April 14, 2020
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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
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IN THE MATTER OF RBC GLOBAL ASSET MANAGEMENT INC. (the Filer)
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## Decision
## Background
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the existing and future mutual funds for which the Filer or an affiliate acts, or will act in the future, as the investment fund manager (the Funds) for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for an exemption under section 19.1 of National Instrument 81-102 Investment Funds (NI 81-102) from the cash cover requirements in section 2.8(1)(d) of NI 81-102 (the Cash Cover Requirements) when a Fund opens or maintains a long position in an FX Forward Contract (as defined below) in order to substitute the risk to the Base Currency for the risk to another currency without increasing the aggregate amount of currency risk to which the Fund is exposed by the substitution (the Requested Relief).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities 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 British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, the Northwest Territories, Nunavut and Yukon (together with the Jurisdiction, the Jurisdictions).
## Interpretation
Terms defined in National Instrument 14-101 – Definitions, MI 11-102 and NI 81-102 have the same meaning if used in this decision, unless otherwise defined.
## Representations
This decision is based on the following facts represented by the Filer.
### The Filer
1. The Filer is a corporation formed by amalgamation pursuant to articles of amalgamation dated November 1, 2010 under the federal laws of Canada and its head office is located in Toronto, Ontario.
2. The Filer is an indirect, wholly-owned subsidiary of Royal Bank of Canada.
3. The Filer is registered as an adviser in the category of portfolio manager and as a dealer in the category of exempt market dealer under the securities legislation of each Jurisdiction, is registered as an investment fund manager in each of British Columbia, Ontario, Québec and Newfoundland and Labrador and is also registered in Ontario as a commodity trading manager.
4. The Filer, or an affiliate thereof, is or will be, the investment fund manager and/or portfolio manager of each Fund.
5. The Filer is not in default of securities legislation in any Jurisdiction.
### The Funds
6. Each Fund is, or will be, a conventional mutual fund or an exchange-traded fund established under the laws of the Province of Ontario or the laws of another Jurisdiction.
7. Each Fund is, or will be, subject to NI 81-102, subject to any exemptions therefrom that may be granted by the securities regulatory authorities. Each Fund is not, or will not be, an alternative mutual fund.
8. The securities of the Funds are, or will be, offered either by a simplified prospectus and annual information form or long-form prospectus, as applicable, filed in all of the Jurisdictions and, accordingly, each Fund is, or will be, a reporting issuer in the Jurisdictions.
9. None of the Funds in existence on the date of this decision are in default of securities legislation in any Jurisdiction.
10. Each Fund invests, or will invest, directly or indirectly, in fixed income, equity securities or other assets denominated in the currency in which it determines its net asset value (the Base Currency) and in fixed income, equity securities or other assets denominated in non-Base Currencies in accordance with its investment objectives.
11. The Funds are, or will be, permitted to use specified derivatives to reduce risk by hedging against losses caused by changes in securities prices, foreign currency exposure, interest rates, exchange rates and/or other risks. The Funds may also use specified derivatives for non-hedging purposes pursuant to their investment strategies in order to gain exposure to other currencies, provided the use of specified derivatives is consistent with the Fund’s investment objectives.
12. In all cases where the Funds may use derivatives, hedging of risks is permitted, including currency risks, whether the currency risk relates to fixed income or equity securities or otherwise.
13. When specified derivatives are used for non-hedging purposes, the Funds are subject to the Cash Cover Requirements.
14. Any Fund that is not currently permitted to engage in the use of derivatives will only do so in accordance with Section 2.11 of NI 81-102.
15. A Fund that enters into or maintains a currency forward contract in which a Fund delivers its Base Currency and receives another currency (a FX Forward Contract) is required to hold cash cover in accordance with the Cash Cover Requirements.
16. Pursuant to NI 81-102, the Funds are permitted to (a) enter into a currency forward contract pursuant to which a Fund delivers a non-Base Currency and receives another non-Base Currency without being subject to the Cash Cover Requirements because (i) the transaction would be a “currency cross hedge” (as defined in NI 81-102) transaction, and (ii) the definition of “hedging” under NI 81-102 includes a currency cross hedge transaction; (b) enter into a currency forward contract pursuant to which a Fund delivers a non-Base Currency and receives the Base Currency without being subject to the Cash Cover Requirements because the definition of “hedging” under NI 81-102 includes such transactions.
17. The Filer seeks the ability for each Fund to enter into FX Forward Contracts without being subject to the Cash Cover Requirements. The FX Forward Contracts will enable a Fund to substitute the Fund’s risk to its Base Currency for a risk to another currency, without increasing the aggregate amount of currency risk to which the Fund is exposed by the substitution. A Fund’s currency exposure (calculated in the Fund’s Base Currency) will not at any time exceed the net asset value of the Fund.
18. The Filer as portfolio adviser takes a deliberate approach towards monitoring and managing the currency exposure and risk in each Fund’s portfolios. Moreover, the Filer does not passively accept currency exposure of the securities a Fund holds and seeks to manage foreign currency exposure separately from cash assets.
19. For example, a Fund that has Canadian dollars (CAD) as its Base Currency may have investment objectives and strategies that permit it to invest in both Canadian and U.S. equities (e.g. a North American equity fund). However, this Fund would not be permitted, without complying with the Cash Cover Requirements, to maintain currency exposure that is split evenly between CAD and the U.S. dollar (USD), unless at least half of the Fund is invested in U.S. equities. This does not allow active management of equity exposures without also introducing unmanaged currency risk. For instance, the portfolio manager of the Fund may be bullish on Canadian equities, but also expects that CAD will underperform relative to USD. The portfolio manager is effectively disincentivized from investing in Canadian equities because in doing so the Fund’s exposure to USD would be reduced and the desired currency exposure would not be maintained. Conversely, there would be no need to comply with the Cash Cover Requirements if the portfolio manager was bullish on U.S. equities but
minicounsel