MI 11-102 -- relief granted from margin rate applicable to a U.K. money market mutual fund in calculation of market risk in Form 31-103F1 -- margin rate for funds qualified for distribution in Canada is 5%, while funds qualified for distribution in U.K. is 100% -- similar regulation of money market funds -- NI 31-103.
Applicable Legislative Provisions
Multilateral Instrument 11-102 Passport System, s. 4.7.
National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, ss. 12.1, 15.
May 26, 2014
IN THE MATTER OF THE SECURITIES LEGISLATION OF ONTARIO (the "Principal Jurisdiction") AND IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS AND IN THE MATTER OF PARETO INVESTMENT MANAGEMENT LIMITED (the "Filer")
The Principal Regulator (as defined below) in the Principal Jurisdiction has received an application from the Filer for a decision under section 15.1 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) for relief from the requirement in section 12.1 of NI 31-103 that the Filer calculate its excess working capital using Form 31-103F1 (the Form F1) only to the extent that the Filer be permitted to apply the same margin rate to an investment in the ILF GBP Liquidity Fund (the Fund), a short-term money market fund authorised under the European Communities (Undertakings for Collective Investment in Transferable Securities (UCITS)) Regulations 2011 (UCITS Regulations) and offered under a prospectus in the United Kingdom, as it would apply to a money market mutual fund qualified for sale by prospectus in a jurisdiction of Canada, when calculating market risk pursuant to Line 9 of Form F1 (the Exemption Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission is the principal regulator (the OSC or Principal Regulator) for this application, and
(b) the Filer has provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in each of Alberta, British Columbia, Saskatchewan, Manitoba, Nova Scotia and Québec (together with Ontario, the Jurisdictions).
Defined terms contained in NI 31-103 and MI 11-102 have the same meanings in this decision (the Decision) unless they are otherwise defined in this Decision.
This Decision is based on the following facts represented by the Filer.
1. The Filer is a Limited Company established under the Laws of England and Wales with its head office located in London, United Kingdom.
2. The Filer is registered as an adviser in the category of portfolio manager in each of the Jurisdictions.
3. The Filer is not a reporting issuer in any jurisdiction of Canada.
4. The Filer is registered as an investment management firm in the United Kingdom and is regulated by the Financial Conduct Authority (the FCA). It is an institutional investment manager with global clients such as corporate and state pension funds, financial institutions and charities.
5. The Filer offers investment solutions for currency risk, other risk management purposes, fixed income, multi-asset and absolute return strategies.
6. The Filer's immediate parent company is Insight Investment Management Limited and its ultimate parent is The Bank of New York Mellon Corporation (BNY Mellon). BNY Mellon is a global investment company.
7. The Filer intends to invest its excess cash in the Fund. The Fund complies with UCITS Regulations applicable to a short-term money market fund, and is also subject to internal investment restrictions. The Fund has also been rated AAAm under Standard & Poors' Money Market Fund rating guidelines.
8. Under Schedule 1 of Form F1 an investment in the Fund would be subject to a margin rate of 100% of the market value of such investment for the purposes of Line 9 of Form Fl which could result in an excess working capital deficit for the Filer, and an inability to meets its capital requirements under NI 31-103.
9. Under Schedule 1 of Form F1 the margin rate for a money market mutual fund qualified for sale by prospectus in a jurisdiction of Canada is 5% of the market value of such investment.
10. From a cash management perspective, it would not be prudent for the Filer to invest its cash balances directly in money market instruments instead of investing in the Fund and, therefore, be subject to a lower margin rate for the following reasons:
(i) the Filer would have to invest in a multitude of money market instruments to achieve the diversity that the Fund provides;
(ii) money market instruments have varying degrees of liquidity and penalties may be incurred if an instrument is disposed of before it matures; and
(iii) directly investing in money market instruments is more time consuming and most likely, more costly, than investing in the Fund without any meaningful benefit.
11. It would also not be practicable for the Filer to invest its cash balances in a money market fund that is qualified for sale by prospectus in a jurisdiction of Canada as such funds are unlikely to be qualified for sale in the United Kingdom. Such funds would also be difficult to use for cash management purposes and would have potential tax implications. The Filer also lacks familiarity with Canadian money market funds and their issuers.
12. The regulatory oversight and the quality of investments held by a money market mutual fund qualified for sale by prospectus in each of the United Kingdom and Canada is similar. In particular, the UCITS Regulations, together with the Fund's internal investment restrictions, set out requirements dealing with portfolio maturity, credit quality and liquidity, which are similar to requirements under National Instrument 81-102 Mutual Funds (NI 81-102).
The Principal Regulator is satisfied that the Decision meets the test set out in the Legislation for the Principal Regulator to make the Decision.
The Decision of the Principal Regulator under the Legislation is that the Exemption Sought is granted so long as:
(a) the Fund is qualified for sale by prospectus in the United Kingdom and complies with the UCITS Regulations;
(b) the requirements for money market mutual funds under the UCITS Regulations or any successor rule or legislation, together with the Fund's internal investment restrictions, are similar to the requirements for Canadian money market funds qualified for sale by prospectus under NI 81-102 or any successor rule or legislation; and
(c) the Filer is registered as an investment management firm in the United Kingdom and is regulated by the Financial Conduct Authority or any successor regulator.