
Financial institutions backing Maple include Alberta Investment Management Corporation, Caisse de dépôt et placement du Québec, Canada Pension Plan Investment Board, CIBC World Markets, Fonds de solidarité des travailleurs du Québec, National Bank Financial, Ontario Teachers’ Pension Plan Board, Scotia Capital and TD Securities.
Canadian regulators are currently reviewing the Maple transaction, with a final decision from the country’s provincial regulators in Ontario, Quebec, Alberta and British Columbia expected in early 2012.