NP 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Relief from sections 6.8(1) and 6.8(2)(c) of NI 81-102 exempting an investment fund from margin deposit limits to invest in specified futures -- subject to conditions.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 6.8(1), 6.8(2)(c) and 19.1
November 18, 2021
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 3iQ CORP. (the Filer)
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of Bitcoin Split Trust (the Fund) a non-redeemable investment fund to be established as a trust under the laws of the Jurisdiction, for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) that exempts the Fund from the requirement in:
(a) section 6.8(1) of National Instrument 81-102 -- Investment Funds (NI 81-102), which restricts an investment fund from depositing portfolio assets as margin with a member of a regulated clearing agency or dealer that is a member of a self-regulatory organization that is a participating member of the Canadian Investor Protection Fund (CIPF) for a transaction in Canada involving certain specified derivatives in excess of 10% of the net asset value (NAV) of the investment fund at the time of deposit; and
(b) section 6.8(2)(c) of NI 81-102, which restricts an investment fund from depositing portfolio assets as margin with a member of a regulated clearing agency or dealer for a transaction outside of Canada involving certain specified derivatives in excess of 10% of the NAV of the investment fund as at the time of deposit,
to permit the Fund to deposit as margin portfolio assets of up to 35% of the Fund's NAV as at the time of deposit with any one futures commission merchant in Canada or the United States (each a Dealer) and up to 70% of the Fund's NAV as at the time of deposit with all Dealers in the aggregate, in each case for transactions in standardized futures, subject to certain conditions proposed in this Application (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
(a) the Filer has provided notice that section 4.7(1) of Multilateral Instrument 11-102 -- Passport System is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, the Northwest Territories, Nunavut and Yukon (together with the Jurisdiction, the Jurisdictions).
Terms defined in National Instrument 14-101 -- Definitions (NI 14-101), NI 81-102 and MI 11-102 have the same meaning if used in this Application, unless otherwise defined herein. Certain other defined terms have the meanings given to them below under "Representations".
This decision is based on the following facts represented by the Filer.
1. The Filer is a corporation incorporated under the laws of Canada, with its head office located at 4800-1 King Street West, Box 160, Toronto, Ontario M5H 1A1.
2. The Filer is registered as (a) a portfolio manager and exempt market dealer in Alberta, British Columbia, Ontario and Quebec, (b) an investment fund manager in Alberta, Ontario and Quebec and (c) a commodity trading manager in Ontario.
3. The Filer will be the investment fund manager of the Fund. The Filer has applied to list the Securities on the Toronto Stock Exchange (the TSX).
4. The Filer is not in default of securities legislation in any of the Jurisdictions.
5. The Fund will be a non-redeemable investment fund structured as a trust that is governed by the laws of the Province of Ontario.
6. The Fund will be a reporting issuer in each of the Jurisdictions.
7. Subject to receiving conditional approval from the TSX and the Fund satisfying the listing requirements of the TSX, the Securities will be listed on the TSX.
8. The Filer will file a final long form prospectus prepared and filed in accordance with National Instrument 41-101 -- General Prospectus Requirements, subject to any exemptions that may be granted by the applicable securities regulatory authorities.
9. The investment objectives for the Preferred Securities are to provide their holders with fixed quarterly cash interest payments of 6% (US$0.60) per annum on the issue price of US$10.00 and to return the original issue price of the Preferred Security to holders on March 31, 2025 (the Maturity Date), subject to extension for successive terms of up to three years as determined by the Filer.
10. The investment objectives for the Capital Units are to provide their holders with quarterly cash distributions targeted to be US$0.1125 per Capital Unit (US$0.45 per annum or 3% per annum) on the issue price of US$15.00 per Capital Unit until the Maturity Date, subject to extension for successive terms of up to three years as determined by the Filer and to provide their holders with the opportunity to participate in the performance of bitcoin held by the Fund on a leveraged basis.
11. To achieve its investment objectives, the Fund will invest, directly or indirectly (through bitcoin futures contracts and micro bitcoin futures contracts traded on the Chicago Mercantile Exchange (CME) under the tickers BTC and MBT, respectively (Bitcoin Futures)), in long-term holdings of bitcoin. Bitcoin will be purchased from reputable bitcoin trading platforms (commonly referred to as bitcoin exchanges) and over-the-counter (OTC) counterparties, in order to provide securityholders with a convenient, safer alternative to a direct investment in bitcoin. In order to seek to generate income, the Fund may write covered call options and put options from time to time on Bitcoin Futures.
12. Subject to any exemptions that may be granted by the applicable securities regulatory authorities, the Fund will be subject to the investment practices permitted by NI 81-102.
13. Generally, the Fund does not intend to borrow money or employ other forms of leverage to acquire bitcoin for its portfolio. The Fund may however borrow money on a short term basis to acquire bitcoin in anticipation of and prior to any follow on offering of Securities by the Fund. Any borrowing by the Fund will be made in accordance with the borrowing restrictions applicable to a non-redeemable investment fund under NI 81-102.
14. The Filer is authorized to establish, maintain, change and close brokerage accounts on behalf of the Fund. In order to facilitate transactions in Bitcoin Futures on behalf of the Fund, the Filer will establish one or more accounts (each an Account) with one or more Dealers.
15. Each Dealer in the United States (each a U.S. Dealer) is regulated by the Commodity Futures Trading Commission (the CFTC) and the National Futures Association (the NFA) in the United States and is required to segregate all assets held on behalf of clients, including the Fund. Each U.S. Dealer is subject to regulatory audit and must have insurance to guard against employee fraud. Each U.S. Dealer has a net worth, determined from its most recent audited financial statements, in excess of the equivalent of C$50 million. Each U.S. Dealer has an exchange assigned to it as its designated self-regulatory organization (the DSRO). As a member of a DSRO, each U.S. Dealer must meet capital requirements, comply with the conduct rules of the CFTC, NFA and its DSRO, and participate in an arbitration process with a complainant.
16. The Fund may use U.S. Dealers and/or Dealers in Canada (Canadian Dealer). Each Canadian Dealer will be a member of a regulated clearing agency or dealer that is a member of a self-regulatory organization that is a participating member of the CIPF.
17. Additionally, each Dealer is a member of the clearing corporations and exchanges that the standardized futures in the Fund's portfolio are primarily traded through. Each clearing corporation is obliged to apply its surplus funds and the security deposits of its members to reimburse clients of failed members.
18. A Dealer will require, for each Account, that portfolio assets of the Fund be deposited with the Dealer as collateral for transactions in Bitcoin Futures (Initial Margin). Initial Margin represents the minimum initial amount of portfolio assets that must be deposited with a Dealer to initiate trading in specified derivatives transactions or to maintain the Dealer's open position in standardized futures.
19. Levels of Initial Margin are established at a Dealer's discretion. At no time will more than 70% of the NAV of the Fund be deposited as Initial Margin with one or more Dealers in the aggregate.
20. Each Dealer is required to hold all Initial Margin, including cash and government securities, in segregated accounts and the Initial Margin will not be available to satisfy claims against the Dealer made by creditors of the Dealer.
Reasons for the Requested Relief
21. The use of Initial Margin is an essential element of investing in Bitcoin Futures for the Fund.
22. The Requested Relief would allow the Fund to invest in standardized futures more extensively with any one Dealer, which would allow the Fund to pursue its investment strategies more efficiently and flexibly.
23. Opening Accounts and transacting with multiple Dealers adds complexity and cost to the management of the Fund. Using fewer Dealers will considerably simplify the Fund's investment and operations and will reduce the cost of implementing the Fund's investment strategy. Using fewer Dealers also simplifies compliance and risk management, as monitoring the data, controls and policies of a smaller number of Dealers is less complex.
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:
(a) the Fund will only use Initial Margin such that the amount of Initial Margin held by any one Dealer on behalf of the Fund does not exceed 35% of the NAV of the Fund as at the time of the deposit;
(b) the Fund shall only use Initial Margin such that the amount of Initial Margin held by Dealers in aggregate on behalf of the Fund does not exceed 70% of the NAV of the Fund as at the time of the deposit; and
(c) all Initial Margin deposited with any Dealer is and will be held in segregated accounts and is not, and will not be available to satisfy claims against such Dealer made by creditor of the Dealer.
Manager, Investment Funds and Structured Products
Ontario Securities Commission
Application File #: 2021/0570
Sedar #: 3286628