Auspice Capital Advisors Ltd.
NP 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions - exemption granted to investment funds from margin deposit limits contained in subsection 6.8(1) and paragraph 6.8(2)(c) of NI 81-102 to invest in specified derivatives using dealers in Canada and the United States - conditional on the amount of margin held by any one dealer on behalf of a fund not exceeding 35% of the net asset value of that fund and the amount of margin held by dealers in the aggregate on behalf of that fund not exceeding 70% of the net asset value of that fund, as at the time of the deposit.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 6.8(1), 6.8(2)(c) and 19.1.
October 12, 2023
IN THE MATTER OF
THE SECURITIES LEGISLATION
OF ALBERTA AND ONTARIO
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS
IN MULTIPLE JURISDICTIONS
IN THE MATTER OF
AUSPICE CAPITAL ADVISORS LTD.
The securities regulatory authority or regulator in each of the Jurisdictions (each a Decision Maker) has received an application from the Filer for a decision under the securities legislation of the Jurisdictions (the Legislation) granting Auspice Diversified Trust (ADT) and Auspice One Fund Trust (AOFT and together with ADT, the Funds and individually, a Fund) exemptions from
(a) subsection 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 with a dealer that is a member of a self-regulatory organization that is a participating member of the Canadian Investor Protection Fund 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) paragraph 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 a 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 deposit by the Funds as margin portfolio assets of up to 35% of the Funds' 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 Funds' NAV as at the time of deposit with all Dealers in the aggregate, in each case for transactions in standardized futures, clearing corporation options, options on futures or cleared specified derivatives, subject to certain conditions proposed in this application (the Exemption Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a dual application),
(a) the Alberta Securities Commission is the principal regulator for this application,
(b) the Filer has 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 jurisdiction of Canada, other than Alberta and Ontario, and
(c) the decision is the decision of the principal regulator and evidences the decision of the securities regulatory authority or regulator in Ontario.
Terms defined in National Instrument 14-101 Definitions, MI 11-102 and NI 81-102 have the same meaning if used in this decision, unless otherwise defined.
This decision is based on the following facts represented by the Filer:
The Filer, ADT and AOFT
1. The Filer is a quantitative investment specialist that was established in 2006.
2. The Filer is registered as a portfolio manager, investment fund manager and exempt market dealer in Alberta, as a commodity trading manager, investment fund manager and exempt market dealer in Ontario, as an investment fund manager in British Columbia, Québec, and Newfoundland and Labrador, and as an exempt market dealer in British Columbia and Québec. The Filer's head office is in Calgary, Alberta.
3. ADT is a trust that is governed by the laws of Alberta, established in June 2009.
4. The investment objective of ADT is to generate returns on investments in, trading in or exposure to exchange traded futures, options, forward contracts for commodities, financial instruments and currencies, including physical commodities, and exchange traded funds (Commodity Interests) that generate returns that are independent of equity, fixed income, and real estate investments.
5. AOFT is a trust that is governed by the laws of Alberta, established in June 2021.
6. The investment objective of AOFT is to achieve superior absolute and risk-adjusted returns as compared to balanced fund approaches, or a long-only equity fund, with the added benefits of protection and performance during sustained downward trends while earning a yield.
7. ADT and AOFT are alternative mutual funds, as defined in NI 81-102.
8. The Filer and the Funds are not in default of securities legislation in any jurisdiction of Canada.
9. Units of each Fund are offered pursuant to a simplified prospectus and fund facts prepared in accordance with National Instrument 81-101 Mutual Fund Prospectus Disclosure.
10. Each Fund is a reporting issuer in each jurisdiction of Canada.
Margin Deposit Limits
11. The Filer's diversified program is a rules-based, unconstrained (e.g., ADT and AOFT are not constrained from participating in opportunities, long and short, in a variety of asset classes), systematic multi-strategy investment program that is designed to deliver superior, non-correlated returns at critical times.
12. To achieve their investment objectives, the Funds will invest directly or indirectly in long-term and short-term holdings of Commodity Interests. Commodity Interests will be purchased from reputable trading platforms (commonly referred to as commodity exchanges) and over-the-counter counterparties in order to provide the Funds with a convenient, safer alternative to a direct investment in futures.
13. The Filer is authorized to establish, maintain, change, and close brokerage accounts on behalf of the Funds. In order to facilitate transactions in Commodity Interests on behalf of the Funds, the Filer will establish one or more accounts (each an Account) with one or more Dealers.
14. Each Dealer in Canada is a member of the Canadian Investment Regulatory Organization and is registered in the applicable jurisdictions as a future commission merchant or equivalent.
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 Funds. 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. A Dealer will require, for each Account, that the portfolio assets of the Funds be deposited with the Dealer as collateral for transactions in Commodity Interests (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.
17. Levels of Initial Margin are established at a Dealer's discretion. At no time will more than 70% of the NAV of the Funds be deposited as Initial Margin with one or more Dealers in the aggregate.
18. 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 Exemption Sought
19. The use of Initial Margin is an essential element of investing in Commodity Interests for the Funds.
20. The Exemption Sought would allow the Funds to invest in standardized futures more extensively with any one Dealer, which would allow the Funds to pursue their investment strategies more efficiently and flexibly.
21. Opening Accounts and transacting with multiple Dealers adds complexity and cost to the management of the Funds. Using fewer Dealers will considerably simplify the Funds' investments and operations and will reduce the cost of implementing the Funds' investment strategies. 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.
Each of the Decision Makers is satisfied that the decision meets the test set out in the Legislation for the Decision Makers to make the decision.
The decision of the Decision Makers under the Legislation is that the Exemption Sought is granted provided that:
(a) each Fund will only use Initial Margin such that the amount of Initial Margin held by any one Dealer on behalf of that Fund does not exceed 35% of the NAV of that Fund, taken at market value as at the time of the deposit;
(b) each Fund shall only use Initial Margin such that the amount of Initial Margin held by Dealers in aggregate on behalf of that Fund does not exceed 70% of the NAV of that 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.