Headnote National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – exemption from sections 2.8(1)(d) and (f)(i) of NI 81-102 to permit the Fund when it opens or maintains a long position in a standardized future or forward contract or when it enters into or maintains a swap position and during the periods when the Fund are entitled to receive payments under the swap, to use as cover, an option to sell an equivalent quantity of the underlying interest of the standardized future, forward or swap.
Applicable Legislative Provisions
National Instrument 81-102 – Mutual Funds, s. 2.8(1)(d), s. 2.8(1)(f)(i).
April 20, 2012
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 BNP Paribas Investment Partners Canada Ltd. (the Filer)
AND
BNP Paribas Global Equity Exposure Fund (the Fund)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from BNP Paribas Investment Partners Canada Ltd. (the Filer) for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for an exemption relieving BNP Paribas Global Equity Exposure Fund (the Fund) from the requirements in sections 2.8(1)(d) and 2.8(1)(f)(i) of National Instrument 81-102 Mutual Funds (NI 81-102) to permit the Fund when the Fund:
(a) opens or maintains a long position in a debt-like security that has a component that is a long position in a forward contract or in a standardized future or forward contract; or
(b) enters into or maintains a swap position and during the periods when the Fund is entitled to receive payments under the swap;
to use as cover, an offsetting right or obligation to sell an equivalent quantity of the underlying interest of the standardized future, forward or swap (the Exemption Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission (the Commission) 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 (MI 11-102) is intended to be relied upon in each jurisdiction where the Filer is a reporting issuer, namely British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, the Northwest Territories, Nunavut and Yukon (the Other Jurisdictions).
Interpretation
Defined terms contained in National Instrument 14-101 Definitions and MI 11-102 have the same meaning in this decision unless otherwise defined.
Representations
This decision is based on the following facts represented by the Filer:
The Fund is an open-end mutual fund trust established under the laws of Ontario by a master declaration of trust dated February 4, 2005.
The Filer is the trustee, principal distributor, investment fund manager, portfolio manager and administrator of the Fund. The Filer is registered in the Province of Ontario as an investment fund manager, adviser in the category of portfolio manager, a commodity manager and an exempt market dealer.
The Fund, by its trustee, entered into a management agreement dated February 4, 2005 (the Management Agreement) with the Filer. Pursuant to the Management Agreement, the Fund has appointed the Filer to provide it with all necessary administrative and management services and to act as principal distributor of the Fund. These services include providing, or arranging for the provision of, investment advice on the purchase and sale of portfolio securities, portfolio management and the calculation of net asset values of the Fund, where necessary. The Filer may provide these services directly or it may retain agents to perform these services.
The Filer is not in default of securities legislation in any jurisdiction.
The Fund has been the subject of a continuous disclosure review conducted by staff of the Commission in which the manner of the Fund’s compliance with certain cash cover rules in NI 81-102 has been discussed. As a result of such discussions, the Filer is making this application on behalf of the Fund.
The investment objective and strategies of the Fund are set out in its simplified prospectus. The Fund’s objective is to achieve long-term capital appreciation by obtaining an enhanced exposure to equity markets around the world through the use of derivatives.
The Fund was not created to be offered to investors on a stand-alone basis. Rather, it was created to serve as an underlying fund for other investment products, being segregated funds or mutual funds that use both fixed income instruments and economic exposure to equity markets to achieve their investment objectives.
The Fund is not available directly to the general public. The Fund has filed disclosure documents and otherwise conforms to the requirements of NI 81-102 in order to enable it to be an underlying fund for mutual funds sold to the public in accordance with NI 81-102.
When specified derivatives are used for non-hedging purposes, the Fund is subject to the cover requirements of NI 81-102. Specifically, sections 2.8(1)(d) and 2.8(1)(f)(i) of NI 81-102 do not permit covering a long position in a standardized future or forward contract or a position in a swap for a period when a Fund is entitled to receive payments under the swap, in whole or in part with a right or obligation to sell an equivalent quantity of the underlying interest of the future, forward or swap. Accordingly, these sections of NI 81-102 do not permit the use of put options or short future, forward or swap positions to cover long future, forward or swap positions.
Regulatory regimes in other countries as well as accepted investment practice recognize the hedging properties of options for all categories of derivatives, including long positions evidenced by standardized futures or forwards or in respect of swaps where a fund is entitled to receive payments from the counterparty, provided they are covered by an amount equal to the difference between the market price of a holding and the strike price of the option that was bought or sold to hedge the position. NI 81-102 effectively imposes the requirement to overcollateralize, since the maximum liability to the fund under the scenario described is equal to the difference between the market value of the long position and the exercise price of the option. Overcollateralization imposes a cost on a mutual fund.
Section 2.8(1)(c) of NI 81-102 permits a mutual fund to write a put option and cover it by holding an offsetting put option on an equivalent quantity of the underlying interest of the written put option. This position has similar risks as a long position in a future, forward or swap. The Filer submits that the Fund should be permitted to cover a long position in a future, forward or swap with a put option or short future, forward or swap position.
Decision
The principal regulator is satisfied that the decision meets the test contained 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) when the Fund enters into or maintains a swap position for periods when the Fund would be entitled to receive fixed payments under the swap, the Fund holds:
(i) cash cover in an amount that, together with margin on account for the swap and the market value of the swap, is not less than, on a daily mark-to-market basis, the underlying market exposure of the swap;
(ii) a right or obligation to enter into an offsetting swap on an equivalent quantity and with an equivalent term and cash cover that, together with margin on account for the position, is not less than the aggregate amount, if any, of the obligations of the Fund under the swap less the obligations of the Fund under such offsetting swap; or
(iii) a combination of the positions referred to in subparagraphs (i) and (ii) that is sufficient, without recourse to other assets of the Fund, to enable the Fund to satisfy its obligations under the swap;
(b) when the Fund opens or maintains a long position in a debt-like security that has a component that is a long position in a forward contract, or in a standardized future or forward contract, the Fund holds:
(i) cash cover in an amount that, together with margin on account for the specified derivative and the market value of the specified derivative, is not less than, on a daily mark-to-market basis, the underlying market exposure of the specified derivative;
(ii) a right or obligation to sell an equivalent quantity of the underlying interest of the future or forward contract, and cash cover that, together with margin on account for the position, is not less than the amount, if any, by which the market price of the future or forward contract exceeds the strike price of the right or obligation to sell the underlying interest; or
(iii) a combination of the positions referred to in subparagraphs (i) and (ii) that is sufficient, without recourse to other assets of the Fund, to enable the Fund to acquire the underlying interest of the future or forward contract;
(c) the Fund will not (i) purchase a debt-like security that has an option component or an option; or (ii) purchase or write an option to cover any position under section 2.8(1)(b), (c), (d), (e) and (f) of NI 81-102, if immediately after the purchase or writing of such option, more than 10% of the net assets of the Fund, taken at market value at the time of the transaction, would be made up of (A) purchased debt-like securities that have an option component or purchased options, in each case, held by the Fund for purposes other than hedging, or (B) options used to cover any positions under section 2.8(1)(b), (c), (d), (e) and (f) of NI 81-102;
(d) on the date that is the earlier of (i) the date when an amendment to the annual information form of the Fund is filed for reasons other than the Exemption Sought and (ii) the date that the renewal annual information form of the Fund is receipted, the Fund shall
(i) disclose the nature and terms of the Exemption Sought in the annual information form of the Fund; and
(ii) include a summary of the nature and terms of the Exemption Sought in the simplified prospectus of the Fund under the Investment Strategies section or in the introduction to Part B of the simplified prospectus with a cross reference thereto under the Investment Strategies section for the Fund; and
(e) this decision will terminate on the coming into force of any securities legislation relating to the use as cover of a right or obligation to sell an equivalent quantity of the underlying interest of the standardized future, forward or swap in compliance with section 2.8 of NI 81-102.
“Darren McKall”
Darren McKall, Manager
Investment Funds Branch ONTARIO SECURITIES COMMISSION
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – exemption from sections 2.8(1)(d) and (f)(i) of NI 81-102 to permit the Fund when it opens or maintains a long position in a standardized future or forward contract or when it enters into or maintains a swap position and during the periods when the Fund are entitled to receive payments under the swap, to use as cover, an option to sell an equivalent quantity of the underlying interest of the standardized future, forward or swap.
Applicable Legislative Provisions
National Instrument 81-102 – Mutual Funds, s. 2.8(1)(d), s. 2.8(1)(f)(i).