The Ontario Securities Commission is putting tough restrictions on the consortium that wants to buy TMX Group Inc. , demanding protection for investors in the form of strict governance controls and pricing concessions for key services that raise questions about how profitable the acquisition will be.
The OSC released a 160-page document Thursday that laid out the demands it is making of the 13-member group of banks and other financial institutions that wants to buy TMX.
The rules require a bigger board than the Maple Group had originally planned, a special regulatory oversight committee, and limits on the company's operations to "address concerns that Maple may act anti-competitively in the pricing of its trading-related services," the OSC said.
Step 1 of Maple's plan is to buy control of TMX, owner of the Toronto Stock Exchange. Step 2 is to fold in the national stock clearinghouse, CDS, which currently operates as a not-for-profit monopoly; as well as the biggest rival to TMX, the bank-backed Alpha trading system.
The proposed creation of such a powerful company at the centre of Canadian financial markets sparked intense regulatory review.
The OSC draft regulations are the culmination of many months of negotiations, and Maple has agreed to abide by them. Even so, the rules are not a done deal: there is still a comment period and there could be revisions.
Maple also must reach an agreement with the federal Competition Bureau, which has been in large part mollified by the OSC's draft regulations, but is said to still have some concerns.
The question now is how much the cost of all the regulation would hamper Maple's ability to do business and generate profit.
"A key concern of ours for the transaction is to what extent Maple and TMX are giving up the upside for shareholders," said Jeff Fenwick, an analyst at Cormark Securities who follows TMX.
Maple has agreed to abide by the rules and can "live with" the conditions, said Luc Bertrand, the National Bank of Canada executive who has been the face of the consortium.
"Rest assured that while at a first read, someone would say, 'Wow these are tough requirements by the regulators,' all this is a give and take," Mr. Bertrand said in an interview. "Everybody was cognizant of that before we got in the process. But people need to look at the numbers. The business case remains very good."
Among the requirements, Maple would have to seek prior OSC approval of any new fees or fee models. The OSC would also impose prohibitions or restrictions on arrangements or volume-based discounts or incentives that might discriminate between market participants.
The pricing controls largely relate to CDS. The clearinghouse would be turned from a not-for-profit utility into a for-profit part of Maple, which worried market users because CDS is a monopoly. Under the new pricing model for CDS, Maple would have to cut in market users on a significant portion of profits.
Currently, CDS works on a cost-recovery model. At the end of the year, if it has collected too much in fees, it pays users rebates.
Even if Maple succeeds in buying TMX and CDS, it would have to continue paying rebates. What is more, Maple would have to share some of the cost savings it expects to get from the transaction with CDS users.
Mr. Fenwick pointed out that the new entity would add more than $75-million a year of expenses to the existing TMX framework, while adding little at first in the way of earnings. That would weigh on margins and returns.
"In this case, why bother to acquire CDS?" he said. "We hope management will begin to better articulate the case for shareholders once the deal is approved by the regulators."