National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- relief from certain specified derivatives and custodial requirements to permit mutual funds to enter into swap transactions that are cleared through a clearing corporation -- relief required because of U.S. requirements to clear over-the-counter derivatives including swaps -- decision treats cleared swaps similar to other cleared derivatives -- National Instrument 81-102 Investment Funds.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 2.7(1) and (4), 6.8(1), 19.1.
March 31, 2015
IN THE MATTER OF THE SECURITIES LEGISLATION OF ONTARIO (the Jurisdiction) AND IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS AND IN THE MATTER OF CANADIAN IMPERIAL BANK OF COMMERCE AND CIBC ASSET MANAGEMENT INC. (collectively, the Filers)
The principal regulator in the Jurisdiction has received an application from each of the Filers for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation), pursuant to Section 19.1 of National Instrument 81-102 Investment Funds (NI 81-102), exempting all current mutual funds managed by Canadian Imperial Bank of Canada (CIBC) that enter into Swaps (as defined below, each, an Existing CIBC Fund and collectively, the Existing CIBC Funds) and future mutual funds managed by CIBC that enter into Swaps (as defined below) in the future (together with the Existing CIBC Funds, each a CIBC Fund and collectively the CIBC Funds) and all current mutual funds managed by CIBC Asset Management Inc. (CAMI) that enter into Swaps (as defined below, each, an Existing CAMI Fund and collectively, the Existing CAMI Funds) and future mutual funds managed by CAMI that enter into Swaps (as defined below) in the future (together with the Existing CAMI Funds, each, a CAMI Fund and, collectively, the CAMI Funds):
(i) from the requirement in subsection 2.7(1) of NI 81-102 that a mutual fund must not purchase an option or a debt-like security or enter into a swap or a forward contract unless, at the time of the transaction, the option, debt-like security, swap or contract has a designated rating or the equivalent debt of the counterparty, or of a person or company that has fully and unconditionally guaranteed the obligations of the counterparty in respect of the option, debt-like security, swap or contract, has a designated rating;
(ii) from the limitation in subsection 2.7(4) of NI 81-102 that the mark-to-market value of the exposure of a mutual fund under its specified derivatives positions with any one counterparty other than an acceptable clearing corporation or a clearing corporation that clears and settles transactions made on a futures exchange listed in Appendix A to NI 81-102 shall not exceed, for a period of 30 days or more, 10 percent of the net asset value of the mutual fund; and
(iii) from the requirement in subsection 6.1(1) of NI 81-102 to hold all portfolio assets of a mutual fund under the custodianship of one custodian in order to permit each CAMI Fund and/or CIBC Fund to deposit cash and portfolio assets directly with a Futures Commission Merchant (as defined below) and indirectly with a Clearing Corporation (as defined below) as margin,
in each case, with respect to cleared Swaps (the Requested Relief).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission is the principal regulator for this application; and
(b) the Filers have provided notice that subsection 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in each of the other provinces and territories of Canada (the Other Jurisdictions).
Terms defined in NI 81-102, National Instrument 14-101 Definitions, and MI 11-102 have the same meaning if used in this decision, unless otherwise defined. Capitalized terms used in this decision have the following meanings:
CFTC means the U.S. Commodity Futures Trading Commission
Clearing Corporation means any of the Chicago Mercantile Exchange Inc., ICE Clear Credit LLC, LCH.Clearnet Limited and any other clearing organization that is permitted to operate in the Jurisdiction or the Other Jurisdiction, as the case may be, where the CAMI Fund and/or CIBC Fund is located.
Dodd-Frank means the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Futures Commission Merchant means any futures commission merchant that is registered with the CFTC and is a member of a Clearing Corporation.
OTC means over-the-counter.
Portfolio Manager means a Filer, and/or each affiliate of the Filers and/or each third party portfolio manager, including a sub-adviser, retained from time to time by a Filer to manage all or a portion of the investment portfolio of one or more CAMI Funds or CIBC Funds.
Swaps means the swaps that are, or will become, subject to a clearing determination issued by the CFTC, including fixed-to-floating interest rate swaps, basis swaps, forward rate agreements in U.S. dollars, the Euro, Pounds Sterling or the Japanese Yen, overnight index swaps in U.S. dollars, the Euro and Pounds Sterling and untranched credit default swaps on certain North American indices (CDX.NA.IG and CDX.NA.HY) and European indices (iTraxx Europe, iTraxx Europe Crossover and iTraxx Europe HiVol) at various tenors.
U.S. Person has the meaning attributed thereto by the CFTC.
This decision is based on the following facts represented by the Filers:
1. CIBC is or will be the investment fund manager of each CIBC Fund. CIBC is registered as an investment fund manager in each of the Provinces of Quebec and Newfoundland and Labrador. The head office of CIBC is in Toronto, Ontario.
2. CAMI is, or will be, the investment fund manager of each CAMI Fund. CAMI is registered as an investment fund manager, a portfolio manager, and a commodity trading manager in the Province of Ontario. CAMI is also registered as a portfolio manager in each of the other Jurisdictions, as a derivatives portfolio manager in Quebec and as an investment fund manager in each of the Provinces of Quebec and Newfoundland and Labrador. The head office of CAMI is in Toronto, Ontario.
3. Either a Filer, and/or an affiliate of the Filers and/or a third party Portfolio Manager will be the portfolio manager or sub-adviser, of all or a portion of the investment portfolio of each CIBC Fund and each CAMI Fund.
4. Each CIBC Fund is, or will be, a mutual fund created under the laws of the Province of Ontario and is, or will be, subject to the provisions of NI 81-102. Each CAMI Fund is, or will be, a mutual fund created under the laws of the Province of Ontario and is, or will be, subject to the provisions of NI 81-102.
5. Neither the Filers nor the Existing CIBC Funds or Existing CAMI Funds are in default of securities legislation in the Jurisdiction or any of the Other Jurisdictions.
6. The securities of each CIBC Fund and each CAMI Fund are, or will be, qualified for distribution pursuant to a prospectus that was, or will be, prepared and filed in accordance with the securities legislation of all the provinces and territories of Canada. Accordingly, each CIBC Fund and each CAMI Fund is, or will be, a reporting issuer or the equivalent in each province and territory of Canada.
7. The investment objective and investment strategies of each CIBC Fund and each CAMI Fund permit, or will permit, a CIBC Fund and a CAMI Fund to enter into derivative transactions, including Swaps. The Portfolio Manager considers Swaps to be an important investment tool that is available to it to properly manage a CIBC Fund's and CAMI Fund's portfolio. Each Existing CIBC Fund and Existing CAMI Fund currently use or intend to use interest rate swaps and/or credit default swaps in their respective portfolios.
8. Dodd-Frank requires that certain OTC derivatives be cleared through a Futures Commission Merchant at a clearing organization recognized by the CFTC. Generally, when one party to a Swap is a U.S. Person, that Swap must be cleared, absent an available exception.
9. Currently, the Existing CIBC Funds and Existing CAMI Funds only enter into Swaps on an OTC basis with a number of Canadian, U.S. and other international counterparties, which are entered into in compliance with the derivative provisions included in NI 81-102.
10. In order to benefit from both the pricing benefits and reduced trading costs that a Portfolio Manager is often able to achieve through its trade execution practices for its managed investments funds and from the reduced costs associated with cleared OTC derivatives as compared to other OTC trades, the Filers wish to have the CIBC Funds and the CAMI Funds have the ability to enter into cleared Swaps.
11. In the absence of the Requested Relief, the Portfolio Manager may need to structure certain Swaps entered into by the CIBC Fund or CAMI Fund so as to avoid the clearing requirements of the CFTC. The Filers respectfully submit that this would not be in the best interests of the CIBC Funds or CAMI Funds and their investors for a number of reasons, as set out below.
12. The Filers believe that it is in the best interests of the CIBC Funds and the CAMI Funds and their investors to be able to execute OTC derivatives with U.S. Persons, including U.S. swap dealers.
13. In their role as investment fund managers for the CIBC Funds or the CAMI Funds, the Filers determined that central clearing represents a good choice for the investors in the CIBC Funds and the CAMI Funds to mitigate the legal, operational and back office risks faced by investors in the global swap markets.
14. A Portfolio Manager will typically use the same trade execution practices for all of its advised investment funds and other accounts. An example of these trade execution practices is block trading, where a large number of securities are purchased or sold or large derivative trades are entered into on behalf of a number of investment funds and other accounts advised by one Portfolio Manager. These practices include the use of cleared Swaps if such trades are executed with a U.S. swap dealer. If the CIBC Funds and the CAMI Funds are unable to use cleared Swaps, then each affected Portfolio Manager will have to create separate trade execution practices only for the CIBC Funds and CAMI Funds for these types of trades. This will increase the operational risk for the CIBC Funds and CAMI Funds. In addition, the CIBC Funds and CAMI Funds will not be able to enjoy the possible price benefits and reduction in trading costs that a Portfolio Manager may be able to achieve through a common practice for its advised funds and other accounts. In the Filers' opinions, best execution and maximum certainty can best be achieved through common trade execution practices, which, in the case of OTC derivatives, involve the execution of Swaps on a cleared basis.
15. As a member of the G20 and a participant in the September 2009 commitment of G20 nations to improve transparency and mitigate risk in derivatives markets, Canada has expressly recognized the systemic benefits that clearing OTC derivatives offers to market participants, such as the CIBC Funds and CAMI Funds. The Filers respectfully submit that the CIBC Funds and the CAMI Funds should be encouraged to comply with the robust clearing requirements established by the CFTC by granting them the Requested Relief.
16. The Requested Relief is analogous to the treatment currently afforded under NI 81-102 to other types of derivatives that are cleared, such as clearing corporation options, options on futures and standardized futures. This demonstrates that, from a policy perspective, the Requested Relief is consistent with the views of the Canadian securities authorities in respect of cleared derivative trades.
17. For the reasons provided above, the Filers submit that it would not be prejudicial to the public interest to grant the Requested Relief.
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 Requested Relief is granted provided that, in respect of the deposit of cash and portfolio assets as margin:
(a) in Canada,
(i) the Futures Commission Merchant is a member of a SRO that is a participating member of CIPF; and
(ii) the amount of margin deposited and maintained with the Futures Commission Merchant does not, when aggregated with the amount of margin already held by the Futures Commission Merchant, exceed 10 percent of the net asset value of the CIBC Fund or CAMI Fund as at the time of deposit; and
(b) outside of Canada,
(i) the Futures Commission Merchant is a member of a Clearing Corporation and, as a result, is subject to a regulatory audit;
(ii) the Futures Commission Merchant has a net worth, determined from its most recent audited financial statements that have been made public or from other publicly available financial information, in excess of the equivalent of $50 million; and
(iii) the amount of margin deposited and maintained with the Futures Commission Merchant does not, when aggregated with the amount of margin already held by the Futures Commission Merchant, exceed 10 percent of the net asset value of the CIBC Fund or CAMI Fund as at the time of deposit.
This decision will terminate on the coming into force of any revisions to the provisions of NI 81-102 that address the clearing of OTC derivatives.