A bid by a consortium of financial heavyweights to buy and combine the TMX Group (X-T), the Alpha alternative trading system and the Canadian Depository for Securities (CDS) has cleared several key hurdles.
The Ontario Securities Commission (OSC) today approved the plans to create a combined exchange and clearing group, but imposed certain conditions on Maple. And the Competition Bureau issued a “no action letter,” meaning it won’t challenge the proposal at this time. Those approvals follow a final recognition order from Quebec’s regulatory authority, the Autorité des marchés financiers (AMF), that green-lighted the TMX takeover in May. AMF is expected to approve the group’s takeover of CDS shortly as well.
The plan by the Maple Group, which consists of several banks, pension funds and an insurance company, was put together last year to scuttle a merger between the London Stock Exchange Group (LSE-L) and the TMX Group.
While the Competition Bureau could still raise concerns later in the process, it noted that “serious competition concerns” it had previously raised regarding equities trading and post-trade services (including clearing, settlement and depository services), had been substantially mitigated through the OSC’s final recognition orders, issued today.
Those orders included a requirement that the original Maple Group investors make up no more than 50% of the Maple Group board. GMP Capital deputy chairman Kevin Sullivan was announced as a nominee to the board today, and at the same time GMP withdrew from the Maple Group to satisfy the OSC’s conditions regarding the board.
After it completes the $3.8-billion TMX acquisition, the Maple Group intends to acquire Alpha Trading Systems (an alternative trading system) for $175 million and the CDS for $167.5. It announced those deals in April.
The plan to combine Canada’s stock exchange infrastructure, including the Toronto Stock Exchange, Toronto Venture Exchange, Montreal derivatives exchange, and the Alpha Trading Systems, as well as the CDS, the clearing and settlement agency for Canadian securities, has been criticized on the grounds it will create a monopoly.
Cindy Petlock, general counsel and corporate secretary for CNSX Markets, which operates the Canadian National Stock Exchange (an alternative to the TSX Venture exchange that typically lists smaller emerging and micro-cap companies) commented to the OSC that there hasn’t been enough meaningful debate about CDS moving from a cost-recovery model to a vertically integrated monopoly.
“Oversight, no matter how strong, is not as effective as the absence of the incentives for anti-competitive behaviour,” Petlock wrote in June. “Without using rules or fees as barriers, a clearing agency could simply prioritize its owners’ needs over those of competitors, and impact competition by decreasing efficiency in the provision of its services.”
Moreover, the fact that some of the country’s largest traders will own the merged monopolistic entity creates untold opportunities for conflicts of interest, real and perceived.
“The structure proposed by the Maple acquisition is fraught with conflicts of interest across every facet of the trading, clearing and settlement infrastructure of this country,” international brokerage firm ITG Canada wrote in a submission to the OSC in June. “The conflicts of interest of the original shareholders of Maple owning the exchanges and clearing entities are so great and probability of such conflicts arising so high, the Commission has been forced to create a governance and oversight structure which is extremely complex.”
ITG pointed out that this structure will mean new responsibilities for the OSC, and added costs of enforcement.
Responding to such concerns brought forward through the public comments periods, the OSC acknowledged that it will “require an increase in capacity and the capability to effectively manage the increased demands of oversight” of the Maple Group, and said it expects the associated costs to be borne by Maple Group through participation and activity fees, rather than by market participants generally. The regulator says enhanced oversight of Maple will include periodic oversight reviews, access to all information, external verification of certain information and processes, and a review of access to CDS by independent dealers.
The Maple Group, now consisting of Alberta Investment Management Corp., Caisse de dépôt et placement du Québec, Canada Pension Plan Investment Board, CIBC World Markets, Desjardins Financial Group, Dundee Capital Markets, Fonds de solidarité des travailleurs du Quebec, National Bank Financial, Ontario Teachers’ Pension Plan, Scotia Capital, TD Securities and the Manufacturers Life Insurance Co., bested the LSE’s $3.6-billion, mostly shares offer last year.
Maple has extended its $50 per share offer for TMX Group (it will pay cash for up to 80% of TMX shares) until July 31. TMX Group shares traded $1.60 or 3.4% higher this afternoon at $48.45. The company has 74.6 million shares outstanding.
The proposal still requires approvals from the British Columbia Securities Commission and the Alberta Securities Commission. The BCSC, which shares responsibility for regulating the Venture market with the ASC, is asking that at least 25% of the Maple board consist of directors with Canadian venture market expertise and experience.
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