Porter:
What are your thoughts on the dispute between the TSE and MSE? You must give Fleming some credit for playing hardball with the MSE on this issue.
From today's Globe and Mail.
Exchanges' spat threatens to disrupt options trading
ME, TSE battle over listings rule
Wednesday, October 22, 1997
By Konrad Yakabuski
Quebec Bureau
MONTREAL -- An escalating battle between Canada's two largest stock exchanges over the listing of equity options could disrupt trading and possibly lead to the liquidation of the country's clearinghouse for options and futures.
Canadian Derivatives Clearing Corp. (CDCC) faces liquidation as early as Dec. 20 because of the Montreal Exchange's refusal to bow to pressure from the Toronto Stock Exchange to lift a 14-year-old rule that prevents both exchanges from listing the same options.
The ME's refusal to consider immediately lifting the multiple listing prohibition led the TSE to file notice Monday of its withdrawal from CDCC.
CDCC is the country's sole issuer, clearinghouse and guarantor of options and futures contracts traded on Canada's exchanges. It plays a crucial role in ensuring the smooth running of the country's billion-dollar-plus options market, settling transactions between buyers and sellers.
Its disappearance would likely undermine investor confidence in the options market unless a new clearinghouse emerged immediately to take over the job of settling transactions.
The countdown to Dec. 20 was triggered on Monday when the TSE invoked a so-called "shotgun" clause in the wake of the ME's refusal to lift the rule.
The ME has now gone to court to prevent the CDCC's dissolution, fearing that without the existing rule much of the options trading on the ME will move to Toronto.
Lawyers for the ME and TSE will appear in the Ontario Court's General Division on Nov. 6 to set a date for a hearing on the ME's motion seeking an injunction that prevents the liquidation from proceeding.
The ME, TSE and Vancouver Stock Exchange are equal shareholders in CDCC, but the VSE signalled its own desire to sell its stake when it exited the options business on Aug. 22.
In a letter sent to ME members on Oct. 15, the exchange president, G‚rald Lacoste, recognized that taking the dispute to court "would not bring credit to the Canadian securities industry." However, he added that a court case would do less damage to the industry than the liquidation of CDCC.
But TSE president and chief executive officer Rowland Fleming accuses ME officials of feeding industry fears of a CDCC liquidation to divert attention away from the rule that prevents the country's exchanges from listing the same options.
This rule, he said, puts Canada's exchanges at a disadvantage to their U.S. counterparts -- where multiple listings of options are common.
"All this talk of the liquidation of the CDCC is nothing but hysteria and rhetoric being whipped up by the people in Montreal, who seem to believe that it is entirely appropriate for [U.S. exchanges] to be able to list options on any Canadian stock but not appropriate for the TSE to be able to do the same thing," Mr. Fleming said in an interview yesterday.
The dispute over the fate of CDCC was triggered when the VSE gave notice that, since it had abandoned options trading, it intended to invoke a clause in the shareholders' agreement that provides for the "orderly" repurchase of its stake by the TSE and ME.
But the TSE balked at the VSE's asking price -- $2-million -- and made any purchase subject to the abolition of the rule prohibiting multiple listings. The CDCC adopted the rule in 1983 to prevent the fragmentation of options trading in Canada, whose derivatives market was then only in its nascent stages.
Mr. Fleming said that since CDCC was created as a non-profit agency, the VSE should not be able to make a capital gain on its original investment in the clearinghouse of $200,000. A VSE spokeswoman refused to comment on the matter.
Mr. Lacoste said yesterday that his exchange is asking the court to stop the 60-day clock until an arbitrator can settle the price dispute between the VSE and TSE. The ME also wants the issue of multiple listing of options dealt with separately from the shareholder dispute, he added.
"There is a split in the securities industry as to whether multiple listing is a good or bad thing," Mr. Lacoste said in an interview.
"My suggestion is that we discuss this in a more relaxed atmosphere and involve all of the securities commissions in any decision."
The country's securities commissions are expected to broach the issues of market fragmentation and electronic trading in joint hearings starting in January. Mr. Lacoste said that would be a more appropriate forum for a debate on multiple listings.
But Mr. Fleming retorted that the abolition of the multiple listing prohibition is essential to the survival of the Canadians options
business, which he maintains has been unprofitable for all three exchanges.
In the wake of Vancouver's exit from the options business, about 60 per cent of equity options trade on the TSE with the remainder trading on the ME. In the first nine months of this year, the value of options traded on the TSE was $780-million.
"By any measure, Canada has the worst performing listed options business in the world," he said, noting that it is easier for
Canadian companies to list options on U.S. exchanges than at home.
While the Chicago Board Options Exchange or New York Stock Exchange can simultaneously list options of the same company, the choice of which Canadian exchange gets to list an option is determined -- literally -- by a roll of the dice.
"I can't list options on Canadian National Railway Co. stock because grown men sat around a table in 1997 and rolled dice," Mr. Fleming said. "Well, that is not the way for Canada to compete."
CDCC, which charged about $3.5-million in clearing fees in 1996 to securities firms that used its services, had a surplus of about $5.5-million at May 30. |
