Canoe Financial LP and The Funds
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Exemption granted from the derivative cover requirements of sections 2.8(1)(d), 2.8(1)(e) and 2.8(1)(f) of NI 81-102 to allow mutual funds that are not alternative mutual funds to open, enter into or maintain standardized futures, forward contracts or swaps to permit the funds to substitute the risk to one currency, interest rate or duration for the risk of another currency, interest rate or duration -- the currency risk, interest rate risk or duration risk to which the fund is exposed is not increased by the substitution, nor is additional leverage created -- relief granted to permit the funds to create synthetic short positions subject to an aggregate limit of 20% of the net asset value of the fund for aggregate direct and synthetic short positions -- relief to alter the currency exposure of a fund subject to the condition that the aggregate currency exposure does not exceed the net asset value of the fund.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 2.8(1)(d), 2.8(1)(e), 2.8(1)(f) and 19.1.
May 22, 2024
IN THE MATTER OF
THE SECURITIES LEGISLATION OF ALBERTA AND ONTARIO
(the Jurisdictions)
AND
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS
IN MULTIPLE JURISDICTIONS
AND
IN THE MATTER OF
CANOE FINANCIAL LP
(the Filer)
AND
IN THE MATTER OF
THE FUNDS (defined below)
DECISION
Background
The securities regulatory authority or regulator in each of the Jurisdictions (each a Decision Maker) has received an application from the Filer, which is the trustee and the investment fund manager of the Canoe Funds set out in Schedule A (the Existing Funds), and each current and future mutual fund managed and advised from time to time by the Filer and/or an affiliate of the Filer (together with the Existing Funds, collectively, the Funds and individually, a Fund) for a decision under the securities legislation of the Jurisdictions (the Legislation) for an exemption pursuant to section 19.1 of National Instrument 81-102 Investment Funds (NI 81-102), exempting each Fund from the cover requirements in:
(a) Sections 2.8(1)(e) and 2.8(1)(f)(ii) of NI 81-102 (the Short Cover Requirements) when a Fund opens, enters into or maintains a Short Derivative (as defined below) provided that the Fund meets certain cash cover requirements and does not exceed the limits for short positions set out in NI 81-102 (the Short Derivatives Relief);
(b) Sections 2.8(1)(d) and 2.8(1)(f) of NI 81-102 (the FX Cover Requirements) when a Fund opens, enters into or maintains a long position in a FX Derivative (as defined below) in order to substitute the risk to the Base Currency (as defined below) for the risk of another currency without increasing the aggregate amount of currency risk to which the Fund is exposed by the substitution (the FX Derivatives Relief);
(c) Sections 2.8(1)(d) and 2.8(1)(f) of NI 81-102 (the IR Cover Requirements) when a Fund opens, enters into or maintains a Long IR Derivative (as defined below) and a corresponding Short IR Derivative (as defined below) in order to substitute the risk to one interest rate or duration for the risk of another interest rate or duration without increasing the aggregate amount of interest rate or duration risk to which the Fund is exposed by the substitution (the IR Derivatives Relief)
(the Short Derivatives Relief, the FX Derivatives Relief and the IR Derivatives Relief, are, collectively, the Exemption Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a dual application),
(a) the Alberta Securities Commission is the principal regulator for this application;
(b) 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 jurisdiction of Canada, other than Alberta and Ontario; and
(c) this decision is the decision of the principal regulator and evidences the decision of the securities regulatory authority or regulator in Ontario.
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 shall also have the following meanings:
(a) Aggregate Short Exposure means that a Fund's aggregate short exposure, both through the short sales of securities and synthetically through positions in Short Derivatives that are entered into for non-hedging purposes, cannot exceed 20% of the net asset value of the Fund;
(b) Base Currency means the currency in which a Fund determines its net asset value;
(c) Cover Requirements means the cover requirements set out in section 2.8 of NI 81-102;
(d) FX Derivative means a long position in a currency standardized future or currency forward contract or position in a currency swap, in each case where a Fund delivers its Base Currency and receives another currency;
(e) Long IR Derivative means a long position in an interest rate standardized future or interest rate forward contract or the long position in an interest rate swap;
(f) Short Derivative means a short position in a standardized future or forward contract or a position in a swap where a Fund is required to make payments under the standardized future, forward contract or swap, in each case that a Fund opens, enters into or maintains not for hedging purposes and in reliance on the Short Derivatives Relief; and
(g) Short IR Derivative means a short position corresponding to a Long IR Derivative.
Representations
This decision is based on the following facts represented by the Filer:
The Filer and the Funds
1. The Filer represents that it is the investment fund manager of the Existing Funds. The Filer is registered as an investment fund manager, portfolio manager and exempt market dealer in the Province of Alberta. The Filer is also registered as an exempt market dealer in British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Northwest Territories, Nova Scotia, Nunavut, Ontario, Prince Edward Island, Québec and Saskatchewan, as a portfolio manager in Ontario and Québec, as a commodity trading manager in Ontario, as a derivatives portfolio manager in Québec, and as an investment fund manager in Newfoundland and Labrador, Ontario and Québec. The Filer's head office is located in Calgary, Alberta.
2. The Filer represents that the Filer and/or an affiliate of the Filer will be the manager and adviser of each Fund. In addition, a third party may from time to time be a sub-adviser to a Fund.
3. Each Fund is, or will be, a mutual fund created either under the laws of the Province of Alberta or under the laws of another jurisdiction and is, or will be, subject to the provisions of NI 81-102, subject to any relief therefrom granted by the securities regulatory authorities.
4. The Filer represents that other than with respect to the subject of this application, neither it nor any of the Existing Funds is in default of securities legislation in any jurisdiction.
5. The securities of each Fund are, or will be, qualified for distribution pursuant to a prospectus or a simplified prospectus that was, or will be, prepared and filed in accordance with the securities legislation of the jurisdictions. Accordingly, each Fund is, or will be, a reporting issuer or equivalent in each jurisdiction in which it is relying on the Exemption Sought.
6. The investment strategies of each Fund permit, or will permit, that Fund to enter into specified derivative transactions, including long and short positions in specified derivatives. These specified derivatives may be used for purposes of hedging, efficient portfolio management and/or investment purposes.
7. The Filer and each adviser and sub-adviser to a Fund (collectively, the Filer Group) have developed a number of controls and mechanisms to monitor the use of derivatives by the Funds in order to comply with the requirements of NI 81-102. In addition, the Filer Group have written policies and procedures that set out the risk management procedures applicable to derivative transactions in respect of the Funds, including Short Derivatives, FX Derivatives and Long IR Derivatives (and the corresponding Short IR Derivatives). These policies and procedures set out specific procedures for authorization, documentation, reporting, and monitoring (including monitoring the level of a Fund's applicable exposures daily) to ensure that (a) the Aggregate Short Exposure does not exceed 20% of the Fund's net asset value and (b) neither the currency exposure nor the interest rate exposure exceeds the Fund's net asset value. These policies and procedures also require the Filer Group to monitor the Fund's FX Derivatives daily to ensure that the amount of Base Currency to be delivered under the FX Derivatives does not exceed the value of the assets held by the Fund that are denominated in its Base Currency and to review the derivative strategies of the Funds to ensure that these functions are performed by individuals independent of those who trade. Independent personnel employed by the Filer Group review the use of derivatives as part of their ongoing supervision of a Fund's investment practices, including exposure thereunder.
Short Derivatives Relief
8. Section 4.3 of the Companion Policy 81-102CP states that NI 81-102 is designed to prevent the use of specified derivatives for the purpose of leveraging the assets of the mutual fund. According to this section, the provisions of subsection 2.8(1) of NI 81-102 restrict leveraging with specified derivatives used for non-hedging purposes.
9. The purpose of the Short Cover Requirements is to prohibit a mutual fund from obtaining leveraged exposure to portfolio assets when using certain specified derivatives other than for hedging purposes.
10. The short sale provisions set out in section 2.6.1 of NI 81-102 permit an investment fund to achieve a limited amount of leverage, as an investment fund that complies with the conditions set out in that section is permitted to sell short securities that have an aggregate market value of up to 20% of the net asset value of the investment fund, provided that, among other things, the investment fund holds cash cover in an amount that, together with portfolio assets deposited with borrowing agents as security in connection with short sales by the investment fund, is at least equal to 150% of the aggregate market value of the securities sold short by the investment fund on a daily mark-to-market basis.
11. The Short Cover Requirements predate section 2.6.1 of NI 81-102. From a risk management perspective, the ability of an investment fund to be able to enter into short positions should not differentiate between a physical short position under section 2.6.1 of NI 81-102 and a position in a Short Derivative that is entered into for non-hedging purposes. Whether a Fund enters into a physical short position or achieves that short position through a Short Derivative, the exposure of the Fund is essentially identical. The Filer believes that a Fund's incremental risk exposure in opening or entering into a Short Derivative compared to the short position risk inherent in a physical short position is negligible. Any such difference (operation or counterparty risks, etc.) will be adequately monitored and managed.
12. The Filer Group has implemented a policy that provides that each Fund must comply with the Aggregate Short Exposure requirement.
13. These policies also provide that in connection with each Short Derivative opened, entered into or maintained by a Fund, the Fund must hold cash cover in an amount that, together with portfolio assets deposited with counterparties, dealers or futures exchanges as collateral or margin in connection with the Short Derivative by the investment fund, is at least 150% of the daily mark-to-market value of the Short Derivative, being the aggregate of the notional amount of the Short Derivative plus or minus the daily increase or decrease in the value of the Short Derivative, respectively.
FX Derivatives Relief
14. A Fund that opens, enters into or maintains a FX Derivative is required to hold cover in accordance with the FX Cover Requirements.
15. Pursuant to NI 81-102, a Fund is permitted to open and maintain a currency standardized futures or forward contract and enter into and maintain a currency swap pursuant to which the Fund delivers: (a) a non-Base Currency and receives another non-Base Currency without being subject to the FX Cover Requirements because (i) the transaction would be a "currency cross hedge" (as defined in NI 81-102), and (ii) the definition of "hedging" under NI 81-102 includes a transaction that is a currency cross hedge transaction; and (b) a non-Base Currency and receives the Base Currency without being subject to the FX Cover Requirements because the definition of "hedging" under NI 81-102 includes such a transaction.
16. The ability of a Fund to open or enter into a FX Derivative without being subject to the FX Cover Requirements will enable the Fund to substitute its risk to its Base Currency for a risk to another currency, without increasing the aggregate amount of currency risk to which the Fund is exposed by the substitution. Subject to the Cover Requirements, a Fund's currency exposure (calculated in the Fund's Base Currency) will not, at any time, exceed the net asset value of the Fund.
17. The sub-adviser of each Fund takes a deliberate approach towards monitoring and managing the currency exposure and risk in that Fund's portfolio. Moreover, the sub-adviser does not passively accept currency exposure of the securities a Fund holds and seeks to manage foreign currency exposure separately from cash assets.
18. In addition, the FX Derivatives Relief will permit the sub-adviser to adjust a Fund's currency exposure to align with the currency exposures of the Fund's benchmark. In addition, if the sub-adviser has the mandate to deviate from the Fund's benchmark exposure, the FX Derivatives Relief will permit the sub-adviser to overlay its active currency views on top of the neutral currency positioning to obtain greater or lower exposure to foreign currencies relative to the Fund's benchmark.
19. Whether a Fund directly holds a foreign security or opens or enters into a FX Derivative to obtain foreign currency exposure, the currency exposure is essentially identical. The Filer believes that a Fund's potential incremental risk exposure in opening or entering into a FX Derivative compared to the currency exposure embedded within a foreign-currency denominated asset is negligible. Any such difference (operational, counterparty or cash flow risks, etc.) will be adequately monitored and managed.
20. The purpose of the FX Cover Requirements is to prohibit a mutual fund from obtaining leveraged exposure to portfolio assets when using certain specified derivatives other than for hedging purposes.
IR Derivatives Relief
21. A Fund that opens, enters into or maintains a Long IR Derivative and a corresponding Short IR Derivative is required to hold cover in accordance with the IR Cover Requirements.
22. The ability of a Fund to open or enter into a Long IR Derivative and a corresponding Short IR Derivative without being subject to the IR Cover Requirements will enable the Fund to substitute its risk to one interest rate, portfolio duration or yield curve for a risk to another interest rate, portfolio duration or yield curve. Subject to the Cover Requirements, the net aggregate notional amount of interest rate, duration or yield curve risk to which a Fund is exposed by this substitution will not, at any time, exceed the market value of the long portfolio assets held by the Fund that are exposed to interest rate, duration or yield curve risk.
23. The sub-adviser of each Fund takes a deliberate approach towards monitoring and managing the interest rate, duration exposure and yield curve risk in that Fund's portfolio.
24. In addition, the IR Derivatives Relief will permit the sub-adviser to adjust a Fund's interest rate, duration or yield curve exposure to align with those exposures in the Fund's benchmark. In addition, if the sub-adviser has the mandate to deviate from the Fund's benchmark exposure, the IR Derivatives Relief will permit the sub-adviser to obtain greater or lower exposure to interest rate, duration or yield curve relative to the Fund's benchmark.
25. Whether a Fund directly holds an interest-bearing asset or opens or enters into a Long IR Derivative to obtain an interest rate, duration or yield curve exposure, the exposure is very similar. The Filer believes that a Fund's potential incremental risk exposure in opening or entering into a Long IR Derivative compared to the exposure embedded within an interest- bearing asset is negligible. Any such difference (operational, counterparty or cash flow risks, etc.) will be adequately monitored and managed.
26. The purpose of the IR Cover Requirements is to prohibit a mutual fund from obtaining leveraged exposure to portfolio assets when using certain specified derivatives other than for hedging purposes.
27. Given a Fund's holding of interest-bearing assets (Interest-Bearing Holdings), by entering into and maintaining a Long IR Derivative and its corresponding Short IR Derivative, the Fund will deliver a return based on one interest rate and receive a return based on another interest rate.
General
28. Permitting the Funds to open, enter into and maintain Short Derivatives, FX Derivatives and/or Long IR Derivatives (and the corresponding Short IR Derivatives) without the requirement to comply with the Short Cover Requirements, the FX Cover Requirements or the IR Cover Requirements, as the case may be, will provide the Funds with a better opportunity to pursue and achieve their investment objectives.
29. The Filer believes that the Exemption Sought is in the best interests of the Funds as it allows active management of portfolio assets in a way that does not create a by-product of unmanaged short position, currency or interest rate risk, as applicable.
30. The Filer is seeking the Exemption Sought to permit the Funds to engage in strategies in a manner that is not otherwise permitted under NI 81-102.
31. It would not be prejudicial to the public interest to grant the Exemption Sought to the Filer and the Funds.
Decision
Each of the Decision Makers is satisfied that the decision meets the test set out in the Legislation for the Decision Maker to make the decision.
The decision of the Decision Makers under the Legislation is that the Exemption Sought is granted, provided that:
(a) the use of Short Derivatives, FX Derivatives and/or Long IR Derivatives (and the corresponding Short IR Derivatives) contemplated by this application is consistent with the fundamental investment objectives and investment strategies of the applicable Fund;
(b) a Fund must not open or enter into a Short Derivative if, immediately after opening or entering into a Short Derivative, the Fund does not comply with the Aggregate Short Exposure limit;
(c) a Fund must not open, enter into or maintain a Short Derivative unless the Fund holds cash cover in an amount that, together with portfolio assets deposited with counterparties, dealers or futures exchanges as collateral or margin in connection with the Short Derivative by the Fund, is at least equal to 150% of the daily mark-to-market value of the Short Derivative, being the aggregate of the notional amount of the Short Derivative plus/minus the daily increase/decrease in the value of the Short Derivative;
(d) a Fund must not open or enter into a FX Derivative if, immediately after opening or entering into the FX Derivative, the aggregate amount of the Fund's Base Currency to be delivered under all FX Derivatives Contracts (the Aggregate FX Amount) would exceed the value of the assets held by the Fund that are denominated in its Base Currency (the Base Currency Holdings);
(e) if a Fund's Aggregate FX Amount exceeds at any time the value of its Base Currency Holdings, the Fund must, as quickly as is commercially reasonable, take all necessary steps to reduce the Aggregate FX Amount to an amount that does not exceed the value of its Base Currency Holdings;
(f) the opening and maintenance by a Fund of each Short IR Derivative meets the definition of "hedging" in NI 81-102 in respect of corresponding long Interest-Bearing Holdings held directly or indirectly by the Fund;
(g) if all or a portion of a Short IR Derivative terminates or is closed out, then a Fund must terminate or close out an equivalent portion of its corresponding Long IR Derivative;
(h) a Fund will not open or maintain a Long IR Derivative unless the underlying market exposure to the Fund of the Long IR Derivative would not exceed, on a daily mark-to-market basis, the aggregate of: (i) the market value of its corresponding Short IR Derivative and Interest-Bearing Holdings; and (ii) the market value of the Long IR Derivative (the Aggregate Amount);
(i) if the underlying market exposure to a Fund of a Long IR Derivative exceeds the Aggregate Amount referenced in condition (h) above, then the Fund must, as quickly as is commercially reasonable, take all necessary steps to reduce the underlying market exposure of its Long IR Derivative so that the underlying market exposure of its Long IR Derivative no longer exceeds the Aggregate Amount.
"Denise Weeres"
Director, Corporate Finance
Alberta Securities Commission
Application File #: 2024/0149
SEDAR+ File #: 6099713
SCHEDULE A
EXISTING FUNDS
Canoe Bond Advantage Fund
Canoe Bond Advantage Portfolio Class
(consisting of Canoe Bond Advantage Class{*} and units of Canoe Trust Fund)
Canoe Global Income Fund
Canoe Global Income Portfolio Class
(consisting of Canoe Global Income Class{*} and units of Canoe Trust Fund)
Canoe Unconstrained Bond Fund
Canoe Unconstrained Bond Portfolio Class
(consisting of Canoe Unconstrained Bond Class{*} and units of Canoe Trust Fund)
Canoe Preferred Share Portfolio Class
(consisting of Canoe Preferred Share Class{*} and units of Canoe Trust Fund)
Canoe Enhanced Income Fund
Canoe Enhanced Income Portfolio Class
(consisting of Canoe Enhanced Income Class{*} and units of Canoe Trust Fund)
Canoe Defensive Global Balanced Fund
Canoe North American Monthly Income Portfolio Class
(consisting of Canoe North American Monthly Income Class{*} and units of Canoe Trust Fund)
Canoe Asset Allocation Portfolio Class
(consisting of Canoe Asset Allocation Class{*} and units of Canoe Trust Fund)
Canoe Defensive U.S. Equity Portfolio Class
(consisting of Canoe Defensive U.S. Equity Class{*} and units of Canoe Trust Fund)
Canoe Defensive International Equity Fund
Canoe Defensive Global Equity Fund
Canoe Premium Income Fund
Canoe Equity Portfolio Class
(consisting of Canoe Equity Class{*} and units of Canoe Trust Fund)
Canoe International Equity Portfolio Class
(consisting of Canoe International Equity Class{*} and units of Canoe Trust Fund)
Canoe Global Equity Fund
Canoe Canadian Small Mid Cap Portfolio Class
(consisting of Canoe Canadian Small Mid Cap Class{*} and units of Canoe Trust Fund)
Canoe Energy Income Portfolio Class
(consisting of Canoe Energy Income Class{*} and units of Canoe Trust Fund)
Canoe Energy Portfolio Class
(consisting of Canoe Energy Class{*} and units of Canoe Trust Fund)
Canoe Trust Fund
{*} each a class of 'GO CANADA!' Fund Corp