Reuters Hits Obstacle In Plan To Protect Deal With Cantor

Reuters has hit an obstacle in its bid to become a Recognized Market Transparency Organization (RMTO) in Canada. The staff of the Investment Dealers Association of Canada (IDA), as well as Star Data Systems, Bloomberg and Dow Jones Telerate Canada, are recommending that the IDA board of directors reject an application by Reuters to become an RMTO. An open hearing to discuss the proposal was underway in Toronto late last week as IMD went to press.

At the hearing, a subcommittee of the IDA's board of directors was scheduled to hear the oral presentations of interested parties. Reuters will present its case and the IDA staff will present its position. Other parties due to make presentations were Telerate Canada, Star Data, Bloomberg, Cantor Fitzgerald, the Interdealer Brokers Association of Canada and Canpx. Following the hearing, the subcommittee will make a written presentation on its position to the IDA board, and the board will make a decision on Reuters' application. If the board rejects the proposal, Reuters can appeal to the Ontario Securities Commission.

In making an application to the IDA, Reuters hopes to become an alternative to the Canpx consolidated bond pricing service (IMD, October 21). In doing so, the vendor is seeking to protect its exclusive agreement with Cantor Fitzgerald for the IDB's Canadian government bond prices.

If Reuters had RMTO status, that would allow Cantor to continue contributing its prices to the vendor exclusively rather than to Canpx. Reuters signed an exclusive deal three years ago with Cantor Fitzgerald for the IDB's non-US Treasury data (IMD, February 1, 1993). The 10-year contract is said by sources to be worth between $10 million and $12 million a year. If Reuters is not granted RMTO status, under a new rule approved by the Ontario Securities Commission (OSC) (IMD, May 20), Cantor would be required to contribute its data to Canpx. Reuters would lose its exclusive, and Cantor would be in default of its deal with the vendor.

In a letter to Reuters America dated October 2, Ian Russell, vice president of capital markets at the IDA said, "The IDA staff regrets that it has not proven feasible to identify a basis upon which Reuters could modify its application for RMTO status in such a way as to enable the staff of the IDA to feel justified in recommending it for approval by the IDA board."

The IDA staff is not alone in rejecting Reuters' proposal. Three market data vendors that are due to distribute the Canpx feed--Star Data, Bloomberg and Telerate--also filed comment letters with the IDA opposing Reuters' plan.

Alan Hutton, president of Star Data, wrote in a letter to the IDA that, "The Reuters proposal has failed to demonstrate that they can perform transparency services as effectively as Canpx..."

Todd Sibilla, of Bloomberg Financial Markets, also had strong words on the matter: "The IDA should be looking to leverage each vendor's market position and strengths, not limit itself to an exclusive distribution arrangement that clearly benefits only one party--Reuters. I feel I can speak for the market data community as a whole when I state that without a complete Canpx feed, we will be extremely disadvantaged. There is absolutely no justifiable reason why the IDA should rewrite their distribution regulations because Reuters and Cantor Fitzgerald have chosen to execute an exclusive distribution agreement which, by Canadian law, is unenforceable," Sibilla wrote.

Telerate, for its part--which was awarded the contract to build and operate the Canpx feed (IMD, October 23, 1995)--also objected to Reuters' proposal. In a letter addressed to the IDA, Robert Young, Telerate Canada's director of marketing, wrote that the Reuters' plan, as compared to the Canpx model, "does not increase investor access to bond price information; would cost most investors (i.e. all non-Reuters subscribers) more in total to access; does not guarantee more data than Canpx would; does not provide balanced transparency; and does not bring any technological advantage."

Young wrote: "In addition to the lack of new benefits brought forward by this proposal, it carries a very serious risk. As noted during the OSC hearings and elsewhere, approval of the application would definitely lessen the chance of success of Canpx..."

Meanwhile, Henry Ann, managing director of Tullett & Tokyo Securities (Canada) and president of the Interdealer Brokers Association of Canada, also raised several concerns in his comment letter. "Over the past few years we have seen the emergence of Reuters as a direct competitor [to Tullett & Tokyo] in many of these [fixed income and money market] products through electronic broking.... [Reuters'] rapid expansion and success leads many market practitioners to believe that it is only a matter of time before they enter into the electronic broking of fixed-income products. Reuters' future intentions in this regard are a relevant consideration in evaluating the RMTO application.

"Whilst competition is healthy for the market and should not be restricted, there should be no special concessions that would create an uneven playing field," Ann continued. "Any organization that had full access to the raw data provided by all Canadian IDBs would be in such an advantageous position that entering into the market as a direct competitor would be comparatively simple. The IDA should be satisfied that Reuters will not derive special advantages from access to this data."

Not surprisingly, Reuters objected to the IDA's concerns about its proposal. The vendor's counsel wrote that Reuters was "concerned that the IDA is diverging from the competitive view of transparency that the OSC envisioned when it approved" Canpx. At that time, the OSC said that the IDA's bylaws permit other RMTOs to apply and potentially operate.