Fidelity Investments Canada Limited and Fidelity Funds - MRRS Decision

Headnote

MRRS exemption granted from requirement contained in section 2.8 of NI 81-102 to permit Fidelity funds to use certain floating rate notes as cash cover subject to certain conditions.

Rules Cited

National Instrument 81-102 - Mutual Funds, s. 2.8.

December 28, 2005

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

BRITISH COLUMBIA, ALBERTA, SASKATCHEWAN,

MANITOBA, ONTARIO, QUEBEC, NEW BRUNSWICK,

NOVA SCOTIA, PRINCE EDWARD ISLAND,

NEWFOUNDLAND AND LABRADOR, YUKON,

NUNAVUT AND THE NORTHWEST TERRITORIES

(the "Jurisdictions")

AND

IN THE MATTER OF

THE MUTUAL RELIANCE REVIEW SYSTEM

FOR EXEMPTIVE RELIEF APPLICATIONS

AND

IN THE MATTER OF

FIDELITY INVESTMENTS CANADA LIMITED

AND

THE FIDELITY FUNDS

MRRS DECISION DOCUMENT

Background

The local securities regulatory authority or regulator (the "Decision Maker") in each of the Jurisdictions has received an application (the "Application") from Fidelity Investments Canada Limited (the "Fidelity") and mutual funds that are or will be managed by Fidelity (the "Fidelity Funds"), for a decision under the securities legislation (the "Legislation") of the Jurisdictions providing an exemption under section 19.1 of National Instrument 81-102 -- Mutual Funds ("NI 81-102") from the requirements in section 2.8 ("Section 2.8") of NI 81-102 (the "Requested Relief") such that the Fidelity Funds can use certain floating rate notes to meet the cash cover requirements in Section 2.8.

Under the Mutual Reliance Review System for Exemptive Relief Applications ("MRRS"),

(a) the Ontario Securities Commission is the principal regulator for the Application, and

(b) this MRRS decision document evidences the decision of each Decision Maker.

Interpretation

Terms defined in N1 81-102 have the same meaning in this decision as in NI 81-102, and defined terms contained in National Instrument 14-101 -- Definitions have the same meaning in this decision unless they are defined in this decision.

Representations

The decision is based on the following facts represented by Fidelity:

1. The Fidelity Funds are or will be mutual funds established under the laws of the Province of Ontario. Fidelity is a corporation amalgamated under the laws of the Province of Ontario. Fidelity is or will be the manager and promoter of each of the Fidelity Funds.

2. The Fidelity Funds are or will be reporting issuers under the securities laws of each of the provinces and territories of Canada.

3. The Fidelity Funds may use specified derivatives as part of their investment strategies and are therefore subject to the cash cover requirements under Section 2.8.

4. The current definition of "cash cover" in NI 81-102 includes:

(a) commercial paper that has a term to maturity of 365 days or less and an approved credit rating and that was issued by a person or company other than a government or permitted supranational agency; and

(b) cash equivalent that is an evidence of indebtedness with a remaining term to maturity of 365 days or less, and that is issued, or fully and unconditionally guaranteed as to principal and interest, by government entities that are listed in the definition of "cash equivalent" as defined in NI 81-102.

5. The purpose of the cash cover requirement in NI 81-102 is to limit a mutual fund from leveraging its assets when using certain specified derivatives under section 2.8 and to ensure that the mutual fund is in a position to meet its obligations on the settlement date.

6. Floating rate evidences of indebtedness, also known as floating rate notes (FRNs), are debt securities issued by the federal or provincial governments, Crown corporations or other corporations and other entities with floating interest rates that reset periodically, usually every 30 to 90 days. However, the term to maturity of FRNs can be more than 365 days.

7. Fidelity proposes to meet the cash cover requirement in section 2.8 of NI 81-102 by investing in FRNs that have a remaining term to maturity of more than 365 days and with interest rates that reset no longer than every 185 days.

8. Fidelity submits that the use of FRNs as cash cover can enhance the return of the Fidelity Funds without reducing the quality of "cash cover" for the purposes of specified derivatives.

9. For the purposes of money market funds (as defined in NI 81-102) meeting the 90 days dollar-weighted average term to maturity, the term of a floating rate evidence of indebtedness is the period remaining to the date of the next rate setting.

10. There is considered to be minimal interest rate risk associated with FRNs as floating interest rates generally reset on a short term basis, such as every 30 days to 90 days. Credit risk aside, if a FRN resets every 365 days, then the interest rate risk of the FRN is about the same as a fixed rate instrument with a term to maturity of 365 days.

11. Further, financial instruments that meet the current "cash cover" requirement have low credit risk. The current "cash cover" requirements provide that evidences of indebtedness of issuers, other than government agencies, must have approved credit ratings. As a result, if the issuer of FRNs is an entity other than a government agency, the FRNs will have an approved credit rating as required in NI 81-102.

12. FRNs that are subject to the conditions of this exemption have substantially the same investment risk profile as the commercial paper and cash equivalents that are currently permitted as cash cover in NI 81-102 but with longer exposure.

13. FRNs will have adequate liquidity and will otherwise meet the requirement for derivative transactions carried out in accordance with Section 2.8.

Decision

Each of the Decision Makers is satisfied that the test contained in the Legislation that provides the Decision Maker with the Jurisdiction to make the Decision has been met.

The Decision of the Decision Makers under the Legislation is that the Requested Relief is granted such that the Fidelity Funds can use the FRNs to meet the cash cover requirements in Section 2.8 provided that

(a) the floating interest rates of the FRNs reset no longer than every 185 days;

(b) the FRNs are floating rate evidences of indebtedness with the principal amounts of the obligations that will continue to have a market value of approximately par each time the rate of interest to be paid to the holders of the evidences of indebtedness is set;

(c) if the FRNs are issued by a person or company other than a government or permitted supranational agency, the FRNs must have an approved credit rating as defined in NI 81-102;

(d) if the FRNs are issued by a government or permitted supranational agency, the FRNs have their principal and interest fully and unconditionally guaranteed by

i. the government of Canada or the government of a jurisdiction in Canada, or

ii. the government of the United States of America, the government of one of the states of the United States of America, the government of another sovereign state or a permitted supranational agency, if, in each case, the FRNs have an approved credit rating; and

(e) the FRNs meet the definition of "conventional floating rate debt instrument" in section 1.1 of NI 81-102.