Banks poised to raise red flags over TMX-LSE merger

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Four of the country's six largest banks are lining up to raise red flags about the planned merger of the parent companies of the Toronto Stock Exchange and the London Stock Exchange, saying the country risks losing clout as a financial centre.

The public opposition from some of the biggest users of the country's stock exchanges is a big blow to TMX Group Inc., which last month announced its plan to combine with the London Stock Exchange Group Plc to create the one of the world's largest exchange companies.

The banks plan to lay out their concerns this week in a public letter. The wording of the letter, tentatively titled "Let's build on a Canadian success story," has not been finalized, nor has the list of signatories, but sources said Tuesday that the banks that were on side as of then included Toronto-Dominion Bank, which is co-ordinating the effort, as well as Bank of Nova Scotia, Canadian Imperial Bank of Commerce and National Bank of Canada.

TD declined to comment on its role. One bank that's notably absent is RBC, whose CEO Gord Nixon has been a public supporter of the exchange merger.

Some smaller brokerage firms, including GMP Capital Inc., AltaCorp. Capital, Canaccord Financial Inc. and ITG Canada, are also being asked to sign the letter. Some may not, sources said.

"Toronto's hopes to be a global financial services hub could suffer a severe and potentially irreversible setback," the draft of the letter is said to read.

"Proponents of the proposed LSE takeover of the TMX believe this transaction represents Canada's only choice to create a globally sustainable exchange," the draft letter adds. "They are wrong. The TMX is already a viable global entity."

The four big banks are united in their concerns. However there is said to be "degrees of opposition" among the banks, said a person familiar with the situation. For example, TD is expected to take a hard-line stance against the deal, while CIBC has said a merger could proceed with more conditions to protect Canada.

The TMX-LSE plan has already run into skepticism from Canadian politicians, including Ontario Finance Minister Dwight Duncan, amid concern that it will lead to a loss of influence for Canada, and a loss of control over the country's capital markets. Ontario, along with Quebec, has a veto on the transaction. The federal government has yet to make a decision on the merger.

The draft letter pushes some of the key hot buttons for politicians like Mr. Duncan, pointedly calling it a "takeover" of TMX by LSE rather than using the "merger of equals," which the TMX and LSE favour. It likely would carry some weight with the Ontario government, which was strongly influenced by the banks in its decision to implement the harmonized sales tax.

TMX shareholders would own less than half the proposed new company. TMX has argued that the company, which also owns the TSX Venture Exchange, needs to grow beyond national borders. By doing so, TMX has said, the company will be able to lower costs for exchange users and increase opportunities for companies listed on the TMX to find new investors.

"With more eyes on Toronto markets, the opportunity to attract new players and new investors will also grow, creating new employment," TMX chief executive officer Tom Kloet told an Ontario government hearing on the merger plan last week.

The opposition puts the potential signatories at odds with the one major bank CEO who has supported the deal: the Royal Bank's Mr. Nixon.

"If Toronto is going to grow as a global financial centre, the benefits of a global exchange co-headquartered in Toronto likely outweigh the implications of a local exchange that will become increasingly less relevant over time as trading and exchanges globalize," he told The Globe last month.

Mr. Nixon has a conflict of interest as his bank is advising the London exchange on the transaction. Sources at RBC said the bank was not asked to sign the letter. The last of the country's big six banks, Bank of Montreal, is advising TMX Group on the transaction, so it would be unlikely to come out against the deal.

Following a speech in Toronto Tuesday where he laid out his concerns about the merger, senior CIBC executive Jim Prentice said the exchange is a key pillar of the Canadian economy. He said Canada must maintain "regulatory control" of the TSX.

Mr. Prentice, a former federal Industry Minister who joined CIBC in November, said conditions that would enshrine Canadian regulatory oversight of the exchange would have to be put in place permanently, so that if the merged exchange was then taken over by another larger exchange, Canada wouldn't lose clout.

"We have several bodies that are going to be conducting investigations into this [transaction]and I think they clearly need to turn their attention to the nature of the conditions that would be attached - which would have to be attached in a permanent way," Mr. Prentice said in an interview after his speech. "So I think there's a lot of work left to be done."