Ninepoint Partners LP
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- relief from subparagraph 2.6.1(1)(c)(ii) of NI 81-102 to permit a fund to short-sell up to 20% of NAV in a single issuer of "government securities" -- relief sought to allow fund to better implement strategy to short sell government bonds as a hedge against interest rate risk of corporate bond portfolio -- subject to conditions.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 2.6.1(1)(c)(ii) and 19.1
June 30, 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 NINEPOINT PARTNERS LP (the Filer)
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of Ninepoint Diversified Bond Fund (the Existing Fund) and any other existing or future investment funds managed by the Filer to which NI 81-102 applies (the Future Funds and collectively with the Existing Fund, theFunds) for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for an exemption from paragraph 2.6.1(1)(c)(ii) of NI 81-102 to permit each Fund to increase the limit on aggregate short sale exposure to any single issuer that is a "government security" (as defined in NI 81-102) to 20% of the net asset value (NAV) of the Fund (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 this 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 each of British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Northwest Territories, Yukon and Nunavut (the Other Jurisdictions and with Ontario, the Jurisdictions).
Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.
The decision is based on the following facts represented by the Filer on behalf of itself and the Fund:
1. The Filer is a limited partnership established under the laws of the Province of Ontario with its head office located in Toronto, Ontario.
2. The Filer is the manager, trustee and portfolio manager of the Existing Fund, and will be the manager of the Future Funds.
3. The Filer is registered under the securities legislation: (i) in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, New Brunswick, Nova Scotia, and Newfoundland and Labrador as an adviser in the category of portfolio manager; (ii) in Ontario, Newfoundland and Labrador and Quebec as an investment fund manager; and (iii) in British Columbia, Alberta, Quebec, Saskatchewan, Manitoba, Ontario, New Brunswick, Nova Scotia, and Newfoundland and Labrador as a dealer in the category of exempt market dealer. The Filer is also registered in Ontario as a commodity trading manager.
4. The Filer is not in default of applicable securities legislation in any of the Jurisdictions.
5. Each Fund is, or will be, an open-ended public mutual fund governed by NI 81-102.
6. Each Fund is, or will be, a mutual fund structured as a trust or a corporation or a class thereof that is governed by the laws of a Jurisdiction.
7. Each Fund is, or will be, a reporting issuer in the Jurisdictions in which its securities are distributed jurisdiction pursuant to disclosure documents filed under National Instrument 81-101 Mutual Fund Prospectus Disclosure (and/or National Instrument 41-101 General Prospectus Requirements in the case of the ETF Facts of a Fund).
8. The Existing Fund is not in default of applicable securities legislation in any of the Jurisdictions.
9. The Existing Fund's investment objectives are to maximize the total return of the Existing Fund and to provide income by investing primarily in debt and debt like securities of corporate and government issuers from around the world.
Short Selling Hedging Strategy
10. Since most of the investment portfolio of the Existing Fund consists of Canadian and U.S. corporate bonds, the value of the Existing Fund can change with fluctuating interest rates.
11. In order to hedge against interest rate risk in the investment portfolio of the Existing Fund, the Filer short sells highly liquid government fixed income securities at the same time that it invests in higher quality corporate fixed income securities in compliance with the 5% single issuer restriction in NI 81-102.
12. Paragraph 2.6.1(1)(c)(ii) of NI 81-102 restricts the Filer from short selling more than 5% of the NAV of a Fund in respect of any one issuer. As a result, a Fund is prevented from short selling Canadian, provincial and territorial government bonds by more than 5% of its NAV and similarly prevented from short selling U.S. government bonds by more than 5% of its NAV, resulting in the Fund only being able to hedge its interest rate exposure using this short selling strategy to a maximum of 10% of NAV.
13. The Filer is of the view that each Fund could benefit further from this hedging strategy if it were able to short sell "government securities" (as defined in NI 81-102) for hedging purposes in an amount greater than 5% of the Fund's NAV per issuer for the following reasons:
(a) The most effective interest rate hedge is where the government debt securities selected by the Filer most closely correlate to the underlying interest rate characteristics of the particular corporate fixed income securities held by a Fund and thus the Filer cannot remain within the 5% single issuer restriction by using different government debt securities and still achieve an optimal hedge for the Fund.
(b) The market for government securities is highly liquid and debt securities issued by the federal governments of Canada and the U.S. and the Canadian provinces and/or territories generally exhibit greater liquidity than high-quality corporate issues.
(c) While derivatives can be used to manage interest rate risk, the use of a derivatives hedging strategy is more inefficient, more complex, and risker than the Filer's strategy of short-selling government securities.
14. Each Fund implements the following controls when conducting a short sale:
(a) the Fund assumes 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 receives cash for the securities sold short within normal trading settlement periods for the market in which the short sale is effected;
(c) the Filer monitors 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 industry practice for that type of transaction and relates only to obligations arising under such short sale transactions;
(e) the Fund maintains 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 keep proper books and records of short sales and all of its assets deposited with Borrowing Agents as security.
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. Each short sale made by each Fund will comply with all of the short sale requirements in section 2.6.1 of NI 81-102, other than the restriction that the aggregate market value of all securities of the issuer of the securities sold sort by the Fund does not exceed 5% of the NAV of the Fund.
2. The only securities which a Fund will sell short in an amount that exceeds 5% of the NAV of the Fund will be securities which meet the definition of "government security", being an evidence of indebtedness issued, or fully and unconditionally guaranteed as to principal and interest, by and of the government of Canada, the government of a Jurisdiction or the government of the United States of America.
3. Each short sale will be made consistent with the applicable Fund's investment objectives and investment strategies.
4. The simplified prospectus of each Fund will disclose, at the next renewal, that the Fund is able to short sell "government securities" (as defined in NI 81-102) for hedging purposes in an amount greater than 5% of the Fund's NAV per issuer.