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Regulators have provided relief to a group of large fund managers, allowing them to borrow more cash to bridge potential settlement mismatches as North American markets shift to T+1 settlement while certain foreign markets continue to operate at T+2.

The latest edition of the Ontario Securities Commission’s (OSC) weekly bulletin sets out the terms of relief granted to 11 big fund managers, including AGF Investments Inc., CI Investments Inc., Fidelity Investments Canada ULC and TD Asset Management Inc., among others. Regulators provided them with relief from the cap on cash borrowing in the fund rules, allowing them to now borrow up to 10% of net asset value (NAV).

Under the regular rules, funds can borrow up to 5% of NAV to facilitate redemptions, but, with the added liquidity strains that could arise due to different settlement cycles, the regulators are giving fund managers a higher limit to avoid liquidity crunches that could otherwise force managers to suspend redemptions or make sub-optimal trades to finance redemptions.

The relief accommodates funds that will settle trades in their own units in one day while holding portfolio securities that still settle at T+2.

According to the decision, the relief gives the fund firms a cushion to accommodate redemption requests in T+1, while the funds settle trades in T+2 markets to finance those redemptions. The relief also enables asset purchases in T+2 markets while settling fund purchases in T+1.

Absent that relief, “funds may experience mismatch between the settlement timing of trades in fund securities and the settlement timing of trades in portfolio securities, which may give rise to a temporary funding gap in the settlement of fund redemptions and the purchase of portfolio security purchases,” the regulators said.

Such mismatches could constrain liquidity and challenge fund managers to meet redemption requests in certain circumstances.

In addition to the mismatch in settlement periods, the markets that continue to settle in T+2 — including those in Europe, the U.K., Japan, Brazil, Australia and New Zealand — are generally not open when Canadian funds are processing fund redemptions at the end of the North American trading day and sometimes have different trading schedules due to local holidays, which may exacerbate the liquidity issue, the regulators noted.

The decision requires fund managers to adopt controls to exceed the 5% borrowing limit, sets conditions on the excess borrowing, and requires disclosure of the new borrowing limits to investors.

The relief expires in three years.