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Desjardins Investments Inc. and the Desjardins Funds
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- exemption from sections 2.8(1)(d) and 2.8(1)(f)(i) of National Instrument 81-102 -- Mutual Funds to permit the Funds, when they open or maintain a long position in a standardized future or forward contract or when they enter into or maintain a swap position and during the periods when the Funds are entitled to receive payments under the swap, to use as cover, a right or obligation to sell an equivalent quantity of the underlying interest of the standardized future, forward or swap.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, ss. 2.8(1), 19.1.
[Translation]
October 29, 2013
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
QUÉBEC AND ONTARIO
(the Jurisdictions)
AND
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF
APPLICATIONS IN MULTIPLE JURISDICTIONS
AND
IN THE MATTER OF
DESJARDINS INVESTMENTS INC.
(the Filer)
AND
IN THE MATTER OF
THE DESJARDINS FUNDS
DECISION
Background
The securities regulatory authority or regulator in each of the Jurisdictions (Decision Maker) has received an application from the Filer for a decision under the securities legislation of the Jurisdictions (the Legislation) for an exemption relieving the Funds (as defined below), under section 19.1 of the Regulation 81-102 respecting Mutual Funds (c. V-1.1, r. 39) (Regulation 81-102) from the requirements in paragraph 2.8(1)(d) and subparagraph 2.8(1)(f)(i) of Regulation 81-102 to permit each of the Funds when it:
a) opens or maintains a long position in a debt-like security that has a component that is a long position in a forward contract, or in a standardized future or forward contract, or
b) enters into or maintains a swap position and during the periods when the Fund is entitled to receive payments under the swap,
to use as cover, a right or an obligation to sell an equivalent quantity of the underlying interest of the forward, standardized future or swap (the Exemption Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a dual application):
(a) the Autorité des marchés financiers is the principal regulator for this application;
(b) the Filer has provided notice that subsection 4.7(1) of Regulation 11-102 respecting Passport System (c. V-1.1, r. 1) (Regulation 11-102) is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Yukon, Northwest Territories and Nunavut; and
(c) the 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 Regulation 14-101 respecting Definitions (c. V-1.1, r. 3), Regulation 11-102 and Regulation 81-102 have the same meaning if used in this decision, unless otherwise defined.
Funds means the existing mutual funds, other than money market funds, for which the Filer or a duly registered affiliate of the Filer acts as investment fund manager and any mutual fund, other than a money market fund, subsequently established for which the Filer, or a duly registered affiliate of the Filer, will act as investment fund manager.
Representations
This decision is based on the following facts represented by the Filer:
The Filer
1. The Filer is a corporation incorporated under the Business Corporations Act of Québec (LRQ, c. S-31.1).
2. The Filer's head office is located at 1, Complexe Desjardins, South Tower, P.O. Box 34, Montréal, Québec, Canada, H5B 1E4.
3. The Filer, or an affiliate of the Filer, acts or will act as the investment fund manager of each of the Funds.
4. The Filer is duly registered as an investment fund manager in Québec, Ontario and Newfoundland and Labrador.
5. The Filer is not in default of securities legislation in any jurisdictions of Canada.
The Funds
6. Securities of the Funds are or will be distributed in all jurisdictions of Canada through a simplified prospectus prepared in accordance with Regulation 81-101 respecting Mutual Fund Prospectus Disclosure (c. V-1.1, r. 38) and, accordingly, each Fund is, or will be, a reporting issuer in all jurisdictions of Canada.
7. Each of the Funds is or will be a mutual fund subject to the requirements of Regulation 81-102.
8. Each of the Funds is not in default of securities legislation in any jurisdictions of Canada.
9. Desjardins Global Asset Management Inc. (DGAM), or an affiliate of the Filer, acts or will act as portfolio manager of the Funds and is also responsible for retaining portfolio sub-advisers for the Funds. DGAM is duly registered in Alberta, Manitoba, Nova Scotia, Ontario and Québec as an adviser in the category of portfolio manager. DGAM is also duly registered in Québec as a derivatives portfolio manager pursuant to the Derivatives Act (RSQ, c. I-14.01) and in Ontario as a commodity trading manager pursuant to the Commodity Futures Act (RSO 1990, c. C.20). Any affiliate of the Filer acting as portfolio manager for the Funds is or will be duly registered under the appropriate categories.
10. Many of the Funds may use specified derivatives under their investment strategies to replicate market indices. This strategy permits the Funds to gain exposure to securities and financial markets instead of investing in the securities directly and to lower trading costs. The Funds may also use derivative instruments to:
(a) reduce risk by protecting the Funds against potential losses from changes in interest rates;
(b) reduce the impact of currency fluctuations on the Funds' portfolio holdings; and
(c) provide protection for the Funds' portfolios and reduce the overall volatility of returns.
11. When specified derivatives are used for non-hedging purposes, the Funds are subject to the cash cover requirements of Regulation 81-102.
Reasons for the Exemption Sought
12. Paragraph 2.8(1)(d) and subparagraph 2.8(1)(f)(i) of Regulation 81-102 do not permit covering a long position in a debt-like security that has a component that is a long position in a forward contract or in a standardized future or forward contract or a position in a swap for a period when a fund is entitled to receive payments under the swap, in whole or in part, with a right or obligation to sell an equivalent quantity of the underlying interest of the forward, future or swap. In other words, these sections of Regulation 81-102 do not permit the use of put options or short forward, future or swap positions to cover long forward, future or swap positions.
13. The regulatory frameworks in other countries recognize the hedging properties of options for all categories of derivatives, including long positions evidenced by standardized futures or forwards or in respect of a swap where a fund is entitled to receive payments from the counterparty, provided they are covered by an amount equal to the difference between the market price of a holding and the strike price of the option that was bought or sold to hedge it. Regulation 81-102 effectively imposes the requirement to overcollateralize, since the maximum liability to the fund under the scenario described is equal to the difference between the market value of the long position and the exercise price of the option.
14. Since overcollateralization imposes a cost on the Funds, the Filer believes the Funds will benefit from the Exemption Sought.
15. Paragraph 2.8(1)(c) of Regulation 81-102 permits a mutual fund to write a put option and cover it with buying a right or obligation to sell an equivalent quantity of the underlying interest of the written put option. This position has risks that are similar to a long position in a future, forward or swap. Accordingly, it is submitted that the Funds should be permitted to cover a long position in a debt-like security that has a component that is a long position in a forward contract or in a standardized future or forward contract or swap, with a put option or a short future, forward or swap.
16. To the extent that the Funds use derivatives, DGAM and portfolio sub-managers retained on behalf of the Funds are responsible for ensuring that derivatives are used in a manner that is consistent with the applicable investment objectives and restrictions of the Funds and that the derivatives comply with the requirements set out in Regulation 81-102. The Filer, DGAM and each portfolio sub-manager have their own policies and procedures relating to the use of derivatives. All derivative transactions for a Fund must be recorded on a real time basis and immediately reflected in the Fund's portfolio management records. Derivative positions are monitored daily to ensure that they comply with all regulatory requirements, including any cash cover requirement.
17. The prospectus and annual information form of the Funds discloses the policies and practices of the Filer regarding the use of derivatives and, upon renewal, will include disclosure of the nature of the Exemption Sought in respect of the Funds.
18. On January 25th, 2008, the Fédération des caisses Desjardins du Québec (the Fédération) acting at that time on behalf of the Desjardins Funds as investment fund manager obtained relief from the securities regulatory authorities from paragraph 2.7(1)(a), subsection 2.8(1) and subparagraphs 2.8(1)(d) and (f)(i) of Regulation 81-102 (the Prior Exemptive Relief).
19. In April 2012, Regulation 81-102 was amended in order to, among other things, remove the term limit on specified derivatives and to provide mutual funds more flexibility in selecting securities for use as cash cover. Consequently, the Funds do not need relief from paragraph 2.7(1)(a) and subsection 2.8(1) of Regulation 81-102.
20. Considering that the Prior Exemptive Relief has been issued in favour of the Fédération, the Filer is hereby seeking the Exemption Sought in order for the Funds to benefit from the Prior Exemptive Relief notwithstanding the fact that the Filer, being an affiliate of the Fédération, replaced the Fédération and currently acts as investment fund manager of 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.
Consequently, the Decision Makers revoke the Prior Exemptive Relief and grant the Exemption Sought provided that:
(a) a Fund shall not open or maintain a long position in a debt-like security that has a component that is a long position in a forward contract or in a standardized future or forward contract unless the Fund holds:
(i) cash cover in an amount that, together with margin on account for the specified derivative and the market value of the specified derivative, is not less than, on a daily mark-to-market basis, the underlying market exposure of the specified derivative;
(ii) a right or obligation to sell an equivalent quantity of the underlying interest of the future or forward contract, and cash cover that together with margin on account for the position, is not less than the amount, if any, by which the strike price of the future or forward contract exceeds the strike price of the right or obligation to sell the underlying interest; or
(iii) a combination of the positions referred to in paragraphs (i) and (ii) above that is sufficient, without recourse to other assets of the Fund, to enable the Fund to acquire the underlying interest of the future or forward contract;
(b) a Fund shall not enter into or maintain a swap position unless for periods when the Fund would be entitled to receive payments under the swap, the Fund holds:
(i) cash cover in an amount that, together with margin on account for the swap and the market value of the swap, is not less than, on a daily mark-to-market basis, the underlying market exposure of the swap;
(ii) a right or obligation to enter into an offsetting swap on an equivalent quantity and with an equivalent term and cash cover that, together with margin on account for the position, is not less than the aggregate amount, if any, of the obligations of the Fund under the swap less the obligations of the Fund under such offsetting swap; or
(iii) a combination of the positions referred to in paragraphs (i) and (ii) above that is sufficient, without recourse to other assets of the Fund, to enable the Fund to satisfy its obligations under the swap;
(c) the Fund will not:
(i) purchase a debt-like security that has an option component or an option; or
(ii) purchase or write an option to cover any positions under paragraphs 2.8(1) (b), (c), (d), (e) and (f) of Regulation 81-102;
if immediately after the purchase or writing of such option, more than 10% of the net asset value of the Fund, taken at market value at the time of the transaction, would be in the form of:
(i) purchased debt-like securities that have an option component or purchased options, in each case, held by the Fund for purposes other than hedging; or
(ii) options used to cover any positions under paragraphs 2.8(1)(b), (c), (d), (e) and (f) of Regulation 81-102;
(d) on the date that is the earlier of:
(i) the date when an amendment to the annual information forms of the Funds are filed for reasons other than the Exemption Sought; or
(ii) the date that the renewal annual information forms of the Funds are receipted;
the Funds shall:
(i) disclose the nature and terms of the Exemption Sought in the annual information form of such Funds with a cross reference thereto in the prospectus of the Funds; and
(ii) include a summary of the nature and terms of the Exemption Sought in the prospectus of the Funds under the Investment Strategies section, or in the introduction to Part B of the prospectus with a cross reference thereto under the Investments Strategies section for the Funds;
(e) this decision will terminate on the coming into force of any securities legislation relating to the use as cover of a right or obligation to sell an equivalent quantity of the underlying interest of the forward, standardized future or swap in compliance with section 2.8 of Regulation 81-102.
"Josée Deslauriers"
Senior Director, Investment Funds and Continuous Disclosure
Autorité des marchés financiers