No Clear Benefits from TMX Merger

FAIR Canada was invited to make a presentation to the Select Committee of the Ontario Legislature about the proposed TMX/LSE merger on March 9, 2011.   

In brief, FAIR Canada’s Executive Director, Ermanno Pascutto, explained that he did not see any clear benefits to the Canadian capital markets or to Toronto (as a financial center) from the merger. During his presentation, Mr. Pascutto noted, “If anything, most directors and executives of the new Exchange Group company will be less knowledgeable about, and more remote from, the needs of Canadian investors, as well as the needs of Canadian issuers and securities dealers.”   

And while FAIR Canada sees benefits to TMX shareholders, it does not believe that the merger will bring real benefits to Canadian listed issuers or investors. If the goal is to improve Canadian issuers’ access to the UK capital markets, what is needed is for UK and Canadian regulators to negotiate the equivalent of the MJDS system that was negotiated with the US S.E.C. A merger does nothing to improve access to capital.    However, if the proposed merger were to proceed, FAIR Canada submits that the conflicts of interest in the TSX’s management of its listing regulation responsibilities should be addressed as a condition to the approval of the proposed merger.   

In July 2009, FAIR Canada released an expert report outlining how similar conflicts have been addressed in several important developed markets, including the US (both NYSE and NASDAQ), the UK, Australia and Hong Kong. The Report found that all of the other seven major exchanges reviewed have addressed their conflicts of interest by implementing one of three specific and sound approaches to conflict of interest management. The TSX was the only exchange among this group that has not implemented specific measures to manage its conflict of interest in regulating listed companies.   

Mr. Pascutto noted, “FAIR Canada does not believe that the TSX is properly discharging its regulatory responsibilities, and this situation will only be exacerbated by a merger with the LSE Group. It is imperative that any structure that the TSX adopts to manage conflicts of interest be independent of the new Group’s commercial listings operations, and be subject to the oversight and supervision of Canadian regulators.”
FAIR Canada concluded its submission by noting that, in light of the proposed merger and the recent introduction of competition for listings from Alpha, the best way forward could be to transfer the TSX’s regulatory functions to another regulator (such as IIROC) and to have a uniform set of listing standards so that competition for listings will not be based on reduced investor protection. Mr. Pascutto noted that this is the model that was used to address TSX conflicts of interest in supervision of trading when the TSX demutualized and went public: Market Regulation Services Inc. was established as an independent regulator of all trading in listed securities, whether through the TSX and TSXV or one of several ATSs, and the Uniform Market Integrity Rules (UMIR) were adopted by RS to provide uniform trading rules across all exchanges and ATSs.

Click here for the full FAIR Canada submission to the Select Committee.

March 13, 2011