And thanks to the Ottawa Economics Association for the opportunity to speak to you today.
I'd like to tell you today about how Canadian capital markets have been changing, and what needs to be done to build on the world-class status we have attained.
I'll focus my remarks on the report of the Wise Persons Committee, which recommended that Canada should have a national securities regulator - like every other industrial country.
It's one of the missing pieces in our future competitiveness. And the federal government has a particular responsibility. They have acknowledged that responsibility in Tuesday's budget documents with a commitment to work with the provinces to create a single Canadian securities regulator. But they need to go further and I'll return to that in a few moments.
It's important to note, however, that our regulatory fragmentation aside, Canada has an extraordinary set of national assets on which to found a future.
But it's not enough to have an outward looking perspective, entrepreneurial energy, supportive institutions and a highly skilled work force.
It's not enough to have sound fiscal policies and - media hype to the contrary - tax policies than have become highly competitive.
We also need capital markets that are more nimble, more efficient, and lower cost than our competitors, like our trade partner and competitor just to the south.
That is why the imperative to reform our regulatory system is pressing in on us.
Up to now, our cost of capital has been among the lowest in the world. A recent study put the costs of raising capital during the 1990s at 25 basis points below those in the United States - and the 90s were not our best decade, on the whole.
It is not a surprise that in the past five years our economic performance in terms of GDP growth has exceeded that of the United States by roughly the same amount, some 20 basis points a year on average.
But our cost of capital is neither as low as it could be, nor as low as it need to be.
We are a country that must dance with the elephants of the global economy - the U.S. and Europe, Japan, China and India.
And now Canadian companies also face the pressure of a higher dollar on their export markets.
You may be surprised that our competitive position on the cost of capital for our public companies is as good as it is.
The media has showcased a lot of Jeremiahs in recent days and weeks. They're arguing that Canadian business is in a crisis, that the Canadian tax system is in crisis, that Canada itself is in crisis - and the government has to do something about it.
Let me tell you about our crisis.
Standard and Poor's, which has no especially Canadian axes to grind, has just released a report on Canada's credit rating.
Here is what S&P found:
Inflation is down.
Per capita income is up.
Savings are up.
The current account is in surplus.
We've gone from being a capital importer to an exporter.
Net government debt has fallen from nearly 70 per cent of GDP to just over 40 per cent.
We're better equipped than most other industrial economies to finance the demographic issues that are on our doorstep.
And we're keeping our Triple A credit rating.
S&P isn't alone.
KPMG has also just released its assessment of Canada, based on a survey of 11 major industrial countries.
It says we're the lowest cost country among the eleven in which to operate a business.
Net, they found that the costs of starting a business in Canada are the lowest in the world, some nine percent below those in the United States after a 20 per cent rise in the dollar and six per cent better on corporate taxes.
Earlier studies found we're a strong competitor in other areas, too.
For example, institutional investors around the world demand a lower premium to invest in Canada compared to the United States on the basis of corporate governance.
In fact, according to McKinsey and Company, Canada's risk premium is the lowest of any of 31 countries they surveyed.
Investors using McKinsey as their guide would have done quite well.
In the last five years, the S&P/TSX Composite out-performed the S&P 500, the comparable U.S. index, by 36.3 per cent, not counting the 20 per cent gain in the Canadian dollar in the last year.
Crisis?
I suppose if this keeps up there is some possibility that we won't need as many economists, though you're probably safe for now.
You know, if it weren't for our well established reputation for humility, Canadians might well seem insufferable.
That doesn't mean there's no work to be done.
There is.
And, right at the top, I would put the need to wrench our system of securities regulation out of the 19th century and into the 21st.
The need for change - basic change, not marginal tinkering - can best be understood from the perspective of how far our system has strayed from its 19th century roots.
In the context of that evolution, it becomes quite obvious why the time has come for the federal government to meet its responsibilities in this area.
It's obvious, too, why the provinces can no longer deal by themselves with the national and global issues that now dominate the securities industry.
It was, however, entirely logical for the provinces to regulate securities in the 19th century - and even through most of the 20th.
Had this country's founders had greater foresight, it is possible they might have better foreseen the needs of the 21st century.
But nobody's perfect, and the fact is they didn't have much to go on to suggest the need for doing anything different from what they did.
Like Canada, the ticker tape was created in 1867. But a quick read of the Constitution will tell you that stock exchanges were not yet overly important in the national scheme of things in that era.
Borrowing money is mentioned. The public debt, yes. Banks and banking get three mentions. Copyrights. Bankruptcy. Beacons, Buoys, Lighthouses and Sable Island. All are there. But stock exchanges? Not a word.
But stock exchanges, what were basically private clubs, were quite obviously local undertakings - they could hardly be anything else in those times.
To trade stocks, you actually had to go to a physical place - on Bay Street, or St. James or Howe Street - and you were only allowed inside an exchange if you had a "seat," for which you paid. Unlike banks, stock exchanges did not have branches in other cities, or provinces or countries.
Not much happened that mattered to stock markets, or could happen, that wasn't within walking distance, or a horse-and-buggy ride of the trading floor.
Certainly it is hard to find any major role that Canadian exchanges might have had in financing the National Dream. That great global icon of travel in Canada in the late 19th and early 20th century - the Banff Springs Hotel - was financed by an issue floated in New York.
So, in that era, stock exchanges fell easily and naturally under the provinces' constitutional powers over property and civil rights, and that is a provision on which provincial regulators eventually rested their authority when they began their move into the markets.
When they did, they took it as their role, not only to protect investors but to protect local exchanges, augmenting the natural protection that came from our being a country of incredibly great distances.
And that locally oriented approach to regulation, not surprisingly, became locked into everybody's thinking about the markets, even as equity markets grew beyond their regional base and became central to financing the country's future.
Not even the great stock market crash of 1929 could dislodge local regulation -notwithstanding the example before us of the United States adding a national regulator to its system of state regulation in the 1930s.
As a result, Canadian capital markets grew up over the decades, not as a single national market, as you find in other grown up countries, but as a bunch of local monopolies.
By the 1990s, however, local exchanges with local regulation were seriously out of whack with reality, a horse and buggy anomaly in an IT world.
The trading floor that was utterly essential to the exchanges of old had become redundant.
We closed ours down in 1997.
The idea of owning a seat on the exchange had become an anachronism - there was no longer any place to sit.
Bay Street itself was no longer a physical place so much as an idea, a state of mind, a political pejorative. The TSX Toronto office isn't even on Bay Street anymore. It's been gone for over 20 years.
The paper on which the system had been based, paper that had to be physically moved person to person from the beginning of a trade to the end, had been largely replaced by electrons.
And when was the last time you saw a ticker tape parade?
More substantively, equity markets, the constitutional orphan of the 1860s, had become overwhelmingly national in character, with a far greater role and purpose both in terms of individual lives and in the life of our country.
Once, and not too long ago, Canadians prepared for the future by putting their money into bank savings accounts or even - can you imagine? - Post Office savings accounts.
By the 90s, we had become a nation of investors.
Now, as a very rough proxy for how much this country has been transformed, the market cap of TSX is nearly three times the amount that Canadians hold in bank accounts and term deposits.
Virtually all adult Canadians - and a lot of the kids, too - have a stake in our equity markets. They either invest directly or through mutual funds. Or they invest indirectly - and often without even knowing it - through their company pension plans and the CPP or QPP.
The equity culture didn't creep up on us suddenly. It has been strengthening since the 1960s when investors began to grow in number and shifted their attention to the stock market.
Technology accelerated the capacity of markets to respond. The 1970s brought electronic trading on stock exchanges - our Computer Assisted Trading Systems or CATS was the first.
The 80s and 90s brought the decentralization of computer technology through the personal computer, the internet.
These, and all the associated information technologies, lowered costs and freed investors from traditional constraints, including the costs of geography.
The distances that had made stock exchanges such locally focussed institutions no longer matter. That market can be anywhere and everywhere, and it is.
This is usually described as the globalization of markets.
In a very real sense, however, it is also the democratization of markets.
An economic institution that most people once considered to be for the elites of the country - after all, it took a lot of money to buy a ticket to the market - had become a mass phenomenon, and that evolution is not over.
And, of course, the technology that wove us into the fabric of world markets, now linked foreign stock exchanges to Canadian investors as well.
Canadians have a whole range of Canadian and foreign choices they never had before - and they have become more and more willing to use them.
As an exchange, we had some serious adapting to do.
Technology was changing faster than we could adapt with the now-old CATS system. Rising volumes were pushing our limits.
Our non-profit ownership structure, itself a vestige like regulation of our 19th century origins, slowed down decision making even as markets like Nasdaq angled to carve out a position in the Canadian market.
Meanwhile, Canada had six stock exchanges, far too many for the size of our market. Most were clinging to life even in the boom years of the late 90s. By comparison, the U.S. - with 25 times our market cap - had nine.
And every fundamental change that anybody wanted to make had to clear 13 provincial and territorial regulators, all of whom were accountable to their provincial and territorial masters, none of whom had a mandate to consider where the whole market was headed.
In terms of our adaptation to all these changes, the year 1999 was pivotal for us.
In that year, we set in train the most massive changes in our history.
We led and largely paid for the restructuring and consolidation of six local - or locally based exchanges - into two national stock exchanges.
Then we bought the venture exchange and integrated it with TSX in everything from technology to payroll to the rulebooks that govern the issuers that list on one or the other.
We changed our ownership structure so TSX was no longer owned by our members and run on a non-profit basis. We became, first a private company, then, in November 2002, a publicly traded company - the first exchange in North America to take this step. This radically changed the incentive structure that had made us far too similar to a utility for our own good.
And we totally renewed our technology, creating the basis for a strategy to expand our core businesses of trading, listing and data and diversify both in terms of our businesses and geographically.
We've already added fixed income securities and natural gas and electricity contracts to our businesses, as well as technological services that we sell to companies like IBM and exchanges like the Shanghai Stock Exchange.
So we have changed. There is very little about us that is local anymore - except that, interestingly, TSX and TSX Venture Exchange now have stronger local representation in more cities than ever before in our history.
In every other way, however, we more resemble an electronic network connecting Canadians to Canadians, and Canadians to every part of the planet, than what people traditionally think of as a stock exchange.
Our focus is far more on external competitors and opportunities than it ever was before, or could be.
We take it as our responsibility, indeed, to sell Canada and its companies in every corner of the world - in Mexico City and Frankfurt, in London, New York, Geneva and Brussels. I've talked to customers and investors in all of these cities in the past year. My colleagues have gone even further afield, to South Africa and China, Australia and South America.
And we take it as our future to build the capacity and lower the cost of linking Canadians through Canada's equity markets to the opportunities on those other continents.
If the constitution makers of 1867 were looking at us now, the last thing they would think is that we are a purely local undertaking. At the very minimum they would consider us to be "for the advantage of two or more provinces." We might even have our own heading, like banks, lighthouses and buoys.
It is beyond question, however, that our role in the national economy would put us, in constitutional terms, on the front line of the national interest.
That is because we have become the basic investment interface that Canadians have with each other and with the world.
And we provide the most basic and immediate way for Canadians to respond to the forces of the world.
When you see that string of ticker symbols on the news channel, or dial up your stock list on the internet, you know immediately the impact the world has had on your personal wealth and prospects.
And your choices are clear and simple. Buy. Sell. Hold.
We take the choice you make, either through your broker or from home, and bounce that information back to the world in mere microseconds. And in that never-ending process Canadians as individual investors adapt to what's happening in the world and the world adapts to Canadians.
So that is how and why we have changed. And, compared to what we once were, you'll have to agree the change is dramatic.
But what hasn't changed?
What hasn't changed is the way Canadian markets are regulated.
TSX may be as national and global a company as this country has produced. We finance companies everywhere in the world. We accommodate investors on every continent. TSX shareholders span the globe.
In a few short years, we may have transformed ourselves, in fact, into the prototypical 21st century Canadian business.
But regulation in our home market is still done within its 19th century framework.
This is not acceptable any longer.
And the regulators, and I think their provincial masters, understand the problem that framework creates.
They have, in a number of ways, tried to develop responses to the new needs of the market and to the growing pressure for more efficient and simpler regulation.
I could not have predicted, in fact, that they would make as much progress as they have in less than three years toward more harmonized regulation and to the development of a uniform securities law that all provinces might adopt. I would not have predicted their embrace of a so-called passport that, in theory anyway, would allow a company to do one set of paperwork for all 13 regulators.
None of these has yet come to fruition, mind you. And if it did there would be no way to ensure it would remain in place.
For example, B.C. has an entirely different regulatory philosophy from the others - it has pinned its flag to principles. Ontario in contrast has pinned its flag to more rules. So there is no harmony as yet, much less uniformity, though there is a lot of progress toward these goals.
Similarly, Ontario has been highly reluctant to endorse a passport system that might let companies go public in another province where, in its view, the rules are weaker and which might force a decision upon Ontarians.
And the proposed passport, while cutting down the paperwork from 13 sets to one set, would still require the company pay all 13 regulators - though an easy payment system that would allow them to pay 13 sets of fees in a single payment is in the works.
Somehow, this doesn't sound like the cost-saver it is supposed to be. And it isn't.
And in such processes the old game of protecting Canadians from other Canadians' money proceeds as it always has.
There is another provincial approach, which arises out of the Wise Persons Committee's report that bears attention. That is the proposal by Premier McGuinty of Ontario that the provinces form their own single regulator for Canada.
This proposal, however, points directly to the real problem.
Provincial constitutional authority, founded as it is on a constitutional provision that is unquestioned within a province but subject to challenge beyond the province's borders, is not sufficient any longer to do what needs to be done.
And even if the provinces combine themselves into a single all-provincial securities commission, that will still not overcome the constitutional limits on them.
By combining forces, they cannot accumulate any greater constitutional authority to do the job than they possess as separate entities.
That does not mean it isn't useful to have a uniform securities law that each province agrees to legislate - having 13 identical securities laws would certainly provide a better basis than 13 different laws.
Similarly, an all-provincial commission would provide a better basis for provincial and federal governments negotiating the creation of a single commission than 13 different provincial and territorial commissions.
But the conclusion is inescapable that the market's need for efficient, coherent, simple 21st century securities regulation cannot be met without direct federal involvement.
Does the federal government have the power to do this, given the claim the provinces have made to jurisdiction or even exclusive jurisdiction over securities?
The Wise Persons Committee - the WPC - is of the clear and strong view that the federal government does indeed have all the constitutional authority it requires to act with the provinces on such a project - or to act without them.
That, in fact, may be one of the most important achievements of the WPC. Its constitutional opinion - later concurred in, incidentally, by one of Canada's leading constitutional scholars, Peter Hogg - basically removes the constitutional bogeyman as the first line of defence of the status quo.
The field is clear for the governments to act. There is no set of constitutional changes to be negotiated - a negotiation nobody wants. There are only practicalities.
Why isn't that happening, then? One reason, of course, is that the provinces now exercise jurisdiction and they have not acquired the habit of inviting the federal government into areas they claim for their own.
They believe, moreover, that they're doing the job quite adequately, thank you - and in terms of their mandate to serve provincial interests, not the national interest, who would expect them to think differently?
The premiers are not saying no, although some of their ministers have done so. But they are not saying yes, either. They are not saying anything, except of course for Premier McGuinty whose view is eminently sound - that the provinces should act on their own before the federal government acts without them.
The general silence, especially from those who usually say no, should be taken, I think, as a positive.
As for the federal government, the view is often expressed that it is unlikely to "expend political capital" on an issue for which few Canadians will go to the barricades. It doesn't want to upset the provinces.
My view is that political capital is like any other kind of capital. If you don't use it, it's dead money. As for the provinces, Canadians have been schooled all their lives in the federal-provincial game.
It's not disagreement per se that bothers them.
It's pointless conflict that offends them, the predictable and seemingly endless attempts by each side to blame the other.
The more relevant point relates to Canadians' willingness to go to the barricades over a national securities commission. I suspect that if they won't go to the barricades in favour of such a commission, they're unlikely to go to the barricades against, either.
When Canadians do think about this issue - and most have a lot of better things to do - I expect that, like market participants, they can find no sense in either doing the same thing 13 times, as happens now, or charging 13 times for doing it once.
Meanwhile, the need for federal action is becoming more urgent. Not a crisis, I underline, because the word crisis is so devalued - but urgent. Why?
Let me illustrate by reference to the famous question posed by Pierre Trudeau in another context. Who speaks for Canada?
The problem of regulatory fragmentation is becoming clearest, in fact, in our efforts to get freer trade in securities with the United States, the U.K., Europe and Asia, especially China, through mutual recognition of each others standards.
Foreign stock exchanges like the idea.
But regulators in the U.K., for example, have told us they are not prepared to open up their market to Canadians one province at a time.
Chinese securities regulators, who concluded a memorandum of understanding with four provinces, have told us they aren't anxious to negotiate in that way again.
Both have told us, basically, that we need to get our act together. We need one voice to speak for Canada on securities, not 13, or even three or four.
Sometimes it is Ontario doing the talking - for example, in negotiating with the U.S. Securities and Exchange Commission on Canadian corporate governance.
Sometimes it is B.C., which negotiated the agreement with China on behalf of the four provinces.
Sometimes it is Quebec who, we are told, has suggested to Euronext that Quebec should be the lead regulator if the European Exchange comes to Canada.
Nasdaq has one deal in Quebec to give Quebecers access to U.S. stocks through Nasdaq terminals.
Nasdaq has a different deal with B.C., and Ontario has proposed yet a third approach.
Nobody seems to consider it their job to convince the U.S. to give Americans the same access to Canadian stocks through TSX terminals.
Why are the provinces negotiating separate agreements with foreign countries and foreign markets?
Isn't that why we have a federal government, so that foreign countries and companies can't play off one group of Canadians against the others? So that our national interest is at least a consideration in such negotiations?
Simply put, as our relationships with foreign equity markets deepen and grow more complex, the involvement of the federal government becomes more necessary.
In such circumstances, it is not sufficient for the federal government to stand by and say that it needs an outpouring of support from business before it will act, or that it is reluctant to upset the provinces.
It has a clear responsibility. It is difficult to conceive of it having a clearer responsibility, in fact, that in protecting the national interest in having a modern, efficient market. Or in serving and protecting our interests in the world. Or in securing continued access for Canadians to the low-cost capital that is an essential precondition for a solid 21st century future.
What, then, should our federal leaders do?
The first step they took this week in the budget with their commitment to work with the provinces. This is an important step, but it is not enough.
That, I believe is the critical step that is necessary to bring the provinces to the table and impel this issue toward solution.
Is this likely to upset the provinces? Probably. But the provinces have good lawyers. They know the Constitution. They also know their history. They know that when a federal train leaves the station, they're better off if they've climbed aboard.
And if the federal government demonstrates that it is unwilling to go beyond a commitment to co-operate? Or is fearful of an adverse response if it declares its determination to actually solve this problem?
Then, almost certainly, nothing will happen, because there will be no need for the provinces to do anything other than what they are doing already - and maybe not even that.
And if nothing happens, then, as time goes by, our inability to put our house in order will eventually dull our competitive edge in global capital markets.
Our capacity to attract global companies and investors to our economy will be diminished and they will go instead to opportunities that present a clearer, simpler set of attractions than we can offer.
We will, no doubt, survive. We have, as I said at the outset, a lot going for us.
But we will become less than we could be. And that is not the future that I want, or anyone should want.
Thank you for your time and attention.
