On April 17, 2020, in the context of the coronavirus disease 2019 outbreak ("COVID-19"), the Canadian Securities Administrators (the "CSA") issued new local harmonized temporary blanket orderspursuant to which mutual funds are permitted to engage in additional short-term borrowing from April 17, 2020 until July 21, 2020 (the "Short-Term Borrowing Orders"). These orders are in addition to the local harmonized blanket orders issued on March 23, 2020, providing market participants with extensions for certain periodic filing, sending or delivery requirements (see our bulletin on some of these blanket orders titled, Canadian Securities Regulators Publish Blanket Orders for Market Participants Due to COVID-19)
The Short-Term Borrowing Orders are intended for any Canadian mutual fund that invests a portion of its assets in fixed income securities, including equity funds holding a portion of fixed income securities. Securities legislation allows a mutual fund to engage in temporary borrowing, up to 5% of its net asset value, to accommodate redemption requests. Because of the challenges caused by COVID-19 and their impact on fixed income markets, the CSA have temporarily increased this borrowing limit to 10% to help investment fund managers ("IFMs") carry out more orderly liquidations of any fixed income securities required to accommodate redemptions.
In order to benefit from the Short-Term Borrowing Orders, mutual funds must comply with a number of conditions, including the following:
i. ensuring the additional borrowing is in the best interest of all investors;
ii. having strict controls around its use;
iii. disclosing the use of any additional borrowing to investors; and
iv. obtaining the approval of the independent review committee.
IFMs should consult their principal jurisdiction regulator's website to be aware of all the conditions imposed to rely on the Short-Term Borrowing Orders.
According to Louis Morisset, CSA Chair, the Short-Term Borrowing Orders are intended to provide IFMs with greater flexibility to manage their funds in the best interest of all investors during the market volatility created by the pandemic while continuing to meet investor expectations for liquidity. However, prior to benefit from the Short-Term Borrowing Order, IFMs should consider all available tools and techniques as they must exercise due care, skill and diligence when managing liquidity of their funds.
Should you have any question on the foregoing, feel free to contact any member of our Investment Management team.
Short-Term Borrowing Order
AMF (French only): DÉCISION N° 2020-PDG-0033 Décision générale relative à la dispense temporaire de la limite d’emprunt pour répondre à des demandes de rachat de titres d’un fonds d’investissement (pdf)
BCSC: British Columbia Securities Commission. BC Instrument 81-520 Temporary Variation from Borrowing Limit to Accomodate Redemption Requests of Mutual Funds Investing in Fixed Income Securities (pdf)
ASC: Alberta Securities Commission Blanket Order 81-506 Citation: Temporary Exemption from Borrowing Limit to Accomodate Redemption Requests for Mutual Funds Investing in Fixed Income Securities, 2020 ABASC 46 (pdf)