Open exchanges to foreign investors, says Flaherty

If you thought Jim Flaherty’s proposal to open up Canada’s stock exchange to foreign investors was limited to three pages in the recent budget, think again. The Conservative finance minister has taken this idea to the speaking circuit — most recently in London, England.

On Monday, Flaherty spoke to the Canada–U.K. Chamber of Commerce, where he spent a few minutes espousing the virtues of open exchanges. “Providing investors with easier access to securities listed on foreign exchanges would increase opportunities to diversify their holdings.” Flaherty told the audience he thinks free trade in securities would “increase competition, boost efficiency, [and] lower costs.”

Flaherty’s not the only high-ranking advocate of free trade in securities. On Tuesday, Richard Nesbitt, the Toronto Stock Exchange’s CEO, spoke to the Institute of Corporate Directors in Vancouver, saying, “If we can get this done, we’ll eliminate a lawyer of paperwork, costs and rules that now impedes Canada–U.S. trading in securities. We’ll also increase the advantages of U.S. companies listing in Canada because it will be easier and less costly for Americans to buy shares of U.S. companies on our exchanges.”

The idea behind free trade in securities is “mutual recognition,” a term tossed around by Canada and the rest of the G7 countries, who are also looking at opening up their exchanges to foreign investors.

Right now, an American who wants to buy stock from the TSX has to go through both a homegrown and Canadian broker, which can be costly. Mutual recognition says, according to the recent budget, “the laws of the jurisdiction in which the exchange is located would protect investors.” So, essentially, brokers north of the border would be able to buy stocks on the New York Stock Exchange, using only an American broker and following American rules. In turn, an American issuer would be allowed to list on the TSX, abiding by Canadian regulations.

Doug Lane, a branch manager with IPC Investment Corp. in Burlington, Ont., is eagerly awaiting the day when brokers can easily trade on any major exchange. “I think the opportunity for investors in both countries to diversify their portfolios and lower the cost of trading would make capital markets more efficient.”

Logistically, Lane says the technology to trade on foreign exchanges is already in place; it’s just a matter of breaking down trade barriers. “If you have co-operation on a broad scale, you really only need one master exchange that you’d be able to hook into and trade whatever stocks you want to.”

But co-operating with other countries, especially the United States, is easier said than done. Free trade in securities isn’t a new concept — Nesbitt’s been discussing this for a few years — but only recently has the States come on board.

In the past, the SEC said that if a foreign company wanted to list in America, it would need to register with the commission and comply with U.S. rules. At one time this wasn’t such a big deal, but with the Sarbanes-Oxley Act governing companies and creating a lot of headaches, foreign companies weren’t so keen on listing in the U.S. anymore.

“Foreign IPOs on U.S. exchanges fell off dramatically,” says Nesbitt. “Other markets grew to the point where, more and more, they could meet not only the needs of their own national markets but compete for U.S. listings as well.”

The lack of foreign listings and the opposition to Sarbanes-Oxley has forced the SEC to take another look at free trade in securities. Since February it has even started using the term “mutual recognition,” which is something it refused to do prior to the February 2007 meeting of G7 finance ministers in Essen, Germany. “The world seems to be changing, and the U.S. is recognizing this,” says Lane. “They are reaching out and willing to talk about dismantling barriers to trade.”

While support for free trade in securities is clearly strong, not everyone is ready to jump on the bandwagon yet. Ian Russell, president and CEO of the Investment Industry Association of Canada, needs to take a closer look at the proposal before endorsing it. “Unfettered bilateral, open-ended free trade in securities does raise complicated issues about what will happen to our domestic marketplace,” he says.

One of his concerns is that, traditionally, free trade considerably alters the way people do business, and this case is no exception. “You’re opening it up to a very big market and a small market which has its own set of issues. You are also talking about a significant change in structure and in the marketplace.”

He’s also unsure of how open exchanges would affect small companies. Especially if one day the markets become so open that what we’re left with is one global exchange. “For small companies, it may not be very good. Will they be listed on that global exchange? Will they have access to capital? I don’t know.”

But Flaherty thinks it’s small- to mid-sized companies, especially organizations in Canada’s strong energy and mining sector, that will benefit the most from free trade in securities.

“The choice to easily buy securities listed on foreign exchanges . . . would allow exchanges to better play to their strengths globally,” he said in London. “It would mean that Canada’s diverse range of mining and energy sector opportunities would be more readily available and accessible to a broader range of international investors.”

While Flaherty’s pushing the open exchange idea all over the place, the fine details are far from worked out. There’s no timeline on when this might happen — Flaherty will continue the discussions with his American counterpart when the G7 finance ministers meet in Washington on April 13 — but it sounds like it’s only a matter of time until Canadians can buy American stock cheaper and more efficiently.

“We’re going to lead the charge,” says Flaherty. “First of all for free trade in securities with the United States and then broadening that to all of our partners in the G7.”

Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com

(04/05/07)

Bryan Borzykowski