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Cablegate: Canadian Capital Markets Update - Free Trade in Securities

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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