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Maple bid for TMX, merger with clearing house under scrutiny

TORONTO — Maple Group’s spokesman says its $3.8-billion takeover offer for TMX Group will die if the country’s largest stock market operator is prevented from integrating with two other businesses that are crucial for the plan to succeed.

TORONTO — Maple Group’s spokesman says its $3.8-billion takeover offer for TMX Group will die if the country’s largest stock market operator is prevented from integrating with two other businesses that are crucial for the plan to succeed.

Luc Bertrand, spokesman for Maple Group Acquisition Corp. told a panel of the Ontario Securities Commission that the Maple offer for TMX Group (TSX:X) is conditional on the integration of the Canadian Depository for Securities Ltd.

After several rounds of questions about how the owners would ensure fair treatment of all market participants, OSC chairman Howard Wetston stopped to ask whether the group was saying the deal would die if it couldn’t have CDS.

“Yes,” Bertrand replied, saying that the CDS clearing house was integral to the economics of the deal.

The offer would also be revoked if regulators rejected its proposed takeover of the Alpha Trading Systems Inc., a smaller alternative market set up and owned by Canada’s banks, including some members of the Maple Group.

The plan to takeover the CDS clearing house — which manages the process of matching buy and sell orders — and transform it into a for-profit entity has received criticism from smaller firms and exchanges.

They worry that too much control of Canada’s financial markets would rest with the large pension plans, banks and other financial giants — who collectively would control TMX — at the expense of smaller independent investment firms.

Thomas Kloet, CEO of TMX assured the panel that the combination of the platforms would create efficiencies and those cost savings would be passed along to all market participants equally.

“Mr. Chairman, with your help, I think we have a real chance at developing a superior model,” Kloet said.

“CDS is a necessary missing element,” Kloet said.

Maple Group’s proposed $3.8-billion takeover deal recently gained the support of TMX’s board of directors following the failure of its preferred deal to merge with the owners of the London Stock Exchange.

The OSC panel hearing comes a day after the federal Competition Bureau said it has “serious concerns” about aspects of the deal, which would see TMX control 80 to 90 per cent of Canadian trades.

The OSC focused its questions on how Maple would ensure fair pricing and competition if it owned both Canada’s largest trading and clearing firms.

CDS Inc. is a little-known but central part of Canada’s stock and securities trading. Among other things, it manages the transactions required to complete purchases and sales of securities on Canada’s public markets.

It also manages a number of national databases on behalf of the provincial securities regulators, including the SEDAR repository for regulatory filings by publicly traded companies.

To alleviate concerns about unfair and currently unclear pricing structures for CDS, Bertrand said Maple would be willing to submit to an OSC recognition order giving the regulator the ability to reject fees.

“What we propose is as comprehensive as possible ... to ensure fees are fair and one-tier,” he said of the group’s offer to allow pricing regulation.

It’s still unclear whether that would be an option to help solve the federal regulator’s concerns.

The Competition Commissioner said Wednesday that there’s room to adjust the plan. But Bertrand and Kloet would not comment to reporters after their presentation about other potential options short of removing CDS and Alpha from their deal.

The TMX Group and Maple Group representatives said the integration of trading and clearing would better prepare the country’s capital markets for a 2008-type crisis.

Bertrand, who is also vice-chairman of National Bank (TSX:NA), part of 13-member consortium of pension plans, banks and other financial services companies, said Maple has the expertise to find solutions to financial crises.

“What is unique in Maple is we have considerable concern and desire to find and build solutions based on the expertise that’s been developed,” he said.

Combining trading and clearing under one umbrella would give regulators a clearer picture and better tools in times of crisis, he said.

Kloet said the integration of CDS needs to be looked at within the context of the deal as a whole, which also includes the takeover of the alternative Alpha exchange.

TMX conceded that Alpha’s presence has had an impact on pricing constraints on its own exchange, but added that there would still vibrant competition both from smaller Canadian exchanges and larger ones south of the border.

“Our expectation is the market will remain hyper competitive post this transaction,” Kloet said.

He added that during the decade when the TMX held 100 per cent market share in Canada, trading fees fell 90 per cent.

The deal needs clearance from the federal body as well as regulators in several provinces including Ontario, Quebec, Alberta and British Columbia.