That Maple wants to rope Alpha into its bid for TMX Group Inc. is no surprise, because a good chunk of the consortium are owners of the alternative trading platform. And the market accepts that. But wrapping the Canadian Depository for Securities Ltd. has caught people in the trading community off guard.
CDS is the go-to source for equity and fixed-income clearing for every Canadian financial institution you can think of. Its participant list is 96 members long, and ranges from big banks like Canadian Imperial Bank of Commerce down to small investment dealers like Odlum Brown Ltd.
All of these participants have benefited from a sharp reduction in CDS fees. Since 2005, prices per exchange trade have fallen from 18 cents before discounts, to 2.3 cents in 2010. And more cuts are expected, according to CDS's latest annual report.
However, those cuts are up in the air if the Maple bid goes through. Maple's pension funds are in this deal for a profit, not simply to just 'save' Canada's biggest exchange. To get that return, they have an incentive to do things like raise per trade fees.
If they did, it would contradict CDS's current objectives. The entity clearly states, "rather than provide investment on returns, CDS shareholders receive value through the efficiencies CDS provides to their operations." (Shareholders are the banks, the Toronto Stock Exchange and the Investment Industry Regulatory Organization of Canada (IIROC). CDS was also set up in the 1970s because back office costs were soaring and the investment industry wanted to benefit from the economies of scale gained by working together.
To be fair, Maple has laid out a framework that tries to explain how CDS could become more profitable without raising costs. For instance, the Canadian Derivatives Clearing Corporation is already owned by TMX and Maple thinks there are cost synergies from integrating CDCC's and CDS's platforms. There is also talk of reducing "friction costs," but an explanation of what exactly that means has yet to be provided.
At the moment, CDS clears equity, fixed income and money markets securities. It has over $3.5-trillion on deposit and handles over 360 million domestic and cross-border securities trades annually.
Tim Kiladze