The Securities Commission granted Franklin Templeton Investments Corp. an exemption from the cash cover requirements under section 2.8 of National Instrument 81-102 Investment Funds (NI 81-102). This decision allows mutual funds managed by Franklin Templeton, including future funds, to use non-rated short-term debt issued or guaranteed by the U.S. government or other sovereign states as cash cover for derivative transactions. The exemption is conditional on the sovereign state having a credit rating of A or higher by Fitch, A2 or higher by Moody’s, and A or higher by S&P.
The rationale for the decision is that the current definition of ‘cash cover’ in NI 81-102 treats short-term debt obligations issued or guaranteed by sovereign states differently from those issued by financial institutions. The Commission recognized that this discrepancy limits the range of instruments available as cash cover, potentially leading to higher cash holdings and negatively impacting fund returns. The exemption is subject to conditions ensuring the creditworthiness and liquidity of the non-rated sovereign debt used as cash cover.
The decision was made under the securities legislation of Ontario, with the Ontario Securities Commission acting as the principal regulator. The relief is also intended to be relied upon in other Canadian jurisdictions under Multilateral Instrument 11-102 Passport System. The decision is based on representations by Franklin Templeton that include the creditworthiness of sovereign states and the practical challenges of obtaining ratings for all short-term debt obligations. The exemption is subject to the condition that the funds cease using the unrated short-term debt as cash cover if the sovereign state’s credit rating or the rating of its short-term debt falls below the specified thresholds.