Quick View: First the Australians, now the Canadians

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News - first reported by the FT - that an all-Canadian consortium of banks and pension funds have rallied round to stop the London Stock Exchange’s “merger of equals” with the TMX Group, with a C$2.8bn counter-bid, is a sign that Canada Inc has decided its national exchange cannot lose its independence in some foreign adventure.

It all sounds a bit like what happened when the Australian government last month blocked the Singapore exchange’s planned combination with ASX, the Sydney-based exchange, in what it said was “a no-brainer” of a decision.

It seems nationalist/protectionist instincts are welling up, big time, as a wave of exchange mergers sweeps the globe. Flag-waving, in other words.

That may seem odd, given that countries have barely blinked as their national airlines, telecoms companies - even carmakers - have been subsumed in cross-continental mergers. Why are exchanges different? Especially in normally mild-mannered Canada.

No-one seemed to care when those deals happened. Not much anyway. What has changed?

The financial crisis, for one thing.

One key element stemming from the crisis was that is that G20 nations, having agreed to set up new market structures to ensure that over-the-counter (OTC) derivatives move onto exchanges and be processed at clearing houses, are far more attuned to having “national market structures” than they were, pre-crisis.

And the Canadian banks are busy figuring out how they can interpose themselves into OTC derivatives clearing right now, so that Canada has “skin in the game”.

And I think that smaller G20 countries - that is, ones smaller than the US and large European nations - are worried about how their market infrastructures will end up in a world dominated by vast transnational exchanges forged by big US and European players - like NYSE Euronext and Deutsche Borse, which are pursuing a merger of their own.

Yet I have a problem with Maple, as the all-Canadian anti-London Stock Exchange team is calling itself.

If Maple succeeds, the biggest Canadian banks will have enormous power in TMX Group, which runs the Toronto and Montreal exchanges. This would mark the first time in at least a decade that banks had a big say in how a national exchange is run. Recall that exchanges used to be, by and large, owner-operated clubs, with the banks heavily represented among those owners.

That changed with demutualisation, which turned those clubby businesses - able to charge customers what they wanted - into publicly-listed companies. Tom Kloet, current chief executive of TMX Group, witnessed this first hand as a board member of the Chicago Mercantile Exchange which in 2002 listed on the New York Stock Exchange, transferring ownership from its trader-members to a public share roster.

The company has been beholden to a range of shareholders - not banks, brokers and traders - ever since. That seems to me a good principle to live by. Do we really want Canada’s two exchanges to be dancing to the tune of Toronto-Dominion Bank, Bank of Nova Scotia, Canadian Imperial Bank of Commerce and National Bank of Canada? Especially as most are also shareholders in Alpha Trading, the alternative share trading platform that the banks were only too happy to set up a couple of years ago as the anti-Toronto Stock Exchange offering, designed to force the Toronto exchange to lower its fees? Quite a turnaround, I must say.

Importantly, Maple does include some of Canada’s largest pension funds, which is a new and fascinating element in exchange governance and ownership: the “buyside” as owners in such market structures. That at least provides a counterweight to the influence of the banks, and given the Canadian funds’ history of fighting for investors - notably on the issue of “proxy access” in the US - a strong counter-argument in favour of Maple.

None the less there is still a tension between the interests of the buy side - pension funds - and the banks which will make this interesting.

What’s equally fascinating is the implications beyond Canada. Nasdaq OMX and IntercontinentalExchange (ICE) are trying to break up an agreed merger between Deutsche Borse and NYSE Euronext. Bob Greifeld, Nasdaq chief executive, has indulged in a bit of flag-waving himself, arguing that a combination of Nasdaq and the New York Stock Exchange would help the US in its battle to attract global initial public offerings (IPOs); it would create a unified US primary listings platform. The flag-waving north of the US border is a no-brainer for Mr Greifeld to co-opt as he tries to make the case in favour of his deal.

And what of Deutsche Borse? So far, the US sensitivities around the NYSE/DBorse deal have been limited, even though DBorse shareholders would end up controlling 60 per cent of a planned Amsterdam-based holding company that the merged entity would morph into. Yes, it has to be recognised that most of the big shareholders in DBorse are actually American funds. But still ... as the Canadian situation shows, emotion and national interest still counts for a lot.

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