Independent brokers oppose part of TMX takeover

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Eighteen of Canada's independent brokerages are urging regulators to halt a major part of the TMX Group Inc. takeover plan that would turn a key piece of the country's financial plumbing into a for-profit enterprise.

Their opinions were made clear in public comment letters submitted to the Ontario Securities Commission, one of the four provincial regulators that must approve Maple Group Acquisition Corp.'s plan to acquire TMX. Maple, a consortium of 13 of the country's biggest financial institutions, hopes to reshape Canada's stock market landscape by both acquiring TMX in a $3.8-billion friendly transaction, and then purchasing the Canadian Depository for Securities, the country's only clearing and settlement firm.

CDS handles all of the back-office processing of cash and securities after a trade is made. Though it is rarely talked about, CDS is crucial to the Canadian capital markets and it currently operates under a cost-recovery model, which means it charges fees to simply cover its expenses.

CDS's clearing costs have steadily fallen over the past decade, and are now among the lowest in the world. Maple has said it plans to keep these fees "fair and reasonable," but its submissions to the regulators clearly state that it plans to turn CDS into a "for-profit" business and to increase revenues by introducing new services.

The 18 firms voiced their concerns over this plan in a letter submitted by the Investment Industry Regulatory Organization of Canada. The group includes the likes of Canaccord Financial, one of the country's largest independent brokerages, and the Canadian arm of brokerage Edward Jones, which has 300,000 clients in Canada. Additional public comment letters were sent in by individual IIROC members, groups such as the Canadian Coalition for Good Governance and companies like alternative trading system Chi-X Canada, in advance of the OSC's public hearings set for early December.

Collectively, the letters raised a number of issues, such as the need for a majority of independent directors on Maple's board and the need for fair access to all trading systems, but the common thread was a desire to keep CDS's current cost-recovery model in place. Should fees rise, there is a concern that the end users (investors) are those that will have to pay more.

The submissions also note that if regulators approve Maple's plan, there must strict be oversight of CDS.

Edward Jones went so far as to urge the OSC and its equivalent in Quebec to deny the plan to purchase CDS. "Maple ownership of CDS is bad for Canadian individual investors," the firm wrote in its submission.

Canaccord echoed that, saying that "we believe the negative impacts of this transaction will far outweigh any potential benefits for the Canadian capital markets" and recommended that the regulators keep the status quo.

Speaking on behalf of all 18 firms, IIROC said the preference would be to "maintain the status quo." While Maple has committed to keeping its fee-setting process open and fair, the committee said it didn't trust those promises.

"The committee is not satisfied that the Maple proposal provides adequate safeguards to ensure equitable pricing for all CDS users," the letter said.

The concerns weren't limited to the brokerage community.

Chi-X Canada, which operates a stock market that competes with those of TMX, raised the spectre of higher costs for non-Maple members.

"Should this new mandate be accomplished, non-Maple participants will surely be the ones to pay," Chi-X wrote. "Adopting this new objective may lead to an increase in the overall cost of trading, which in turn may risk Canada's competitive position internationally for equity markets."

In response on Wednesday night, a Maple representative said: "We note the concerns expressed about CDS. We believe we have proposed a structure that ensures open access, competitive fees and strong benefits to all market participants. Additional definitive information on pricing policy for CDS will be made available in the weeks ahead."