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The Globe and Mail

TMX-LSE deal approval should come with strict conditions: Prentice

Environment Minister Jim Prentice speaks with reporters in the foyer of the House of Commons on Oct. 27, 2009.

Adrian Wyld/The Canadian Press

If the merger between the Toronto and London stock exchanges is approved, strict conditions will need to be applied, CIBC executive Jim Prentice said Tuesday.

The former federal cabinet minister, who joined the bank in November, also said the country must hold on dearly to regulatory control of its biggest stock exchange if the deal is to be allowed.

"This proposed merger is less about ownership than it is about regulatory control," Mr. Prentice said during a speech in Toronto.

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The real issue is not about who owns the pipes and the wires. The real issue is that the TMX, as the clearing house for capital, is far more than a strategic asset. It is one of the fundamental building blocks of capital formation in Canada."

"Canada must retain the capacity to regulate in order to advance our national interests. Canadian regulations that served us so very well through the financial crisis cannot be watered down… We've run a tighter ship," he said.

"How Canadian regulatory standards will integrate with those applicable in London is not yet clear… We must ensure that the so called 'mind and management' of Canadian finance not migrate to London, or for that matter to New York or to Hong Kong."

The proposed merger of the TSX and the LSE has sparked a debate about whether a national stock exchange is a so-called strategic asset.

Under the proposed structure of the deal, shareholders in LSE parent London Stock Exchange PLC will own 55 per cent of the merged company and its CEO will be based in London.

Mr. Prentice said Canada needs increasing access to global capital markets, noting that cumulative capital investment in the oil sands will reach $93-billion by 2015, and $40-billion of hydro projects are being looked at across the country.

"The world's demand for capital is growing. And so is Canada's," Mr. Prentice said, adding that maintaining access to low-cost capital should be the country's first priority.

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"There are a few, however limited, studies on the merger of stock exchanges. And those studies point to the fact that mergers can affect liquidity and therefore the cost of capital. Mergers affect different sized firms in different ways. Firm size, industrial sector and the location of an exchange will affect those seeking capital."

His speech is the first time the former Industry Minister has spoken publicly since leaving the federal government to join CIBC.

His comments come after Royal Bank of Canada CEO Gordon Nixon told The Globe and Mail two weeks ago that the TMX-LSE merger was key to Canada playing a larger role on the global financial stage. Mr. Nixon said the TSX could be deemed irrelevant if it doesn't partner with larger players.

"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," Mr. Nixon said. He noted that he has conflict of interest in making that argument, because RBC Dominion Securities is advising LSE on the deal. As well, RBC and CIBC are both part of the ownership group for the Alpha Group, the alternative trading system set up in 2007 that is the TSX's biggest domestic rival.

Mr. Prentice said in his speech that the trend of stock exchanges merging with each other is becoming a reality.

"We are now at the edge of the next phase in the globalization of financial markets, namely the interconnected ownership of a small number of dominant international exchanges," Mr. Prentice said.

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"We should focus our efforts on determining what specific conditions this transaction or any future transaction must meet to ensure that Canadian capital markets continue to succeed and prosper. The question to be answered is "on what national terms does a merger make sense?" Absent such specific conditions, permanently applied, decisions made over time by future owners could diminish the strength and vitality of Canadian capital markets and we can not allow that to happen."

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