HSBC Global Asset Management
Multilateral Instrument 11-102 Passport System and National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- National Instrument 81-102 Investment Funds -- A fund seeks relief from section 2.18 of NI 81-102 for money market funds to continue to hold existing held securities that no longer have a designated rating -- The fund is a money market fund; an economic disruption has occurred that is expected to temporarily impair the credit ratings of debt security issuers; the portfolio manager considers that holding a debt security that has been downgraded below a designated rating continues to be suitable for the fund; if the security's credit rating falls below a lower specified rating, the fund will as soon as commercially reasonable sell the security; the relief is time-limited to coincide with the expected end of an economic disruption.
Applicable Legislative Provisions
National Instrument 81-102 Investment Fund, ss. 2.18 and 19.1.
August 17, 2020
IN THE MATTER OF THE SECURITIES LEGISLATION OF BRITISH COLUMBIA AND ONTARIO (the Jurisdictions) AND IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS AND IN THE MATTER OF HSBC GLOBAL ASSET MANAGEMENT (CANADA) LIMITED (the Filer)
¶1 The securities regulatory authority or regulator in each of the Jurisdictions (Decision Maker) has received an application from the Filer, on behalf of the Existing Funds (defined below) and future mutual funds that are or will be reporting issuers, that qualify or will qualify as a money market fund (as defined in National Instrument 81-102 Investment Funds (NI 81-102)), and that are or will be managed by the Filer or by an affiliate or successor of the Filer (each a Fund and collectively, the Funds), for a decision under the securities legislation of the Jurisdictions (the Legislation) granting an exemption to allow each Fund to continue to describe itself as a "money market fund" in its prospectus, a continuous disclosure document or a sales communication, even though the Fund holds a Security (as defined below) that does not have a designated rating (as defined in NI 81-102), provided that the Security had a designated rating at the time of purchase and has a Temporary Acceptable Rating (as defined below) (the Exemption Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a dual application):
(a) the British Columbia Securities Commission is the principal regulator for this application;
(b) the Filer has provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in Alberta, Manitoba, New Brunswick, Newfoundland and Labrador, Northwest Territories, Nova Scotia, Nunavut, Prince Edward Island, Quebec, Saskatchewan and Yukon; and
(c) the decision is the decision of the principal regulator and evidences the decision of the securities regulatory authority or regulator in Ontario.
¶2 Terms defined in National Instrument 14-101 Definitions, National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, NI 81-102 and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.
1. Corporate Debt means those securities described in subparagraphs 2.18(1)(a)(iii) and (iv) of NI 81-102;
2. Designated Rating Cash Equivalents means those securities described in paragraphs (b) and (c) of the definition of "cash equivalent" in NI 81-102;
3. Designated Rating Organization means any of:
(a) DBRS Limited, Fitch Ratings, Inc., Moody's Canada Inc. or S&P Global Ratings Canada; or
(b) an affiliate of one of the foregoing that issues credit ratings in a foreign jurisdiction and that has been designated as a DRO affiliate; or
(c) a successor of one of the foregoing;
4. Designated Rating Threshold means the lowest acceptable credit rating for a Security under the definition of designated rating in NI 81-102;
5. Existing Funds means HSBC Canadian Money Market Fund, HSBC U.S. Dollar Money Market Fund and HSBC Canadian Money Market Pooled Fund;
6. Portfolio Manager means the portfolio manager of a Fund;
7. Security means either a Designated Rating Cash Equivalent or Corporate Debt; and
8. Temporary Acceptable Rating means a credit rating for a Security, from a Designated Rating Organization, that is at or above one of the following rating categories, or that is at or above a category that replaces one of the following rating categories:
Designated Rating Organization
Commercial Paper / Short Term Debt
Long Term Debt
Fitch Ratings, Inc.
Moody's Canada Inc.
S&P Global Ratings Canada
¶3 This decision is based on the following facts represented by the Filer:
1. the head office of the Filer is located in Vancouver, British Columbia;
2. the Filer is registered as (a) an exempt market dealer in each of Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, Quebec, Saskatchewan and Northwest Territories), (b) a portfolio manager in each of Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, Quebec and Saskatchewan, and (c) an investment fund manager in each of British Columbia, Newfoundland and Labrador, Ontario and Quebec;
3. the Funds are, or will be, managed by the Filer or by an affiliate or successor of the Filer;
4. the Filer is the Portfolio Manager of the Existing Funds;
5. the Filer is not in default of securities legislation in any jurisdiction;
6. each Fund is, or will be, a mutual fund that is formed as a trust or as a class of shares of a mutual fund corporation, the securities of which are, or will be, in continuous distribution;
7. each Existing Fund is a reporting issuer in each of the provinces and territories of Canada and subject to NI 81-102; each future Fund will be a reporting issuer in some or all of the provinces and territories of Canada and subject to NI 81-102;
8. the securities of the Funds are, or will be, qualified for distribution under a simplified prospectus, annual information form and fund facts document that have been, or will be, prepared and filed in accordance with National Instrument 81-101 Mutual Fund Prospectus Disclosure;
9. each of the Funds is or will be a "money market fund";
10. the Existing Funds are not in default of securities legislation in any jurisdiction;
Reasons for the Exemption Sought
11. section 2.18 of NI 81-102 says that a mutual fund must not describe itself as a "money market fund" in its prospectus, a continuous disclosure document or a sales communication unless it has all of its assets invested in one or more of (a) cash, (b) cash equivalents (which include Designated Rating Cash Equivalents), (c) Corporate Debt or (d) securities issued by one or more money market funds (Money Market Fund Requirements);
12. in order for a Security to qualify as a Designated Rating Cash Equivalent or Corporate Debt, it must maintain a designated rating;
13. each of the Existing Funds currently has all or a portion of its portfolio invested in Securities; these Securities were selected after the Portfolio Manager performed the necessary due diligence and satisfied itself that each Security was suitable for the Existing Fund and met the investment objectives of the Existing Fund;
14. under normal market conditions, if a Security in a Fund's portfolio was downgraded below the Designated Rating Threshold, the Fund would sell such Security as soon as commercially reasonable, to maintain compliance with the Money Market Fund Requirements;
15. under current market conditions, Designated Rating Organizations have begun to downgrade credit ratings as a result of the economic slowdown triggered by COVID-19; these credit rating changes have resulted in Securities, that are considered to be high quality investment grade debt and which may be suitable for a Fund to continue to hold, being downgraded below the Designated Rating Threshold;
16. the Funds, along with any other money market fund subject to National Instrument 81-102, must immediately dispose of a Security if a Designated Rating Organization downgrades its rating below the Designated Rating Threshold in order to meet the requirements in National Instrument 81-102;
17. this will result in the same security coming onto the market at the same time, which event may cause a Fund to dispose of the Security at a price that is less than it was valued in the Fund's portfolio causing the Funds to realize losses despite the otherwise strong credit quality of such Securities; this could have a material negative impact on the value of the Funds;
18. in order to minimize such industry wide selling of securities that are downgraded below a Designated Rating Threshold and the resulting impact on the Funds, the Exemption Sought, combined with similar relief granted to money market funds managed by other investment fund managers, would contribute to market stability by allowing the Funds to continue to hold a Security after it no longer meets the Designated Rating Threshold;
19. all Securities currently held in the portfolios of the Existing Funds were suitable for the Funds and in compliance with the designated rating requirement in National Instrument 81-102 at the time of purchase; any new Securities purchased by the Funds will be suitable for the Funds and will hold a designated rating at the time of purchase;
20. permitting the Funds to continue to hold a Security after it has been downgraded below the Designated Rating Threshold is unlikely to negatively impact the risk of default in a Fund's portfolio; if a Security is downgraded below the Designated Rating Threshold to a rating that is at or above a Temporary Acceptable Rating, from a credit perspective, the risk of default, while increased, will still be low and has only risen by an incremental amount;
21. the Portfolio Manager conducts an assessment of the creditworthiness of a Security, independent of the credit rating assigned to such Security by Designated Rating Organizations for each Security held by a Fund;
22. while Designated Rating Organizations provide valuable industry analysis, comparative statistics and an added level of oversight on an issuer, credit ratings are, at their core, only opinions, and credit ratings issued by a Designated Rating Organization are only one way in which credit risk is monitored in a Fund's portfolio;
23. the procedures for a Portfolio Manager to select issuers and to monitor and manage Securities held by the Funds include conducting independent research on potential securities, establishing an approved list of securities, doing an initial evaluation of the credit quality of an issuer prior to adding the Security to the approved list, monitoring the credit risk of issuers on the approved list on an ongoing basis, and monitoring all other significant portfolio risk parameters on a regular basis; and
24. to the extent a Security is determined not to be creditworthy and/or the Portfolio Manager anticipates that the issuer will be unable to make its payments of principal and interest to a Fund when due, the Portfolio Manager must determine, consistent with its fiduciary and other obligations to the Fund, whether it is appropriate to dispose of such Security or continue to hold it to maturity; the granting of the Exemption Sought will not change this ongoing suitability obligation of the Portfolio Manager.
¶4 Each of the Decision Makers is satisfied that the decision meets the test set out in the Legislation for the Decision Maker to make the decision.
The decision of the Decision Makers under the Legislation is that the Exemption Sought is granted in respect of each Fund, provided that:
1. the Fund, as soon as reasonably practicable, notifies the Director of the Investment Funds and Structured Products Branch by email at [email protected] that the Fund is relying on the order in all of the following circumstances:
(a) the first time the Fund relies on the Exemption Sought; and
(b) the first time the Fund holds Securities in reliance on the Exemption Sought that collectively comprise 10% or more of the Fund's net asset value;
2. the Fund maintains records of its reliance on the Exemption Sought, including the name and particulars of any applicable Securities, in a place and format that is reasonably accessible; and
3. if any Designated Rating Organization:
(a) makes an announcement of which the Filer is or should reasonably be aware, that the credit rating of a Security held by the Fund may be downgraded to a rating category that is below a Temporary Acceptable Rating, or
(b) downgrades a Security held by the Fund below a Temporary Acceptable Rating,
the Fund sells that Security as soon as commercially reasonable following the announcement or the downgrade.
The Exemption Sought expires on July 31, 2021.
British Columbia Securities Commission