The Ontario Securities Commission is now in the second day of its public hearings on the proposed takeover of TMX Group Inc. So far, two things have become clear.
First, the OSC has done its homework. The questions posed to the panelists were spot on, and the OSC chair, vice-chair and commissioner presiding over the hearings were able to converse on both the big and small details of the proposed transaction.
Second, putting together a ruling is going to be extremely difficult. Some of the key issues -- such as CDS fees -- already stand out, but it’s clearer now that there are myriad nuances to consider. A brief overview of at least some of these is below.
Cross-margining: This one requires an explanation. Currently, equity trades made on margin, or with borrowed money, require collateral to be posted with the Canadian Depository for Securities. The same is true for derivative trades, except the collateral is posted with Canadian Derivatives Clearing Corp. Maple argues that many of these trades offset each other, which reduces the need for so much collateral. But right now the systems don’t ‘talk’ to each other. By buying CDS, Maple hopes to make them talk, which should free up money that could potentially be put into more trades.
All of the speakers agreed that cross-margining is a great idea. Not only because it could free up cash, but also because it makes risk management a much easier task. If CDS and CDCC talk to each other, a dealer would be able to see all of its exposures on one screen.
The question is whether Maple’s takeover is the only way to achieve this. Could CDS and CDCC talk to each other without being combined? That’s something the OSC is looking into.
Regulators still waiting for Alpha and CDS terms: As Streetwise pointed out yesterday, OSC chair Howard Wetston made it very clear that it’s practically impossible for him to rule on the proposed purchase of Alpha and CDS if the terms and conditions of each deal aren’t available. Maple keeps talking about the efficiencies that would come from these transactions, but the hard data to back these claims up is still missing. (Maple is now saying that CDS pricing details should be coming in the next few days.)
Status quo: The OSC asked the same question of each speaker: is the status quo acceptable? And if not, why not? The answers were varied, but the question itself was interesting. It’s easy to assume that the provincial regulators are simply ruling on the potential benefits or drawbacks of Maple’s deal, but they must also consider the status quo, and whether or not blocking the deal would hurt innovation in the Canadian capital markets. Which leads to the next point…
Innovation: This was brought up repeatedly, particularly with regard to CDS. The question: can CDS, which is crucial to Canada’s capital markets, keep up with global innovation if it keeps its cost recovery model? Does it have an incentive to innovate?
The representatives who advised IIROC’s board had an interesting answer. The way they see it, a for-profit structure wouldn’t foster innovation any more than a cost-recovery model would. That’s because within Maple, CDS would still hold a monopoly on trading and settlement in Canada. It’s competition that fosters change, they said, and there wouldn’t any additional competition following the takeover.
Profit maximization vs. the public interest: The pension funds backing Maple’s bid have been put in a tough spot. They have a fiduciary responsibility to maximize returns for their beneficiaries, which in Maple’s case could come through upping fees. Yet if their representatives sit on Maple’s board, they will also have a responsibility to act in the best nature of Canada’s capital markets.
The OSC chairs asked about this conflict of interest, and the answer it heard wasn’t exactly expected. Representatives from Ontario Teachers Pension Plan, Caisse de Depot et Placement du Quebec and AIMCo all said they saw no conflict of interest at all. The OSC appeared to be so taken aback that it asked the question several times, in a few different ways. The answer didn’t change.
AIMCo tried to justify. The funds’ investments in Maple are tiny relative to the size of their balance sheets. So while they need to maximize investments, eking out a few extra million in fees isn’t going to help them much. That allows their board representatives to act objectively.