LongPoint Asset Management Inc.

Decision

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- ETFs granted relief from paragraph 2.6(2)(c) and section 2.6.2 of NI 81-102 to borrow cash up to 100% of NAV -- ETFs granted relief from certain restrictions in NI 81-102 on securities lending transactions, including (i) the 50% limit on lending; (ii) the requirement to use the fund's custodian or sub-custodian as lending agent; and (iii) the requirement to hold the collateral during the course of the transaction -- ETFs intend to borrow cash from one or more lenders, in aggregate, up to 100% of the NAV of the ETF, which could result in the total assets of the ETF representing up to 200% of the NAV -- All or a portion of the portfolio of securities of the ETFs will be deposited with the lenders as collateral for the borrowed cash -- ETFs wanting to lend up to 200% of the NAV of the ETF -- Lenders must release security interest in the underlying securities in order to allow the ETFs to lend such securities, provided the ETFs grant the lenders a securities interest in the collateral held by the ETF for the loaned securities -- Relief subject to conditions.

Applicable Legislative Provisions

National Instrument 81-102 Investment Funds, ss. 2.6(2)(c), 2.12(1)1, 2.12(1)2, 2.12(1)12, 2.12(3) and 6.8(5), and 2.6.2, 2.15, 2.16 and 19.1.

May 15, 2025

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 LONGPOINT ASSET MANAGEMENT INC. (the Filer)

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the existing and future exchange-traded funds that are or will be managed by the Filer or an affiliate of the Filer, and that have investment objectives to provide daily results, before fees, expenses, distributions, brokerage commissions and other transaction costs, that endeavour to correspond to a multiple, no less than two times and no greater than three times, of the daily performance of an index, publicly traded security of a United States of America (U.S.) public issuer, or another instrument (each, an ETF, and collectively, the ETFs), for a decision under the securities legislation of the Jurisdiction exempting each ETF from the following provisions of National Instrument 81-102 Investment Funds (NI 81-102):

(a) subsection 2.6(2)(c) to permit each ETF to borrow cash when the value of cash borrowed, when aggregated with the value of all outstanding borrowing by the ETF, exceeds 50% of the ETF net asset value;

(b) section 2.6.2 to permit each ETF to borrow cash and sell securities short when, immediately after entering into a cash borrowing or short selling transaction, the aggregate value of cash borrowed combined with the aggregate market value of all securities sold short by the ETF (the Combined Aggregate Value) exceeds 50% of the ETF's net asset value and, if the Combined Aggregate Value exceeds 50% of the ETF's net asset value, permit the ETF to not reduce the Combined Aggregate Value to 50% or less of the ETF's net asset value;

(c) paragraph 2.12(1)1 to permit each ETF to enter into securities lending transactions that will not be administered and supervised in compliance with certain requirements of sections 2.15 and 2.16 of NI 81-102 as set forth in paragraphs (g) and (h) below;

(d) paragraph 2.12(1)2 to permit each ETF to enter into securities lending transactions that are not made under an agreement that fully implements the requirements of section 2.12 of NI 81-102;

(e) paragraph 2.12(1)12 to permit each ETF to enter into securities lending transactions where the aggregate market value of securities loaned by the ETF exceeds 50% of the net asset value of the ETF;

(f) subsection 2.12(3) to permit each ETF, during the term of a securities lending transaction, to pledge the collateral delivered to it as collateral in the transaction to its Lenders (as defined below);

(g) section 2.15 to permit each ETF to lend securities through an agent that is not the custodian or sub-custodian of the ETF;

(h) section 2.16 to the extent this section contemplates that securities lending transactions be entered into through an agent appointed under section 2.15 of NI 81-102; and

(i) subsection 6.8(5) to permit each ETF, in connection with a securities lending transaction it has entered into, to deliver any collateral, cash proceeds or purchased securities that it has received to a Lender that is not the custodian or sub-custodian of the ETF,

(the Exemption Sought).

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 section 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 and the Jurisdiction (together with the Jurisdiction, the Canadian Jurisdictions).

Interpretation

Capitalized terms used herein have the meaning ascribed thereto below (or in MI 11-102, National Instrument 14-101 Definitions, National Instrument 41-101 General Prospectus Requirements (NI 41-101) and NI 81-102, as applicable) unless otherwise defined in this decision.

Representations

This decision is based on the following facts represented by the Filer:

The Filer

1. The Filer is a corporation formed and organized under the laws of the Province of Ontario. The head office of the Filer is located in Toronto, Ontario.

2. The Filer is currently registered as a portfolio manager in Ontario and as an investment fund manager in Ontario, Québec and Newfoundland and Labrador. The Filer is currently seeking registration as a commodity trading manager and exempt market dealer in Ontario.

3. The Filer is not a reporting issuer in any Canadian Jurisdiction and is not in default of securities legislation in any Canadian Jurisdiction.

4. The Filer is, or will be, the investment fund manager of each of the ETFs.

The ETFs

5. Each ETF will be constituted as a separate class or series of shares of LongPoint ETF Corp., a corporation established under the federal laws of Canada. Each ETF will be a separate investment fund with its own investment objective and portfolio of investments.

6. Each ETF will be a reporting issuer in the Canadian Jurisdictions in which it offers securities (ETF Securities) that will be distributed pursuant to a long form prospectus prepared in accordance with NI 41-101 and Form 41-101F2 Information Required in an Investment Fund Prospectus.

7. Each ETF will be governed by the provisions of NI 81-102, subject to any relief therefrom granted by the securities regulatory authorities.

8. Each ETF will be an alternative mutual fund in that the ETF will adopt fundamental investment objectives that permit the ETF to invest in specified derivatives, borrow cash and/or engage in short selling in a manner not permitted for other mutual funds under NI 81-102.

9. Preliminary long form prospectuses in respect of the ETF Securities of certain ETFs (the Proposed ETFs) were filed with the securities regulatory authorities in each of the Canadian Jurisdictions on May 2, 2025 and May 5, 2025.

10. The Filer will apply to list the ETF Securities of each Proposed ETF on the Toronto Stock Exchange (the TSX). The Filer will not file a final long form prospectus for an ETF until the TSX, or another "marketplace" as defined in National Instrument 21-101 Marketplace Operation that is located in Canada, has conditionally approved the listing of the ETF Securities.

11. The objective of each ETF will be to provide daily results, before fees, expenses, distributions, brokerage commissions and other transaction costs, that endeavour to correspond to a multiple, no less than two times and no greater than three times, of the daily performance of an index, publicly traded security of a U.S. public issuer, or another instrument.

12. In order to achieve its investment objective, each ETF may invest in securities of the constituent issuers of the target underlying index or the publicly traded security of the U.S. public issuer (as applicable) and/or other financial instruments, including specified derivatives. Each ETF will employ a passive investment strategy that is not actively managed.

Cash borrowing

13. Each ETF intends to borrow cash which, together with the net proceeds from its offering of ETF Securities, will be invested in a portfolio of securities (the Portfolio) that seeks to endeavour to correspond to the levered performance of the underlying benchmark, or publicly traded security of a U.S. public issuer, in accordance with its investment objective.

14. Each ETF proposes to borrow from one or more lenders (each a Lender and together the Lenders) cash, in aggregate, up to 100% of the net asset value of the ETF, which could result in the total assets in the Portfolio of the ETF representing up to 200% of the net asset value of the ETF.

15. Each ETF will grant to its Lenders a security interest over a portion or all of its Portfolio as permitted by subsection 2.6(2) of NI 81-102, and will deposit a portion or all of its Portfolio with its Lenders as permitted by subsection 6.8(3.1) of NI 81-102.

Securities lending

16. In order to earn additional returns for the ETFs, the Filer proposes to engage in securities lending transactions on behalf of each ETF in respect of its entire Portfolio. As a result, the aggregate market value of all securities loaned by the ETF could be up to 200% of the net asset value of the ETF.

17. The Portfolio of an ETF will generally be a static portfolio in accordance with the ETF's investment objective and will not be actively managed except in limited circumstances, such as when the securities of a component of the underlying benchmark is not available to be purchased in the open market due to a trading halt.

18. The securities held in each Portfolio are well suited for securities lending in excess of 50% of the net asset value of the ETF because each ETF will employ a passive investment strategy and the securities to be held in the Portfolios are considered to be liquid by the Filer.

19. Securities in the Portfolio will be loaned only to borrowers that have been considered acceptable to the ETF as contemplated by subsection 2.16(2) of NI 81-102.

20. The collateral received by an ETF in respect of a securities lending transaction will be in the form of cash, Government of Canada bonds and close equivalents, and provincial bonds and close equivalents subject to minimum credit rating criteria and/or other collateral permitted by NI 81-102, and will not be reinvested in any other types of investment products.

21. On a daily mark-to-market basis, an ETF will receive collateral worth at least 102% of the value of the loaned securities, as required under NI 81-102. In respect of securities lending transactions in which the aggregate market value of securities loaned by the ETF represents in excess of 50% of the ETF's net asset value, the ETF will only enter such securities lending transactions if it receives securities lending collateral with a market value equal to at least 110% of the market value of any securities that are to be loaned at or prior to the term of the loan.

Securities lending agent

22. As a portion or all of the Portfolio of each ETF will be deposited with each Lender, it may not be practical for the custodian or a sub-custodian of the ETF to act as the agent of the ETF in respect of the ETF's securities lending transactions as the custodian or sub-custodian may not have control over the Portfolio.

23. Each ETF intends to appoint its Lenders or, in appropriate circumstances, affiliated dealers of its Lenders, to act as the ETF's agent in administering the ETF's securities lending activities.

Deposit and pledge of securities lending collateral

24. Each Lender will release its security interest in the Portfolio of the ETF in order to allow the ETF to lend those securities, provided that the ETF grants to the Lender a security interest in the collateral held by the ETF for the loaned securities from the Portfolio of the ETF.

25. To facilitate each Lender's release of its security interest in the Portfolio of an ETF, the Filer will ensure that the portfolio assets of the Portfolio are loaned to an affiliate of the Lender, which will be a registered dealer and a member of the Canadian Investment Regulatory Organization or another borrower that is acceptable to both the ETF and the Lender.

26. The revenues from the securities lending transactions paid to an ETF will not be affected by the borrower of the assets of the ETF being affiliates of the Lenders. Revenue generated from an ETF's securities lending transactions will be paid to the ETF.

Reasons for Exemption Sought

27. Subparagraph 2.6(2)(c) of NI 81-102 states that an ETF may borrow cash or provide a security interest over any of its portfolio asset if the value of cash borrowed, when aggregated with the value of all outstanding borrowing by the ETF, does not exceed 50% of the ETF's net asset value.

28. Section 2.6.2 of NI 81-102 restricts an ETF from borrowing cash or selling securities short if, immediately after entering into a cash borrowing or short selling transaction, the Combined Aggregate Value would exceed 50% of the ETF's net asset value, and requires the ETF, if the Combined Aggregate Value exceeds 50% of the ETF's net asset value, as quickly as commercially reasonable, to take all necessary steps to reduce the Combined Aggregate Value to 50% or less of the ETF's net asset value.

29. The ability to engage in additional cash borrowing in connection with the investment strategies of each ETF may provide material cost savings to the ETF compared to obtaining the same level of investment exposure through the use of specified derivatives while, at the same time, not increasing the overall level of risk to the ETF.

30. The costs to the ETF of engaging in cash borrowing are expected to be less when compared to the equivalent derivative transactions due to a number of factors which may include:

(a) Lenders typically have greater flexibility to offer more favourable financing terms to the ETFs in relation to the aggregate amount of the ETF's assets;

(b) margin requirements for derivative instruments are primarily based on the underlying investment exposure and, as a result, can be high; and

(c) certain derivative instruments (such as futures contracts) require cash or near cash securities (such as government treasuries) to be deposited with the counterparty as collateral. This would require the ETF to use these Portfolio assets to satisfy collateral requirements rather than utilizing them in connection with the ETF's investment strategies.

31. Cash borrowing is more efficient to utilize on a day-to-day basis compared to derivative instruments which generally require a higher degree of negotiation and ongoing administration on the part of the Filer. The Exemption Sought will provide the Filer with access to a more functional source of additional leverage to utilize on behalf of each ETFs at a lower cost which, in turn, would benefit investors.

32. NI 81-102 contemplates that the ETFs may obtain additional investment exposure using a combination of cash borrowing and specified derivative positions subject, in all cases, to the aggregate leverage limit prescribed by section 2.9.1 of NI 81-102 (the Leverage Limit). Accordingly, the Exemption Sought will simply allow each ETF to do directly what it could otherwise do indirectly through the use of specified derivatives.

33. Each ETF will benefit from the flexibility to borrow cash when doing so is, in the opinion of the Filer, in the best interests of the ETF and to not be obligated to utilize an equivalent amount of leverage synthetically through the use of specified derivatives as a result of regulatory restrictions in NI 81-102 that the Filer believes do not provide any material additional benefit or protection to investors in the ETFs.

34. The Filer believes that the Exemption Sought will allow the Filer to manage each ETF's investment exposure more effectively by enabling the Filer to reduce the related expenses incurred by the ETF.

35. The Filer, as a registrant and a fiduciary, is in the best position to determine, depending on the surrounding circumstances, whether an ETF should obtain additional investment exposure via cash borrowing versus achieving the same result through the use of specified derivatives. The Exemption Sought will provide the Filer with the required flexibility to obtain additional investment exposure through cash borrowing or synthetic transactions. Accordingly, the Exemption Sought will permit the Filer to implement more cost-efficient portfolio management activities on behalf of each ETF and its investors.

36. Any cash borrowing transaction entered into by an ETF will be consistent with the investment objectives and strategies of the ETF.

37. The investment strategies of each ETF will clearly disclose that the cash borrowing strategies and abilities of the ETF are outside the scope of NI 81-102, including that the aggregate amount of cash borrowed may exceed 50% of the ETF's net asset value. The prospectus of each ETF also will contain appropriate risk disclosure, alerting investors of any material risks associated with such cash borrowing.

38. The Filer has comprehensive risk management policies and/or procedures that address the risks associated with cash borrowing in connection with the implementation of the investment strategies of the ETFs.

39. Paragraph 2.12(1)12 of NI 81-102 states that an ETF may enter into a securities lending transaction as lender if, immediately after the ETF enters into the transaction, the aggregate market value of all securities loaned by the ETF and not yet returned to it does not exceed 50% of the net asset value of the ETF.

40. In order to maximize revenues from the securities lending transactions on behalf of investors in the ETFs, the Filer proposes to lend up to 100% of the securities in the Portfolio of each ETF, which could represent up to 200% of the net asset value of the ETF.

41. Each ETF will be an alternative mutual fund governed by NI 81-102 that, by its nature, is allowed to use specified derivatives and leverage in a manner that is not permitted for other mutual funds.

42. It will beneficial for investors in each ETF to allow the ETF to loan up to 100% of the securities in its Portfolio in an effort to generate additional revenues for the ETF that offset its ongoing operating costs.

43. Notwithstanding the Exemption Sought from paragraph 2.12(1)12 of NI 81-102, each securities lending transaction on behalf of an ETF will be conducted in accordance with other relevant requirements of NI 81-102. In particular, each ETF entering into securities lending transactions will receive collateral prescribed by paragraphs 2.12(1)3 to 2.12(1)6 of NI 81-102 and will have the rights set forth in paragraphs 2.12(1)7 to 2.12(1)9 and 2.12(1)11 of NI 81-102. Each such securities lending transaction also will comply with paragraph 2.12(1)10 of NI 81-102.

44. Subsection 2.15(1) of NI 81-102 states that a manager of an ETF shall appoint an agent or agents to act on behalf of the ETF in administering the securities lending transactions entered into by the ETF. Section 2.15(3) of NI 81-102 provides that the custodian or sub-custodian of the ETF shall be the agent appointed under subsection 2.15(1) of NI 81-102.

45. It will not always be practicable for the custodian or a sub-custodian of the ETF to act as the agent with respect to the securities lending transactions of the ETF as a portion or all of the securities to be loaned by the ETF will be deposited with its Lenders as security for the cash borrowed from the Lenders.

46. The Filer will, on behalf of each ETF, enter into a written agreement with each Lender, or an affiliated dealer of the Lender, that will comply with each of the requirements set forth in subsection 2.15(4) of NI 81-102, except as such obligations are modified by the Exemption Sought.

47. In addition, the agent, when administering the securities lending transactions on behalf of the ETF, will comply with the standard of care set out in subsection 2.15(5) of NI 81-102.

48. The agent will be a bank or a trust company described in paragraph 1 or 2 of section 6.2 of NI 81-102, or an affiliated dealer of one of the foregoing that is registered as an investment dealer or in an equivalent category of registration.

49. Section 2.16 of NI 81-102 contemplates that securities lending transactions will be entered into by each ETF through an agent appointed under section 2.15 of NI 81-102. As indicated above, it is expected that the agents appointed by each ETF will not be the custodian or a sub-custodian of the ETF. However, as required by section 2.16 of NI 81-102, an ETF will not enter into a securities lending transaction unless the Filer has reasonable grounds to believe that the agent has established and maintains appropriate internal controls, procedures and records as prescribed in subsection 2.16(2) of NI 81-102. In addition, the Filer will comply with the annual obligations prescribed by subsection 2.16(3) of NI 81-102, except to the extent that such obligations contemplate that the agent administering the securities lending transactions will be appointed in accordance with section 2.15 of NI 81-102.

50. Subsection 6.8(5) of NI 81-102 states that an ETF may deliver portfolio assets to a person or company in satisfaction of its obligations under a securities lending agreement that complies with NI 81-102 if the collateral that is delivered to the ETF in connection with the transaction is held under the custodianship of the custodian or a sub-custodian of the ETF.

51. Section 2.12(3) of NI 81-102 states that an ETF, during the term of a securities lending transaction, shall hold all, and shall not invest in or dispose of any, non-cash collateral delivered to it as collateral in the transaction.

52. When an ETF engages in securities lending transactions, the ETF will receive cash collateral or non-cash collateral. As described above, it is expected that the ETF's Lenders will release their security interests in the securities within the ETF's Portfolio to permit securities lending transactions only if the collateral received for the transaction is delivered and pledged to such Lender.

53. Since each ETF is permitted (a) by subsection 2.6(2) of NI 81-102 to grant to its Lenders a security interest over a portion or all of its Portfolio, and (b) by subsection 6.8(3.1) of NI 81-102 to deposit a portion or all of its Portfolio with its Lenders, it is reasonable for each ETF to likewise be permitted to deliver and pledge to its Lenders the collateral it receives from its securities lending transactions.

54. Paragraph 2.12(1)1 of NI 81-102 states that an ETF may enter into a securities lending transaction as lender if the transaction is administered in the manner required by sections 2.15 and 2.16 of NI 81-102. As the Exemption Sought will permit each ETF to deviate from certain provisions of sections 2.15 and 2.16, it is appropriate to grant relief from the more general requirement that securities lending transactions comply with those sections.

55. Section 2.12(1)2 of NI 81-102 states that an ETF may enter into a securities lending transaction as lender if the transaction is made under a written agreement that implements the requirements of section 2.12 of NI 81-102. As the Exemption Sought will permit each ETF to deviate certain provisions of section 2.12 of NI 81-102, it is appropriate to grant relief from the more general requirement that the ETF enter into written agreements that implement the provisions of that section.

56. The prospectus of each ETF will contain disclosure specifying that the ETFs may, pursuant to exemptive relief granted by Canadian securities regulatory authorities, enter into securities lending transactions for which the aggregate market value of securities loaned by the ETF may represent up to 200% of the net asset value of the ETF.

57. Other than as set forth herein, any securities lending transactions entered into by each ETF will be conducted in accordance with the provisions of NI 81-102.

58. The Filer submits that it is in the best interests of each ETF to be permitted to enter into securities lending transactions in which the aggregate market value of securities loaned by the ETF represents up to 200% of the net asset value of the ETF, and that it would not be prejudicial to the public interest to grant the Exemption Sought.

Decision

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 in respect of an ETF provided that:

1. The ETF may borrow cash only if, immediately after the cash borrowing transaction:

(a) the aggregate value of all cash borrowing by the ETF does not exceed 100% of the ETF's net asset value;

(b) the aggregate market value of securities sold short by the ETF combined with the aggregate value of cash borrowing by the ETF does not exceed 100% of the ETF's net asset value;

(c) the ETF's aggregate exposure to short selling, cash borrowing and specified derivatives does not exceed the Leverage Limit;

(d) the cash borrowing transaction:

(i) otherwise complies with all of the cash borrowing requirements applicable to alternative mutual funds under sections 2.6 and 2.6.2 of NI 81-102; and

(ii) is consistent with the ETF's investment objectives and strategies; and

(e) the prospectus of the ETF discloses in the investment strategies that the ETF can borrow cash up to, and subject to, the limits described above.

2. With respect to the exemption from paragraph 2.12(1)12 of NI 81-102, each ETF has borrowed cash from a Lender and has granted that Lender a security interest in a portion or all of the ETF's Portfolio and, in connection with a securities lending transaction relating to those securities:

(a) receives the collateral that:

(i) is prescribed by paragraphs 2.12(1)3 to 6 of NI 81-102, other than collateral described in subparagraph 2.12(1)6(d) or in paragraph (b) of the definition of "qualified security"; and

(ii) is marked to market on each business day in accordance with paragraph 2.12(1)7 of NI 81-102;

(b) has the rights set forth in paragraphs 2.12(1)8, 2.12(1)9 and 2.12(1)11 of NI 81-102;

(c) complies with paragraph 2.12(1)10 of NI 81-102; and

(d) lends its securities only to borrowers that are acceptable to the ETF and the Lender.

3. With respect to the exemption from subsection 2.12(3) of NI 81-102, the ETF has provided a security interest to the applicable Lender in the collateral delivered to it as collateral pursuant to a securities lending transaction.

4. With respect to the exemption from section 2.15 of NI 81-102:

(a) the ETF has entered into a written agreement with an agent that complies with each of the requirements set forth in subsection 2.15(4) of NI 81-102, except as set out herein; and

(b) the agent administering the securities lending transaction of the ETF:

(i) is in compliance with subsection 2.15(5) of NI 81-102; and

(ii) is a Lender, or is an affiliate of a Lender which is a registered dealer and a member of the Canadian Investment Regulatory Organization.

5. With respect to the exemption from section 2.16 of NI 81-102, the Filer and the ETF comply with the requirements of section 2.16 of NI 81-102 as if the agent appointed by the Filer is the agent contemplated in that section.

6. With respect to the exemption from subsection 6.8(5) of NI 81-102:

(a) the ETF provides a security interest to the Lender in the collateral delivered to it as collateral pursuant to a securities lending transaction; and

(b) the collateral delivered to the ETF pursuant to the securities lending transaction is held by the Lender or an affiliate of the Lender which is a registered dealer and a member of the Canadian Investment Regulatory Organization.

"Darren McKall" 
Manager, Investment Management Division 
Ontario Securities Commission

Application File #: 2024/0572

SEDAR+ File #: 6189938