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Canada’s securities regulators are temporarily increasing borrowing limits for mutual funds to satisfy investors redemptions at a time when fixed income markets are experiencing reduced liquidity as a result of the coronavirus pandemic.

The Canadian Securities Administrators (CSA) announced on Friday a temporary exemption to allow certain mutual funds to borrow up to 10 per cent of their net asset value - up from the traditional 5 per cent borrowing limit.

Under securities legislation, a mutual fund can engage in temporary borrowing to accommodate redemption requests. However, all borrowings must not exceed five per cent of a fund’s net asset value at the time of borrowing. Now, with the coronavirus impacting fixed income markets, the CSA is temporarily increasing this limit to 10 per cent to “help facilitate a more orderly liquidation of any fixed income securities that might be required to accommodate redemption requests.”

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"Investment fund managers are currently dealing with liquidity challenges in the fixed income markets,” said Louis Morisset, CSA Chair and CEO of the Autorité des marchés financiers, in a statement. “This relief gives fund managers greater flexibility to manage their portfolios in the best interests of all investors, while continuing to meet investor expectations for liquidity.”

The increase in short-term borrowing is available for any mutual fund in Canada that invests a portion of its assets in fixed income securities, including equity funds holding a portion of fixed income securities; and can be used from April 17 to July 31.

In addition, mutual funds that use the additional short-term borrowing must comply with a number of conditions such as: ensuring the additional borrowing is in the best interest of all investors, having strict controls around its use, and disclosing the use of any additional borrowing to investors.

Paul Bourque, CEO of the Investment Funds Institute of Canada, applauded the regulators “quick assessment” of the fixed income market.

“This blanket relief provides fund managers with important flexibility, enabling them to better manage their fixed income portfolios to the benefit of their investors in the midst of the market volatility arising from the pandemic,” said Mr. Bourque, in a statement.

The CSA says it will continue to closely monitor the situation and consider whether further relief or an extension is necessary.

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