Securities Law & Instruments


Relief from early warning requirements and moratorium requirements for purchases ofunits of a mutual fund pursuant to a hedging program for forward contracts entered into bythe Applicant with RSP clone funds.

Statutes Cited

Securities Act (Ontario), R.S.O. 1990, c.S.5, as am. S. 101. S. 104(2)(c)

Rules Cited

Proposed National Instrument 62-103









WHEREAS the Canadian securities regulatory authority or regulator (the "DecisionMaker") in each of British Columbia, Alberta, Saskatchewan, Manitoba, Ontario andQuebec (the "Jurisdictions") has received an application from Merrill Lynch Internationaland Merrill Lynch Canada Inc. (individually, an "Applicant", and collectively, the"Applicants") for a decision pursuant to the securities legislation of the Jurisdictions (the"Legislation") that the requirements contained in the Legislation triggered by theacquisition of 10% or more of the outstanding securities of a reporting issuer (the "EarlyWarning Requirements") and the corresponding restrictions on further acquisitions (the"Moratorium Requirements") as well as the requirements for the filing of insider tradingreports do not apply to the Applicants in respect of an investment by an Applicant in unitsor securities of Underlying Funds (as defined below) where:

a) An Applicant enters into a forward or other permitted derivative transaction (aForward Contract) directly with a fund that is a fully qualified investment forregistered plans such as RRSPs the units or securities of which are not foreignproperty for the purposes of the Income Tax Act (Canada) (the Tax Act) (each suchfund hereinafter referred to as an RSP Fund and collectively as the RSP Funds);

b) The respective underlying interest of each forward contract is units or securities ofa related corresponding fund that is foreign property for the purposes of the Tax Act(each such fund, with respect to the corresponding RSP Fund having the sameinvestment objective, is hereinafter referred to as an Underlying Fund andcollectively as the Underlying Funds);

c) An Applicant purchases units or securities of an Underlying Fund pursuant to aprospectus for which a receipt has been issued in order to hedge its obligationsunder the corresponding Forward Contract;

AND WHEREAS pursuant to the Mutual Reliance Review System for ExemptiveRelief Applications (the "System") the Quebec Securities Commission is the principalregulator for this application;

AND WHEREAS the Applicants have represented to the Decision Makers that:

Merrill Lynch International is a United Kingdom based broker dealer in securities anddealer in equity derivatives.

Merrill Lynch Canada Inc. is registered in the Jurisdictions as a broker and investmentdealer.

The RSP Funds and the Underlying Funds (collectively, the "Funds") are or will be open-end mutual fund trusts or corporations established under the laws of Canada or provincethereof.

The Funds are or will be reporting issuers under the securities laws of one or more of theprovinces and territories of Canada.

The RSP Funds will enter into Forward Contracts and other permitted derivativeinstruments that are linked to the performance of the corresponding Underlying Funds,while ensuring that units or securities of the RSP Funds do not constitute "foreign property"under the Tax Act for registered tax deferral plans. The investment objectives, practicesand restrictions of the Funds are or will be set out in their respective prospectuses.

The structure of the RSP Funds permits investors to increase their exposure to foreignsecurities markets beyond the current 20% limit imposed by the Tax Act, without beingsubject to a penalty tax.

The value of the Forward Contracts will be linked to the value of the correspondingUnderlying Funds. It is expected that each of the Forward Contracts will be entered intoand settled on a monthly or quarterly basis. Certain contracts will be adjusted daily toreflect the net amounts received by the RSP Funds in respect of purchases of their unitsor securities, the amounts paid in respect of redemption of their units or securities, the costof the Forward Contratcs and the expenses paid by such RSP Funds. All payments underthe Forward Contracts are to be made only in cash and no RSP Fund will have anyentitlement or right to securities of the Underlying Fund held by an Applicant. EachForward Contract creates economic exposure to the Underlying Fund by delivering to therelated RSP Fund a cash payment from an Applicant substantially equal to the investmentreturn, if any, in such Underlying Fund, less the cost of the Forward Contract and theoperating expenses of the RSP Fund. Any investment loss in an Underlying Fund resultsin a cash payment by the related RSP Fund to an Applicant.

The result of the investment strategy is that investors in the RSP Funds will receiveapproximately the same investment return as investors in the corresponding UnderlyingFund, (i) plus the income derived from the RSP Funds' investments and bank deposits,and (ii) less amounts payable to counterparties (such as the Applicants) as premiums forthe issue of the Forward Contracts, the cost of the Forward Contracts and the RSP Funds'other operating expenses.

In order for an Applicant to hedge its position under the Forward Contracts, the Applicantmay acquire directly units or securities of the Underlying Funds or alternatively, may enterinto forward contracts, swaps or other derivatives that would have the effect of hedging itsposition under the Forward Contracts. In such case, the counterparty to the Applicantwould acquire directly units or securities of the Underlying Funds. The number of units orsecurities of the Underlying Funds to be acquired from time to time by an Applicant or itscounterparty in a back-to-back forward arrangement pursuant to its hedging programcannot be determined in advance and will change daily. Both the Applicant's subscriptionsfor units or securities and requests for redemption of units or securities of the UnderlyingFunds will be linked to the number of units or securities subscribed for and redeemed fromday to day by investors in the RSP Funds.

All purchases of an Underlying Fund by an Applicant will be from treasury of theUnderlying Fund.

The Applicants may, from time to time, acquire beneficial ownership of more than 10% ofthe outstanding units or securities of an Underlying Fund.

The units or securities of the Funds will be qualified for sale pursuant to a prospectus ora simplified prospectus and annual information form, which will disclose generally thatcounterparties to forward contracts with the RSP Funds may purchase units or securitiesof the Underlying Funds for hedging purposes and the possible effects thereof.

Purchases of units or securities in the Underlying Funds by an Applicant to implement itshedge will be made with passive investment intent with respect to its ownership or controlof units or securities of the Underlying Funds.

The Early Warning Requirements and the Moratorium Requirements of the Legislationimpose on the Applicants obligations to issue press releases and file reports in connectionwith the acquisition, as required to effect its hedge, of units or securities of an UnderlyingFund and impose restrictions on further acquisitions by the Applicants of units or securitiesof an Underlying Fund.

An Applicant will have difficulty in determining its percentage interest in an UnderlyingFund at any given time because its percentage interest is subject to change on a dailybasis due to issuances and redemptions of units or securities of the Underlying Funds.

Whereas pursuant to the System this MMRS Decision Document evidences the decisionof each Decision Maker (collectively, the "Decision");

Whereas each of the Decision Makers is satisfied that the test contained in the Legislationthat provides the Decision Maker with the jurisdiction to make the decision has been met;

THE DECISION of the Decision Makers pursuant to the Legislation is that the EarlyWarning Requirements, the Moratorium Requirement and the insider trading reportingrequirements contained in the Legislation shall not apply to an Applicant in respect ofacquisitions of units or securities of an Underlying Fund purchased in order to hedge itsobligations under the Forward Contracts.

DATED at Montreal this 19th day of January, 2000.

"Guy Lemoine"      "Viateur Gagnon"