Toronto's June 30 `Baby Bang' will reverberate through Canadian finance
Canadians sometimes make light of the re-regulation and reorganization of their financial industry now under way. They call it the ``Baby Bang'' or ``Little Bang,'' after the ``Big Bang'' that resounded in London last fall. One official even spoke of ``The Pop.''
In fact, the changes are highly significant, especially since Canadian capital markets are the fourth largest in the world.
Canada hopes the changes will ``bring Canadian financial institutions and their regulatory agencies into the 20th and 21st centuries,'' says Thomas Courchene, an economics professor at the University of Western Ontario.
``We are too small not to go along with the world trends. We had to make dramatic changes. We had to decide to open it up.''
The Baby Bang officially starts June 30 under new regulations issued by the Ontario Securities Commission and new laws to be passed later this month by Parliament here in the nation's capital.
But, as in London, the adjustments started well before the legal changes actually occur.
The Investment Dealers Association of Canada, with a membership of 62 firms conducting some 95 percent of the securities business in Canada, has some 50 new applications for membership. Half are from Canadian financial institutions, half from abroad.
At Canada's biggest stock exchange in Toronto, new members include Japan's four largest brokerage houses (Nomura, Daiwa, Yamaichi, and Nikko), S.G. Warburg & Co. of London, Instanet (owned by Reuters), Drexel Burnham Lambert Inc., and Pershing, a division of Donaldson, Lufkin & Jenrette Securities. They paid as much as C$361,000 (US$270,000) for their seats.
``We are looking forward to the links to the international markets that the new members represent,'' says Keith Boast, vice-president of listed company and member regulation for the Toronto exchange. ``This exchange is very cognizant of the need to be globally oriented.''
Re-regulation not only affects the securities business in Canada. It will reshape all ``four pillars'' of Canadian finance: commercial banks, trust and loan (mortgage) companies, securities dealers (known in Canada as investment dealers), and insurance companies.
Activities of these four pillars are separated by law or regulation, limiting competition. Canada, in fact, has had one of the world's most stable and well-ordered financial markets. Toronto's Bay Street, the equivalent of Wall Street, has had a clubby atmosphere.
In recent years that has changed gradually as both Canadian and foreign institutions moved into the rapidly growing so-called ``exempt'' markets. These are markets where investors deal in such instruments as private placements, Eurobonds, commercial paper, government debt, and so on.
Some 60 percent of securities transactions take place in that area now. The participants have not necessarily had to belong to the Security Dealers Association or register their securities with the Ontario Securities Commission.
By now, Canada has a sophisticated financial market, fourth in size after New York, Tokyo, and London. As more participants have gotten into the act, competition has become more lively.
Under new laws and regulations - some in place at the end of this month, others that may take a year to pass - competition across the lines of the four pillars will greatly increase.
The Canadian equivalent of the Glass-Steagall Act (the US law separating banking and securities businesses) will no longer exist. Canadian and foreign commercial banks will be able to get into investment banking, including underwriting.
Already among the world's largest, Canadian commercial banks will be able to engage in nearly any financial activity.
Any element of non-competitiveness in the Canadian financial system ``is sure going to break down in a hurry,'' says Stanley Beck, chairman of the Ontario Securities Commission (OSC).
A year from now, says Andrew Kniewasser, president of the Investment Dealers Association, his organization could have 250 members as both domestic and foreign financial firms pile into the Canadian securities melee.
Another reason for the rush of new members will be a requirement that all participants in the ``exempt'' markets register as investment dealers, joining the regulatory associations. Before long, there will be an oversupply of services and a shortage of skilled personnel, Mr. Kniewasser says.
``This will result,'' he says, ``in another rearrangement of the players. But nobody is clever enough to forecast exactly how it is going to shape up.''
Some of the players will disappear in mergers and takeovers - a shakeout widely accepted in the industry as necessary if Canada is to avoid becoming a financial backwater.
This week the Dealers Association held its annual meeting for the first time in Ottawa, a location that reflects the changes being imposed on the industry by the federal government. The theme of the gathering: ``building a new financial system in Canada.''
At the moment, Canada has no official national stock market regulatory organization like the Securities and Exchange Commission in the US. Nor does the government of Prime Minister Brian Mul roney plan to introduce legislation for that purpose within its present electoral mandate, which has about two years to go. The Ministry of Finance has a full legislative agenda already with a major tax reform in the works.
Traditionally, securities regulation has been undertaken by provincial authorities. Since Toronto is Canada's most important financial center, by far the most important regulator has been the Ontario Securities Commission. It has played the role of a national securities commission.
But there is a widespread assumption Ottawa eventually will legislate a federal commission, one which might share jurisdiction provincial commissions. ``It is the Canadian way,'' says the OSC's Mr. Beck.
Kniewasser of the Investment Dealers Association maintains the current round of financial reforms already has given the federal government more regulatory powers in the securities area.
``We have de facto a federal securities commission in Canada,'' he says.
He was referring to the planned creation this summer of an Office of the Superintendent of Financial Institutions to regulate commercial banks, federal insurance companies, and federal trust and loan companies.
In April, the federal and Ontario governments reached a somewhat complex agreement in effect sharing the regulation of those institutions as they move into the securities business.
The current round of federal legislation was outlined in a policy paper entitled ``New Directions for the Financial Sector,'' released last December.
Its recommendations form the basis of the two pieces of legislation scheduled to be passed later this month. A third is to be introduced in the House of Commons by the end of the month. It is not expected to be passed until next spring.
Some 1,000 pages of legislation are involved, aimed at modernizing decades-old legislation affecting all four financial pillars. This will be a major technical task for drafters of the new laws.
Thomas Hockin, Minister of State (Finance), has set four goals for the legislation:
The integration of financial services through the common ownership of institutions and the extension of powers.
A pragmatic ownership policy that checks the growth of commercial-financial links in the economy while maintaining balanced competition within the financial services sector.
Providing a strong framework for prudential regulation.
Modernizing and strengthening the supervisory system.
The government's goal will be to give the public an array of innovative and convenient financial services, perhaps including one-stop shopping at neighborhood branches of institutions.
But that eventual development is being preceded by some turmoil as foreign and domestic brokerage houses, banks, and other financial institutions position themselves competitively for re-regulation.