CSA Loosen Borrowing Limits for Mutual Funds Investing in Fixed Income Due to COVID-19

May 8, 2020

The Canadian Securities Administrators (CSA) recently issued temporary blanket relief exempting mutual funds that invest in fixed income securities, other than labour sponsored and venture capital funds, from the borrowing limit set out in National Instrument 81-102 Investment Funds (NI 81-102) relating to redemption requests. The relief applies from April 17 to July 31, 2020. According to the CSA release announcing the relief, the measure is intended to provide these fund managers with additional resilience to deal with market volatility and the unique liquidity challenges created by the COVID-19 pandemic in the fixed income markets.

Under section 2.6(1)(a)(i) of NI 81-102, retail investment funds, including mutual funds, may engage in temporary borrowing to effect an orderly liquidation of portfolio assets to accommodate redemption requests provided the outstanding amount of all such borrowings does not exceed 5% per cent of the fund’s net asset value at the time of borrowing.

Pursuant to the Order issued by the Ontario Securities Commission (OSC), for example, this borrowing limit has been temporarily increased for mutual funds (other than labour sponsored or venture capital funds) which invest in fixed income securities to 10% of a fund’s net asset value at the time of borrowing, subject to certain conditions. Among other things:


  • reliance on the Order must be for the purpose of facilitating an orderly liquidation of fixed income securities to deal with the short-term market disruptions in the fixed income securities market due to COVID-19;
  • the manager must obtain the prior approval the Independent Review Committee (IRC) of the mutual fund before it first relies on the Order;
  • the manager must have written liquidity risk management policies and procedures in place, as well as policies and procedures to implement controls on borrowing above the borrowing limit, including to monitor asset mix, holdings, redemptions levels and cash positions, and to report to the IRC on the levels of borrowing above the limit;
  • the mutual fund must disclose how and why the temporary exemption was used in each management report of fund performance required to be filed after the use of the higher limit;
  • the mutual fund must notify the OSC prior to the first use of the higher limit and post a statement on its website stating that it intends to rely on the Order;
  • the mutual fund must keep an information record relating to each instance the temporary exemption was used and provide it to the OSC upon request; and
  • the mutual fund must reduce or report to the OSC borrowing positions exceeding specified thresholds and timelines.

The CSA have also stated their expectation that fund managers consider “all available tools and techniques that can be employed to manage liquidity during the current stressed market conditions”, including consulting the global liquidity risk management recommendations developed by the International Organization of Securities Commissions (IOSCO).

For more information, see Ontario Instrument 81-504 Temporary Exemption from Borrowing Limits to Accommodate Redemption Requests of Mutual Funds.

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