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London-TMX deal won't give Canada best, most competitive exchange Add to ...

The TMX Group is a world leading exchange for the global resources sector and public venture companies. It has developed unique capabilities for serving the needs of Canada's capital markets, and it has a strong platform in the fast-growing derivatives business.

Despite these strengths, it faces certain challenges before it can be valued on par with other leading exchanges. These include the need to provide fully integrated services and the need to gain scale to be able to invest in IT to stay competitive.

The TMX Group's board has decided the best way to meet these challenges is to be acquired by the London Stock Exchange in a transaction that we at Maple Acquisition Corp. believe does a lot more for the LSE than it does for the TMX Group or its shareholders. We believe there is a better way; a more compelling alternative for shareholders and indeed, for all TMX Group stakeholders and Canadian capital markets participants.

Our concept is to build on TMX Group's strengths rather than trade them away. We believe our group, which comprises five of the nation's largest pension funds and four bank-owned investment dealers, can bring the scale and resources the TMX Group needs to meet its challenges and create far greater value for all concerned. In particular, the opportunity to combine TMX Group with Alpha Group and CDS will allow us to become an integrated exchange and clearing group modelled after similar exchanges in Australia, Hong Kong and Germany.

With our backing, TMX Group will be better able to invest in technology to become more efficient and will be well positioned to pursue growth opportunities through innovative new product development, distribution, cross-listing arrangements and acquisitions, all while staying responsive to the needs of Canada's capital markets. Capital market participants and communities across Canada will benefit from ongoing investment in, and development of, operational centres of excellence in Vancouver, Calgary, Toronto and Montreal. TMX Group employees will have expanded opportunities as part of a bigger and better-positioned company with its centre of decision-making and headquarters in Canada.

The initial response to our proposal - from the markets, capital market participants, and others - has been very positive. A small minority - of which the LSE is not surprisingly the most vocal - has expressed concerns, however, calling it "protectionist" or arguing it would somehow create a monopoly. These concerns are unfounded and, for the LSE, which is trying to save its takeover of the TMX Group, entirely self-interested.

Each of the investors in Maple is a return-driven, profit-making enterprise. Yes, we believe our proposal is clearly superior for Canada and the health of our capital markets, but that is not what motivates our proposal. Our proposal is motivated by the belief that we can build a better exchange and create more value for all concerned, including our respective shareholders and plan beneficiaries. In no way is this protectionist. In fact, we would be pleased to see a combined and strengthened TMX-Maple Group pursue value-generating international transactions following the completion of our offer.

While the provincial and federal regulators will of course come to their own conclusions, we believe the concern that our proposal would create a monopoly is equally misplaced.

Much of this concern has been directed at the role of the bank-owned investment dealers. This shouldn't be an issue for several reasons. First, the bank-owned dealers will not have control of the company. Each will own approximately 6 per cent individually, or approximately 25 per cent in the aggregate. The combined Maple-TMX Group will continue to be an independent public company governed by a board with a majority of independent directors. Approximately 75 per cent of the company will be owned by the existing public shareholders and pension funds.

This concern is also misplaced because as very large customers of the exchange, the bank-owned dealers and their clients (large and small) have more to gain from low trading fees than high ones. With respect to CDS, our plan is to attract more business by improving services, access and efficiency while preserving CDS's open access and applying the same governance framework and policy that CDS follows today to set - and maintain - competitive fees. Two-tier pricing at CDS doesn't exist today and will not be introduced.

Intense competitive market forces will also be at work. Unlike the NASDAQ/NYSE proposed merger, which was opposed by the U.S. Department of Justice, this is not a proposed combination of two long-established full-service stock exchanges. Alpha is a relatively small operation that has been in existence for only about two and a half years, licenses the technology used in its trading system from a third party, and does not currently provide listing services, derivatives trading or an array of other services offered by TMX Group.

In the one area where Alpha and TMX Group do overlap - equities trading - Pure, Omega, Chi-X and other existing Canadian-based alternative trading systems provide a strong competitive alternative. Moreover, Canadian securities regulations require dealers to route trades through whichever of these systems offers the best price - and each of these competitors has the capacity, capability and linkages to traders to handle volumes well in excess of the volume handled by Alpha.

Competition for trading and listing fees doesn't stop at the 49th parallel. To the contrary, Canadian dealers can easily trade on U.S. exchanges such as NYSE and NASDAQ - and a great many do. Many of Canada's most highly traded stocks are "inter-listed," meaning they also trade on a U.S. exchange. On a market capitalization basis, inter-listed companies represent approximately 69 per cent of the total market capitalization of the S&P/TSX composite index. Of all the inter-listed securities on the TSX, on average 56 per cent of their value and 58 per cent of their volume traded on U.S. exchanges between Jan. 1, 2011 and April 30, 2011. Research In Motion, Potash and Barrick are just a few examples.

The alternative of trading on a foreign exchange provides a further constraint on trading fees in Canada, as does the fact that potential new entrants such as U.S.-based BATS and DirectEdge can quickly and easily enter Canada with their existing technology and industry relationships.

Market participants should dismiss alarmist concerns for another reason, as well: Canada has distinctive, proven and comprehensive regulatory oversight of virtually all aspects of the operations of both the TMX and CDS, including with respect to access and fees. In addition to our own belief that CDS functions as well as it does because it is open and inclusive, this extensive regulatory framework, including provincial securities legislation and Bank of Canada oversight, provides an overriding safeguard to protect the public interest and it will remain firmly in place following the completion of our proposed transaction.

Provincial and federal regulators will be reviewing Maple's proposed transaction with a view to ensuring efficient and competitive capital markets that operate in the public interest. Maple is committed to working constructively and effectively with all of the relevant regulators to address any questions they may have so that the proposed transaction can proceed in the best interests of TMX Group, its shareholders and the Canadian capital markets.

In the meantime, TMX Group shareholders should consider the superior value and future upside of our proposal, as well as the very significant risks inherent in the LSE's takeover plan, both in terms of its ability to gain regulatory approval and the potential long-term negative effect it could have on Canada's capital markets.

Luc Bertrand is a spokesman for Maple Acquisition Corp., a corporation formed by five of the country's largest pension funds and four Canadian bank-owned investment dealers, which has made an offer to purchase the TMX Group.

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