(Corrects 12th paragraph to show Tony Clement is industry minister, not finance minister)
* Report will influence Ontario regulator's decision
* Kloet says no foreign regulation over Toronto exchange
* CEO says Toronto leadership in resources will only grow
* Legislator fears TMX could become "second fiddle"
(Adds details, comments from legislators)
By Solarina Ho and Pav Jordan
TORONTO, March 2 (Reuters) - The architects of the London Stock Exchange's (LSE.L) takeover of TMX Group (X.TO) defended the transatlantic tie-up to skeptical lawmakers on Wednesday in the first of a series of government and regulatory approvals.
An Ontario legislative review that began on Wednesday is not in itself legally binding. But it will likely influence regulatory and federal government reviews that have the power to derail the C$3.1 billion takeover.
In questions to the CEOs of the two exchanges, provincial legislators challenged the notion that the deal is needed to keep TMX competitive with other consolidating global exchanges, and they echoed widespread domestic concern that Canada would cede authority over its own financial markets.
The deal has raised fears that the Toronto Stock Exchange could become a "second fiddle" in its own backyard," lawmaker Gilles Bisson said as the hearings got underway in Toronto.
Economic sovereignty is a touchy issue in Canada, and these hearings come just four months after the federal government blocked BHP Billiton's (BHP.AX) $39 billion bid for Potash Corp (POT.TO), saying the Anglo-Australian miner's stewardship of the world's largest fertilizer maker would not benefit Canada.
But TMX Chief Executive Tom Kloet said control and regulatory supervision of the exchange will stay in Canadian hands even after the bourse's owner is folded into the larger London-based company.
"In short...Toronto Stock Exchange will operate for all intents and purposes as before," Kloet told the all-party committee. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ For timeline on LSE-TMX deal: [ID:nN28155639] For factbox on approval process: [ID:nN15252795] For factbox on LSE and TMX history: [ID:nN08113490] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
Speaking alongside LSE head Xavier Rolet, Kloet said the combination would give Canadian companies increased access to capital and would create a global leader in listings, particularly in natural resources.
The Toronto Stock Exchange and its junior counterpart, the TSX Venture Exchange, list thousands of mining and energy companies, winning Canada a role as a hub of resource capital.
"By joining forces with London, our leadership in mining and energy will only grow," Kloet told the panel.
Jammed into a packed conference room in Toronto's Romanesque provincial parliament buildings, the executives were grilled by more than a dozen legislators. Lawmakers posed pointed questions, but the overall mood was cordial.
Following the provincial hearings, the deal will go before regulators from at least four Canadian provinces, and must also be be approved by the Canadian Industry Minister Tony Clement, who surprised the market when he halted the BHP-Potash transaction late last year.
The weight of public opinion is crucial as Ontario's governing Liberal Party trails the Progressive Conservatives in opinion polls ahead of the October election in the province, which is home to Canada's financial capital Toronto.
That said, Ontario politicians on all sides have so far been united in criticizing the proposed deal.
The complex approvals process and risks about whether it will go ahead has made investors cautious about the friendly deal. TMX shares on Wednesday were just 3.7 percent below the implied offer price, after trading about 10 percent below the offer two weeks ago.
The two exchanges have said the combined company could go on the offensive as stock market competition intensifies internationally, especially with Deutsche Boerse (DB1Gn.DE) in takeover talks with NYSE Euronext NYX.N. [ID:nN28270191].
The two CEOs won support from Frank Smeenk, head of tiny chrome and base metals explorer KWG Resources KWG.V, who told the hearing the deal would precipitate an "entirely new era of exploration." ($1=$0.97 Canadian) (Additional reporting by Claire Sibonney, writing by Cameron French; editing by Janet Guttsman)