A series of high-level industry and government departures could have major implications for the securities industry, suggests a new report from ITG Canada Corp.
The report notes that there have been “an unprecedented slew of retirements announced on and around Bay Street” over the last several weeks — including the resignation of since-deceased federal Finance minister, Jim Flaherty, and the retirements of TMX Group CEO, Tom Kloet, and, Susan Wolburgh Jenah, president and CEO of the Investment Industry Regulatory Organization of Canada (IIROC).
“The choices for replacements to these positions will have implications to financial industry regulation,” it notes.
The departure of Flaherty, and his number two, Michael Horgan, leaves two significant issues unresolved, as far as financial markets are concerned, the report says.
First, the ban on so-called “character conversion” transactions in the 2013 budget may come under pressure, it suggests. “These trades allowed financial firms to recast interest income as capital gains in pursuit of tax optimization,” it notes. “While the budget has been passed, and the ban is set to take full effect this September, we suspect that those most harmed by the change will use this opportunity to push for a reprieve.”
Second, is the national securities regulator issue, which was actively pushed by Flaherty over the past few years. The deadline for provinces to sign onto the latest initiative, which so far has the support of Ontario and British Columbia, along with the federal government, comes at the end of the month. “It would be beyond disappointing to see the national regulator project end with Mr. Flaherty’s departure,” the report says.
The report says that Flaherty’s replacement, securities industry veteran, Joe Oliver, “is widely viewed as the only member of the Tory caucus capable of continuing the national regulator push. However, it also notes that, “With a very competitive election on the horizon, we will be watching closely to see if he wilts under the pressure from Alberta and Quebec.”
At the same time, the report counsels that “Liberal Leader Justin Trudeau could do himself a world of good on Bay Street by publicly supporting this initiative and promising not to use it as a campaign issue.”
Additionally, the report suggests that Kloet’s retirement from the TMX comes at a crucial time for TMX, “as Canadian equity markets continue to be out of favour internationally, and are facing increasing competition from the southbound U.S. trading venues, for interlisted flows.”
“The new CEO will need to quickly address street concerns around pricing in order to repatriate that flow before real damage is done to the Canadian capital markets,” it says.
“As the race heats up to replace Mr. Kloet, we will watch with great interest to see if the board chooses to bring in a steward, capable of optimizing revenues and profits from legacy businesses; or elects to take greater risk by bringing in a visionary bent on capitalizing on the opportunities afforded by the Volcker portion of Dodd Frank, as well as MIFID 2,” it notes.
“Such an individual would need to implement value added systems to trade and clear new asset classes that may be orphaned by many of their existing liquidity providers as a result of the incoming regulations,” it says. For example, it suggests that the vertical integration of the clearing function “allows the new CEO a unique opportunity to assist smaller firms looking to disrupt markets in traditionally capital intensive markets like [foreign exchange].”
“The CEO of the TMX is among the most influential and important in our markets. We can only hope the board is able to identify an individual who is able to represent the needs of all stakeholders, not just the shareholders. Such an individual is needed to find a way to bring TMX pricing down to levels more closely aligned with its international competitors, in order to limit marketplace frictions and rigorously compete for interlisted flows, while not destroying TMX shareholder value,” it says.
Finally, it says that IIROC will find out tough to replace Wolburgh Jenah. “Ms. Wolburgh Jenah’s greatest strength has been her understanding that regulators need to consider the impact of all regulation on the robustness of markets and market participants and work toward designing regulation that addresses real risks, while avoiding regulation where the cost outweighs any potential benefits,” it says. “One does not buy tidal wave insurance in Rwanda.”
“IIROC’s board will be lucky to find another candidate who is able to appreciate this approach to regulation, rather than get swept up in the desire to regulate away any and all risk regardless of the implicit and explicit costs,” it concludes.