The head of the Toronto Stock Exchange says he shares the two major concerns raised by a group of financial institutions opposing a proposed merger with the London Stock Exchange, but argues the issues have been addressed in the terms of the deal.
In a statement issued Thursday, TMX Group Inc. chief executive officer Thomas Kloet said he was concerned from the beginning with the need to protect Canada's "winning regulatory structure" while also ensuring Canadian management and board oversight.
"As the financial institutions correctly point out, Canada's regulatory regime has served this country extremely well," Mr. Kloet said.
"That is why, as we have clearly stated from day one, the merger agreement contains protections and covenants to ensure that regulatory oversight of the exchanges and of Canadian issuers remain intact."
The statement is Mr. Kloet's first public comment since a group of five financial institution, led by Toronto-Dominion Bank, signed a letter calling the merger bad for Canada and saying it would cause the country to lose regulatory oversight of its biggest stock exchange.
"Our success does not depend on selling out or waiting for others to 'save' us," the letter said.
Mr. Kloet, however, said the deal ensures no foreign regulator, including Britain's Financial Services Authority, will have any regulatory powers or influence over Canada's exchanges or public companies.
He added the undertakings negotiated in the deal will maintain "Canadian mind and management for the future."
Canada's exchanges in Toronto, Montreal and the Western-based Venture Exchange will have their own separate boards of directors with a minimum of 50 per cent Canadian residents, he said. The head of the exchanges will also be a Canadian resident, he said.
At the holding company level, he said seven of 15 directors overseeing the merged company will come from Canada, although that number can be reduced after three years. There are also provisions to ensure Canadian executive oversight, Mr. Kloet said.
"In addition, any future transaction resulting in a change of control would once again require Canadian regulatory approval," Mr. Kloet said.
Also Thursday, the chairman of the Ontario Securities Commission offered more detail on how the OSC will review the merger proposal, saying it will take a regulatory perspective to ensure it continues to operate in "the public interest."
In testimony before an Ontario legislature panel examining the deal, Howard Wetston said the OSC's role is not to "approve or reject the proposed transaction" but to ensure the deal is structured in a way that meets key criteria for operating an exchange in Canada.
However, in response to questions from panel members, he said the commission will not approve applications if the commission is not convinced the deal is in the public interest.
Mr. Wetston's comments cast a new light on how the OSC views the "public interest" in terms of the transaction. TMX Group is not allowed to be more than 10 per cent owned by any entity without OSC approval.
"While it appears that this is uncharted territory, we do have an established framework that will allow us to examine the regulatory aspects of the proposed transaction with a view to assessing whether it is in the public interest to provide the required approvals," Mr. Wetston told the committee.
He said in order to obtain recognition from the OSC, an exchange must:
- have a board of directors "that provides for fair and meaningful representation," one aspect of which is appropriate representation by independent directors;
- provide for fair access to services of the exchange, including charging reasonable fees and permitting access to services provided by the exchange;
- have arrangements in place to regulate listed companies, including having requirements for them to make timely disclosure of certain information;
- regulate trading by participants;
- have a system with appropriate capacity and integrity that are subject to regular testing and reviews;
- and co-operate and share information with the OSC and other regulators.
He told the committee the OSC's review will examine the structure, operations and undertakings provided by the merged group to ensure they meet the criteria.
"In addition, we will determine the terms and conditions that may be required to enable us to continue to maintain our regulatory oversight of the exchange going forward," he said.
Mr. Wetston also said the OSC needs to assess the board composition of the parent company and its ability to regulate that company.
"We are not really looking at the financial or business side of the transaction," he said. "What we want to ensure is we have a viable asset doing business in Ontario today and going forward."
Mr. Wetston said the OSC will hold a hearing to provide an opportunity for public input and to allow the commission to question interested parties.
The OSC will also have discussions with Britain's Financial Services Authority, which regulates the LSE, about regulatory co-operation and oversight.
"I don't think we would accept any watering down or diminution of our oversight," Mr. Wetston said, nor would the OSC accept "the diminution of our exchanges' ability to function because of the important role they have in our country"
Janet McFarland