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TMX Group’s Cannabis Woes Go Way Beyond CDS

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A story published by The Globe and Mail on August 3rd alleges that TMX Group Limited (TSE:X), owners and operators of the Canadian Depository for Securities Ltd. (CDS), are contemplating a ban on Canadian Securities Exchange (CSE) issuers who have marijuana-related assets in the United States from having transactions cleared by CDS.

Shares in CSE-listed companies with U.S. pot assets promptly sold off, prompting CDS to issue the following statement on August 17:

“TMX Group, owner and operator of CDS, Canada’s equities and fixed income clearing house, is engaged with the Canadian Securities Administrators (CSA), an umbrella organization of Canada’s provincial and territorial securities regulators, regarding the clearing of securities of issuers with marijuana-related activities in the U.S. This is a complex matter which touches multiple aspects across our capital market system, and as such requires close examination and careful consideration.”

That move would essentially strand CSE stocks and taint them in the perception of investors. TMX Group Limited CEO Lou Ecclestone is quoted as confirming that they are “in discussion on that right now”. (Lou Ecclestone lists as his principle residence an address in New Jersey).

But take a closer look at CDS, and the threat is at odds with the interests of many of TMX Group’s shareholders, and even its own Board of Directors.

Canadian Securities Exchange CEO Richard Carlton is a member of the Board of Directors of CDS, as is include Jean-Paul Bachellerie, president and Chief Operating Officer of PI Financial Corporation, a broker-dealer whose clients hold CSE-listed companies with U.S. marijuana assets. Another board member is Patrick Cronin, CEO and Group Head of BMO Capital Markets, who were among the first to finance Canopy Growth Corp predecessor Tweed Inc.

In fact, looking more closely at the dynamics behind the scenes, another picture emerges that illuminates the predicament that TMX Group Inc. might actually be in, suggesting the CSE issue is a diversion for bigger problems at Canada’s senior exchange operator.

Anti-competitive, Anti-trust

The Canadian Depository for Securities, where almost all Canadian securities are cleared, is a wholly-owned subsidiary of TMX Group, owners and operators of the TSX and TSX Venture Exchanges. The TSX Venture’s only competitor is the CSE.

TMX Group Ltd., in turn, counts among its major shareholders several of Canada’s top tier banks, who formed a consortium in 2011 to counter a failed bid by the London Stock Exchange Group to take over Canada’s two largest exchanges.

Maple Group Acquisition Corp.’s shareholders at the time of the takeover were Alberta Investment Management Corporation, Caisse de Dépôt et Placement du Québec, Canada Pension Plan Investment Board, CIBC World Markets Inc., Desjardins Financial Corporation, Dundee Capital Markets Inc., Fonds de solidarité des travailleurs du Québec (F.T.Q.), GMP Capital Inc., The Manufacturers Life Insurance Company, National Bank Financial & Co. Inc., Ontario Teachers’ Pension Plan Board, Scotia Capital Inc. and TD Securities Inc.

Maple Leaf Acquisition Corp changed its name to TMX Group Limited after the successful takeover of TMX Group Inc. in 2012.

Neither CDS, nor TMX Group, can make any change to clearing services policies that would affect any market participants without OSC approval. There has been no hearing scheduled, and so on the surface, the threat of withdrawing clearing services from CSE issuers is not something that could be done right away.

According OSC documentation:

“For any decision made by the clearing agency that affects an applicant or a participant, including a decision in relation to access, the clearing agency ensures that: (A) an applicant or a participant is given an opportunity to be heard or make representations; and (B) the clearing agency keeps a record of, gives reasons for, and provides for appeals or reviews of, its decisions.

Thus, all affected issuers are empowered to challenge any changes to the rules governing access in front of the Ontario Securities Commission.

Furthermore, TMX Group Ltd., the owner of CDS, is also the owner of the CSE’s main competitor – the TSX Venture Exchange.  By flexing its policy muscle prematurely, TMX Group has demonstrated in no uncertain terms that it exercises a monopoly in the clearance of securities in Canada, and that has now raised questions surrounding anti-trust rules.

Certain broker-dealers have already stated that they will make “alternative arrangements” for the clearing of those securities, meaning CDS might soon no longer be the only game in town.

TMX Group owners under fire

We know that several of these members have participated in transactions wherein they and their clients hold shares in potentially affected CSE companies. Current market capitalization of CSE-listed issuers in the marijuana space is over $1 billion.

The New York Times published a story on August 25 that revealed U.S. banks were threatening to withdraw access to U.S. banking services from Uruguayan banks that were processing the proceeds from that country’s legal marijuana industry. As a result, pharmacies there have been forgoing their right to sell Cannabis rather than risk their banking relationships, as Uruguayan banks choose not to have cannabis vending pharmacies as clients.

Does this mean that U.S. banks will threaten the same for Canadian banks when marijuana goes legal for recreational use on July 1st 2018?

TMX Group Ltd.’s main shareholders likely have investments in the U.S, and in TD’s case at least, have major operations south of the border. Might they become subject to regulatory action if Sessions decides to use the banks to force his anti-cannabis agenda?

There’s little doubt that TMX Group’s bank shareholders are growing nervous about the approach of July 2018.

The seemingly arbitrary policy changes on the part of TMX-CDS start to become understandable, in view of these cross-relationships.

Perhaps a solution would be for TMX Group to sell its CDS unit to a non-bank affiliated entity? That would certainly take the heat off the CSE. But it still leaves the question as to whether or not the United States is going to take punitive action against the banks who own TMX Group Ltd, for providing marketplace access to Canadian ACMPR growers.

At any rate, CSE-listed issuers with U.S. marijuana assets are not the ones investors need worry about.


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