TSX boss calls for free trade in securities

(April 7, 2005) The chief executive officer of the Toronto Stock Exchange says the three NAFTA countries should be viewed as a single market for securities. In his first speech in the U.S. since being appointed head of the TSX, Richard Nesbitt said that national borders are an “artificial and ineffective impediment” to investment.

“Surely it is time to get rid of these impediments, to free our financial markets so that we can make our full contribution to North America becoming more prosperous than the sum of its parts,” Nesbitt said Thursday at the Harvard Club in New York City.

Nesbitt said there are some hopeful signs that governments are beginning to think the same way, pointing to a provision signed by Presidents Bush and Fox and Prime Minister Paul Martin last month in Texas.

The NAFTA leaders agreed to work together “towards the freer flow of capital and the efficient provision of financial services throughout North America.” For example, the three said they would work to facilitate cross-border electronic access to stock exchanges without compromising investor protection.

“I think this is an important advance and I hope that the financial communities in all three countries will throw their support behind the idea,” added Nesbitt. “I see no reason why New York would not want to lead in this endeavour. If New York stands for anything, it is the free flow of capital, efficient markets and sound investor protection.”

Nesbitt said the TSX Group supports the idea and will assist the working groups that are being established to map out the next steps. “As I have noted, all three countries are wealthier because of the North American Free Trade Agreement but we could be wealthier still.”

The push towards freer trade in securities has already forced governments to take action. For instance, the Canadian government recently moved to abolish limits on foreign investment by retirement funds, including individual pension plans.

Those limits led the big mutual fund companies to create synthetic securities that replicated the performance of foreign stocks, Nesbitt said. “And not long after, investment funds began marketing these derivative-based products to individual investors. So a whole industry was built up to produce the same effect as free trade for retirement accounts, except for the higher costs and without the free trade.”

But the foreign property rule also had some perverse effects, Nesbitt noted, reducing access to Canadian capital and costing Canadians additional investment opportunities that U.S. listings might have provided.

“Once all the legislative niceties are in place, Canadians will be free to invest where they think they can make the best return, which is what markets are supposed to be about. And we’ll be a more attractive market for American companies wanting to raise money in Canada because one of the artificial barriers created back in the ’70s will be gone.”

Free trade in securities doesn’t mean harmonizing each and every rule in each country, Nesbitt said, instead suggesting a system of mutual recognition.

“Complete harmony probably isn’t possible, but it isn’t necessary in any case,” he explained. “What is necessary is that our different markets share the same goals, and we do. Canada and the United States are both after the same thing — stronger disclosure, greater transparency and tougher enforcement. That is what matters, not the intricacies of different rules in different countries in different languages.”

“I think everyone would also agree, after our experience of the last few years, that no single market has found the silver bullet for guaranteeing full and honest disclosure or robust enforcement,” he added. “To insist on a particular set of rules seems to me in these circumstances to simply invite failure.”

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com