The group of 13 financial institutions that's banding together to try to buy TMX Group Inc. likely isn't going to make as much money as originally hoped, after regulators exacted stiff concessions on pricing.
The Ontario Securities Commission on Thursday morning unveiled its proposed "recognition order" for Maple and TMX -- the rules under which the newly structured TMX would be allowed to operate.
The 13 financial institutions that call themselves Maple Group plan to buy a majority of TMX, which owns the Toronto Stock Exchange and other markets, and fold in the country's clearinghouse for stocks, CDS, and a rival stock market called Alpha that is the TSX's biggest competitor.
CDS would be turned from a non-profit utility into a for-profit part of Maple -- and that worried market users because CDS is a monopoly. CDS users who aren't part of Maple can worry less after seeing the rules. Under the new pricing model for CDS, Maple will have to cut in market users on a significant portion of profits forever more.
Currently, CDS works on a cost recovery model. At the end of the year, if it has collected too much in fees, the clearinghouse pays rebates to users.
Even if Maple succeeds in buying TMX and CDS, it will still be forced to continue paying rebates. What's more, Maple will have to share some of the synergies it expects to get from the transaction with market users, according to the pricing model, which is now being made public for the first time by the OSC.
Starting on Nov. 1, a Maple-owned CDS will split any annual revenue gains on the current suite of CDS clearing services 50-50 with users. That continues indefinitely.
On top of that, the so-called "integration rebate" to market users starts at $2.75-million and rises to $4-million by 2016. The fee will be capped at that level after 2016, but it will continue in future years.
It's supposed to reflect the cost-savings Maple extracts. But interestingly, it's not conditional on Maple actually saving money. So CDS users get paid no matter whether Maple manages to find synergies or not.
All of this means Maple will have to really deliver on its original promise -- to make money from CDS not by raising fees for existing services but by creating new services that it can charge for. Those new services won't be subject to the revenue sharing. However, even there, regulators are not making it easy on Maple.
Every three years Maple will have to review its fee model, and fees on any new services will have to approved by the OSC and the Quebec securities regulator.
Seeing all this for the first time, it's no wonder there was significant grousing behind the scenes from Maple participants that the regulators' demands were eating into the economics of the transaction.