CI Investments Inc.
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions –Relief granted from short selling restrictions in NI 81-102 to permit a alternative mutual funds to short sell “government securities”, as defined in NI 81-102, up to 300% of NAV – relief sought in order to short securities in connection with fund’s hedging strategy – features of government bonds mitigate many of the risks associated with short selling strategies – relief also granted to future alternative mutual funds managed by the Filer with similar short selling strategies.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds – ss. 2.6.1(1)(c)(v), 2.6.2 and 19.1.
June 6, 2019
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS
IN MULTIPLE JURISDICTIONS
IN THE MATTER OF
CI INVESTMENTS INC.
The principal regulator in the Jurisdiction has received an application from the Filer, on behalf of CI Lawrence Park Alternative Investment Grade Credit Fund and CI Marret Alternative Absolute Return Bond Fund (the Existing Funds) and any alternative mutual fund established in the future and managed by the Filer or an affiliate of the Filer (each, a Future Fund and, together with the Existing Funds, the Funds), for a decision under the securities legislation of the principal regulator (the Legislation) exempting the Funds from the following provisions of National Instrument 81-102 Investment Funds (NI 81-102) in order to permit each Fund to short sell “government securities” (as defined in NI 81-102) up to a maximum of 300% of a Fund’s net asset value (NAV) (the Exemption Sought):
(a) subparagraph 2.6.1(1)(c)(v), which restricts a Fund from selling a security short if, at the time, the aggregate market value of the securities sold short by the Fund exceeds 50% of the Fund’s NAV; and
(b) section 2.6.2 of NI 81-102, which states that a Fund may not borrow cash or sell securities short if, immediately after entering into a cash borrowing or short selling transaction, the aggregate value of cash borrowed combined with the aggregate market value of the securities sold short by the Fund would exceed 50% of the Fund’s NAV
(together, the Short Selling Limits).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission is the principal regulator for the application; and
(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 all of the provinces and territories of Canada other than the Jurisdiction (together with the Jurisdiction, the Jurisdictions).
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:
1. The Filer is a corporation subsisting under the laws of Ontario with its head office located in Toronto, Ontario. The Filer is registered:
(a) under the securities legislation of all provinces of Canada as a portfolio manager;
(b) under the securities legislation of Ontario, Québec, and Newfoundland and Labrador as an investment fund manager;
(c) under the securities legislation of Ontario as an exempt market dealer; and
(d) under the Commodity Futures Act (Ontario) as a commodity trading counsel and a commodity trading manager.
2. The Existing Funds are alternative mutual funds established as trusts under the laws of Ontario that operate under the provisions of NI 81-102 applicable to alternative mutual funds. Each Future Fund will be an alternative mutual fund under NI 81-102.
3. The Existing Funds are reporting issuers in each Jurisdiction and their units are qualified for distribution to the public in each Jurisdiction pursuant to a simplified prospectus dated May 10, 2019. Each Future Fund will be a reporting issuer in one or more Jurisdictions.
4. Neither the Filer nor the Existing Funds are in default of securities legislation in any Jurisdiction.
5. The investment objective of CI Lawrence Park Alternative Investment Grade Credit Fund is to generate consistent positive total returns with an emphasis on capital preservation and low correlation to traditional equity and fixed income markets. This Fund is primarily invested in the investment grade debt of corporations and financial institutions in the developed world.
6. The investment objective of the CI Marret Alternative Absolute Return Bond Fund is to provide positive absolute returns with low volatility over a market cycle regardless of market conditions or general market direction, by primarily investing in debt instruments across the credit spectrum including cash, government debt, investment grade corporate debt, high yield debt, credit derivatives and other income-producing securities throughout the world.
7. An important investment strategy used by each of the Existing Funds is to enter into long positions in corporate bonds while hedging the interest rate risk of those bonds by taking short positions in government bonds. The short positions in the government bonds can be achieved either through short selling government bonds or by entering into short positions in government bond futures.
8. The Short Selling Limits would restrict the Existing Funds to short selling government securities to no more than 50% of the Fund’s NAV. However, NI 81-102 would permit the Existing Funds to obtain the additional leveraged short exposure through the use of specified derivatives, up to an aggregate exposure of 300% of the Fund’s NAV.
9. The Filer is of the view, however, that it would be in the Existing Funds’ best interest to permit them to physically short sell government securities up to 300% of the Fund’s NAV, instead of being limited to achieve the same degree of leverage through either specified derivatives only, or a combination of physical short selling and specified derivatives, for the following reasons:
(a) While derivatives can be used to create similar investment exposure as short selling up to 300% of each Existing Fund’s NAV, the use of derivatives is more complex, more expensive and riskier than short selling. Implementing derivatives necessitates incremental transactional steps and expense to each of the Existing Funds.
(b) There is a potential mismatch between the corporate bond and government security futures contract, which makes the use of derivatives less efficient than short selling government securities. The futures contract has standard terms set by the exchange on which it trades and is not directly linked to one particular government security. This makes it more difficult to determine whether the interest rate exposure of the government security futures contract is a good match for the interest rate exposure of the corporate bond it is meant to hedge. On the other hand, the short position in a government security that the market pairs with a corporate bond has been selected due to its proven effectiveness in hedging the interest rate exposure of the corresponding corporate bond.
10. The Future Funds will employ an investment strategy similar to the Existing Funds’ in that each Future Fund will contemplate short selling government securities concurrently with investing in long positions in corporate fixed-income securities.
11. The only securities sold short by the Funds in excess of 50% of a Fund’s NAV will be “government securities” as such term is defined in NI 81-102. The Funds will otherwise comply with the provisions governing short selling by an alternative mutual fund under sections 2.6.1 and 2.6.2 of NI 81-102.
12. Each Fund’s aggregate exposure to short selling, cash borrowing and specified derivatives transactions will not exceed 300% of the Fund’s NAV, in compliance with subsection 2.9.1 of NI 81-102 (the Aggregate Exposure Limit).
13. Each Fund will implement the following controls when conducting a short sale:
(a) The Fund will assume the obligation to return to the Borrowing Agent (as defined in NI 81-102) the securities borrowed to effect the short sale;
(b) The Fund will receive cash for the securities sold short within normal trading settlement periods for the market in which the short sale is effected;
(c) The Filer will monitor the short positions of the Fund at least as frequently as daily;
(d) The security interest provided by the Fund over any of its assets that is required to enable the Fund to effect a short sale transaction is made in accordance with section 6.8.1 of NI 81-102 and will otherwise be made in accordance with industry practice for that type of transaction and relates only to obligations arising under such short sale transaction;
(e) The Fund will maintain appropriate internal controls regarding short sales, including written policies and procedures for the conduct of short sales, risk management controls and proper books and records; and
(f) The Filer and the Fund will keep proper books and records of short sales and all of its assets deposited with Borrowing Agents as security.
14. Each Fund’s prospectus (the Prospectus) will contain adequate disclosure of the Fund’s short selling activities, including material terms of the Exemption Sought.
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 Exemption Sought is granted, provided that:
1. The only securities which a Fund will sell short in an amount that exceeds 50% of the Fund’s NAV will be securities that meet the definition of “government security” as such term is defined in NI 81-102.
2. Each short sale by a Fund will comply with all of the short sale requirements applicable to alternative mutual funds in sections 2.6.1 and 2.6.2 of NI 81-102.
3. A Fund’s aggregate exposure to short selling, cash borrowing and specified derivatives will not exceed the Aggregate Exposure Limit.
4. Each short sale will be made consistent with the Fund’s investment objectives and investment strategies.
5. The Fund’s Prospectus will disclose that the Fund is able to short sell “government securities” (as defined in NI 81-102) in an amount up to 300% of the Fund’s NAV, including the material terms of this decision.
Manager, Investment Funds and Structured Products
Ontario Securities Commission