Sun Life Global Investments (Canada) Inc. and Sun Life Multi-Strategy Target Return Fund

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – relief provided to a commodity pool subject to NI 81-104 to invest up to 10% of net assets in aggregate in underlying funds subject to UCITS rules – relief granted from counterparty designated rating requirement and custodian requirements to enter into cleared swaps transactions – relief granted from counterparty designated rating requirements for non-cleared over-the-counter derivatives – relief granted from requirement for non-Canadian dealers to have publicly available audited financial statements.

Applicable Legislative Provisions

National Instrument 81-102 Investment Funds, ss. 2.5(2) and 2.7(1), 6.1, 6.8(2).
National Instrument 81-104 Commodity Pools, s. 1.1(1).

May 10, 2016

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
SUN LIFE GLOBAL INVESTMENTS (CANADA) INC.
(the Filer)

AND

IN THE MATTER OF
SUN LIFE MULTI-STRATEGY TARGET RETURN FUND
(the Fund)

DECISION

Background

The principal regulator in the Jurisdiction has received an 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), pursuant to section 19.1 of National Instrument 81-102 Investment Funds (NI 81-102) and section 10.1 of National Instrument 81-104 Commodity Pools (NI 81-104), exempting the Fund from the following provisions of NI 81-102:

(i)            the requirements in subsection 2.5(2) of NI 81-102 that an investment fund must not purchase or hold a security of another investment fund unless: (a) the other investment fund is a mutual fund that is subject to NI 81-102 and offers or has offered securities under a simplified prospectus in accordance with National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101); (b) at the time of purchase of that security, the other investment fund holds no more than 10 percent of its net asset value in securities of other investment funds; (c) the investment fund and the other investment fund are reporting issuers in the local jurisdiction; (d) no sales fees or redemption fees are payable by the investment fund in relation to its purchases and redemptions of the securities of the other investment fund if the other investment fund is managed by the manager or an affiliate or associate of the manager of the investment fund; and (e) no sales fees or redemption fees are payable by the investment fund in relation to its purchases or redemptions of securities of the other investment fund that, to a reasonable person would duplicate a fee payable by an investor in the investment fund (collectively, the Underlying Funds Requirements) in order to permit the Fund to invest up to 10 percent of its net assets in one or more Underlying Funds (as defined below) (the Underlying Funds Relief);

(ii)           (a)           the requirement in subsection 2.7(1) of NI 81-102 that a mutual fund must not purchase an option or a debt-like security or enter into a swap or a forward contract unless, at the time of the transaction, the option, debt-like security, swap or contract has a designated rating or the equivalent debt of the counterparty, or of a person or company that has fully and unconditionally guaranteed the obligations of the counterparty in respect of the option, debt-like security, swap or contract, has a designated rating (the Counterparty Designated Rating Requirement); and

(b)           the requirement in subsection 6.1(1) of NI 81-102 to hold all portfolio assets of an investment fund under the custodianship of one custodian (the Custodian Requirement) in order to permit the Fund to deposit cash and other portfolio assets directly with a Futures Commission Merchant (as defined below) and indirectly with a Clearing Corporation (as defined below) as margin

in each case, with respect to Cleared Swaps (as defined below) (collectively, the Cleared Swaps Relief);

(iii)          the Counterparty Designated Rating Requirement in subsection 2.7(1) of NI 81-102 with respect to OTC Derivatives (as defined below) (the OTC Derivatives Counterparty Designating Rating Requirement Relief); and

(iv)          the requirement in subsection 6.8(2)(b) of NI 81-102 that an investment fund must not deposit portfolio assets with a dealer as margin for transactions outside of Canada involving clearing corporation options, options on futures or standardized futures unless the dealer has a net worth, determined from its most recent audited financial statements that have been made public, in excess of the equivalent of $50 million (the Dealer Audited Financial Statements Requirement) in order to permit the Fund to deposit portfolio assets as margin with a dealer that does not have separate audited financial statements that have been made public (the Dealer Audited Financial Statements Relief).

The Underlying Funds Relief, the Cleared Swaps Relief, the OTC Derivatives Counterparty Designated Ratings Requirement Relief and the Dealer Audited Financial Statements Relief are, collectively, the Requested Relief.

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

(i)            the Ontario Securities Commission is the principal regulator for this application; and

(ii)           the Filer has provided notice that subsection 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in each of the other provinces and territories of Canada (the Other Jurisdictions).

Interpretation

Terms defined in NI 81-102, National Instrument 14-101 Definitions, and MI 11-102 have the same meaning if used in this decision, unless otherwise defined. Capitalized terms used in this decision have the following meanings:

AIGSL means Aviva Investors Global Services Limited, an affiliate of Aviva Investors

Aviva Investors means Aviva Investors Canada Inc.

CFTC means the U.S. Commodity Futures Trading Commission

Cleared Swap means any derivative transaction that can be entered into on a cleared basis, whether or not such derivative is subject to a clearing determination or a clearing obligation issued by the CFTC or ESMA, as the case may be

Clearing Corporation means any clearing organization registered with the CFTC or central counterparty authorized by ESMA, as the case may be, that, in either case, is also recognized or exempt from recognition in Ontario

Dodd-Frank means the Dodd-Frank Wall Street Reform and Consumer Protection Act

EMIR means the European Market Infrastructure Regulation

ESMA means the European Securities and Markets Authority

European Economic Area means all of the European Union countries and also Iceland, Liechtenstein and Norway

Futures Commission Merchant means any futures commission merchant that is registered with the CFTC and/or is a clearing member for purposes of EMIR, as applicable, and is a member of a Clearing Corporation

LSOC Model means the legally segregated operationally commingled model adopted by the CFTC for cleared swaps collateral

Member States means each of the United Kingdom, Ireland, Luxembourg, Germany, France, Netherlands, Italy and Spain, a subset of the member states of the European Union that have translated the UCITS directive into local legislation or rules

OTC means over-the-counter

OTC Derivatives means all options, debt-like securities, swaps and forward contracts that are not traded on an exchange and that are not cleared

S&P means Standard & Poor’s Ratings Services, a part of McGraw Hill Financial

UCITS means an undertaking for collective investments in transferable securities

UCITS Framework means the Guidelines on Risk Measurement and the Calculation of Global Exposure and Counterparty Risk for UCITS developed by the Committee of European Securities Regulators

UCITS fund means the regulated retail mutual fund offered as an open-ended investment company in the United Kingdom and a Société d'Investissement à Capital Variable in Europe by Aviva Investors and its affiliates that has the same investment objective and strategies as the Fund

Underlying Fund means any fund authorized as a UCITS by, and subject to the supervision of, a national competent authority in any Member State

U.S. fund means the investment company registered under the Investment Company Act of 1940, as amended, offered in the United States by Aviva Investors and its affiliates that has the same investment objective and strategies as the Fund

U.S. Person has the meaning attributed thereto by the CFTC

Representations

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

Background Facts

1.             The Filer is the trustee, the investment fund manager and the portfolio manager of the Fund. The Filer is registered as an investment fund manager in each of the Provinces of Ontario, Québec and Newfoundland and Labrador, as a mutual fund dealer in each Jurisdiction and as a portfolio manager and a commodity trading manager in the Province of Ontario. The head office of the Filer is in Toronto, Ontario.

2.             The Filer has retained Aviva Investors as the sub-advisor of the Fund. Aviva Investors is registered as a portfolio manager and an exempt market dealer in each of the Provinces of Canada. Aviva Investors, in turn, has retained AIGSL to provide the investment advice to it in respect of the investment portfolio of the Fund.

3.             AIGSL currently advises a number of investment vehicles offered globally that use an investment strategy similar to the strategy for the Fund, which investment vehicles are available both directly and through intermediaries to retail customers in a number of countries. In particular, Aviva Investors’ affiliates currently offer to retail investors the UCITS fund in the United Kingdom and in Europe, the U.S. fund in the United States and a feeder fund in Australia that invests in the UCITS fund. In addition, Aviva Investors’ affiliates are making application to register the UCITS fund in certain Asian jurisdictions.

4.             The Fund is a mutual fund created under the laws of the Province of Ontario and is governed as a commodity pool by the provisions of NI 81-102 and NI 81-104, subject to any relief therefrom granted by the securities regulatory authorities.

5.             The Filer is not in default of securities legislation in any Jurisdiction.

6.             The securities of the Fund will be qualified for distribution pursuant to a prospectus that will be prepared and filed in accordance with the applicable securities legislation of the Jurisdictions. Accordingly, the Fund will be a reporting issuer or the equivalent in each Jurisdiction.

7.             The proposed investment objective of the Fund is to seek long-term absolute return by delivering a positive return over rolling three-year periods, regardless of the prevailing market environment.

8.             In pursuing its investment objective, the Fund will aim to generate a positive return over rolling three-year periods of, on average, 5% per annum above a prevailing Canadian cash rate before the deduction of fees and expenses. In seeking to target this level of return, the Fund will also aim to manage volatility to a target of less than half the volatility of global equities represented by the MSCI All Country World Index, measured over the same rolling three-year periods. For this purpose, volatility will be the measure of the extent to which the prices of the securities of the Fund fluctuates over time. The Fund may invest globally in equity and fixed income securities, securities of other investment funds, cash and near cash investments, money market instruments, derivatives and other financial instruments.

9.             The Fund will make significant use of derivative instruments and may take both long and short positions. Derivatives may be used for purposes of hedging, efficient portfolio management and/or investment purposes. They will be used to take long and short positions in markets, assets and groups of assets. In its use of derivatives, the Fund will aim to contribute to the target return and the volatility objectives of the Fund. The use of derivative instruments as part of the investment strategy will mean that the Fund may, from time to time, have substantial holdings in liquid assets, including deposits and money market instruments. The Fund will also engage in synthetic short selling through the permitted derivative instruments.

Underlying Funds Relief

10.          The investment strategies of the Fund permit the Fund to invest in one or more other investment funds, including exchange-traded funds the securities of which are index participation units and Underlying Funds.

11.          Each Underlying Fund (i) has, or will have, a primary purpose to invest money provided by its securityholders and (ii) has, or will have, securities that entitle its securityholders to receive on demand, or within a specified period after demand, an amount computed by reference to the value of a proportionate interest in the net assets of such Underlying Fund. Accordingly, each Underlying Fund is, or will be, a mutual fund within the meaning of Canadian securities legislation and, therefore, is, or will be, considered to be an investment fund in Canada.

12.          Each Underlying Fund is, or will be, subject to investment restrictions and practices under the laws of the relevant Member State that are applicable to mutual funds that are sold to the general public. The Underlying Funds are, or will be, authorized as a UCITS by the applicable national competent authority of a Member State.

13.          No Underlying Fund is, or will be, subject to NI 81-102 and no Underlying Fund distributes, or will distribute, its securities in Canada under a simplified prospectus in accordance with NI 81-101.

14.          None of the Underlying Funds are or will be managed by the Filer or an affiliate or associate of the Filer.

15.          At the time of purchase by the Fund of securities of an Underlying Fund, either the Underlying Fund will hold no more than 10 percent of its net asset value in securities of other investment funds or the Underlying Fund: (a) will have adopted a fundamental investment objective to track the performance of another investment fund or similar investment product; (b) will purchase or hold securities of investment funds that are the equivalent of “money market funds” (as such term is defined in NI 81-102); or (c) will purchase or hold securities that are “index participation units” (as such term is defined in NI 81-102) issued by an investment fund.

16.          In the case of those Underlying Funds that are, or will be, exchange-traded funds whose securities are listed on a stock exchange in a Member State, certain brokerage fees may be incurred by the Fund for the purchase or sale on the applicable stock exchanges of the securities issued by such Underlying Funds.

17.          The Filer believes that it is in the best interests of the Fund to be permitted to invest up to 10 percent of its net assets in one or more Underlying Funds, as such investments will allow the Fund to gain exposure to certain asset classes and markets in an economically efficient manner. Investing in one or more Underlying Funds will enable the Fund to better capitalize on global economic trends and respond to market conditions.

18.          The Fund will otherwise comply fully with section 2.5 of NI 81-102 in its investment in each Underlying Fund and will provide all disclosure mandated for investment funds investing in other investment funds. In particular, additional disclosure will be made in the simplified prospectus of the Fund that the Underlying Funds are not subject to Canadian securities regulation.

19.          Each Underlying Fund is, or will be, subject to investment restrictions and practices that are substantially similar to the restrictions in NI 81-102.

Cleared Swaps Relief

20.          The investment strategies of the Fund permit the Fund to enter into derivative transactions, including Cleared Swaps. The portfolio management team of AIGSL considers Cleared Swaps to be an important investment tool that is available to it to properly manage the Fund’s portfolio.

21.          Dodd-Frank requires that certain OTC derivatives be cleared through a Futures Commission Merchant at a Clearing Corporation. Generally, where a U.S. Person is a party to any of a fixed-to-floating interest rate swap, basis swap, forward rate agreement in U.S. dollars, the Euro, Pounds Sterling or the Japanese Yen, overnight index swap in U.S. dollars, the Euro and Pounds Sterling or untranched credit default swaps on certain North American indices (CDX.NA.IG and CDX.NA.HY) and European indices (iTraxx Europe, iTraxx Europe Crossover and iTraxx Europe HiVol) at various tenors, that swap must be cleared, absent an available exception.

22.          EMIR also requires that certain OTC derivatives be cleared through a central counterparty authorized to provide clearing services for purposes of EMIR. Generally, where one party to a swap is a financial counterparty or a non-financial counterparty whose OTC derivative trading activity exceeds a certain threshold, in each case established in a state that is a participant in the European Economic Area, that swap will be required to be cleared. The first clearing directive has been issued in respect of certain interest rate swaps and will be phased-in based on the categories of both parties to the trade.

23.          In addition to clearing swaps that are mandated to be cleared under Dodd-Frank and/or EMIR, many of the global Clearing Corporations offer clearing services in respect of other types of derivative transactions. Many global derivative end-users enter into Cleared Swaps on both a voluntary and a mandatory basis.

24.          In order to benefit from both the pricing benefits and reduced trading costs that AIGSL is often able to achieve through its trade execution practices for its managed investments funds and accounts and from the reduced costs associated with Cleared Swaps as compared to other OTC trades, the Filer wishes that the Fund have the ability to enter into Cleared Swaps.

25.          In the absence of the Requested Relief from the Counterparty Designated Rating Requirement and the Custodian Requirement in respect of Cleared Swaps, AIGSL will need to structure the derivative transactions entered into by the Fund so as to avoid clearing, including the clearing requirements of the CFTC and under EMIR, as applicable.  The Filer respectfully submits that this would not be in the best interests of the Fund and its investors for a number of reasons, as set out below.

26.          The Filer strongly believes that it is in the best interests of the Fund and its investors to be able to execute OTC derivatives with global counterparties, including U.S. and European swap dealers.

27.          In its role as a fiduciary for the Fund, the Filer has determined that central clearing represents the best choice for the investors in the Fund to mitigate the legal, operational and back office risks faced by investors in the global swap markets.

28.          As referred to above, AIGSL uses the same trade execution practices for all of its managed investment funds and accounts, including the UCITS fund and the U.S. fund. An example of these trade execution practices is block trading, where a large number of securities are purchased or sold or large derivative trades are entered into on behalf of a number of investment funds and accounts advised by AIGSL. These practices include the use of Cleared Swaps. If the Fund is unable to employ these trade execution practices, then AIGSL will have to create separate trade execution practices only for the Fund and will have to execute trades for the Fund on a separate basis. This will increase the operational risk for the Fund, as separate execution procedures will need to be established and followed only for the Fund. In addition, the Fund will not be able to enjoy the possible price benefits and reduction in trading costs that AIGSL may be able to achieve through a common practice for its managed investment funds and accounts. In the Filer’s opinion, best execution and maximum certainty can best be achieved through common trade execution practices. In the case of OTC derivatives, these practices involve the execution of Cleared Swaps.

29.          As a member of the G20 and a participant in the September 2009 commitment of G20 nations to improve transparency and mitigate risk in derivatives markets, Canada has expressly recognized the systemic benefits that clearing OTC derivatives offers to market participants, such as the Fund. The Filer respectfully submits that the Fund should be encouraged to comply with the robust clearing requirements established by the CFTC and under EMIR by granting it the Requested Relief from the Counterparty Designated Rating Requirement and the Custodian Requirement in respect of Cleared Swaps.

30.          The Requested Relief from the Counterparty Designated Rating Requirement and the Custodian Requirement in respect of Cleared Swaps is analogous to the treatment currently afforded under NI 81-102 to other types of derivatives that are cleared, i.e., clearing corporation options, options on futures and standardized futures. This demonstrates that, from a policy perspective, such Requested Relief is consistent with the views of the Canadian securities authorities in respect of cleared derivative trades.

OTC Derivatives Counterparty Designated Rating Requirement Relief

31.          The investment strategies of the Fund permit the Fund to enter into derivative transactions, including OTC Derivatives, Cleared Swaps and exchange-traded derivatives. In order to mitigate counterparty risk, AIGSL, on behalf of the Fund, intends to enter into OTC Derivatives with a number of counterparties. Counterparty diversification allows the Fund to effectively manage and spread the counterparty risk among a number of derivative market participants. In addition, if AIGSL decides that it no longer wants to transact with one counterparty on behalf of the Fund, having existing relationships with a number of counterparties helps with the novation process, as these counterparties will have already conducted their credit assessment against the Fund. Having trading relationship with a large number of counterparties also allows the Fund to benefit from more competitive pricing and better service and execution. However, not all counterparties offer the types of derivative products that AIGSL will want the Fund to purchase or enter into.

32.          In executing derivative transactions for its managed investment funds and accounts, AIGSL seeks best execution, including the best terms and pricing available. In most cases, AIGSL transacts with global counterparties that offer a broader range of products and better pricing than their Canadian counterparts.

33.          The credit ratings assigned to the short-term and long-term debt obligations of many global counterparties do not satisfy the designated rating requirement provided for in NI 81-102.

34.          While the Filer understands that the Counterparty Designated Rating Requirement is one method that the Fund can use to mitigate counterparty risk, it believes that counterparty diversification is also an effective mitigation tool. In addition, best execution of derivative transactions is an important factor for the Fund and its securityholders.

35.          The Filer believes that counterparty risk can be effectively mitigated in a manner that still permits best execution. AIGSL is a sophisticated user of derivative instruments and has robust risk management techniques and policies in place that, in the opinion of AIGSL, mitigate counterparty risk at least as effectively as the Counterparty Designated Rating Requirement. AIGSL has considerable experience in using derivatives and it monitors and manages every position in line with industry best practice. Its efficient use of risk budgeting and its integration of risk into the portfolio management process has historically resulted in a portfolio where potential and realized risks are significantly mitigated. For example, under AIGSL’s policies, the net mark-to-market value of the Fund’s OTC Derivatives positions with any one counterparty, less the market value of any collateral posted by that counterparty in favour of the Fund, will not exceed 10 percent of the net asset value of the Fund. In addition, all OTC Derivatives that the Fund enters into will be fully collateralized in favour of the Fund through daily collateral calls with the Fund’s counterparties. In other words, the full amount of the Fund’s counterparty payment risk will be covered by the collateral that is posted by the counterparty. Appropriate haircuts will be assigned to any non-cash collateral that is held in favour of the Fund. All of the collateral posted by a counterparty in favour of the Fund will be held by the Fund’s custodian in an account in the name of the Fund. In the event of a counterparty default, the collateral held by or on behalf of the Fund would be used to cover the close out of the applicable OTC Derivative positions or the placing of replacement OTC Derivative positions, as appropriate.

36.          In addition to AIGSL’s policy regarding collateral, AIGSL has two minimum debt rating threshold policies that apply to the use of derivatives by accounts advised by it, such as the Fund. Generally speaking, AIGSL will not enter into a new relationship with a derivative counterparty on behalf of the Fund unless that counterparty has a minimum credit rating of A- (as rated by S&P). This policy, however, is subject to certain exceptions, including if AIGSL’s internal credit assessment indicates that the counterparty is a better credit risk than reflected by its credit rating and/or the counterparty is a key liquidity provider that mitigate, at least in part, the counterparty’s credit rating. If AIGSL, on behalf of the Fund, has an existing and ongoing relationship with a derivative counterparty, then, in general, it will not enter into a new transaction with that counterparty if the counterparty is downgraded to a level below BBB+ (as rated by S&P).

Dealer Audited Financial Statements Requirement Relief

37.          Many dealers that trade in clearing corporation options, options on futures and/or standardized futures are securities dealers that are wholly-owned subsidiaries of larger securities dealers or financial institutions. As a result of the corporate structure, many of the dealers with whom the Fund will want to deposit margin in connection with clearing corporation options, options on futures and/or standardized futures do not have separate financial statements that have been made public, as their financial positions are consolidated into the audited financial statements of their parents. These dealers do, however, have other publicly available financial information that indicates their net worth, including financial information filed with applicable securities regulatory authorities.

38.          The Filer respectfully submits that the policy rationale for the net worth requirement in subsection 6.8(2)(b) of NI 81-102 is to ensure that any dealer that receives and/or holds margin or collateral from an investment fund must have a net worth that is sufficient to mitigate, at least in part, the risk of loss of any margin or collateral properly owing to the investment fund during or on settlement of a transaction. Provided that the dealer is otherwise able to demonstrate its net worth through publicly available documentation, there is no policy rationale for requiring each dealer to have audited financial statements that have been made public.

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 Requested Relief is granted provided that:

(i)            in the case of the Underlying Funds Relief:

(a)           each Underlying Fund is subject to investment restrictions and practices under the laws of the relevant Member State that are applicable to mutual funds that are sold to the general public and are regulated investment funds authorized as a UCITS by the applicable national competent authority of a Member State;

(b)           the Fund will not purchase securities of an Underlying Fund if, immediately after the purchase, more than 10 percent of its net assets would consist of investment in one or more Underlying Funds;

(c)           at the time of purchase by the Fund of securities of an Underlying Fund, either the Underlying Fund will hold no more than 10 percent of its net asset value in securities of other investment funds or the Underlying Fund:

(I)            will have adopted a fundamental investment objective to track the performance of another investment fund or similar investment product;

(II)           will purchase or hold securities of investment funds that are the equivalent of “money market funds” (as such term is defined in NI 81-102); or

(III)          will purchase or hold securities that are “index participation units” (as such term is defined in NI 81-102) issued by an investment fund;

(d)           the Fund will otherwise comply fully with section 2.5 of NI 81-102 in its investment in each Underlying Fund and will provide all disclosure mandated for investment funds investing in other investment funds; and

(e)           if the laws applicable to the Underlying Fund that are, as at the date of this decision, substantially similar to Part 2 of NI 81-102 change in a manner that is materially inconsistent with Part 2 of NI 81-102, the Fund shall not acquire any additional securities of any Underlying Fund and shall dispose of the securities of the Underlying Funds then held by it in an orderly and prudent manner;

(ii)           in the case of the Cleared Swaps Relief, when any rules applicable to customer clearing of OTC derivatives enter into force the Clearing Corporation is permitted to offer customer clearing of OTC derivatives in Ontario and provided further that:

(a)           in respect of the deposit of cash and other portfolio assets as margin, in Canada,

(I)            the Futures Commission Merchant is a member of a SRO that is a participating member of CIPF; and

(II)           the amount of margin deposited and maintained with the Futures Commission Merchant does not, when aggregated with the amount of margin already held by the Futures Commission Merchant, exceed 10 percent of the net asset value of the Fund as at the time of deposit;

(b)           in respect of the deposit of cash and other portfolio assets as margin, outside of Canada,

(I)            the Futures Commission Merchant is a member of a Clearing Corporation and, as a result, is subject to a regulatory audit;

(II)           the Futures Commission Merchant has a net worth, determined from its most recent audited financial statements that have been made public or from other publicly available financial information, in excess of the equivalent of $50 million; and

(III)          the amount of margin deposited and maintained with the Futures Commission Merchant does not, when aggregated with the amount of margin already held by the Futures Commission Merchant, exceed 10 percent of the net asset value of the Fund as at the time of deposit; and

(c)           this decision with respect to the Cleared Swaps Relief will terminate on the coming into force of any revisions to the provisions of NI 81-102 that address the clearing of OTC derivatives;

(iii)          in the case of the OTC Derivatives Counterparty Designated Rating Requirement Relief:

(a)           if the Fund enters into, or holds, an OTC Derivative with a counterparty whose equivalent debt does not have a designated rating, the counterparty will deposit, in accordance with industry practice, in favour of the Fund collateral having a mark-to-market value at least equal to the obligation of such counterparty to the Fund under the OTC Derivative; and

(b)           if the Fund enters into, or holds, an OTC Derivative with a counterparty whose equivalent debt is rated below the following rating categories:

(I)            in the case of long term debt, A (low) in the case of DBRS Limited, A- in the case of each of Fitch, Inc. and S&P, or A3 in the case of Moody’s Canada Inc. or, in each case, the applicable DRO affiliate, or

(II)           in the case of commercial paper/short term debt, R-2 (high) in the case of DBRS Limited, F2 in the case of Fitch, Inc., A-2 in the case of S&P, or P-2 in the case of Moody’s Canada Inc. or, in each case, the applicable DRO affiliate,

then the counterparty will deposit, in accordance with industry practice, an independent amount of collateral in favour of the Fund, together with additional collateral that, separate from the independent amount, has a mark-to-market value at least equal to the obligation of such counterparty to the Fund under the OTC Derivative;

(c)           the Fund will not enter into a new relationship with a derivative counterparty unless that counterparty has a minimum credit rating of A- (as rated by S&P), provided, however, that the Fund may enter into a new relationship with such a derivative counterparty if AIGSL’s internal credit assessment indicates that the counterparty is a better credit risk than reflected by its credit rating and/or the counterparty is a key liquidity provider that mitigate, at least in part, the counterparty’s credit rating;

(d)           if the Fund has an existing and ongoing relationship with a derivative counterparty, then, in general, it will not enter into a new transaction with that counterparty if the counterparty is downgraded to a level below BBB+ (as rated by S&P); and

(e)           the net mark-to-market value of the Fund’s OTC Derivatives positions with any one counterparty, less the market value of any collateral posted by that counterparty in favour of the Fund, will not exceed 10 percent of the net asset value of the Fund; and

(iv)          in the case of the Dealer Audited Financial Statements Requirement Relief, the dealer is able to demonstrate that it has a net worth, determined from its most recent audited financial statements that have been made public or from other publicly available financial information, in excess of the equivalent of $50 million.

“Darren McKall”
Manager, Investment Funds and Structured Products Branch