BetaPro Management Inc. and the ETFs Listed In Schedule A - MRRS Decision

MRRS Decision

Headnote

Mutual Reliance Review System for Exemptive Relief Applications -- Exchange traded commodity pools granted relief from certain restrictions in National Instrument 81-102 Mutual Funds on securities lending transactions, including (i) the 50% limit on lending; (ii) the requirement to use a custodial lending agent; and (iii) the requirement to hold the collateral during the course of the transaction.

Rules Cited

National Instrument 81-102 Mutual Funds, ss. 2.12(1)1, 2.12(1)2, 2.12(1)12, 2.12(3), 2.15, 2.16, 19.1.

April 7, 2008

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

BRITISH COLUMBIA, ALBERTA, SASKATCHEWAN,

MANITOBA, ONTARIO, QUÉBEC, NEW BRUNSWICK,

NOVA SCOTIA, PRINCE EDWARD ISLAND, AND

NEWFOUNDLAND AND LABRADOR

(the Jurisdictions)

AND

IN THE MATTER OF

THE MUTUAL RELIANCE REVIEW SYSTEM

FOR EXEMPTIVE RELIEF APPLICATIONS

(MRRS)

AND

IN THE MATTER OF

BETAPRO MANAGEMENT INC.

(the Filer)

AND

THE ETFs LISTED IN SCHEDULE A

(each an Existing ETF)

 

MRRS DECISION DOCUMENT

Background

The local securities regulatory authority or regulator (the Decision Maker) in each of the Jurisdictions has received an application from the Filer on behalf of the Existing ETFs set out in Schedule A, including any similar exchange traded funds established by the Filer in the future (each a Future ETF), for a decision under the securities legislation of the Jurisdictions (the Legislation) for exemptive relief for the Existing ETFs and the Future ETFs (each an ETF) from the following provisions of National Instrument 81-102 Mutual Funds (NI 81-102):

1. subsection 2.12(1)1 of NI 81-102 to permit an ETF to enter into securities lending transactions that will not be administered in compliance with all of the requirements of section 2.15 and 2.16 of NI 81-102;

2. subsection 2.12(1)2 of NI 81-102 to permit an ETF to enter into securities lending transactions that do not fully comply with the requirements of section 2.12 of NI 81-102;

3. subsection 2.12(1)12 of NI 81-102 to permit an ETF to enter into securities lending transactions in which the aggregate market value of securities loaned by the ETF exceeds 50% of the total assets of the ETF;

4. subsection 2.12(3) of NI 81-102 to permit an ETF, during the term of a securities lending transaction, to not hold or to dispose of any non-cash collateral delivered to it as collateral in the transaction;

5. section 2.15 of NI 81-102 to permit an ETF to appoint an agent (Agent), other than the custodian or sub-custodian of the ETF, as agent for administering the securities lending transactions entered into by the ETF; and

6. section 2.16 of NI 81-102 to the extent this section contemplates that securities lending transactions be entered into through an agent appointed under section 2.15 of NI 81-102.

Paragraphs 1 through 6 above are collectively referred as the "Requested Relief".

Under the Mutual Reliance Review System for Exemptive Relief Applications:

(a) the Ontario Securities Commission is the principal regulator for this application; and

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

Interpretation

Defined terms contained in NI 81-102 and National Instrument 14-101 Definitions have the same meaning in this MRRS decision document unless they are defined in this MRRS decision document.

Representations

This MRRS decision document is based on the following facts represented by the Filer on behalf of the ETFs:

1. Each ETF is, or will be, a mutual fund trust organized under the laws of Ontario and is, or will be, a reporting issuer under the laws of some or all of the Jurisdictions.

2. The Filer, a corporation incorporated under the laws of Canada, acts, or will act as, the trustee and manager of each ETF.

3. Securities of each ETF are, or will be, listed on the Toronto Stock Exchange (the TSX). The Filer will not file a final prospectus for an ETF unless the TSX has conditionally approved the listing of securities of the ETF.

4. Each ETF is, or will be, a commodity pool as such term is defined in section 1.1(1) of National Instrument 81-104 Commodity Pools, in that each ETF has adopted, or will adopt, fundamental investment objectives that permit that ETF to use or invest in financial instruments in a manner that is not permitted under NI 81-102.

5. Each ETF's fundamental investment objective will be to provide daily results, before fees, expenses, distributions, brokerage commissions and other transaction costs, that endeavour to correspond to a multiple or the inverse (opposite) multiple of the daily performance of a "permitted index" as defined in NI 81-102 (the Underlying Index).

6. In order to achieve its fundamental investment objective, each ETF will invest in equity securities and/or other financial instruments, including derivatives.

7. Each bull ETF uses, or will use, financial instruments to track its Underlying Index by +200% on a daily basis. Each bear ETF uses, or will use, financial instruments to track the inverse of its Underlying Index by -200% on a daily basis.

8. Each bull ETF will be rebalanced daily to ensure that its exposure and performance will be +200% of its Underlying Index on each day on which it is valued and each bear ETF will be rebalanced daily to ensure that its exposure and performance will only be -200% of its Underlying Index on each day on which it is valued.

9. Initially, each ETF intends to achieve its investment objective by means of a forward contract. Each ETF will invest its net proceeds from this offering in a basket of Canadian equity securities (the Common Share Portfolio) and will then pledge the securities within its Common Share Portfolio to a Canadian chartered bank (the Counterparty), pursuant to a forward share purchase agreement or some other equivalent financial instrument (the Forward Contract).

10. The Common Share Portfolio of an ETF is generally a static portfolio that will not be actively managed except in limited circumstances. The Common Share Portfolio of an ETF is held by the custodian of the ETF, but solely and exclusively as an agent of the Counterparty. As a result, while the Common Share Portfolio is held by the custodian of an ETF, it is actually held as pledged security to the Forward Contract the ETF has entered into, on behalf of the Counterparty to the Forward Contract.

11. The Filer proposes to engage in securities lending transactions on behalf of each ETF that may represent up to 100% of the net assets of that ETF, in order to earn additional returns for that ETF. The Filer may lend the securities of an ETF to one or more borrowers indirectly through an Agent, other than the custodian or sub-custodian of the ETF, which will be a Canadian financial institution or the investment bank affiliate of a Canadian financial institution. It may not be practical for the custodian of an ETF to act as Agent with respect to the ETF's securities lending transactions as it may not have control over the securities in the ETF's Common Share Portfolio for the reason set out in paragraph 10.

12. Each ETF may appoint the Counterparty or, in appropriate circumstances, an affiliated dealer of the Counterparty, through the custodian (which is holding the Common Share Portfolio on behalf of the Counterparty), to act as that ETF's Agent in administering that ETF's securities lending activities. It is also possible that an ETF's custodian will, with the consent of the Counterparty, act as the ETF's Agent with respect to the ETF's securities lending activities.

13. The securities lending activities of an ETF are in addition to the exemptive relief the ETF has already obtained which allow it to borrow up to 15% of its net assets to fund redemptions.

14. The Filer shall ensure that any Agent through which an ETF lends securities shall maintain appropriate internal controls, procedures, and records for securities lending transactions as prescribed in subsection 2.16(2) of NI 81-102.

15. The securities of the Common Share Portfolio of an ETF will be pledged to the Counterparty as collateral for the obligations of the ETF under its Forward Contract. The Counterparty must release its security interest in the securities in the Common Share Portfolio of the ETF in order to allow the ETF to lend such securities, provided that the ETF grants the Counterparty a security interest in the collateral held by the ETF for the loaned securities.

16. To facilitate the Counterparty's release of its security interest in the securities in the Common Share Portfolio of an ETF, the Filer will ensure that the securities of the Common Share Portfolio of the ETF are loaned to an affiliate of the Counterparty, which will be a registered dealer and a member of the Investment Dealers Association of Canada or another borrower that is acceptable to both the Filer and the Counterparty.

17. The collateral received by an ETF in respect of a securities lending transaction, and in which the Counterparty will have a security interest, will not be reinvested in any other types of investment products.

18. The prospectus of each ETF will contain disclosure about securities lending transactions before that ETF enters into such securities lending transactions. Other than as set forth herein, any securities lending transactions on behalf of an ETF will be conducted in accordance with the provisions of NI 81-102.

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 to the ETFs provided that:

(a) with respect to the exemption from subsection 2.12(1)12 of NI 81-102, each ETF, in connection with a securities lending transaction is using a Forward Contract and,

(i) receives the collateral prescribed by subsections 2.12(1)3 to 6 of NI 81-102,

(ii) has the rights set forth in subsections 2.12(1)7 to 9 and 2.12(1)11 of NI 81-102, and

(iii) complies with subsection 2.12(1)10 of NI 81-102;

(b) with respect to the exemption from subsection 2.12(3) of NI 81-102, each ETF provides a security interest to the applicable Counterparty in the collateral delivered to it as collateral pursuant to a securities lending transaction as described in representation 15;

(c) with respect to the exemption from section 2.15 of NI 81-102:

(i) each ETF enters into a written agreement with an Agent that complies with each of the requirements set forth in subsection 2.15(4) of NI 81-102, except as set out herein;

(ii) the Agent administering the securities lending transaction of each ETF:

(A) is in compliance with subsection 2.15(5) of NI 81-102; and

(B) is a bank or trust company described in paragraph 1 or 2 of section 6.2 of NI 81-102 or the investment bank affiliate of such bank or trust company that is registered as an investment dealer or in an equivalent registration category; and

(d) with respect to the exemption from section 2.16 of NI 81-102, the Filer and the ETFs comply with the requirements of section 2.16 of NI 81-102 as if references to an "agent appointed under section 2.15" in that section are references to an "agent appointed by the manager".

"Vera Nunes"
Assistant Manager, Investment Funds Branch
Ontario Securities Commission

 

Schedule A

List of Horizons BetaPro ETFs

Horizons BetaPro S&P/TSX 60® Bull Plus ETF
Horizons BetaPro S&P/TSX 60® Bear Plus ETF
Horizons BetaPro S&P/TSX® Global Mining Bull Plus ETF
Horizons BetaPro S&P/TSX® Global Mining Bear Plus ETF
Horizons BetaPro COMEX® Gold Bullion Bull Plus ETF
Horizons BetaPro COMEX® Gold Bullion Bear Plus ETF
Horizons BetaPro NYMEX® Crude Oil Bull Plus ETF
Horizons BetaPro NYMEX® Crude Oil Bear Plus ETF
Horizons BetaPro NYMEX® Natural Gas Bull Plus ETF
Horizons BetaPro NYMEX® Natural Gas Bear Plus ETF
Horizons BetaPro DJ-AIGSM Agricultural Grains Bull Plus ETF
Horizons BetaPro DJ-AIGSM Agricultural Grains Bear Plus ETF
Horizons BetaPro S&P/TSX Capped Financials Bull Plus ETF
Horizons BetaPro S&P/TSX Capped Financials Bear Plus ETF
Horizons BetaPro S&P/TSX Capped Energy Bull Plus ETF
Horizons BetaPro S&P/TSX Capped Energy Bear Plus ETF
Horizons BetaPro S&P/TSX Global Gold Bull Plus ETF
Horizons BetaPro S&P/TSX Global Gold Bear Plus ETF