January 30, 2019
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 AGF INVESTMENTS INC.
BLACKROCK ASSET MANAGEMENT CANADA LIMITED
BMO ASSET MANAGEMENT INC.
FRANKLIN TEMPLETON INVESTMENTS CORP.
HORIZONS ETFS MANAGEMENT (CANADA) INC.
MACKENZIE FINANCIAL CORPORATION
MANULIFE ASSET MANAGEMENT LIMITED
RBC GLOBAL ASSET MANAGEMENT INC.
VANGUARD INVESTMENTS CANADA INC.
(each a Filer, and collectively, the Filers)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from each Filer, requesting a decision, pursuant to section 19.1 of National Instrument 81-102 – Investment Funds (NI 81-102), exempting all current mutual funds (the Existing Funds) and future mutual funds that (i) are, or will be, reporting issuers with exchange-traded securities and (ii) are, or will be, managed by the Filers or by affiliates or successors of the Filers (collectively with the Existing Funds, the Funds), in each case, that invest currently or may subsequently invest a portion of their portfolio assets in T+3 Securities (as defined below) from:
(a) the requirement for a purchaser to forward any cash or securities received for payment of the issue price of Units (as defined below) of a Fund to an order receipt office of the Fund so that the cash or securities arrive at the order receipt office as soon as practicable and in any event no later than the second business day after the Pricing Date (as defined below);
(b) the requirement for a purchaser to deliver the payment of the issue price of Units of a Fund to the Fund on or before the second business day after the Pricing Date;
(c) the requirement that if payment of the issue price of the Units of a Fund to which a purchase order pertains is not made on or before the second business day after the Pricing Date, the Fund must redeem the Units to which the purchase order pertains as if it had received an order for the redemption of the Units on the third business day after the Pricing Date; and
(d) the requirement for a Fund to pay the redemption proceeds for Units that are the subject of a redemption order within two business days after the Pricing Date,
in each case to allow such Funds to settle primary market trades in Units (as defined below) in three business days after a trade (the Exemption Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) in accordance with Part 4 of Multilateral Instrument 11-102 – Passport System (MI 11-102) and section 3.6 of National Policy 11-203 – Process for Exemptive Relief Applications in Multiple Jurisdictions (NP 11-203), the Ontario Securities Commission (the OSC) has been selected as the principal regulator for each Filer, as the head office of each Filer is located in Ontario; and
(b) in accordance with subsection 4.7(2) of MI 11-102, each Filer gives notice to the OSC, pursuant to paragraph 4.7(1)(c) of MI 11-102, that the requested relief is to be relied upon by each Filer in each province and territory of Canada (the provinces and territories of Canada are collectively defined as the Jurisdictions).
Interpretation
Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.
Authorized Dealer means a registered dealer that has entered into an agreement with a Filer authorizing such dealer to subscribe for and, as applicable, redeem Units from a Fund on a continuous basis from time to time.
Basket of Securities means a group of securities selected by the Filer from time to time to be delivered by (i) a purchaser to the Fund on a subscription of Units; or (ii) the Fund upon a redemption of Units.
NEO Exchange means Aequitas NEO Exchange Inc.
Marketplace means the TSX, the NEO Exchange or another "marketplace" as defined in National Instrument 21-101 Marketplace Operations that is located in Canada.
Prescribed Number of Units means the number of Units of a Fund determined by a Filer from time to time for the purpose of subscription orders, redemptions or for other purposes.
Pricing Date means the date on which the net asset value per Unit of a Fund is calculated for the purpose of determining the price at which the Unit is to be issued or redeemed, as applicable.
T+3 Securities means securities, the trades in respect of which, customarily settle on the third business day after a Trade Date.
Trade Date means the date upon which pricing for a trade in a security is determined.
TSX means the Toronto Stock Exchange.
UCITS means Undertakings for Collective Investment in Transferable Securities.
Units means the shares or units of a Fund that are, or will be, traded over a Marketplace.
Representations
This decision is based on the following facts represented by each Filer:
The Filers and the Funds
1The head office location of each Filer is in Ontario.
2The Jurisdictions in which each Filer is registered and the specific categories of registration for each Filer are provided in Schedule "A".
3Each Fund is, or will be, managed by a Filer or by an affiliate or successor of the Filer.
4The Funds are, or will be, mutual funds subject to NI 81-102 and are, or will be, reporting issuers in one or more of the Jurisdictions.
5Each Fund has issued, or will issue, at least one series of Units that are or will be listed on a Marketplace.
6Other than where an Existing Fund was unable to settle a trade in Units within two business days after the Trade Date since November 14, 2017, none of the Filers nor any of the Existing Funds are in default of any of the requirements of securities legislation of the Jurisdictions.
Subscriptions and Redemptions of Securities of the Funds
7Units of a Fund may generally only be subscribed for directly from the Fund (Creation Units) by Authorized Dealers that have entered into an agreement with the applicable Filer. Generally, subscriptions may only be placed for a Prescribed Number of Units (or a multiple thereof) on any day when there is a trading session on the Marketplace on which the Units are listed.
8Each Authorized Dealer that subscribes for Creation Units must deliver, in respect of each Prescribed Number of Units to be issued, either (i) a Basket of Securities and/or cash, or (ii) in the discretion of each Filer, cash only. In each case, the value of the subscription proceeds delivered to the Fund must be equal to the net asset value (NAV) of the Units subscribed for as determined on the Pricing Date. A Filer may charge a fee to a purchaser for purchases of Creation Units in cash in accordance with the terms of the agreement between the purchaser and the Filer.
9In order to satisfy a redemption of a Prescribed Number of Units of a Fund, the Fund must deliver either (i) a Basket of Securities and/or cash, or (ii) in the discretion of each Filer, cash only. In each case, the value of the redemption proceeds delivered must equal the NAV of the Units redeemed as determined on the Pricing Date. A Filer may charge a fee for a cash redemption in accordance with the terms disclosed in a Fund's prospectus or the terms of the agreement with the Authorized Dealer.
10Generally, a Filer decides whether in-kind or cash subscriptions and redemptions are appropriate depending on the characteristics of each Fund.
Settlement Requirements
11Prior to November 14, 2017, NI 81-102 required a purchaser to deliver payment of the issue price of a Fund on the third business day after the Pricing Date of the Units. If the payment of the issue price was not received by the Fund on or before the third business day after the Pricing Date of the Units, the Fund was required to redeem the Units to which the purchase order pertained as if it had received an order for the redemption of the Units on the fourth business day after the Pricing Date.
12Additionally, NI 81-102 required a Fund to pay the redemption proceeds with respect to a redemption order within three business days after the Pricing Date.
13Effective November 14, 2017, amendments to NI 81-102 now require a purchaser to deliver payment of the issue price of Units of a Fund on the second business day after the Pricing Date of the Units. If the payment of the issue price is not received by the Fund on or before the second business day after the Pricing Date of the Units, the Fund will be required to redeem the Units to which the purchase order pertains as if it had received an order for the redemption of the Units on the third business day after the Pricing Date.
14Additionally, NI 81-102 requires a Fund to pay the redemption proceeds with respect to a redemption order within two business days after the Pricing Date.
15NI 81-102 was amended to align the requirements in NI 81-102 with the adoption of a shortened settlement cycle for equity and long-term debt markets in Canada, the U.S. and certain international markets from three business days after a Trade Date (T+3) to two business days after a Trade Date (T+2).
16While a T+2 settlement cycle has been adopted in most global markets, a number of countries have maintained a standard T+3 or greater settlement cycle, including, but not limited to Japan, Brazil, China, Qatar, Colombia, Indonesia, Malaysia, Philippines, Thailand and South Africa.
Reasons Supporting the Exemption Sought
17Each of the Funds has, or will have, a portion of its portfolio assets invested in T+3 Securities and such T+3 Securities will comprise a portion of the Basket of Securities to be delivered by a purchaser when subscribing in-kind for Creation Units of a Fund or to be delivered by the Fund when satisfying a redemption order in-kind.
18A purchaser subscribing for Units in-kind will generally be unable to deliver to a Fund that portion of the Basket of Securities comprised of T+3 Securities on the second business day following the Pricing Date.
19An Authorized Dealer redeeming a Prescribed Number of Units of a Fund will generally receive as redemption proceeds a Basket of Securities and/or cash only, at the discretion of a Filer. Where there are T+3 Securities in a Basket of Securities, a Fund may not be able to deliver that component by T+2. A Fund satisfying a redemption order in cash will generally need to sell a Basket of Securities in the open market in order to raise sufficient cash to meet the redemption order. A Fund will not receive cash proceeds from the sale of that portion of the Basket of Securities comprised of T+3 Securities until the third business day following the Pricing Date, and such cash proceeds are therefore unavailable to be paid on the second business day following the Pricing Date.
20Each Fund may borrow up to 5 percent of its NAV in order to accommodate redemption requests. This may facilitate a Fund's delivery of cash redemption proceeds depending on the size of the redemption order relative to the size of the Fund. However, there is a cost associated with this borrowing that may be indirectly borne by investors in the Fund. Additionally, a large redemption request may require a Fund to borrow in excess of 5 percent of its NAV to fund the redemption, contrary to NI 81-102.
21While it is possible for a Fund to maintain a portion of its assets in cash to fulfill redemption requests, maintaining such a cash position impacts the Fund's performance, results in a deviation from the index being tracked (in the case of a Fund that is an index mutual fund) and results in a portion of the NAV of the Fund not being invested in accordance with its investment objective.
22While it is possible for a Fund to dispose of securities that settle on a T+2 basis in order to obtain any cash necessary to fund the portion of the redemption that would otherwise be funded by the delivery of T+3 Securities, making such a disposition (which would generally be followed by an acquisition of the same securities) impacts the Fund's performance, results in a deviation from the index being tracked (in the case of a Fund that is an index mutual fund) and results in a portion of the NAV of the Fund not being invested in accordance with its investment objective. This type of portfolio reshuffling and rebalancing also increases transaction costs that are indirectly borne by investors.
23Because ETFs trade in the secondary market, unlike conventional mutual funds, ETFs are generally required to maintain consistent relative market exposures within their portfolios, regardless of any subscription or redemption activity. This consistency of market exposure enables market participants to effectively make markets on the ETF. As a result, an ETF is more constrained than a conventional mutual fund in its ability to fund cash redemptions by disproportionately liquidating T+2 securities in lieu of T+3 Securities.
24Absent the Exemption Sought, the Filers will be required to change their primary market practices for the Funds in a manner that may be detrimental to investors. For example, the Funds may be precluded from accepting in-kind subscriptions, or may be forced to rely on costly borrowing and/or cash buffers to ensure settlement of redemptions in cash on a T+2 basis. Each of these alternatives has associated costs or inefficiencies that will be indirectly borne by investors.
25Additionally, absent the Exemption Sought, offering Funds that invest in T+3 markets may become costly and administratively burdensome for the Filers and/or may result in a reduction or absence of market makers for the strategy, which may cause the ETF industry to shift away from offering investment products that provide exposure to these markets. This may have the effect of reducing the availability of lower cost investment options that provide Canadian investors with exposure to T+3 markets as a means to diversify their portfolios.
26The Filers are of the view that it is in the best interest of the Funds and their investors to have the flexibility to settle subscriptions and redemptions of Units of the Funds in greater than two business days after a Pricing Date.
27The Exemption Sought only applies to primary market trades in Units. Secondary market trades in Units would continue to be subject to the settlement rules and procedures that apply to exchange-traded securities in Canada, including T+2 settlement.
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 Decision Makers under the Legislation is that the Exemption Sought is granted, provided that:
At the time a Fund relies on the relief, the Fund must have a portion of its portfolio invested in T+3 Securities; and
At the time a Fund's prospectus is next renewed, it shall:
(a) describe this Decision, including that the settlement cycle for a purchase or redemption of primary market trades in Units of the Fund is within T+3, and
(b) disclose that the settlement cycle for primary market trades in Units of the Fund differs from the standard settlement cycle of T+2 for secondary market trades in Units of the Fund.
"Darren McKall"
Darren McKall, Manager
Investment Funds & Structured Products
Ontario Securities Commission
Application #: 2017/0674
Sedar Nos : 2706203, 2706205, 2706207, 2706209, 2706211, 2706213, 2706215,
2819980, 2854613
Schedule "A"
Funds
Name of Fund Manager (Filers)
Category of Registration
Jurisdiction of Registration
AGF Investments Inc.
Exempt Marker Dealer
Ontario
Investment Fund Manager
Alberta, British Columbia, Newfoundland and Labrador, Ontario, and Quebec
Portfolio Manager
Each province and territory of Canada
Mutual Fund Dealer
British Columbia, Ontario, and Quebec
Commodity Trading Manager
Ontario
BlackRock Asset Management Canada Limited
Exempt Market Dealer
Each province and territory of Canada
Investment Fund Manager
Each province and territory of Canada
Portfolio Manager
Each province and territory of Canada
Commodity Trading Manager
Ontario
BMO Asset Management Inc.
Exempt Market Dealer
Each province and territory of Canada
Investment Fund Manager
Ontario, Quebec and Newfoundland and Labrador
Portfolio Manager
Each province and territory of Canada
Commodity Trading Manager
Ontario
Franklin Templeton Investments Corp.
Exempt Market Dealer
Each province of Canada and the Yukon territory
Investment Fund Manager
Alberta, British Columbia, Manitoba, Newfoundland and Labrador, Nova Scotia, Ontario, and Quebec
Mutual Fund Dealer
Each province of Canada and the Yukon territory
Portfolio Manager
Each province of Canada and the Yukon territory
Commodity Trading Manager
Ontario
Horizons ETFs Management (Canada) Inc.
Exempt Market Dealer
Each province of Canada
Investment Fund Manager
Newfoundland and Labrador, Ontario and Quebec
Portfolio Manager
Alberta, British Columbia, Ontario and Quebec
Commodity Trading Adviser
Ontario
Commodity Trading Manager
Ontario
Mackenzie Financial Corporation
Exempt Marker Dealer
Each province and territory of Canada
Portfolio Manager
Each province and territory of Canada
Investment Fund Manager
Newfoundland and Labrador, Ontario, and Quebec
Commodity Trading Manager
Ontario
Manulife Asset Management Limited
Portfolio Manager
Each province and territory of Canada
Investment Fund Manager
Newfoundland and Labrador, Ontario, and Quebec
Commodity Trading Manager
Ontario
Derivatives Portfolio Manager
Quebec
RBC Global Asset Management Inc.
Exempt Market Dealer
Each province and territory of Canada
Investment Fund Manager
British Columbia, Newfoundland and Labrador, Ontario, and Quebec
Portfolio Manager
Each province and territory of Canada
Commodity Trading Manager
Ontario
Vanguard Investments Canada Inc.
Exempt Market Dealer
Each province of Canada
Investment Fund Manager
Newfoundland and Labrador, Ontario, and Quebec
Portfolio Manager
Ontario
Commodity Trading Manager
Ontario