NP 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – exemption granted to current, new and future commodity pools from margin deposit limit contained in paragraphs 6.8(1) and 6.8(2)(c) of National Instrument 81-102; and exemption granted from seed capital requirements for current, new and future commodity pools in National Instrument 81-104. Exemption granted to permit current, new and future commodity pools to invest in derivatives in Canada and in the U.S. through the Filer that, in turn, will use dealer in Canada or U.S. future commission merchants; and exemption from seed capital requirements for commodity pool in section 3.2(2)(a) of NI 81-104. Exemption conditional on the amount of margin deposited not exceeding 30% of the net assets of the funds and on all margin deposited with dealers being held in segregated accounts; and the filer permitted to redeem $50,000 seed capital investment in each fund provided the fund has received subscriptions from investors other than the filer totalling at least $5.0 million and provided the filer maintain $100,000 in excess working capital.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, paragraphs 6.8(1), 6.8(2)(c) and 19.1.
National Instrument 81-104 Commodity Pools, sections 3.2(2)(a) and 10.1
March 19, 2010
In the Matter of
the Securities Legislation of
Ontario (the Jurisdiction)
and
In the Matter of
the Process for Exemptive Relief Applications in Multiple Jurisdictions
and
In the Matter of
Claymore Investments, Inc.
(the “Filer” or “Claymore”)
and
Claymore Inverse Natural Gas Commodity ETF
Claymore Long-Term Natural Gas Commodity ETF
Claymore Broad Commodity ETF
Claymore Managed Futures ETF
Claymore Natural Gas Commodity ETF
(the “Commodity Pools”)
Decision
Background
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Commodity Pools and such other commodity pools as the Filer may establish in the future (together with the Commodity Pools, the “Funds”) for a decision (the “Exemption Sought”) under the securities legislation of the Jurisdiction of the principal regulator (the “Legislation”) for exemptive relief from the following provisions of National Instrument 81-102 – Mutual Funds (“NI 81-102”) and National Instrument 81-104 – Commodity Pools (“NI 81-104”):
Subsection 6.8(1) of NI 81-102 limiting the deposit of portfolio assets of the Funds as margin with any dealer inside Canada that is a member of a self-regulatory organization (“SRO”) that is a participating member of the Canadian Investor Protection Fund (“CIPF”) to ten percent of the net assets of the Fund, taken at market value as at the time of deposit;
Subsection 6.8(2)(c) of NI 81-102 limiting the deposit of portfolio assets of the Funds as margin with any dealer outside Canada to ten percent of the net assets of the mutual fund, taken at market value as at the time of deposit; and
Subsection 3.2(2)(a) of NI 81-104 requiring a commodity pool to have invested in it at all times securities that were issued pursuant to paragraph 3.2(1)(a) of NI 81-104 having an aggregate issue price of $50,000 at the time of issue.
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission (OSC) is the principal regulator for this application, and
(b) the Filer has provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System is intended to be relied upon in all of the provinces and territories of Canada other than Ontario (together with Ontario, the Jurisdictions).
Representations
This decision is based on the following facts represented by the Filer:
General
Each Commodity Pool is, or will be, a mutual fund trust governed by the laws of the Province of Alberta, however, other Funds may be established as trusts under the laws of another jurisdiction, but each Fund will be a reporting issuer under the laws of all of the Jurisdictions.
Claymore filed a preliminary and pro forma prospectus in respect of the Commodity Pools on October 23, 2009 and filed a final prospectus in respect of Claymore Natural Gas Commodity ETF on December 4, 2009.
Each of the Funds is, or will be, a commodity pool as such term is defined in section 1.1 of NI 81-104, in that each Fund has adopted or will adopt fundamental investment objectives that permit the Fund to use or invest in specified derivatives in a manner that is not permitted under National Instrument 81-102 – Mutual Funds.
Each Fund is, or will be, subject to NI 81-102, subject to the exceptions relating to commodity pools, as such exceptions are outlined in NI 81-104.
Capital Units (“Capital Units”) of each Fund will be listed on the Toronto Stock Exchange (the “TSX”) or another stock exchange recognized by the OSC. Units of Claymore Natural Gas Commodity ETF are listed on the TSX and Claymore has applied to list the units of each other Commodity Pool on the TSX.
The investment objective of the Commodity Pools (other than the Claymore Inverse Natural Gas Commodity ETF) is to replicate, to the extent possible, the performance of an index. The investment objective of the Claymore Inverse Natural Gas Commodity ETF is to replicate the inverse (opposite) daily performance of the NGX Canadian Natural Gas Index. The other Funds will have similar investment objectives.
In order to achieve its investment objective, each Commodity Pool may invest in exchange-traded notes or securities issued by exchange-traded funds which may or may not be managed by Claymore or an affiliate, and in specified derivatives including options, futures, forward contracts, swaps and debt-like securities. Each Commodity Pool may also use specified derivatives to hedge, or protect, against changes in asset class prices or foreign exchange risks (if applicable). The Commodity Pools may also invest in futures contracts in order to provide market exposure for cash held by the Commodity Pools and may hold money market instruments or cash to meet their current obligations. It is expected that other Funds will use similar investment strategies.
Claymore acts, or will act, as trustee and manager of the Funds. Claymore is registered as a portfolio manager and exempt market dealer. The principal and head office of Claymore is located in Toronto, Ontario.
The Commodity Pools will be sub-advised by Auspice Capital Advisors Ltd., a registered portfolio manager with its head office in Calgary, Alberta.
The investment strategies of the Funds will, except to the extent that the Exemption Sought is granted, be limited to the investment practices permitted by NI 81-102 and NI 81-104.
NI 81-102, Subsections 6.8(1) and 6.8(2)(c)
The Funds may take both long and short positions in their portfolios on exchanges in the United States, Canada and elsewhere around the world. The Funds may seek to apply leverage.
Claymore may seek to engage in specified derivative transactions in Canada and outside of Canada.
Claymore is authorized to establish, maintain, change and close brokerage accounts on behalf of the Funds. In order to facilitate specified derivatives transactions outside of Canada, Claymore may establish accounts with futures commissions merchants in the United States of America (“Dealers”).
Each Dealer is regulated by the Commodity Futures Trading Commission (the “CFTC”) and the National Futures Association (the “NFA”) in the United States, and is required to segregate all assets held on behalf of clients, including each Fund. Each Dealer is subject to audits and must have insurance to guard against employee fraud. Each Dealer has a net worth, determined from its most recent audited financial statements that have been made public, in excess of the equivalent of $50 million. Each Dealer has an exchange assigned to it as its designated self-regulatory organization (the “DSRO”). As a member of a DSRO, each Dealer must meet capital requirements, comply with the conduct rules of the CFTC, NFA and its DSRO, and participate in an arbitration process with a complainant.
The dealers are members of the clearing corporations and exchanges through which the standardized futures in the Funds’ portfolio are primarily traded. Each clearing corporation is obliged to apply its surplus funds and the security deposits of its members to reimburse clients of failed members.
Each dealer requires, for each account, that cash and/or government securities be deposited with the dealer as collateral for specified derivatives transactions (“Margin”). Margin represents the minimum amount of funds that must be deposited with the dealer to initiate trading in specified derivatives transactions or to maintain the dealer’s open position in standardized futures.
Dealers are required to hold all Margin, including cash and government securities, in segregated accounts and the Margin is not available to satisfy claims against the dealer made by parties other than the Funds.
Margin will be deposited with dealers in respect of standardized futures traded on exchanges.
Levels of Margin are established at the dealers’ discretion. However, the Funds expect to operate generally with an approximate average margin utilization of 20%, and a maximum margin utilization of 30%, of the net asset value of each Fund. At no time will more than 30% of the net assets of a Fund be deposited with dealers as Margin.
The use of Margin allows the Funds to use leverage to invest in standardized futures more extensively than if no leverage was used.
The use of leverage is in accordance with the investment objectives and investment restrictions of the Funds.
NI 81-104, Subsection 3.2(2)(a)
If the Funds were governed by the provisions of NI 81-102 in this regard, Claymore would be allowed to redeem its seed capital investment in each Fund upon the Fund having received subscriptions totalling not less than $500,000 from investors other than the persons or companies referred to in paragraph 3.1(1)(a) of NI 81-102.
Claymore wishes to redeem the seed capital invested in each Fund subject to the conditions set out in this decision.
Claymore understands that the policy rationale behind the permanent seed capital requirement for commodity pools under NI 81-104 is to encourage promoters to ensure that the commodity pool is being properly run for the benefit of the investors by requiring that the promoter of a pool, or a related party, will itself be an investor in the pool at all times.
Claymore is obliged: (i) in accordance with the Legislation, to at all times act honestly and in good faith, and in the best interests of the Fund, and exercise the degree of care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances; and (ii) in accordance with the terms of the declaration of trust governing each Fund, to act as a reasonably prudent trustee.
Having regard to Claymore’s fiduciary obligation as set out in paragraph 25 above, the Funds’ fixed investment objective, not having $50,000 invested in each Fund at all times will not change how Claymore manages each Fund. Claymore’s interests will generally be aligned with those of investors in the Fund.
Claymore will be subject to the applicable requirements of registration as an investment fund manager under National Instrument 31-103 – Registration Requirements and Exemptions (NI 31-103) no later than the one year transition period after NI 31-103 came into force on September 28, 2009.
Decision
The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.
The decision of the principal regulator under the Legislation is that the Exemption Sought is granted provided that:
(a) the Funds shall only use margin such that the amount of Margin already held by any dealer within Canada and outside Canada on behalf of a Fund does not exceed 30% of the net assets of the Fund, taken at market value as at the time of the deposit;
(b) all Margin deposited with any dealers within Canada and outside Canada is and will be held in segregated accounts and is not, and will not be, available to satisfy claims against such dealers made by parties other than Claymore or Funds;
(c) Claymore may not redeem any of its initial investment of $50,000 in a Fund until $5.0 million has been received by the Fund from persons or companies other than the persons and companies referred to in paragraph 3.2(1)(a) of NI 81-104;
(d) the basis on which Claymore may redeem any of its initial investment of $50,000 from a Fund will be disclosed in the prospectus of the Fund;
(e) if, after Claymore redeems its initial investment of $50,000 in a Fund in accordance with condition (c) above, the value of the Capital Units of a Fund subscribed for by investors other than the persons and companies referred to in paragraph 3.2(1)(a) of NI 81-104 drops below $5.0 million for more than 30 consecutive days, Claymore will, unless the Fund is in the process of being dissolved or terminated, reinvest $50,000 in the Fund and maintain that investment until condition (c) is again satisfied; and
(f) Claymore will at all times maintain excess working capital of a minimum of $100,000, or any higher amount that maybe required by NI 31-103.
“Vera Nunes”
Vera Nunes, Assistant Manager
Investment Funds Branch
Ontario Securities Commission