Barbara Shecter, Financial Post · Wednesday, Mar. 2, 2011
Senior executives from TMX Group Inc. and the London Stock Exchange were forced to defend the influence Canada will have following the “merger of equals” between the two exchange groups as the first round of public hearings got under way in Toronto on Wednesday.
At issue during an all-party committee of Ontario politicians was the possibility that Canada could have as few as three members on the 15-member board within four years of the transaction closing.
Peter Shurman, Conservative MPP for the Toronto suburb of Thornhill, expressed concern that Canada could become a branch plant if the transaction is allowed to proceed. He challenged what appears to be a diminished role for Canadians on the board of directors four years into operations as a combined company.
Seven guaranteed seats drop to three at that point, he said.
But Xavier Rolet, chief executive of the LSE who is poised to become CEO of the combined exchange groups, said that characterization is not completely accurate because the promise of three seats represent a guarantee for Canada “come what may.”
In unknown scenarios that could include further exchange amalgamations, Canada receives a “protection” that is not extended to any other partner nation, Mr. Rolet said.
Meanwhile, TMX’s biggest rival told the hearing that the Toronto Stock Exchange owner should be forced to sell assets “strategic” to the proper functioning of Canadian financial markets because its influence will inevitably be diminished.
Jos Schmitt, the chief executive of TMX rival Alpha Group Trading Systems who also appeared before the committee, told the politicians that loss of influence is inevitable in a consolidating industry.
“The centre of gravity is going to move from Toronto to London,” Mr. Schmitt said of the TMX-LSE tie-up, adding that inevitable add-on mergers, most likely in Asia, ‘will further diminish the influence of Canada.”
Mr. Schmitt said his rival should be forced to divest or face revised regulations for “strategic” assets such as derivatives and securities clearing and accounting — which he called the core plumbing of financial markets — and benchmark indices.
These functions “which cannot be easily replaced and are core to the proper functioning of the Canadian financial markets need to remain under full Canadian control,” he said.
In the event of another financial crisis, “who’s going to call the shots?” if they are not, he said.
Mr. Schmitt acknowledged that the changes he advocates would help create an environment for Alpha to become “the new generation Canadian exchange.” Alpha, which operates an alternative trading platform, hopes to secure its bid to become a listing exchange by September, Mr. Schmitt told the government committee members.
Gilles Bisson, an MPP from Northern Ontario, said he sees benefits of the proposed transaction, such as giving companies access to global capital. But past experience with foreign takeovers of Canadian mining companies has made him wary.
“There’s some skepticism when we hear people come to us and say, ‘This is to your benefit,’” Mr. Bisson told Mr. Rolet and Tom Kloet, chief executive of TMX Group.
Mr. Bisson pushed for more guarantees to be written into the transaction agreement so the board of directors continues to make decisions that are in the interests of Canada and Toronto.
Failing that, he said, “what guarantee do we have that the expertise we built up here ... doesn’t end up in London?”
Mr. Rolet and Mr. Kloet said “change of control” provisions built into the deal should address concerns beyond the balanced structure they have negotiated. The provisions require any further large mergers to be vetted by Canadian regulatory authorities.
Following a two-hour appearance in front of the committee, Mr. Rolet said he thought the exchange executives were given a “fair” hearing by politicians who had legitimate questions.
The hearings are to continue Thursday and next week.
Committee chair Gerry Phillips said he hopes to hear from officials at the Ontario Securities Commission. The regulator has the power to block the proposed transaction and will hold independent public hearings after the committee releases its report in April.