OSC expectations regarding the rehypothecation of portfolio assets

As part of the OSC’s commitment to reducing regulatory burden, we are clarifying the OSC’s views regarding the rehypothecation of portfolio assets (which was item #F-13 in the Reducing Regulatory Burden in Ontario’s Capital Markets report published in November 2019).

Information regarding the rehypothecation of portfolio assets had previously been provided in the April 2015 and March 2018 editions of the Investment Funds Practitioner.

decision document that was issued in August 2019 included a paragraph clarifying and summarizing the OSC’s updated views regarding the rehypothecation of portfolio assets. This paragraph states that:

  1. notwithstanding statements previously made in the Investment Funds Practitioner, there is no prohibition on rehypothecating portfolio assets in section 6.8 of National Instrument 81-102 Investment Funds (NI 81-102), including subsections 6.8(3), 6.8(3.1) and 6.8(4), and
  2. the use of the term “beneficial owner” in subsection 6.8(4) of NI 81-102 does not preclude the rehypothecation of portfolio assets held by a counterparty or lender.

Background regarding the August 2019 decision:

Approximately a year ago, a fund manager applied for multiple types of exemptive relief in connection with the launch of new alternative mutual funds, including exemptive relief to permit the funds to allow a lender to rehypothecate portfolio assets deposited as part of a cash borrowing transaction. Based on the information from the April 2015 edition of the Investment Funds Practitioner, the filer concluded that relief would be required from subsection 6.8(3.1) of NI 81-102 to permit the rehypothecation. Following discussions with staff, the filer withdrew the request for the relief from subsection 6.8(3.1), and the decision was issued without this relief.

If there are any questions about this matter, please contact Christopher Bent, Senior Legal Counsel, Investment Funds and Structured Products Branch at [email protected].