Random Thoughts on Regulating the Merged TMX-LSE

It's not every day I get quoted in the Financial Post. Since I haven't posted for a while, I thought this was the perfect excuse to get back in the swim of things.

My views were a little confused in the article. Whether this was due to incoherence on my part or editorial tweaking I don't know, but I'd like to set down a few thoughts.

All I know about the proposed merger is what I've read in the press, which is to say I don't know all that much. At its most basic, this could end up as a number of stand-alone stock exchanges with common ownership. Although this raises fewer regulatory concerns, it means that the merger will be a non-event for investors, issuers and other market participants.

There is, of course, no international body to regulate global markets, so they have continued to be regulated at the local level. In this regard, the current approach of the Canadian Securities Administrators serves as a model for international regulation. The TMX Group, headquartered in Toronto, runs four exchanges: The Toronto Stock Exchange (TSX), the Montreal Exchange (ME), the TSX Venture Exchange (TSX VE) and the Natural Gas Exchange (NGX). It also owns a majority interest in the Boston Options Exchange (BOX).

The exchanges are overseen by the provincial securities commissions on a lead regulator model, where only one commission effectively regulates each exchange: Ontario for the TSX, Quebec for the ME and Alberta for the NGX. The TSX VE has both B.C. and Alberta as lead regulators, but they have divided their oversight responsibilities so there is no overlap. BOX is overseen by the SEC.

There is no reason why the same model can't work for the merged entity, with the TSX continuing to be regulated by the OSC, the LSE by the FSA in London and the Bolsa Italiana by the Italian regulator. If all of the various commission insist on having a say in regulating each exchange that is part of the group, it would likely be unworkable, particularly as the Canadian stock exchanges have a great self-regulatory role (either directly or through IIROC) than their European counterparts.

Of course, there will need to be co-ordination if the merged entity wants to harmonize rules across all markets.

The FP article also talked about a college of regulators and suggested that I see a role for IOSCO. This isn't the case. What I said was that it is possible for regulators to specialize to take advantage of local expertise. For example, in Canada, there is expertise for regulation of oil & gas issuers in Alberta and derivatives in Quebec. This does not mean that there will be one regulator of a particular product or issuer.

Take oil & gas. The disclosure standards in National Instrument 51-101 for oil & gas activities were probably largely developed by staff of the Alberta Securities Commission (I don't know this for a fact, but it is a logical assumption). They are national rules, but are not administered only by the ASC. They are in effect in Ontario because the OSC has adopted them as a local rule, and any prospectus by an oil & gas issuer that is cleared in Ontario will have its disclosure reviewed by the OSC. While it is possible a similar recognition of expertise could happen at the international level, I don't see a global regulator anytime soon.