Bay Street is getting behind Finance Minister Jim Flaherty's budget promise to pursue free trade in securities with the United States and other Group of Seven countries.
The Conservatives pledged Monday to open up trading in stocks and bonds, a plan that fits neatly with the Toronto Stock Exchange's push to reduce international barriers to stock trading.
“We have been pushing this idea for two years and are encouraged this was included in the budget,” said Toronto Stock Exchange spokesman Steve Kee. “We will support, where we can, advancing the file, and we hope that the federal government and the provinces can work together to make it happen.”
Mr. Flaherty also set out to work toward a national securities watchdog, although financial executives questioned whether he could get the provinces' support for new market rules.
“He deserves full marks for showing some leadership on the regulatory reform agenda, but it's contingent on the provinces moving in lockstep,” said Ian Russell, president of the Investment Industry Association of Canada.
The budget speech called on “provincial and territorial colleagues to come together now to establish a common securities regulator.” Establishing such an agency has been resisted in the past by provinces such as Quebec, Alberta and British Columbia. Last night, spokespersons for those provincial regulators said they were still studying Ottawa's latest proposals, but there is little indication the logjam will be broken.
Canada has almost 3,800 publicly listed companies, far more per capita than many other developed economies, and the TSX, the country's leading exchange, is seventh largest globally. But “Canada's global ranking cannot be taken for granted,” says a companion document to the budget. The rules that govern capital markets increasingly affect the location of investment and opportunities for investors and firms, it noted.
“Other key jurisdictions — the United States, the United Kingdom, Asian economies and Australia — are developing concerted strategies to enhance the competitiveness of their capital markets,” it said.
“Canada must act now to further develop vibrant capital markets that serve the needs of Canadian businesses, investors and the economy.”
“We must pursue free trade in securities so Canadians can more easily buy foreign securities, and so foreign investors can more easily invest in Canada,” the document said. “Our country is spearheading discussions with the United States and other Group of Seven countries to achieve these goals.”
The discussions with the U.S. are being pursued under the Security and Prosperity Partnership of North America. And, at a meeting in Germany in early February, the G7 finance ministers committed to explore free trade in securities.
The aim is to allow Canadian investors to directly access securities listed on foreign exchanges through a Canadian or a foreign broker (as long as the foreign exchange or broker is recognized by Canadian regulators as being regulated in a manner that protects investors). In addition, foreign investors in all participating jurisdictions would be able to invest directly in securities listed on Canadian exchanges through their domestic broker or a Canadian broker.
Free trade in securities would raise opportunities for diversification, as well as opportunities for returns for investors, the government said. Competition between stock exchanges and brokers would lower investment and trading costs, thereby reducing capital costs and encouraging economic growth.
“Under mutual recognition, the laws of the jurisdiction in which the exchange is located would protect investors,” the document said.
It noted that moving forward on the initiative will need action on behalf of not only the Canadian government, but provincial securities commissions, self-regulatory organizations and market participants.
The government also said that a revised tax treaty with the U.S. will decrease barriers to the flow of capital between the countries. That will include a complete exemption from withholding tax in respect of cross-border interest payments between the countries, as well as extension of treaty benefits to limited liability companies commonly used by U.S. venture capital firms.
Canada and the U.S. have agreed in principle to update the tax treaty. When the revised treaty comes into force, the government proposes to eliminate Canadian withholding tax on interest paid to all arm's-length non-residents, a move aimed at expanding funding opportunities for investment.
In addition, the budget proposed to consolidate the debt issuance of some of the major crown corporations — Canada Mortgage and Housing Corp., Farm Credit Canada, Business Development Bank of Canada — with the government's debt program to reduce overall borrowing costs and improve the liquidity of the government securities market. And it aims to modernize bankruptcy and insolvency rules to “ensure full protection” for collateral arrangements supporting financial contracts.
Other elements of the plan include promoting financial literacy among young Canadians and introducing a new principles-based disclosure regime for bank investment products with complex features.
With files from reporter Andrew Willis in Toronto
