The difficult choice between nationalism and monopoly.
For those who believe that financial exchanges are strategic national assets to be protected from foreign marauders, the past week has been a mixed bag. Driven in part by worries that Canada would lose control of its markets if TMX were to merge with the London Stock Exchange, the country’s largest banks and pension funds launched a rival bid for the operator of the Toronto bourse. Tellingly branded “Maple”, the consortium pledges to ensure the “ongoing integrity” of Canada’s capital markets by merging TMX with the banks’ own trading platform and a clearing house.
South of the border, however, the idea of a national champion is dead. NASDAQ and InterContinental Exchange have ended their attempt to wrest NYSE Euronext away from Germany’s Deutsche Börse after regulators threatened to block the deal, which would create a share-listing monopoly.
Financial protectionism has grown since the credit crisis as governments re-regulate financial firms and markets. But the level of nationalism varies. In the merger-obsessed world of exchanges, America and Britain still broadly welcome foreign bidders. In smaller markets, where officials fret about business migrating to bigger financial centres, there is more flag-waving. Canada’s provincial politicians have applauded Maple’s bid. In a recent poll, most Canadians agreed that TMX was a “strategic” asset. This mirrors the mood in Australia, whose government blocked the proposed merger between ASX and Singapore’s exchange in April.
Canada and Australia weathered the crisis well partly because their financial systems were built for stability more than dynamism. Both, for instance, have banking oligopolies that have long accepted tough regulation as a cost of their market power. With exchanges, too, they seem willing to contemplate sacrificing some competition for perceived solidity.
This can pose a dilemma. Canada’s federal government and provincial securities commissions must choose between a TMX that is largely foreign-owned and an all-Canadian offer that could increase monopoly power and thus raise costs for investors. If the Maple bid succeeds, the banks would be key members of a group controlling more than 80% of share-trading and a clearing house that until now was run as a not-for-profit utility. Luc Bertrand of National Bank of Canada points out that no investor would own more than 10% of the new entity. But some are uneasy that the banks and pension funds would hold a combined 60%.
The arguments for strategic status, though politically appealing, are questionable. The nationality of an exchange’s owners has little or no economic impact on the financial centre in which it is based. True, Paris did see jobs migrate to New York and London after NYSE’s takeover of Euronext in 2007, but the centre of gravity was moving to bigger centres anyway. It is hard to see Deutsche Börse’s shareholders, many of which are American, advocating an exodus to Frankfurt.
The public-policy case for keeping mergers domestic may be flimsy but the business rationale is stronger. The revenue synergies of cross-border deals are much smaller than the cost synergies of home-market deals. In the former, most of the benefits have flowed to hedge funds and the exchanges’ managements. Moreover, investors can trade any share or derivative cost-effectively through a local exchange, using globally active brokers and so-called Direct Market Access services. That may be why CME Group, the biggest and savviest derivatives-exchange operator, has always stuck to domestic takeovers. As one consultant puts it: “Technology has made the idea of a global exchange questionable rather than compelling.”
Source: The Economist