TORONTO — Canada’s federal competition watchdog said Wednesday it has “serious concerns” about Maple Group’s proposed merger of Canada’s largest securities market with both the CDS clearing house and smaller Alpha exchange.
But some observers say the takeover of Canada’s only clearing house is far more serious than the Alpha merger, and at least one investor said the Alpha deal shouldn’t even be an issue.
The Competition Bureau said it voiced its concern to Maple Group, the consortium of 13 Canadian financial institutions, and TMX Group (TSX:X) Tuesday about the $3.8 billion deal that would see the group control 80 to 90 per cent of trading in Canada.
However, the bureau said there is an opportunity for the companies to alleviate some of its concerns.
If Commissioner of Competition Melanie Aitken finds the merger is likely to substantially affect competition, she may be able to work out a mutually agreeable solution, the bureau said.
“However, when remedies cannot sufficiently address the bureau’s concerns, it may apply to the Competition Tribunal for an order to prevent, dissolve or alter the merger.”
Thomas Caldwell, head of Toronto investment manager Caldwell Securities, said he understands the commissioner’s concern about the planned merger of the CDS clearing house with TMX Group, owner of the Toronto and TSX Venture stock exchanges, Montreal derivatives market and more specialized trading platforms.
But Caldwell said the inclusion of Alpha in the larger TMX Group shouldn’t cause a competition problem because the exchange is used mainly by the banks and would change little in the marketplace.
While there are many alternative trading platforms to the TSX, there are none for clearing in Canada, Caldwell, who owns shares in TMX, explained.
“I don’t understand the Alpha issue, it’s a non-issue because it’s the banks just throwing their own trading into what already happens and they’re already controlling that volume of trade,” he said.
However, the CDS issue is of greater competition concern. While the non-profit CDS is currently owned by banks, jointly with the TSX and regulatory bodies, the relationship is one of competing interests, Caldwell said.
“The concern is that (smaller traders) would have to (clear trades) through a mechanism that is now owned by your competitors, and you don’t have an alternative venue as you do in equities trading.”
Some of Canada’s smaller investment firms and exchange operators have raised red flags about the clearing house issue in the past, saying the Maple plan could create a monopoly that favours the banks and insurance companies.
Luc Bertrand, spokesman for the Maple Group, has tried to assure independent firms there would be no “two-tier” pricing structure that would favour the exchange’s owners. He was not available for comment Wednesday.
But Richard Carleton, CEO of the alternative Canadian National Securities Exchange, said pricing is not the only issue, and for him, the only solution is to stop CDS’ inclusion in the deal.
“There are a lot of subtle tools that you could have if you were managing CDS that could tilt the competitive landscape without touching the overall clearing prices at all.”
“They could make adjustments to the risk model that could make it more capital intensive for smaller dealers for example to do the same transaction that a Royal Bank or CIBC could do.”
But he’s not as convinced the Alpha takeover would be bad for business.
“It will certainly change the competitive landscape. I can’t really predict whether it will be positive or negative for organizations such as ourselves which are competing with TMX and Alpha at present.”
The 13-member Maple Group includes some of Canada’s biggest pension managers, banks, investment houses and the country’s largest life insurance firm — all major users of securities markets.
Maple needs regulatory approvals from the Competition Bureau and several provincial regulators to merge the owner of the Toronto Stock Exchange with the alternative Alpha Trading System, and clearing and depository firm CDS Inc.
In a joint statement earlier Wednesday, Maple Group Acquisition Corp. and TMX Group Inc. note Aitken indicated she has not reached a final conclusion.
“Maple and TMX Group intend to continue to work closely with staff of the Competition Bureau to address the commissioner’s concerns, including by identifying appropriate remedial measures,” the companies said in a statement.
“As Maple has stated previously, it is committed to working constructively with all of the relevant regulators, including Canadian securities regulators, to address any questions they may have so that the proposed transactions can proceed in the best interests of TMX Group, its shareholders and the Canadian capital markets,” the statement said.
“Maple and TMX Group continue to strongly believe that the proposed transactions will substantially benefit all capital market participants.”
The companies’ statement didn’t say what options are available but, in the past, the Competition Bureau has required the sale of some parts of a business to a third party as a condition for approving the larger deal.