The Securities Commission granted an exemption from the cash cover requirements outlined in section 2.8(1)(d) of National Instrument 81-102 Investment Funds (NI 81-102) to RBC Global Asset Management Inc. (the Filer) on behalf of the Funds it manages. This exemption applies to certain cross hedging strategies, specifically Government Bond Rate Cross Hedging and Equity Cross-Market Hedging, under specified conditions.
The exemption allows the Funds to hedge their exposure to interest rates of government bonds and equity indices without the need to hold cash cover, which is typically required to prevent mutual funds from obtaining leveraged exposure to portfolio assets through derivatives. The Filer argued that these cross hedging strategies do not increase leverage in the manner that the cash cover requirements aim to address, but rather replace exposure to one benchmark with another preferred by the portfolio manager.
The decision was made under section 19.1 of NI 81-102 and is subject to conditions ensuring that the hedging strategies are consistent with the Funds’ investment objectives and strategies, and that the long derivatives positions do not exceed the market value of their corresponding short positions and holdings. If the long derivatives exposure exceeds the aggregate amount of the corresponding short positions and holdings, the Fund must reduce its exposure or allocate additional cash cover or margin.
The Ontario Securities Commission served as the principal regulator for this application, and the Filer provided notice that it intends to rely on section 4.7(1) of Multilateral Instrument 11-102 – Passport System in multiple Canadian jurisdictions. The decision is based on representations by the Filer regarding its registration, the nature of the Funds, and the intended use of derivatives for hedging purposes. The Filer has also developed policies and procedures to monitor compliance with the requirements of NI 81-102 and the conditions of the granted exemption.