Paragraphs 2.8(1)(d) and (e) of the Instrument prohibit a mutual fund from, among other things, opening and maintaining a position in a standardized future except under the conditions referred to in those paragraphs. Opening and maintaining a position in a standardized future could be effected through the exercise by a mutual fund of an option on futures. Therefore, it should be noted that a mutual fund cannot exercise an option on futures and assume a position in a standardized future unless the applicable provisions of paragraphs 2.8(1)(d) or (e) are satisfied.
The Canadian securities regulatory authorities remind industry participants of the following requirements contained in securities legislation:
(a) is permitted, either by virtue of registration as an adviser under the securities legislation or commodity futures legislation of the jurisdiction in which the portfolio adviser is providing the advice or an exemption from the requirement to be registered, to provide that advice to the investment fund under the laws of that jurisdiction and
(b) has satisfied all applicable option proficiency requirements of that jurisdiction.
2. An investment fund may invest in or use futures and options on futures only if the portfolio adviser advising with respect to these investments or uses is registered as an adviser under the securities or commodity futures legislation of the jurisdiction in which the portfolio adviser is providing the advice, if this registration is required in that jurisdiction, and meets the proficiency requirements for advising with respect to futures and options on futures in the jurisdiction.
3. A portfolio adviser of an investment fund that receives advice from a non- resident sub-adviser as contemplated by section2.1of the instrument is not relieved from the registration requirements described in paragraphs 1 and 2.
4. In Ontario, a non-resident sub-adviser is required, under the commodity futures legislation of Ontario, to be registered in Ontario if it provides advice to another portfolio adviser of an investment fund in Ontario concerning the use of standardized futures by the investment fund. section 2.10 of the Instrument does not exempt the non-resident sub-adviser from this requirement. A non-resident sub-adviser should apply for an exemption in Ontario if it wishes to carry out the
(1) The investment restrictions in the Instrument are in part intended to prevent the use of specified derivatives for the purpose of leveraging the assets of a mutual fund. The definition of “hedging” prohibits leveraging with respect to specified derivatives used for hedging purposes. The provisions of subsection 2.8(1) of the Instrument restrict leveraging with respect specified derivatives used for non-hedging purposes.
(2) Alternative mutual funds however, are exempted from section 2.8 and are instead subject to the restrictions on the use of leverage set out in section 2.9.1 of the instrument, which limit exposure to certain sources of leverage to no more than 300% of alternative mutual fund’s net asset value. The calculation in section 2.9.1 requires an investment fund to determine the notional amount of its specified derivatives positions. While the Instrument does not define notional amount, in this context we would expect it to be determined in regards to the value of the underlying reference asset, as if the specified derivative position were converted into the equivalent position in the underlying reference asset at the time of the calculation.
The definition of “cash cover” in the Instrument prescribes the securities or other portfolio assets that may be used to satisfy the cash cover requirements relating to specified derivatives positions of mutual funds required by Part 2 of the Instrument. The definition of “cash cover” includes various interest-bearing securities; the definition includes interest accrued on those securities, and so mutual funds are able to include accrued interest for purposes of cash cover calculations.
(1) Subsection 4.4(1) of the Instrument contains provisions that require that any agreement or declaration of trust under which a person or company acts as manager of an investment fund provide that the manager is responsible for any loss that arises out of the failure of it, and of any person or company retained by it or the investment fund to discharge any of the manager’s responsibilities to the investment fund, to satisfy the standard of care referred to in that section. Subsection 4.4(5) of the instrument provides that Subsection 4.4 does not apply to any losses to an investment fund or securityholder arising out of an action or inaction by acustodian or sub-custodian or by a director of an investment fund. A separate liability regime is imposed, on custodians or sub-custodians by section6.6of the instrument. Directors are subject to the liability regime imposed by the relevant corporate legislation.of the instrument. Directors are subject to the liability regime imposed by the relevant corporate legislation.