Use of cash collateral for delayed basket securities in ETF subscriptions

On May 22, 2024, Investment Management Division staff published Ontario Securities Commission Staff Notice 81-735 Cash Collateral Use for Delayed Basket Securities in ETF Subscriptions to facilitate the use of cash collateral in ETF market-making activities. Specifically, the Staff Notice sets out our views regarding the use of cash collateral for ETF in-kind subscriptions where one or more securities from a basket of securities comprising payment cannot be delivered on the settlement date.

This issue was brought to our attention in a letter to staff from the Canadian Capital Markets Association and the Canadian ETF Association dated April 23, 2024. The Staff Notice is the result of our work with these industry associations to address the concerns expressed in their letter.

This guidance provides both ETFs and market makers with the flexibility to use cash collateral to prevent settlement failure due to the delayed delivery of basket securities. All investors in the ETFs, including retail investors, will benefit from the use of cash collateral, as it will result in a market price that better reflects the underlying net asset value of the ETF.