IIAC demands clarity on TMX-LSE deal

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The tug of war among industry participants over the proposed TMX-LSE merger intensified as the Investment Industry Association of Canada (IIAC) weighed in on the tussle.

In a presentation to the Ontario Legislature’s Select Committee on the proposed merger, the IIAC, while admitting the merger has potential benefits, called for more detail and clarity about its overall impact.

“There are potential benefits to the TMX-LSE merger and similar stock exchange consolidations,” said Philip Smith, chair of the IIAC board of directors and deputy head, global investment banking, Scotia Capital Inc.

However, it remains unclear if the benefits clearly outweigh the potential costs. “We support global consolidation of stock exchanges in principle,” said Smith. “However, we must ensure the proposed TMX-LSE transaction improves both access to capital and cost of capital, reduces transaction costs for investors and issuers, and retains core trading and listing functions in Canada to safeguard capital formation and market liquidity in Canadian markets.”

The IIAC has raised some issues around the merger’s impact on the liquidity and efficiency of the Canadian equity market. It also expressed concern over the cost for market participants and the safety of Canadian trading and listing operations in the cash and derivatives market.

The association said more detail and greater clarity about the transaction are required to assess the full merits of the merger. “We support this global consolidation of stock exchanges that is taking place,” said Ian Russell, president and CEO, IIAC, but asked “Does this merger on a net basis provide benefits to issuers, investors, and are there risks?”

The rationale that lies behind the merger is to build scale to capture certain proprietary special products to enhance revenues. “Will the merger result in better capital raising opportunities for a small business, meaning wider and deeper distribution for new shares?” asked Russell.

He uses the proposed NYSE and Euronext merger as an example to indicate that cross listings – one of the much touted benefits of such consolidation – have not been a very common occurrence.

“In a framework where we have two separate exchanges in two separate jurisdictions, listing fees and regulatory costs imposed on issuers certainly provide a disincentive to cross list,” said Russell. “If you could do that, you’d be tapping into another market, [but] whether it happens is very much an open question.”

Another much debated aspect of the transaction is the possibility of regulatory harmonization. The stock exchanges in Canada have provided very specific regulatory mechanisms to facilitate financing. Russell asked if this merger will impact that in a negative way.

“If there’s a downturn over the course of next two or three years, and there’s a rationalization in operations, how will that unfold? What are the safeguards for the Canadian capital markets if that happens?”

Industry watchers have also expressed their misgivings about the LSE’s largest shareholders being Borse Dubai, which owns a 20% stake and will become one of the largest shareholders in the merged entity.

Interestingly, under Ontario’s securities legislation, no one entity can own more than 10% of a stock exchange. Russell, though, is not particularly concerned about that.

“From our standpoint what’s important has nothing to do with who the foreign investors are, the issue that’s being raised is the proportion of Canadian ownership to ensure control, that’s what is important,” Russell said.

Although widely billed as a merger of equals, the deal will award 55% of the enlarged bourse to LSE shareholders with TMX investors holding 45%. A fact that has had many Canadian asking if it’s a merger of equals, how come the ownership is not equal.

“In order to ensure that the Canadian interests are served, most people are looking for some kind of evidence of Canadian control over the operations of the TSX and that would normally be reflected in share ownership,” said Russell.

It often comes down to voting interest and what kind of assurances are there to ensure there’s sufficient voting interest for Canada to have a certain amount of control over the operations that are in Canada, he added.