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### Viewing cable 08TORONTO13, Canadian Capital Markets Update - Free Trade in Securities

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
08TORONTO13 | 2008-01-11 15:03 | 2011-04-28 00:12 | UNCLASSIFIED//FOR OFFICIAL USE ONLY | Consulate Toronto

`

    VZCZCXRO0053
    PP RUEHGA RUEHHA RUEHQU RUEHVC
    DE RUEHON #0013/01 0111511
    ZNR UUUUU ZZH
    P 111511Z JAN 08
    FM AMCONSUL TORONTO
    TO RUEHC/SECSTATE WASHDC PRIORITY 2309
    INFO RUCNCAN/ALCAN COLLECTIVE
    RUCPDOC/USDOC WASHDC
    RUEATRS/DEPT OF TREASURY WASHDC
    RUEHLO/AMEMBASSY LONDON 0038
    RUEHFR/AMEMBASSY PARIS 0029
    RUEHTC/AMEMBASSY THE HAGUE 0008
    RUEHBS/AMEMBASSY BRUSSELS 0016
    RUEHLI/AMEMBASSY LISBON 0002

` `

    UNCLAS SECTION 01 OF 02 TORONTO 000013

    SIPDIS

    SIPDIS
    SENSITIVE

    DEPT PASS USTR FOR MELLE, MENDENHALL, CHANDLER
    DEPT PASS SEC

    E.O. 12958: N/A
    TAGS: EFIN EINV PGOV PREL CA
    SUBJECT: Canadian Capital Markets Update - Free Trade in Securities
    and Toronto Montreal Exchange Merger

    REF: (A) 07 Toronto 375 (notal) (B) 07 Toronto 160 (notal)

    (C) 07 Toronto 372 (notal)

    Sensitive But Unclassified -- protect accordingly.

    ¶1. (SBU) SUMMARY:  Canadian market and regulatory officials applaud
    U.S. Securities and Exchange Commission (SEC) deliberations to allow
    U.S. investors to trade directly on foreign exchanges that have
    regulations in line with U.S. securities regulations.  Free trade in
    securities has been a priority issue under the Security and
    Prosperity Partnership (SPP).  Canadian market analysts believe
    mutual recognition of securities regulations would enable U.S.
    investors to directly access the Canadian market and would encourage
    foreign issuers to list on the Toronto Stock Exchange (TSX), the
    world's seventh largest exchange by market capitalization (almost
    US$2 trillion).  Market watchers are optimistic that the proposed
    merger of the TSX and the Montreal Exchange (MX) will increase
    cooperation among Canadian regulatory jurisdictions, effectively
    moving Canada closer to a common domestic securities regulation.
    The TSX/MX merger seems on track and awaits approvals from TSX and
    MX shareholders, Ontario and Quebec regulators, the Canadian
    Competition Bureau, and the SEC.  Canadian securities regulators are
    highly motivated and would make good partners for the SEC to ensure
    a successful transition to mutual recognition of securities
    regulation across the US/Canada border.  END SUMMARY.

    --------------------------------
    Mutual Recognition in Securities
    --------------------------------

    ¶2. (SBU) More than a dozen large U.S. brokerages, such as Merrill
    Lynch, currently allow U.S. investors to buy Canadian stocks through
    a Canadian office or partner, but existing cross-border investment
    rules are a costly barrier for small investors and securities firms.
     Canadians were pleased that the SEC is considering changing its
    approach to regulating U.S. investors' trading on foreign stock
    exchanges in order to keep pace with U.S. investors who are
    increasing their international investments as the U.S. dollar falls.
     Converging international accounting standards and securities
    regulation principles, and closer ties among exchanges in different
    countries, may have made the concept of mutual recognition more
    palatable to regulators.  The NYSE's purchase of Euronext last year
    to form NYSE Euronext Inc would be another beneficiary if U.S.
    investors can more easily trade international securities.  Canadian
    officials realize that as yet no date has been set for commission
    consideration of the proposed rule change, which SEC Chairman Cox
    previewed in a December 19th speech at Columbia University.

    ¶3. (SBU) Canadian analysts believe the TSX would win mutual
    recognition approval from the SEC under the new rules, though
    investor demand for quick access to European markets and concerns
    about dealing with Canada's multiple securities regulators could put
    Canada farther down the list for mutual recognition by the SEC than
    some other regulatory jurisdictions.  If the rules change, the TSX
    expects to gain more U.S. investors, which would increase the
    exchange's trading volumes and fee revenue.  Mutual recognition
    could also make it easier to persuade global companies (especially
    in the commodities sector) to list shares on the TSX.  Mutual
    recognition of securities regulations also could help Canadian
    "snowbird" investors who winter in the U.S. to avoid technical
    violations of U.S. securities laws when they trade Canadian-listed
    securities while residing in the U.S.

    ----------------
    TSX -- MX Merger

    SIPDIS
    ----------------

    ¶4. (SBU) Market watchers are optimistic that the proposed merger
    between the TSX and the Montreal Exchange (MX), Canada's leading
    derivatives exchange (ref (B)), will be approved, creating a new
    Toronto-based market entity called the "TMX Group."  A TSX contact
    told us that the announced February departure of TSX CEO Richard
    Nesbitt will not slow the deal.  Under the terms of the C$1.3
    billion deal, the TSX Group will indirectly acquire all of the MX's
    outstanding common shares.  On November 29, the TSX Group was valued
    at around C$3.5 billion and Montreal Exchange Inc. was valued at
    about C$1.1 billion on the TSX.  The Ontario Securities Commission
    (OSC) will oversee the new Toronto-based TMX entity, while the
    derivatives piece of the business, still based in Montreal, will be
    overseen by Quebec's Autorit des marchs financiers (AMF).

    TORONTO 00000013  002 OF 002

    ¶5. (SBU) Financial sector analysts reportedly see Nesbitt's
    departure as opening the way for Luc Bertrand, the Ontario-born
    francophone head of the MX, currently slated to be deputy of the
    combined exchange, to instead be named CEO.  Analysts speculate that
    naming Bertrand to the CEO job might also allay Quebec political
    concerns about the deal.  Bertrand's previous experience with the
    Boston Options Exchange could also help the combined exchange expand
    its business south of the border.  The TSX/MX merger still requires
    approvals from TSX shareholders; a quorum of MX shareholders (a
    special MX shareholder meeting is scheduled for mid-February); the
    OSC; the AMF, which plans to hold two days of hearings in late
    February or early March; the Canadian federal Competition Bureau;
    and the SEC.

    ----------------------------------
    Single Securities Regulator Update
    ----------------------------------

    ¶6. (SBU) Critics point to Canada's fragmented capital regulatory
    system, separated by provincial and territorial boundaries (ref
    (B)), as a continuing barrier to "free trade" in securities, and
    European, Canadian, and U.S. media have speculated that European
    jurisdictions may receive SEC mutual recognition approval before
    Canada does.  An OSC contact explained to us that the mutual
    recognition initiative, while led by Ontario in partnership with
    Quebec, is actually a Canadian Securities Administrators (CSA)
    initiative.  The contact said the 13 provincial and territorial
    members of the CSA ((ref (B)) are very supportive of the efforts
    needed to position Canada for mutual recognition.  The consolidation
    of the Canadian market through the TSX/MX merger is expected to
    increase cooperation between Canadian regulatory jurisdictions,
    which the OSC believes may move Canada closer to common securities
    regulation (reftels).

    ¶7. (SBU) COMMENT:  Our OSC contact said OSC believes the SEC is
    likely to test the waters first with jurisdictions whose regulatory
    structure are most comparable to the United States.  Given the
    sectoral niche markets of North America -- large caps on the NYSE,
    tech stocks on the NASDAQ, energy and mining stocks on the TSX, and
    small-micro caps on the TSX Venture Exchange in Calgary - some here
    believe it would make sense to "streamline" North American markets
    by easing cross-border securities trading before focusing on Europe.
     Canadian market operators and regulators recognize the value of
    easing cross-border securities trade restrictions and hope Canada
    will be one of the initial jurisdictions slated for mutual
    recognition, although they recognize that the SEC has offered no
    details as to timing or likely market priority when it actually
    moves to ease the rules regarding U.S. trades on foreign exchanges.
    Canadian securities regulators are highly motivated and would make
    good partners for the SEC to ensure a successful transition to
    mutual recognition of securities regulation across the U.S.-Canada
    border. END COMMENT.

    NAY

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