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OSC chairman Howard Wetston stressed the importance of assessing the deal's impact on individual investors.Fernando Morales/The Globe and Mail

The rarely talked about plumbing behind Canada's capital markets stole the spotlight during Ontario's public hearings on the proposed takeover of TMX Group Inc. , the parent company of the Toronto Stock Exchange and the Montreal Exchange.

While the $3.8-billion friendly transaction has raised a number of red flags with regulators, the consortium of 13 financial institutions behind it, collectively Maple Group Acquisition Corp., have pushed the most buttons with its additional plans to purchase Alpha Group, an alternative trading venue, and the Canadian Depository for Securities, the firm responsible for clearing and settling every Canadian trade.

The proposed purchase of CDS was the most thorny issue on the first day of the two-day hearings because the company is both crucial to Canada's capital markets, and also operates under a cost-recovery model, which ensures that its fees remain extremely low around 1 cent a trade. Maple has expressed a desire to turn it into a for-profit monopoly.

Speaking on behalf of Maple, acting spokesman Luc Bertrand reiterated comments that he has already made. If Maple is allow to buy CDS, it will maintain fees at "fair and reasonable levels," but would not commit to hard targets. He did, however, make a firm commitment that Maple will not introduce a two-tier pricing model at CDS, which could have given Maple's backers preferential fees.

Maple, along with TMX, whose board has supported the takeover bid, argued that it wouldn't be able to jack up clearing and settlement fees to unreasonable levels because its U.S. rival, Depository Trust & Clearing Corp., already has low fees and many Canadian stocks are listed on exchanges in both countries. If fees moved too high in Canada, traders could simply execute more orders south of the border.

A group that advised the board of the Investment Industry Regulatory Organization of Canada took issue with this argument, deeming it as an "overly simplistic view."

"It isn't clearing and settlement that determines where a trade gets executed," said Jeffrey Kennedy, chief financial officer of Cormark Securities. Liquidity and the best bid and ask prices are much more important, he added.

The group also pointed that only 164 of the 2,144 Canadian-based companies listed on the TSX have a dual listing on a U.S. marketplace. Though some of these companies are high-profile names, such as Research In Motion and Royal Bank of Canada, and therefore account for a lot of volume, the vast majority of companies could not be traded south of the border even if clearing and settlement fees were higher here.

As for the benefits of buying CDS, Maple argued that the purchase would allow it to merge CDS with TMX-owned Canadian Derivatives Clearing Corp., which would allow for what is termed cross-margining. Currently, equity trades made on margin, or with borrowed money, require collateral to be posted with CDS.

The same is true for derivative trades, except the collateral is posted with CDCC. Maple argues that many of these trades offset each other, reducing the need for so much collateral. Freeing up this money could potentially result in more trades, thereby enhancing liquidity.

All of the other speakers agreed that cross-margining would be beneficial from a risk management standpoint, but many believe it can be achieved without Maple's bid.

Moreover, Mr. Kennedy pointed out that many firms only trade equities, and not derivatives, so they wouldn't benefit from such a transaction.

CDS wasn't the only issue discussed Thursday. Other topics included the role of retail investor representatives on Maple's board of directors, as well as the role that Alpha would play within Maple. The consortium has argued that it would not be able to alter trading fees at Alpha or the TSX because other trading venues, such as Chi-X and Pure Trading, operate in Canada and their pricing models aren't expected to rise.

OSC chairman Howard Wetston opened the hearing with a reminder of the issues his team has to assess before giving its ruling. Broadly, they include providing investor protection and fostering fair and efficient capital markets.

Mr. Wetston also stressed the importance of assessing the deal's impact on individual investors, whom he said are too often forgot about.

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