Invesco Canada Ltd. and Invesco Balanced-Risk Allocation Pool

Decision

Headnote

NP 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Relief from sections 6.8(1) and 6.8(2)(c) of NI 81-102 exempting an investment fund from margin deposit limits to invest in specified derivatives -- Relief granted from section 2.9.1 of NI 81-102 to permit fund to use Absolute Value at Risk (Absolute VaR) measurement for leverage exposure -- Relief granted from item 4 and instruction (4) of Part B of Form 81-101F1 Contents of Simplified Prospectus (Form 81-101F1) and item 3 of Part I of Form 81-101F3 Contents of Fund Facts Document (Form 81-101F3) -- Relief granted from subsection 2.2(1.1) of NI 81-102 in order to permit the Fund to invest up to 35% of its NAV in Foreign Government Securities.

Applicable Legislative Provisions

National Instrument 81-102 Investment Funds, ss. 2.2(1.1), 2.9.1, 6.8(1), 6.8(2)(c) and 19.1.

Form 81-101F1 Contents of Simplified Prospectus, Part B, item 4 and instruction (4).

Form 81-101F3 Contents of Fund Facts Document, Part I, item 3.

December 5, 2024

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
INVESCO CANADA LTD.
(the Filer)

AND

INVESCO BALANCED-RISK ALLOCATION POOL
(the Fund)

DECISION

Background

The principal regulator in the Jurisdiction has received an application (the Application) from the Filer on behalf of the Fund for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) to grant the Filer and the Fund exemptive relief from:

Margin

(a) the requirements of:

(i) section 6.8(1) of National Instrument 81-102 Investment Funds (NI 81-102), which restricts an investment fund from depositing portfolio assets as margin with a member of a regulated clearing agency or dealer that is a member of a self-regulatory organization that is a participating member of the Canadian Investor Protection Fund (CIPF) for a transaction in Canada involving certain specified derivatives in excess of 10% of the net asset value (NAV) of the investment fund as at the time of deposit; and

(ii) section 6.8(2)(c) of NI 81-102, which restricts an investment fund from depositing portfolio assets as margin with a member of a regulated clearing agency or dealer for a transaction outside of Canada involving certain specified derivatives in excess of 10% of the NAV of the investment fund as at the time of deposit;

to permit the Fund to deposit as margin portfolio assets of up to 35% of the Fund's NAV as at the time of deposit with any one futures commission merchant in Canada or the United States of America (U.S.) (each a Dealer) and up to 70% of the Fund's NAV as at the time of deposit with all Dealers in the aggregate, in each case for transactions in standardized futures that are traded or cleared on or through a stock exchange, a futures exchange, a recognized clearing agency, or a swap execution facility that is exempted from recognition as an exchange under subsection 21(1) of the Securities Act (Ontario) (Exchange Traded Specified Derivatives) (the Margin Deposit Relief);

Leverage

(b) the requirements of:

(i) section 2.9.1 of 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 NAV; and

(ii) item 4 and instruction (4) of Part B of Form 81-101F1 Contents of Simplified Prospectus (Form 81-101F1) and item 3 of Part I of Form 81-101F3 Contents of Fund Facts Document (Form 81-101F3), 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

(the Leverage Relief); and

Concentration

(c) the requirement of subsection 2.2(1.1) of NI 81-102 which prohibits an alternative mutual fund from purchasing a security of an issuer or entering into a specified derivatives transaction, if, immediately after the transaction, more than 20% of the alternative mutual fund's NAV would be invested in securities of any one issuer, other than a "government security" (as defined in NI 81-102) (the Concentration Restriction) in order to permit the Fund to invest up to 35% of its NAV in Foreign Government Securities (as defined below) (the Concentration Restriction Relief and together with the Margin Deposit Relief and Leverage Relief, the Exemption Sought).

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):

(a) the Ontario Securities Commission is the principal regulator (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 of the provinces and territories of Canada (together with Ontario, the Canadian 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. The following terms have the following meanings:

Canadian Dealer means a Dealer located in Canada;

CFTC means the Commodity Futures Trading Commission;

CIRO means the Canadian Investment Regulatory Organization;

DRO affiliate means an affiliate of a designated rating organization that issues credit ratings in a foreign jurisdiction and that has been designated as a DRO affiliate under the terms of the designated rating organizations' designation;

DSRO means a designated self-regulatory organization;

Foreign Government Securities means evidences of indebtedness of any one issuer if those evidences of indebtedness are issued, or guaranteed fully as to principal and interest, by supranational agencies or governments (other than the government of Canada or U.S. or the government of a jurisdiction in Canada) and are rated "AAA" by Standard & Poor's (S&P) or its DRO affiliates, or have an equivalent rating by one or more other designated rating organizations or their DRO affiliates.

NFA means the National Futures Association; and

U.S. Dealer means a Dealer located in the U.S.

Representations

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

The Filer and the Fund

1. The Filer is:

(a) a corporation amalgamated under the laws of the Province of Ontario with its head office located in Toronto, Ontario;

(b) registered as:

(i) an adviser in the category of portfolio manager in each province of Canada;

(ii) an investment fund manager in Ontario, Québec and Newfoundland and Labrador;

(iii) a dealer in the category of: (1) mutual fund dealer in Alberta, British Columbia; Nova Scotia, Ontario, Prince Edward Island, Québec; and (2) exempt market dealer in each province of Canada; and

(iv) a commodity trading manager in Ontario.

(c) the investment fund manager and portfolio manager of the Fund. An affiliate of the Filer is the sub-advisor of the Fund.

2. The Fund:

(a) is a mutual fund trust created under the laws of the Province of Ontario; and

(b) commenced operations on November 7, 2012 with its securities being sold pursuant to certain prospectus exemptions. However, on November 4, 2022 the Fund's securities became available for sale to the public as securities of an alternative mutual fund within the meaning of NI 81-102. Securities of the Fund are currently qualified for distribution pursuant to a prospectus that is prepared and filed in accordance with the securities legislation of one or more of the Canadian Jurisdictions. Accordingly, the Fund is a reporting issuer or the equivalent in one or more of the Canadian Jurisdictions and is subject to the provisions of NI 81-102, subject to any relief therefrom granted by the securities regulatory authorities.

3. The Fund's current investment objectives seek to provide total return with a low to moderate correlation to traditional financial market indices by investing, directly or indirectly, in a diversified portfolio of equity securities, fixed income securities and commodities located anywhere in the world. The Fund may invest more than 10% of its NAV, directly or indirectly, in commodities.

4. The Fund currently employs a proprietary risk premium capture investment strategy which permits the Fund to enter into specified derivative transactions for hedging and non-hedging purposes up to a limit of 250% of its NAV.

5. The Filer has proposed the following changes to the Fund's investment objectives and strategies:

The Fund's investment objectives seek to deliver a positive absolute return over a full market cycle with a low correlation to traditional financial market indices. The Fund invests primarily in long and short positions in a diversified portfolio of futures contracts, forward contracts and other derivatives that provide exposure to equity securities, fixed income securities, commodities and currencies located anywhere in the world. The Fund will use leverage through the use of derivatives, short selling or borrowing.

The Fund's investment strategies utilize a systematic trading strategy designed to provide a stable level of volatility regardless of market conditions while taking advantage of price trends. This strategy targets an annualized volatility of 12% of the Fund's NAV with a maximum monthly value at risk (VaR) of 20% of the Fund's NAV.

(collectively, the Objective Change)

6. The Filer will seek the approval of the Fund's securityholders for the Objective Change at a meeting to be held on or about January 28, 2025. If the securityholders approve the Objective Change, the Filer will seek to affect the Objective Change on or about January 31, 2025.

7. The Filer and the Fund are not in default of securities legislation in any Canadian Jurisdiction.

Margin Deposit Relief

8. To seek to achieve its current investment objectives and proposed investment objectives, the Fund may engage in specified derivative transactions in Canada and outside of Canada.

9. The Fund's current investment strategies and proposed investment strategies will, except to the extent that the Exemption Sought is granted and other exemptive relief is applicable, be limited to the investment practices permitted by NI 81-102. Any use of leverage by the Fund will be in accordance with the applicable investment objectives, strategies and restrictions of the Fund.

10. The Filer or its affiliates are authorized to establish, maintain, change and close brokerage accounts on behalf of the Fund. In order to facilitate specified derivative transactions on behalf of the Fund, the Filer or its affiliates have established or will establish one or more accounts (each an Account) with one or more Dealers.

11. Each Canadian Dealer is:

(a) a member of CIRO, or successor to CIRO in Canada, and is registered in the applicable Canadian Jurisdictions as a futures commission merchant or equivalent; and

(b) a member of an exchange, regulated clearing agency or self-regulatory organization that is a participating member of the CIPF.

12. Each U.S. Dealer:

(a) is regulated by the CFTC and the NFA in the U.S., or successor to the CFTC or the NFA in the U.S.;

(b) is required to segregate all assets held on behalf of clients, including the initial margin, including the Fund;

(c) is subject to regulatory audit and must have insurance to guard against employee fraud;

(d) has a net worth, determined from its most recent audited financial statements, in excess of the equivalent of C$50 million; and

(e) has an exchange assigned to it as its DSRO. As a member of a DSRO, each U.S. 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.

13. Each Dealer is a member of the exchanges, clearing agencies or swap execution facilities. Each such exchange, clearing agency and swap execution facility is obliged to apply its surplus funds and the security deposits of its members to reimburse clients of failed members.

14. For each Account established for the Fund, a Dealer requires that portfolio assets of the Fund be deposited with the Dealer as collateral for Exchange Traded Specified Derivatives (Initial Margin). Initial Margin represents the minimum initial amount of portfolio assets that must be deposited with a Dealer to initiate trading in specified derivatives transactions or to maintain the Dealer's open position in standardized futures. Accordingly, the use of Initial Margin is an essential element of investing in Exchange Traded Specified Derivatives for the Fund.

15. Levels of Initial Margin are established at a Dealer's discretion. At no time will more than 70% of the Fund's NAV be deposited as Initial Margin with Dealers in the aggregate.

16. Each Dealer is required to hold all Initial Margin, including cash and government securities, in segregated accounts and the Initial Margin will not be available to satisfy claims against the Dealer made by creditors of the Dealer.

17. The Margin Deposit Relief would allow the Fund to invest in Exchange Traded Specified Derivatives more extensively with any one Dealer, which would allow the Fund to pursue its investment strategies more efficiently and flexibly.

18. Opening Accounts and transacting with multiple Dealers adds complexity and cost to the management of the Fund. Using fewer Dealers will simplify the Fund's:

(a) investments and operations and will reduce the cost of implementing the Fund's strategy; and

(b) compliance and risk management, as monitoring the data, controls and policies of a smaller number of Dealers is less complex.

Leverage Relief

19. The proposed investment strategies of the Fund would permit the Fund to use a combination of short selling and specified derivatives that at times could result in the Fund's aggregate exposure to cash borrowing, short selling and specified derivatives transactions exceeding 300% of the Fund's NAV, but in a manner that does not expose the Fund to an inappropriate level of leverage risk.

20. The Fund will construct a diversified portfolio of assets and then use the application of gross exposure to target a specified risk level. The Fund's portfolio would have a lower correlation to equity markets and could be risk reducing when the volatility of equity markets is high.

21. Notional exposures of futures contracts move with price and do not represent risk. Risk, as measured by futures exchanges, is a function of price and volatility, both of which are captured in VaR (as defined in Appendix A), but not notional exposure. VaR is a better measure of risk for the Fund.

22. For example, based on back tested data the aggregate exposure to cash borrowing, short selling and specified derivatives transactions of the Fund's hypothetical portfolio as calculated pursuant to section 2.9.1 of NI 81-102 is typically less than 400%. Notwithstanding this, risk is still managed at a consistent level, and there is no relationship between the aggregate notional exposure and the volatility of the Fund's hypothetical portfolio's returns over the past 25 years. The back tested data shows that historically, periods of higher-than-average aggregate notional exposure have not represented periods of higher volatility (or risk), and periods of lower-than-average aggregate notional exposure have not represented periods of lower volatility (or risk).

23. The Filer or its affiliates on behalf of the Fund have used multiple definitions of risk to capture diversified risk premia while remaining adaptable to changing market conditions. The Filer or its affiliates also systematically manage risk across multiple constraints at the market level.

24. The current regulatory framework in section 2.9.1 of NI 81-102 does not appropriately or adequately address the uniqueness of the Fund's proposed investment strategies.

25. Unlike typical funds, under the proposed investment strategies the Fund:

(a) will trade futures on margin, which is different than stocks and bonds (e.g., for stocks and bonds exchange margin requirements are determined by the value of the securities, whereas for futures, exchange margin requirements are determined by notional exposure and volatility (the primary inputs to VaR models));

(b) is systematic and quantitative;

(c) utilizes systematic risk management, risk allocation as opposed to capital allocation, volatility targeting, and drawdown management techniques; and

(d) will target specific volatility levels as a risk management strategy. During periods of high volatility and high correlations, the Fund may have lower exposure to the underlying assets to maintain the target level of portfolio volatility. Conversely, during periods of low volatility and low correlations, the Fund may require greater exposure to underlying assets to maintain its target level of portfolio volatility.

26. The Fund's back tested data shows that the Fund's hypothetical returns have achieved the desired risk level for its proposed investment objective, without adding additional risk through the application of leverage.

27. 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 VaR based approach to regulatory risk management for investment funds that extensively use derivatives.

28. This approach allows for two methods of VaR limits, "relative" and "absolute", as defined in Appendix A, and which in general terms can be summarized as follows:

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

(b) Absolute VaR: 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.

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

30. On October 28, 2020, the SEC adopted new Rule 18f-4 under the U.S. 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 rules as it adopted a 200% limit for funds using a relative VaR approach, and a 20% VaR limit for funds using an absolute VaR approach.

31. When dealing with a fund that is managed using a multi-asset approach, 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.

32. A risk-based approach which relies on VaR, stress testing, and overall risk management would address concerns about the Fund's proposed use of leverage, while allowing the Fund to use derivatives for a variety of purposes.

33. The portfolio managers of the Fund are CFA charter holders and are well versed with VaR as a risk management tool.

34. Of the two VaR approaches (i.e. "relative" and "absolute"), the Fund will utilize an absolute VaR approach as there is no appropriate reference portfolio that can be used for the purpose of complying with the 200% limit applicable to funds using a relative VaR approach. Due to the nature of the Fund's proposed investment strategies, the potential reference portfolios for the Fund would incorporate dynamic gross exposure with periods of time where this exposure would be greater than 100%, and therefore would not be a permitted reference portfolio.

35. The Filer and its affiliates:

(a) have the necessary policies and procedures in place to use a VaR model, and the Fund will adhere to the applicable VaR limit and will operate in accordance with the conditions set out in Appendix A, which are conditions of the exemptive relief granted by the Alberta Securities Commission (as principal regulator) and the Principal Regulator to Auspice Capital Advisors Ltd. in a decision dated February 23, 2023, Viewpoint Investment Partners Corporation in a decision dated October 2, 2023 and CI Investments Inc. in a decision dated January 30, 2024 and which are based on the SEC Rule;

(b) will use a historical simulation VaR model with respect to the Fund and the Filer and its affiliates will continue to use an absolute VaR model for the Fund unless the Principal Regulator authorizes the Filer and its affiliates to use a relative VaR model for the Fund;

(c) will, on each business day, upload the Fund's investment portfolios to a third-party service provider who specializes in risk analytics and risk management for hedge fund investments, such as MSCI RiskManager, (the "Risk Service Provider") in order to have the Risk Service Provider generate the Fund's absolute VaR which will be used to confirm that the Fund is compliant with the applicable VaR test as set out in Appendix A;

(d) are not and will not be affiliated with or otherwise related to the Risk Service Provider;

(e) have previously validated and confirmed the VaR models used by the Risk Service Provider; and

(f) have appointed a "derivatives risk manager" (a "DRM") and have developed a "Derivatives Risk Management Program" (the "DRMP") that:

(i) incorporates the well documented policies and procedures for risk monitoring, risk management and risk reporting of the Fund's VaR methodology to regulators as developed by securities regulators in the U.S.; and

(ii) is consistent with and adheres to the conditions set out in Appendix A.

A copy of the DRMP has been provided to the Principal Regulator.

Concentration Restriction Relief

36. To achieve the Fund's objectives, the Fund will invest in equities, fixed income, commodities and currencies. As such the Fund's portfolio will be diversified across different asset classes. However, for its investments in fixed income securities, the Fund may seek to gain exposure to any one issuer of Foreign Government Securities in excess of the Concentration Restriction.

37. Allowing the Fund to hold highly rated fixed-income securities issued by non-Canadian and non-US governments will enable the Fund to: (a) have access to assets with less credit risk; (b) hold securities that may have higher yielding returns than Canadian or US short-term securities; (c) better manage its interest rate, duration and credit risk; and (d) enhance portfolio diversification.

38. Subsection 2.1(1.1) of NI 81-102 prohibits the Fund from purchasing a security of an issuer, other than a "government security" as defined in NI 81-102, if immediately after the purchase more than 20% of the NAV of the Fund, taken at market value at the time of the purchase, would be invested in securities of the issuer.

39. The Foreign Government Securities are not "government securities" as such term is defined in NI 81-102.

40. The Filer believes that the ability to purchase Foreign Government Securities in excess of the limit in subsection 2.1(1.1) of NI 81-102 will better enable the Fund to achieve its fundamental investment objectives, thereby benefitting the Fund's investors.

41. The Fund will only purchase Foreign Government Securities if the purchase is consistent with the Fund's fundamental investment objectives.

42. The Fund's prospectus will disclose the concentration risks associated with the Fund holding a limited number of issuers.

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:

1. In respect of the Margin Deposit Relief:

(a) the Fund will rely on this decision only with respect to investment in Exchange Traded Specified Derivatives;

(b) the Fund shall only use Initial Margin such that the amount of Initial Margin held by any one Dealer on behalf of the Fund does not exceed 35% of the NAV of the Fund, taken at market value as at the time of the deposit;

(c) the Fund shall only use Initial Margin such that the amount of Initial Margin held by Dealers in aggregate on behalf of the Fund does not exceed 70% of the NAV of the Fund, taken at market value as at the time of the deposit; and

(d) all Initial Margin deposited with any Dealer is and will be held in segregated accounts and is not, and will not be available to satisfy claims against such Dealer made by creditor of the Dealer.

2. In respect of the Leverage Relief:

(a) securityholders of the Fund approve the Objective Change at a meeting of securityholders called to approve such Objective Change; and the Filer complies with the material change requirements under section 11.2(1) of National Instrument 81-106Investment Fund Continuous Disclosure;

(b) the Filer has appointed a DRM;

(c) the Fund complies with the 20% absolute VaR test as set out in Appendix A and all of the additional leverage conditions set out in Appendix A, and complies with all of the additional leverage conditions for funds set out in Appendix A;

(d) the Filer discloses in the Fund's simplified prospectus and fund facts documents the maximum VaR that the Fund is permitted to incur, and the Filer discloses in the Fund's annual and interim management report on fund performance, or any successor thereto, the maximum amount of VaR incurred by the Fund over the applicable period;

(e) the Filer files a copy of its initial DRMP with the Principal Regulator;

(f) the Filer notifies the Principal Regulator promptly of any material changes to its DRM or DRMP;

(g) no later than 30 days after the end of each month, the Filer prepares and retains a monthly portfolio investment report containing the elements set out in its DRMP, and, no later than 60 days after the end of each fiscal quarter, files with the Principal Regulator the monthly portfolio investment reports for that quarter;

(h) the Filer and its affiliates will continue to use an absolute VaR model for the Fund unless the Principal Regulator authorizes the Filer and its affiliates to use a relative VaR model for the Fund;

(i) the Filer or its affiliates upload the investment portfolios of the Fund each business day to the Risk Service Provider in order to have the Risk Service Provider generate the Fund's VaR which will be used to confirm that the Fund is compliant with the applicable VaR test as set out in Appendix A on each business day;

(j) the Filer provides to the Principal Regulator on a quarterly basis a report which shows the Fund's VaR calculated each business day as determined by the Risk Service Provider for the last quarter;

(k) the Filer notifies the Principal Regulator within one business day if the Fund is offside the 20% absolute VaR test as set out in Appendix A for more than five consecutive business days, providing the information described in the DRMP;

(l) the Filer promptly (e.g., within 1 business day) provides the Principal Regulator with any other information that the Principal Regulator may request regarding the intermonth calculations and risk metrics the Filer is using;

(m) the Filer appropriately documents its risk methodology for the 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

(n) the Filer and its affiliates are not and will not be affiliated with or otherwise related to the Risk Service Provider.

3. In respect of the Concentration Relief:

(a) Any security that may be purchased under the Concentration Relief is traded on a mature and liquid market;

(b) Any securities purchased pursuant to this decision are consistent with the fundamental investment objectives of the Fund;

(c) The prospectus of the Fund discloses the additional risk associated with the concentration of the Fund's NAV in securities of fewer issuers, such as the potential additional exposure to the risk of default of the issuer in which the Fund has so invested and the risks, including foreign exchange risks, of investing in the country in which the issuer is located; and

(d) The prospectus of the Fund discloses, in the investment strategies section, a summary of the nature and terms of the Concentration Relief, along with the conditions imposed and the type of securities covered by this decision.

"Darren McKall"
Manager, Investment Management
Ontario Securities Commission

Application File #: 2024/0583
SEDAR+ File #: 6191832

APPENDIX A

ADDITIONAL LEVERAGE CONDITIONS

In these conditions,

"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;

"board", with respect to a fund, means the fund manager's board of directors;

"derivatives risk manager" means an officer or officers of the fund's investment adviser responsible for administering the program and policies and procedures required by condition 1 below, provided that the derivatives risk manager:

(1) may not be a portfolio manager of the fund, or if multiple officers serve as derivatives risk manager, a majority of the derivatives risk managers must not be portfolio managers of the fund; and

(2) must have relevant experience regarding the management of derivatives risk;

"derivatives risks" means the risks associated with a fund's derivatives transactions or its use of derivatives transactions, including leverage, market, counterparty, liquidity, operational, and legal risks and any other risks the derivatives risk manager deems material;

"derivatives transaction" means

(1) any swap, security-based swap, futures contract, forward contract, option, any combination of the foregoing, or any similar instrument, under which a fund is or may be required to make any payment or delivery of cash or other assets during the life of the instrument or at maturity or early termination, whether as margin or settlement payment or otherwise; and

(2) any short sale borrowing.

"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. In the case of a blended index, none of the indexes that compose the blended index may be 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. Notwithstanding the first sentence of the definition of designated index in these conditions, 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;

"independent director" means a director who would be independent within the meaning of section 1.4 of National Instrument 52-110 Audit Committees;

"relative VaR test" means that the VaR of the fund's portfolio does not exceed 200% of the VaR of the designated reference portfolio;

"securities portfolio" means the fund's portfolio of securities and other investments, excluding any derivatives transactions, that is approved by the derivatives risk manager for purposes of the relative VaR test, provided that the fund's securities portfolio reflects the markets or asset classes in which the fund invests (i.e., the markets or asset classes in which the fund invests directly through securities and other investments and indirectly through derivatives transactions);

"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.

Conditions

1. Derivatives risk management program. The fund must adopt and implement a written derivatives risk management program (program), which must include policies and procedures that are reasonably designed to manage the fund's derivatives risks and to reasonably segregate the functions associated with the program from the portfolio management of the fund. The program must include the following elements:

(i) Risk identification and assessment. The program must provide for the identification and assessment of the fund's derivatives risks. This assessment must take into account the fund's derivatives transactions and other investments.

(ii) Risk guidelines. The program must provide for the establishment, maintenance, and enforcement of investment, risk management, or related guidelines that provide for quantitative or otherwise measurable criteria, metrics, or thresholds of the fund's derivatives risks. These guidelines must specify levels of the given criterion, metric, or threshold that the fund does not normally expect to exceed, and measures to be taken if they are exceeded.

(iii) Stress testing. The program must provide for stress testing to evaluate potential losses to the fund's portfolio in response to extreme but plausible market changes or changes in market risk factors that would have a significant adverse effect on the fund's portfolio, taking into account correlations of market risk factors and resulting payments to derivatives counterparties. The frequency with which the stress testing under this paragraph is conducted must take into account the fund's strategy and investments and current market conditions, provided that these stress tests must be conducted no less frequently than weekly.

(iv) Backtesting. The program must provide for backtesting to be conducted no less frequently than weekly, of the results of the VaR calculation model used by the fund in connection with the relative VaR test or the absolute VaR test by comparing the fund's gain or loss that occurred on each business day during the backtesting period with the corresponding VaR calculation for that day, estimated over a one-trading day time horizon, and identifying as an exception any instance in which the fund experiences a loss exceeding the corresponding VaR calculation's estimated loss.

(v) Internal reporting and escalation -

A. Internal reporting. The program must identify the circumstances under which persons responsible for portfolio management will be informed regarding the operation of the program, including exceedances of the guidelines specified in paragraph 1(ii) of these conditions and the results of the stress tests specified in paragraph 1(iii) of these conditions.

B. Escalation of material risks. The derivatives risk manager must inform in a timely manner persons responsible for portfolio management of the fund, and also directly inform the board as appropriate, of material risks arising from the fund's derivatives transactions, including risks identified by the fund's exceedance of a criterion, metric, or threshold provided for in the fund's risk guidelines established under paragraph 1(ii) of these conditions or by the stress testing described in paragraph 1(iii) of these conditions.

(vi) Periodic review of the program. The derivatives risk manager must review the program at least annually to evaluate the program's effectiveness and to reflect changes in risk over time. The periodic review must include a review of the VaR calculation model used by the fund under condition 2 below (including the backtesting required by paragraph 1(iv) of these conditions) and any designated reference portfolio to evaluate whether it remains appropriate.

2. Limit on fund leverage risk.

(i) The fund must comply with the relative VaR test unless the derivatives risk manager reasonably determines that a designated reference portfolio would not provide an appropriate reference portfolio for purposes of the relative VaR test, taking into account the fund's investments, investment objectives, and strategy. A fund that does not apply the relative VaR test must comply with the absolute VaR test.

(ii) The fund must determine its compliance with the applicable VaR test at least once each business day. If the fund determines that it is not in compliance with the applicable VaR test, the fund must come back into compliance promptly after such determination, in a manner that is in the best interests of the fund and its securityholders.

(iii) If the fund is not in compliance with the applicable VaR test within five business days,

A. The derivatives risk manager must provide a written report to the board and explain how and by when (i.e., number of business days) the derivatives risk manager reasonably expects that the fund will come back into compliance;

B. The derivatives risk manager must analyze the circumstances that caused the fund to be out of compliance for more than five business days and update any program elements as appropriate to address those circumstances; and

C. The derivatives risk manager must provide a written report within thirty calendar days of the exceedance to the board explaining how the fund came back into compliance and the results of the analysis and updates required under paragraph 2(iii)(B) of these conditions. If the fund remains out of compliance with the applicable VaR test at that time, the derivatives risk manager's written report must update the report previously provided under paragraph 2(iii)(A) of these conditions and the derivatives risk manager must update the board on the fund's progress in coming back into compliance at regularly scheduled intervals at a frequency determined by the board.

3. Board oversight and reporting --

(i) Approval of the derivatives risk manager. The board, including a majority of independent directors of the fund manager, if any, must approve the designation of the derivatives risk manager.

(ii) Reporting on program implementation and effectiveness. On or before the implementation of the program, and at least annually thereafter, the derivatives risk manager must provide to the board a written report providing a representation that the program is reasonably designed to manage the fund's derivatives risks and to incorporate the elements provided in paragraphs 1(i) through (vi) of these conditions. The representation may be based on the derivatives risk manager's reasonable belief after due inquiry. The written report must include the basis for the representation along with such information as may be reasonably necessary to evaluate the adequacy of the fund's program and, for reports following the program's initial implementation, the effectiveness of its implementation. The written report also must include, as applicable, the derivatives risk manager's basis for the approval of any designated reference portfolio or any change in the designated reference portfolio during the period covered by the report; or an explanation of the basis for the derivatives risk manager's determination that a designated reference portfolio would not provide an appropriate reference portfolio for purposes of the relative VaR test.

(iii) Regular board reporting. The derivatives risk manager must provide to the board, annually or at such other frequency determined by the board, a written report regarding the derivatives risk manager's analysis of exceedances described in paragraph 1(ii) of these conditions, the results of the stress testing conducted under paragraph 1(iii) of these conditions, and the results of the backtesting conducted under paragraph 1(iv) of these conditions since the last report to the board. Each report under this paragraph must include such information as may be reasonably necessary for the board to evaluate the fund's response to exceedances and the results of the fund's stress testing.

4. [Not applicable]

5. [Not applicable]

6. Recordkeeping --

(i) Records to be maintained. A fund must maintain a written record documenting the following, as applicable:

A. The fund's written policies and procedures required by condition 1, along with

(1) The results of the fund's stress tests under paragraph 1(iii) of these conditions;

(2) The results of the backtesting conducted under paragraph 1(iv) of these conditions;

(3) Records documenting any internal reporting or escalation of material risks under paragraph 1(v)(B) of these conditions; and

(4) Records documenting the reviews conducted under paragraph 1(vi) of these conditions.

B. Copies of any materials provided to the board in connection with its approval of the designation of the derivatives risk manager, any written reports provided to the board relating to the program, and any written reports provided to the board under paragraphs 2(iii)(A) and (C) of these conditions.

C. Any determination and/or action the fund made under paragraphs 2(i) and (ii) of these conditions, including a fund's determination of: the VaR of its portfolio; the VaR of the fund's designated reference portfolio, as applicable; the fund's VaR ratio (the value of the VaR of the fund's portfolio divided by the VaR of the designated reference portfolio), as applicable; and any updates to any VaR calculation models used by the fund and the basis for any material changes thereto.

(ii) Retention periods.

A. The fund must maintain a copy of the written policies and procedures that the fund adopted under condition 1 that are in effect, or at any time within the past seven years were in effect, in an easily accessible place.

B. The fund must maintain all records and materials that paragraphs 6(i)(A)(1) through (4) and 6(i)(B) through (D) of these conditions describe for a period of not less than seven years (the first two years in an easily accessible place) following each determination, action, or review that these paragraphs describe.