BlackRock Asset Management Canada Limited (Re), 2024 CanLII 85699

September 11, 2024

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 BLACKROCK ASSET MANAGEMENT CANADA LIMITED (the Filer)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the iShares Flexible Monthly Income ETF (the Top Fund) and iShares Flexible Monthly Income ETF (CAD-Hedged) (the Currency Neutral Fund, together with the Top Fund, the Funds) for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for an exemption from:

(a) the requirements of

(i) section 2.9.1 of National Instrument 81-102 Investment Funds (NI 81-102), which limits an alternative mutual fund’s aggregate exposure to cash borrowing, short selling and specified derivatives transactions to 300% of the fund’s net asset value (NAV); and

(ii) Items 3.3, 5.1 and 6.1 of Form 41-101F2 Information Required in an Investment Fund Prospectus (Form 41-101F2) and Item 3 of Part I of Form 41-101F4 Information Required in an ETF Facts Document (Form 41-101F4), which all require an alternative mutual fund to disclose its maximum aggregate exposure to leverage as calculated pursuant to section 2.9.1 of NI 81-102

(collectively, the Leverage Relief);

(b) the requirements of

(i) subsection 2.1(1.1) of NI 81-102 to permit the Top Fund to purchase securities of the U.S. Underlying ETF (as defined below) even though, immediately after the transaction, more than 20% of the Top Fund’s NAV would be invested in it;

(ii) paragraph 2.5(2)(a.1) of NI 81-102 to permit the Top Fund to purchase securities of the U.S. Underlying ETF even though it is not subject to NI 81-102;

(iii) paragraph 2.5(2)(b) of NI 81-102 to permit the Top Fund to purchase securities of the U.S. Underlying ETF even though it may hold more than 10% of its NAV in securities of one or more Bottom Tier Funds (as defined below); and

(iv) paragraph 2.5(2)(c) of NI 81-102 to permit the Top Fund to purchase securities of the U.S. Underlying ETF even though it is not a reporting issuer in a Jurisdiction;

(collectively, the Three-Tier Relief); and

(c) the requirements of paragraph 2.5(2)(b) of NI 81-102 to permit the Currency Neutral Fund to purchase, directly or indirectly, securities of the Top Fund which holds, directly or indirectly, more than 10% of its NAV in securities of the U.S. Underlying ETF, which may hold more than 10% of its NAV in securities of one or more Bottom Tier Funds

(the Four-Tier Relief, and together with the Three-Tier Relief and the Leverage Relief, the Exemption Sought).

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 (MI 11-102) is intended to be relied upon in all of the provinces and territories of Canada other than the Jurisdiction (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.

Absolute VaR Test means that the VaR of a fund’s portfolio does not exceed 20% of the value of the fund’s net assets.

BlackRock Funds means the Funds and the U.S. Underlying ETF.

Bottom Tier Funds means those investment funds, including exchange-traded funds, in which the U.S. Underlying ETF invests that are each subject to the Investment Company Act of 1940 (the Investment Company Act).

Designated Index means an unleveraged index that is approved by the derivatives risk manager for purposes of the Relative VaR Test and that reflects the markets or asset classes in which the fund invests and is not administered by an organization that is an affiliated person of the fund, its investment adviser, or principal underwriter, or created at the request of the fund or its investment adviser, unless the index is widely recognized and used.

Designated Reference Portfolio means a Designated Index or the fund’s securities portfolio, provided that, if the fund’s investment objective is to track the performance (including a leverage multiple or inverse multiple) of an unleveraged index, the fund must use that index as its Designated Reference Portfolio.

Four-Tier Structure refers to the structure where the Currency Neutral Fund holds, or will hold, securities of the Top Fund, which Top Fund holds, or will hold, more than 10% of its NAV in securities of the U.S. Underlying ETF, and which U.S. Underlying ETF holds, or may hold, securities of one or more Bottom Tier Funds.

Relative VaR Test means that the VaR of the fund’s portfolio does not exceed 200% of the VaR of the Designated Reference Portfolio.

Three-Tier Structure refers to the structure where the Top Fund holds, or will hold, more than 10% of its NAV in securities of the U.S. Underlying ETF, and which U.S. Underlying ETF holds, or may hold, securities of one or more Bottom Tier Funds.

U.S. means the United States of America.

U.S. Underlying ETF means the BlackRock Flexible Income ETF (ticker: BINC), an exchange traded mutual fund subject to the Investment Company Act whose securities are listed on NYSE Arca (NYSE Arca).

value-at-risk or VaR means an estimate of potential losses on an instrument or portfolio, expressed as a percentage of the value of the portfolio’s assets (or net assets when computing a fund’s VaR), over a specified time horizon and at a given confidence level, provided that any VaR model used by a fund for purposes of determining the fund’s compliance with the Relative VaR Test or the Absolute VaR Test must: (1) take into account and incorporate all significant, identifiable market risk factors associated with a fund’s investments, including, as applicable: (i) equity price risk, interest rate risk, credit spread risk, foreign currency risk and commodity price risk; (ii) material risks arising from the nonlinear price characteristics of a fund’s investments, including options and positions with embedded optionality; and (iii) the sensitivity of the market value of the fund’s investments to changes in volatility, (2) use a 99% confidence level and a time horizon of 20 trading days; and (3) be based on at least three years of historical market data.

Representations

This decision is based on the following facts represented by the Filer:

The Filer

1. The Filer is a corporation amalgamated under the laws of the Province of Ontario with its head office located in Toronto, Ontario, and is an indirect, wholly-owned subsidiary of BlackRock, Inc., a global investment manager headquartered in the U.S.

2. The Filer will be the investment fund manager and portfolio manager of the Funds and is registered in the categories of Portfolio Manager, Investment Fund Manager and Exempt Market Dealer in all of the Jurisdictions. The Filer is also registered as a Commodity Trading Manager in Ontario and an Adviser under the Commodity Futures Act in Manitoba.

3. The Filer is not in default of the securities legislation in any of the Jurisdictions.

The BlackRock Funds and Portfolio Managers

4. Each Fund will be an actively managed exchange-traded open-ended alternative mutual fund governed by the laws of the Province of Ontario that operates under the provisions of NI 81-102 applicable to alternative mutual funds.

5. The U.S. Underlying ETF is an actively managed exchange-traded fund subject to the Investment Company Act and is an “investment fund” within the meaning of applicable Canadian securities legislation.

6. Each Bottom Tier Fund is, or will be, a fund subject to the Investment Company Act and an “investment fund” within the meaning of applicable Canadian securities legislation. Each Bottom Tier Fund may be managed by an affiliate of the Filer or a third-party fund manager.

7. BlackRock Fund Advisors (BFA), an affiliate of the Filer, acts as the investment adviser for the U.S. Underlying ETF. BFA is registered with the U.S. Securities and Exchange Commission (the SEC) under the U.S. Investment Advisers Act of 1940 (the Investment Advisers Act)

8. BFA, in respect of the U.S. Underlying ETF, has appointed BlackRock International Limited (BIL) and BlackRock (Singapore) Limited (BSL), each an affiliate of the Filer, to act as sub-advisers. Each of BIL and BSL are registered with the SEC under the Investment Advisers Act.

9. BlackRock Institutional Trust Company, N.A. (BTC), an affiliate of the Filer and BFA, will act as sub-adviser (the Sub-Adviser) to the Funds. BTC is a national banking association organized under the laws of the U.S. and its primary regulator is the Office of the Comptroller of the Currency, the agency of the U.S. Treasury Department. Its principal office is located in San Francisco, California. References herein to Portfolio Manager are to BFA, BTC, BIL and BSL and their respective investment management professionals, as applicable.

10. Each of BFA, BIL, BSL and the U.S. Underlying ETF are regulated by the SEC. The regulatory oversight of BFA, BIL, BSL and the U.S. Underlying ETF by the SEC is functionally equivalent to that of the Filer and the Funds which are both primarily regulated by the OSC.

11. BFA is subject to a governance framework which sets out the duty of care and standard of care, which require BFA to act in the best interest of the U.S. Underlying ETF.

12. The primary individual portfolio managers at BFA and BTC responsible for overseeing each BlackRock Fund’s portfolio and investments are the same.

13. State Street Bank and Trust Company, the parent company of State Street Trust Company Canada, currently acts as the administrator, custodian, fund accountant and transfer agent for the U.S. Underlying ETF. State Street Trust Company Canada will act as the custodian, fund accountant and valuation agent for the Funds.

14. The primary investment objective of each of the BlackRock Funds is to seek to maximize long-term income by primarily investing in debt and income-producing securities with a secondary objective of capital appreciation.

15. Each Fund will distribute its securities under a long form prospectus prepared pursuant to National Instrument 41-101 General Prospectus Requirements (NI 41-101) and Form 41-101F2 and will be governed by the applicable provisions of NI 81-102, subject to any exemptions therefrom that have been, or may in the future be, granted by the Canadian securities regulatory authorities.

16. The Filer filed a preliminary long form prospectus in respect of the Funds with the securities regulatory authorities in each of the Jurisdictions on July 18, 2024. The Filer expects to file a final long form prospectus in respect of the Funds with the securities regulatory authorities in each of the Jurisdictions on or about the date that the Exemption Sought is granted.

17. The Filer has applied to list the units of the Funds on the Toronto Stock Exchange (the TSX). The Filer will not file a final long form prospectus for any of the Funds in respect of the units of such Fund until the TSX has conditionally approved the listing of such units.

18. Subject to approval of the TSX, units of the Funds will be listed and traded on the TSX.

19. Each Fund will be a reporting issuer in each of the Jurisdictions.

20. None of the Funds are in default of the securities legislation in any of the Jurisdictions.

21. Securities of the U.S. Underlying ETF are offered in their primary market in a manner similar to the Funds pursuant to a prospectus filed with the SEC which discloses material facts, similar to the disclosure requirements under Form 41-101F2.

22. The U.S. Underlying ETF is required to prepare key investor information documents which provide disclosure that is substantially similar to the disclosure required to be included in the ETF facts document required by Form 41-101F4.

23. The U.S. Underlying ETF is subject to continuous disclosure obligations which are substantially similar to the disclosure obligations under National Instrument 81-106 Investment Fund Continuous Disclosure.

24. The U.S. Underlying ETF is required to update information of material significance in its prospectus, to prepare management reports and an unaudited set of financial statements at least semi-annually, and to prepare management reports and an audited set of financial statements annually.

25. The securities of the U.S. Underlying ETF are listed and traded on NYSE Arca (a recognized exchange in the U.S.). The listing requirements of NYSE Arca are consistent with the listing requirements of the TSX and Cboe Canada in Canada.

Principal Investment Objectives and Strategies of the BlackRock Funds

26. Each BlackRock Fund employs a flexible, active investment process, and does not seek to maintain any specified degree of similarity relative to its benchmark.

The Currency Neutral Fund

27. The investment objective of the Currency Neutral Fund is to seek to maximize long-term income by primarily investing in debt and income-producing securities with a secondary objective of capital appreciation. The Currency Neutral Fund also seeks to hedge any resulting U.S. dollar currency exposure, as applicable, back to Canadian dollars. The Currency Neutral Fund will seek to achieve its investment objective primarily by investing all or substantially all of its assets in the Top Fund or by investing directly in Fixed Income Securities (as defined below).

The Top Fund

28. The investment objective of the Top Fund is to seek to maximize long-term income by primarily investing in debt and income-producing securities with a secondary objective of capital appreciation. The Top Fund will seek to achieve its investment objective primarily by investing all or substantially all of its assets in the U.S. Underlying ETF or by investing directly in Fixed Income Securities (as defined below).

The U.S. Underlying ETF

29. The investment objective of the U.S. Underlying ETF is to seek to maximize long-term income by primarily investing in debt and income-producing securities with a secondary objective of capital appreciation. Under normal market conditions, the U.S. Underlying ETF will invest in a combination of fixed-income securities, including, but not limited to: high yield securities; obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities; mortgage-backed securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities, including U.S. agency mortgage pass-through securities; commercial mortgage-backed securities; non-agency residential mortgage-backed securities; mortgage to-be-announced securities; municipal securities; securitized assets such as asset-backed securities; dollar-denominated and non-dollar-denominated debt obligations of U.S. or foreign issuers, including emerging market issuers; collateralized debt obligations (CDOs) and collateralized loan obligations (CLOs); floating rate loans and other types of floating rate instruments; preferred securities; and money market securities (collectively, Fixed Income Securities). Depending on market conditions, the U.S. Underlying ETF may invest in other market sectors.

30. The U.S. Underlying ETF may also gain exposure to Fixed Income Securities through its investments in Bottom Tier Funds that invest in such securities, although it is not a principal investment strategy of the U.S. Underlying ETF to do so. The U.S. Underlying ETF will invest in Bottom Tier Funds generally only for cash management purposes or for temporary exposure to Fixed Income Securities while the U.S. Underlying ETF is not fully invested directly in Fixed Income Securities. In some circumstances, these investments in Bottom Tier Funds may exceed 10% of the U.S. Underlying ETF’s NAV where the Bottom Tier Funds represent securities of a money market fund or a mutual fund that issues index participation units, or as otherwise permitted by discretionary relief. Each Bottom Tier Fund will primarily invest directly in a portfolio of securities of issuers that are not investment funds and/or in other assets.

31. The U.S. Underlying ETF may invest in bonds of any maturity, but will maintain an average portfolio duration that is between 1 and 5 years (the Duration Target).

32. The U.S. Underlying ETF will invest not more than 20% of its assets in U.S.-domiciled, U.S.-registered dollar-denominated investment grade corporate bonds, U.S. Treasury securities, U.S. agency securities and U.S. agency mortgage-backed securities (collectively, Core Securities).

33. The U.S. Underlying ETF may invest without limit in securities rated below investment grade or which are considered to be of comparable quality by its Portfolio Manager (“high yield” or “junk” bonds) at the time of purchase.

34. The U.S. Underlying ETF may invest up to 10% of its assets in preferred securities. The U.S. Underlying ETF may invest in CDOs, including up to 15% of its assets in CLOs. CDOs are types of asset-backed securities. CLOs are ordinarily issued by a trust or other special purpose entity and are typically collateralized by a pool of loans, which may include, among others, domestic and non-U.S. senior secured loans, senior unsecured loans, and subordinate corporate loans, including loans that may be rated below investment grade or equivalent unrated loans, held by such issuer.

35. The U.S. Underlying ETF may also invest up to 15% of its assets in floating rate loans. The U.S. Underlying ETF may invest in other types of floating rate instruments without limit.

36. The U.S. Underlying ETF may use derivatives, such as futures contracts, options (including, but not limited to, options on futures and swaps) and various other instruments including, but not limited to, interest rate, total return, credit default and credit default index swaps (which can be used to transfer the credit risk of a security without actually transferring ownership of the security or to customize exposure to a particular credit risk) and indexed and inverse floating-rate securities. The U.S. Underlying ETF may also invest in derivatives based on foreign currencies. In addition, the U.S. Underlying ETF may use derivatives and short sales to enhance returns as part of an overall investment strategy or to offset a potential decline in the value of other holdings (commonly referred to as a hedge), although the U.S. Underlying ETF is not required to hedge and may choose not to do so.

37. As at September 4, 2024, the total value of the U.S. Underlying ETF was US$4,063 million and the U.S. Underlying ETF held 2,378 individual positions across 15 sectors of the fixed income market.

38. The U.S. Underlying ETF is permitted under applicable securities laws in the U.S. to invest up to 15% of its NAV in securities and other instruments that are, at the time of investment, illiquid. The Funds will be subject to NI 81-102 which limits the extent to which the Funds may invest in illiquid assets to a similar degree.

39. Generally, the U.S. Underlying ETF does not invest in illiquid assets.

40. The portfolio holdings of the U.S. Underlying ETF are available on the U.S. Underlying ETF’s website and are updated on a daily basis.

41. The market for securities of the U.S. Underlying ETF is liquid because it is a large fund and is traded on NYSE Arca (i.e. it is more liquid because of its size and its trading volume). In addition, it is supported by authorized participants (who are U.S. broker-dealers) which make the market for the securities of the U.S. Underlying ETF and are incentivized to do so because of the arbitrage opportunities inherent in making such market. Accordingly, the Filer expects the Funds to be able to dispose of their securities of the U.S. Underlying ETF through market facilities in order to raise cash, including to fund the redemption requests of their unitholders from time to time.

Fixed Income Securities

42. The size of the USD-denominated Fixed Income Securities market is currently around US$52.9 trillion. The Portfolio Manager believes that Fixed Income Securities are an important and desirable asset class for investors given the asset’s unique combination of relatively high yield potential and low duration.

43. The Funds will provide significant exposure to Fixed Income Securities which are generally complementary to Core Securities. The Funds will therefore provide Canadian investors with an opportunity to diversify their overall fixed income portfolios, as well as generate income.

Indirect Investment Exposure

44. The investment opportunities available to the Funds are affected by the total assets available to invest. A larger total asset base enables greater diversification, as a larger number of Fixed Income Securities can be purchased, held, and sold efficiently in “Round Lots” (typically quantities of $100,000 par or more). Generally, it is more costly to transact in Fixed Income Securities in quantities smaller than a Round Lot.

45. The U.S. Underlying ETF is a Qualified Institutional Buyer (QIB) pursuant to Rule 144 of the Securities Act, 1933. A significant proportion of the Fixed Income Securities purchased by the U.S. Underlying ETF are distributed pursuant to registration exemptions and may only be purchased by QIBs (144A Securities). Each Fund would not qualify as a QIB unless its total assets are at least USD$100 million. An inability to purchase 144A Securities would severely limit the investment opportunities available to the Funds and would undermine each Fund’s ability to effectively implement its investment strategy.

46. There is no certainty as to the timeline for the Funds to achieve QIB status, if at all.

47. Given the benefits that the Funds can achieve by obtaining exposure to Fixed Income Securities through direct or indirect investment in the U.S. Underlying ETF (being diversification, liquidity, access to greater Fixed Income Securities exposure), each Fund would like to invest, directly or indirectly, up to 100% of its net assets in the U.S. Underlying ETF.

Leverage and Derivatives

48. Pursuant to section 2.9.1 of NI 81-102, an alternative mutual fund or non-redeemable investment fund’s aggregate exposure to cash borrowing, short-selling and specified derivatives transactions must not exceed 300% of the fund’s NAV (the Leverage Limit). That section further requires that an alternative mutual fund or non-redeemable investment fund include in its calculation of aggregate leverage exposure its proportionate share of the assets of any underlying investment fund for which a similar calculation is required.

49. The U.S. Underlying ETF enters into derivative transactions in order to ensure that average portfolio duration is within the Duration Target. Depending on the overall duration of the Fixed Income Securities in which the U.S. Underlying ETF is invested, there may be a need for the U.S. Underlying ETF to enter into derivatives transactions with large notional exposures to adjust the overall portfolio duration to be within the Duration Target. Although these transactions can have large notional exposures, such transactions are ultimately intended to more precisely manage overall duration risk and ensure that overall portfolio duration is within the Duration Target.

50. Accordingly, each Fund may, from time to time, exceed the Leverage Limit as a result of the U.S. Underlying ETF’s derivatives transactions that are intended to manage the portfolio’s credit risk and duration risk, and to maintain an average portfolio duration that is within the Duration Target.

51. Although the U.S. Underlying ETF seeks to manage credit risk and duration risk through risk managed derivatives transactions, such transactions may not always constitute “hedging” as such term is defined in NI 81-102. A “hedging” transaction under NI 81-102 requires a high degree of negative correlation between changes in the value of the investment or position, or group of investments or positions, being hedged and changes in the value of the instrument or instruments with which the investment or position is hedged. Only specified derivatives positions that constitute “hedging” reduce the notional exposure of a fund for purposes of calculating the Leverage Limit.

52. The European Union approved a new regulation of mutual funds in 2010 in the fourth European Directive covering Undertakings for Collective Investment in Transferable Securities (UCITS IV), which introduced a value-at-risk based approach to regulatory risk management for investment funds that extensively use derivatives.

53. This approach allows for two methods of VaR limits, the Relative VaR Test and the Absolute VaR Test, which in general terms can be summarized as follows:

(a) Relative VaR Test: This approach uses a ratio of up to 200% between the VaR of the portfolio and the VaR of a reference portfolio.

(b) Absolute VaR Test: This approach is generally used when there is no reference portfolio or benchmark and allows the one-month VaR to be up to 20% of the NAV of the portfolio.

54. UCITS IV also includes rules for the computation of VaR and requires regular stress- and back-testing to complement the VaR estimation.

55. On October 28, 2020 the SEC adopted new Rule 18f-4 under the Investment Company Act of 1940 (17 CFR § 270.18f-4, the SEC Rule), which modernized the regulatory framework for derivatives used by registered funds. The SEC Rule is generally the same as the UCITS IV rule as it adopted a 200% limit for funds using a Relative VaR Test, and a 20% VaR limit for funds using an Absolute VaR Test.

56. The SEC Rule institutes a standardized risk management framework for registered funds, while also permitting principles-based tailoring to the registered fund’s particular derivatives risks, including leverage, market, counterparty, liquidity, operational, and legal risks. The “Derivatives Risk Management Program” (DRMP) required by the SEC Rule must include risk guidelines, stress testing, back testing, internal reporting and escalation, and program review elements:

(a) Risk guidelines. The DRMP must include risk guidelines, including establishing, maintaining, and enforcing these guidelines. These include investment, risk management, or related guidelines that provide for quantitative or otherwise measurable criteria, metrics, or thresholds related to a fund’s derivatives risks.

(b) Stress testing. The DRMP must include stress testing of the fund’s portfolio to evaluate potential losses under stressed conditions.

(c) Backtesting. The DRMP must provide for “backtesting” its VaR model on a weekly basis by comparing the fund’s actual gain or loss for each business day with the VaR calculated for that day. A fund must identify any instance in which the fund experiences a loss exceeding the corresponding VaR calculation’s estimated loss.

(d) Internal reporting and escalation. Certain matters relating to a fund’s derivatives use would have to be reported to the fund’s portfolio management and board of directors (the board), and require the derivatives risk manager (the DRM) to inform (1) the fund’s portfolio managers about guideline exceedances and stress testing results, and (2) the fund’s board directly about material risks arising from the fund’s derivatives use.

(e) Periodic review of the program. The DRM is required to review the DRMP at least annually, to evaluate the DRMP’s effectiveness and to reflect changes in risk over time.

57. Pursuant to the SEC Rule, if the fund’s DRM reasonably determines that a Designated Reference Portfolio would not provide an appropriate reference portfolio for purposes of the Relative VaR Test, the fund would be required to comply with the Absolute VaR Test.

58. Pursuant to the SEC Rule, a fund must determine its compliance with its VaR approach at least once each business day. If a fund is not in compliance, then it must come back into compliance promptly, in a manner that is in the best interests of the fund and its securityholders. If the fund is not in compliance within five business days, the DRM must provide certain written reports to the fund’s board and analyze the circumstances that caused the fund to be out of compliance and update any program elements as appropriate. For funds that remain out of compliance for thirty calendar days, the DRM must update the board at regularly scheduled intervals until the fund has come back into compliance.

Reasons for Exemption Sought

Leverage Relief

59. Absent the Leverage Relief, a Fund may exceed the Leverage Limit in section 2.9.1 of NI 81-102 as a result of the derivatives transactions of the U.S. Underlying ETF in which it invests because subsection 2.9.1(3) of NI 81-102 requires the Fund to include in its calculation of aggregate leverage exposure, its proportionate share of the assets of any underlying investment fund for which a similar calculation is required.

60. The U.S. Underlying ETF currently relies on, and complies with, the SEC Rule, specifically the Relative VaR Test, to monitor fund leverage risk.

61. As recognized in the SEC Rule, VaR is a commonly-known and broadly-used industry metric that enables risk to be measured in a reasonably comparable and consistent manner across the diverse instruments that may be included in a fund’s portfolio. The VaR-based limits in the SEC Rule are designed to address leverage risk for a variety of fund strategies.

62. For the Funds, which are currently expected to directly or indirectly invest all or substantially all of their assets in the U.S. Underlying ETF, a VaR-based approach is a better means of managing risk because, unlike notional amounts which do not measure risk or volatility, VaR enables risk to be measured in a reasonably comparable and consistent manner.

63. The risk-based approach in the SEC Rule, which relies on VaR, stress testing, and overall risk management, addresses concerns about fund leverage for fund investment portfolios, while allowing such portfolios to continue to use derivatives for a variety of purposes.

64. Allowing the Funds to use the same Relative VaR Test used by the U.S. Underlying ETF in which they invest should give investors access to a fixed income mandate that seeks to manage overall portfolio duration and credit risk within specific limits. Of the two VaR approaches (“absolute” and “relative”) used in the SEC Rule, the relative approach used by the U.S. Underlying ETF is the approach that is most suitable as there are appropriate reference portfolios that can be used.

65. BFA already uses a VaR model. The U.S. Underlying ETF complies with the SEC Rule and its board has appointed a DRM, who is responsible for administering the DRMP in accordance with the SEC Rule. The Designated Reference Portfolio of the U.S. Underlying ETF is the U.S. Underlying ETF’s securities portfolio, excluding any derivatives positions. Thus, as a result of their direct or indirect investment of substantially all of their assets in securities of the U.S. Underlying ETF, each Fund will adhere to the Relative VaR Test and operate in accordance with the SEC Rule.

66. BlackRock, Inc. and its affiliates, including BTC, BFA and the Filer share a common investment management infrastructure. This infrastructure will allow the Portfolio Manager and Sub-Adviser of the Funds to have direct access to the DRMP for the U.S. Underlying ETF, including the information necessary to determine whether the U.S. Underlying ETF is offside the Relative VaR Test.

67. As at the date of this decision, the U.S. Underlying ETF has consistently operated well below the Relative VaR Test.

Three-Tier Relief

68. Absent the Three-Tier Relief, an investment by the Top Fund of up to 100% of its NAV in securities of the U.S. Underlying ETF would be prohibited by:

(a) subsection 2.1(1.1) of NI 81-102 because more than 20% of the Top Fund’s NAV would be invested in securities of the U.S. Underlying ETF;

(b) paragraph 2.5(2)(a.1) of NI 81-102 because the U.S. Underlying ETF is not subject to NI 81-102;

(c) paragraph 2.5(2)(b) of NI 81-102 because the U.S. Underlying ETF may invest more than 10% of its NAV in securities of Bottom Tier Funds, resulting in a Three-Tier Structure; and

(d) paragraph 2.5(2)(c) of NI 81-102 because the U.S. Underlying ETF is not a reporting issuer in a Jurisdiction.

69. An investment by the Top Fund in the U.S. Underlying ETF would not qualify for the exceptions in subsection 2.1(2), paragraph 2.5(3)(a) and subsection 2.5(4) of NI 81-102.

70. The Top Fund’s investment objectives and investment strategies seek to provide its unitholders with exposure to a diversified portfolio of Fixed Income Securities. The Filer submits that having the ability to directly or indirectly invest up to 100% of the Top Fund’s NAV in securities of the U.S. Underlying ETF will provide the Top Fund with access to investment opportunities that the Top Fund is currently unable to access due to its size, which will in turn allow the Top Fund to maintain a much more diversified portfolio.

71. The Filer submits that an investment in securities of the U.S. Underlying ETF by the Top Fund is an efficient and cost-effective alternative to investing in Fixed Income Securities directly.

72. The investment objectives, investment strategies, investment restrictions and risk factors applicable to the Top Fund and the U.S. Underlying ETF are substantially the same. The Top Fund is essentially the Canadian version of the U.S. Underlying ETF and is managed by affiliates and advised by the same portfolio advisor and portfolio management team.

73. The Top Fund will not pay any management or incentive fees in connection with an investment in securities of the U.S. Underlying ETF which to a reasonable person would duplicate a fee payable by the U.S. Underlying ETF for the same service.

74. Given the benefits that the Top Fund can achieve by obtaining exposure to Fixed Income Securities through direct investment in the U.S. Underlying ETF (being diversification, liquidity, access to greater Fixed Income Securities exposure and the ability to buy Round Lots), each Fund would like to invest up to 100% of its net assets in the U.S. Underlying ETF.

75. Any risks associated with an investment in securities of the U.S. Underlying ETF are mitigated by the fact that:

(a) the U.S. Underlying ETF is subject to the Investment Company Act and BFA is regulated by the SEC; and

(b) the U.S. Underlying ETF is managed in a manner that is consistent with the investment restrictions in sections 2.1 (concentration restriction), 2.2 (control restrictions), 2.3 (restrictions concerning types of assets) and 2.4 (restrictions concerning illiquid assets) of NI 81-102 that apply to an “alternative mutual fund”.

76. The amount of loss that could result from an investment by the Top Fund in securities of the U.S. Underlying ETF will be limited to the amount invested by the Top Fund in the U.S. Underlying ETF.

77. An investment by the Top Fund in securities of the U.S. Underlying ETF represents, or will represent, the business judgement of responsible persons uninfluenced by considerations other than the best interests of the Fund.

Four-Tier Relief

78. Absent the Four-Tier Relief, an investment by the Currency Neutral Fund of up to 100% of its NAV in securities of the Top Fund would be prohibited by paragraph 2.5(2)(b) of NI 81-102 because the Top Fund may hold more than 10% of its NAV in the U.S. Underlying ETF, which may in turn hold more than 10% of its NAV in one or more Bottom Tier Funds. This Four-Tier Structure is contrary to the multi-layering restriction in paragraph 2.5(2)(b) of NI 81-102 and does not fit within the exceptions to paragraph 2.5(2)(b) found in subsection 2.5(4) of NI 81-102. Except for paragraph 2.5(2)(b), the Currency Neutral Fund’s use of the Four-Tier Structure will be made in accordance with the provisions of section 2.5 of NI 81-102.

79. The investment objectives, investment strategies, investment restrictions and risk factors applicable to the Currency Neutral Fund and the Top Fund are substantially the same. The Currency Neutral Fund is essentially a currency hedged version of the Top Fund and is managed by affiliates and advised by the same portfolio advisor and portfolio management team.

80. The Currency Neutral Fund will not pay any management or incentive fees in connection with an investment in securities of the Top Fund which to a reasonable person would duplicate a fee payable by the Top Fund for the same service.

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.

Leverage Relief

1. The decision of the principal regulator is that the Leverage Relief is granted, provided that:

(a) the portfolio manager of the U.S. Underlying ETF (the Underlying Portfolio Manager) is BFA or any affiliate, or their respective successors, that is registered with the SEC under the Investment Advisers Act;

(b) the Underlying Portfolio Manager has appointed a DRM;

(c) the Underlying Portfolio Manager and the U.S. Underlying ETF comply with the Relative VaR Test, in accordance with the SEC Rule;

(d) the Filer discloses in the Funds’ prospectus and ETF facts document the maximum VaR that each Fund is permitted to incur, and the Filer discloses in the annual and interim MRFP of each Fund the maximum amount of VaR incurred by each Fund over the applicable period;

(e) the Filer notifies the OSC within one business day of being advised by the Sub-Adviser of the Funds that the U.S. Underlying ETF is offside the Relative VaR Test for more than five consecutive days, as required by its sub-advisory agreement with the Sub-Adviser (the Sub-Advisory Agreement);

(f) the Filer promptly (e.g. within 24 hours) provides the OSC with any other information that it may request regarding the Funds’ direct or indirect investments in the U.S. Underlying ETF and the inter-month calculations and risk metrics that the U.S. Underlying ETF is using, which the Sub-Adviser has agreed to provide to the Filer pursuant to the terms of the Sub-Advisory Agreement;

(g) the Filer appropriately documents its risk methodology for each Fund in accordance with the requirements of paragraph 15.1.1(a) of NI 81-102 and items 2 and 4 of Appendix F Investment Risk Classification Methodology to NI 81-102; and

(h) all or substantially all of the Funds’ assets are, directly or indirectly, invested in the U.S. Underlying ETF in accordance with the Thee-Tier Relief and Four-Tier Relief.

Three-Tier Relief

2. The decision of the principal regulator is that the Three-Tier Relief is granted, provided that:

(a) the investment by the Top Fund in securities of the U.S. Underlying ETF is in accordance with the investment objectives of the Top Fund;

(b) the Top Fund only invests directly in the U.S. Underlying ETF, cash, cash equivalents and specified derivatives used to equitize cash or to hedge risks associated with the portfolio holdings of the U.S. Underlying ETF and/or Bottom Tier Funds, but does not hold directly any other portfolio securities;

(c) the U.S. Underlying ETF is an investment company subject to the Investment Company Act in good standing with the SEC;

(d) the portfolio manager of the U.S. Underlying ETF is BFA or any affiliate, or their respective successors, that is registered with the SEC under the Investment Advisers Act;

(e) the U.S. Underlying ETF is managed in a manner that is consistent with the investment restrictions of sections 2.1, 2.2, 2.3 and 2.4 of NI 81-102, as such provisions apply to alternative mutual funds, except to the extent that the U.S. Underlying ETF may exceed the Leverage Limit in accordance with the SEC Rule;

(f) the U.S. Underlying ETF does not, at the time securities of the U.S. Underlying ETF are acquired by the Top Fund, hold more than 10% of its NAV in securities of any Bottom Tier Funds other than securities of a money market fund or a mutual fund that issues index participation units, except to the extent that discretionary relief has been granted from any such requirement;

(g) no management fees or incentive fees are payable by the Top Fund that, to a reasonable person, would duplicate a fee payable by another investment fund in the Three-Tier Structure for the same service;

(h) the Top Fund’s investments in securities of the U.S. Underlying ETF are otherwise made in compliance with all other requirements of section 2.5 of NI 81-102, except to the extent that discretionary relief has been granted from any such requirement; and

(i) the final long form prospectus of the Top Fund discloses, in the investment strategy section, the fact that the Top Fund has obtained the Three-Tier Relief to permit investments in the U.S. Underlying ETF on the terms described in this decision.

Four-Tier Relief

3. The decision of the principal regulator is that the Four-Tier Relief is granted, provided that:

(a) the Currency Neutral Fund only invests directly in the Top Fund, cash, cash equivalents and specified derivatives used to equitize cash or to hedge risks associated with the portfolio holdings of the Top Fund, the U.S. Underlying ETF and/or Bottom Tier Funds, but does not hold directly any other portfolio securities;

(b) the Top Fund in which the Currency Neutral Fund invests complies with the terms of the Three-Tier Relief;

(c) no management fees or incentive fees are payable by the Currency Neutral Fund that, to a reasonable person, would duplicate a fee payable by another investment fund in the Four-Tier Structure for the same service;

(d) the Currency Neutral Fund’s investments in securities of the Top Fund are otherwise made in compliance with all other requirements of section 2.5 of NI 81-102, except to the extent that discretionary relief has been granted from any such requirement; and

(e) the final long form prospectus of the Currency Neutral Fund discloses, in the investment strategy section, the fact that the Currency Neutral Fund has obtained the Four-Tier Relief to permit investments in the Top Fund on the terms described in this decision.

“Darren McKall”

Darren McKall

Manager, Investment Management Division

Ontario Securities Commission

Application No. 2024/0249

SEDAR+: 6117671