Regulators Mull Maple-TMX Deal

Terry Flanagan

Proposed acquisition holds implications for Canada’s market structure.

The proposed acquisition of TMX Group by Maple Group Acquisition Corp. holds implications for the future of Canada’s market structure, as regulators formally consider approval of the deal.

In some quarters, the Maple offer was construed as directly contributing to the collapse of merger talks between TMS and LSE Group earlier this year.

“At one level, there’s a view that says that the Maple bid would never have materialized if there had not been a perceived threat from LSE,” Steve Grob, head of strategy at Fidessa Group, told Markets Media. “Is that a good thing for Canada? In a world that’s increasingly global, probably not.”

On another level, though, the Maple bid, which would combine TMX and Alpha, and also integrate the operations of CDS Clearing and the Canadian Derivatives Clearing Corp. (CDCC), could insulate the combined entity against being a takeover target in the future.

“An interesting counterpoint is that if Canada can pull together its market infrastructure, including TSX, Alpha, and clearing under one roof, then the resulting entity is strengthened, and potentially it becomes an acquirer itself rather than looking to be acquired,” Grob said. “By tying everything together, it gives them a much more coherent platform.”

In its filing with regulators, Maple said that the integrated operations of TMX, Alpha, and CDS/CDCC would generate efficiencies, enhance speed of execution, and maintain low costs, and that the new entity would be well-positioned to pursue growth opportunities through new product development, expanded distribution and international acquisitions or joint ventures.

Regulators are not unmindful of these considerations.

“The Maple proposal raises complex and novel issues for the capital markets,” the Ontario Securities Commission (OSC) said in its notice and request for comment, issued earlier this month. “The structure that would result from the proposal exists in some other jurisdictions, and we understand there is not determinative evidence that suggests one structure is superior to another in all contexts.”

Maple’s vision is to create an integrated group of businesses that provides trading, clearing, settlement and depository services in Canada. It will mark a move to a vertical model for clearing services and integration of exchange and clearing agency that have not been seen in the Canadian cash market, the OSC noted.

Vertical integration refers to the consolidation of the various functions associated with trading, clearing and settlement of a transaction. Often, in a vertical mode, the clearing and settlement services are conducted through wholly-owned subsidiaries of a marketplace, giving the marketplace full control, although clearing and settlement services may be made available to other trading platforms or for bilateral OTC transactions.

A horizontal model of clearing refers to the provision of clearing and settlement services across different marketplaces and products. Horizontal organizations are typically owned by the participants or users of the services.

Both vertical and horizontal models exist in many jurisdictions, the OSC noted. For example, the vertical model is seen in Europe, South America, and Asia, and the horizontal model is seen in both North America and Europe; the vertical model is also common for futures markets.

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