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OPINION: Want to 'build back better'? Improve Canada's investment climate – Toronto Sun

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Consider that Canada has plummeted in competitiveness report cards such as the World Bank’s Ease of Doing Business report (where we dropped to 23rd in 2020 from 4th in 2007) and the latest World Economic Forum’s Global Competitiveness Report (Canada ranks 14th compared to the United States, which ranks 2nd).

Not surprisingly, from 2014 to 2019 (pre-COVID), business investment — including investment in machinery, equipment, factories and intellectual property — dropped 17.3%. Indeed, 10 of the 15 major sectors of the Canadian economy — including oil and gas, agriculture, manufacturing and retail—experienced a drop in investment. Investors (both foreign and Canadian) fled Canada for more favourable investment climates. In total, more than $185 billion in net investment left the country from 2014 to 2019.

If we truly want to “build back better,” we must reverse this trend. But how?

Well, the throne speech itself contained the answer — or at least part of it. It said that Ottawa “will ensure Canada is the most competitive jurisdiction in the world” for … wait for it … “clean technology companies.” The Trudeau government will “cut the corporate tax rate in half for these companies to create jobs and make Canada a world leader in clean technology.”

Of course, there’s nothing wrong with becoming the most competitive jurisdiction in the world for clean technology. But why stop there?

According to Statistics Canada, the environmental and clean technology sector comprises 3.2% of our economy and accounts for 1.7% of all jobs in Canada. What about the remaining 96.8% of the economy? Or the remaining 98.3% of jobs? What about construction, manufacturing, retail, wholesale trade, accommodation and food services, agriculture, mining and our energy industries? Why not make Canada the most competitive and attractive in the world, period?

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TransLink in time crunch to update its 10-year Metro Vancouver transit investment plan – Vancouver Sun

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The COVID-19 pandemic and an unexpected provincial election have put TransLink in a time crunch to finish a required update to its 10-year investment plan.

Metro Vancouver’s transit authority is obligated, by provincial legislation, to update the plan at least every three years. The current plan was approved on June 28, 2018, which means the new one is due by June 28, 2021.

“Originally we had had planned for that to happen this year, but because of COVID-19 and dealing with the emergent financial challenges with that, that was not possible,” Mayors’ Council chair Jonathan Coté said following a meeting on Thursday. “But we’ve now reached the point where we need to start to work towards that.”

Priorities for the update include finding revenue to cover long-term COVID-19 losses. Although the federal and provincial governments will provide a combined $644 million to TransLink to cover its pandemic losses for 2020 and 2021, there will likely be shortfalls of $100 million to $300 million each year between 2021 and 2030.

The losses will depend on how long the pandemic lasts, the depth of economic damage and how quickly transit ridership recovers. The plan cannot show a deficit.

“Even with the near-term financial aid, we almost certainly have a fairly significant structural hole in our budget and we’re going to have to work to understand just what that hole is over the months to come,” CEO Kevin Desmond said after the meeting.

“There’s still a lot of uncertainty about the path of the pandemic.”

The investment plan will also deliver elements of the second phase of the 10-year regional transportation vision that are outstanding or were delayed due to the pandemic, plus approving projects that are already funded, such as a SkyTrain extension to Fleetwood and the next stage of the low-carbon fleet strategy.

A lot will have to be done before next June, including confirming federal and provincial contributions, finding new regional funding sources and setting rates, plus consultation with the public and local governments.

“No doubt this is going to be a significant part of our work plan and probably one of the more challenging things the Mayors’ Council is going to have to work on,” Coté said during the council meeting.

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Morgan Stanley Investment Sees Decade-Best Credit Opportunities – BNN

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(Bloomberg) — Morgan Stanley Investment Management is seeing fertile ground for putting capital to work in certain pockets of private markets where mid-sized firms are facing a liquidity squeeze.

“Companies that have had some disruption but are fundamentally sound are looking for creative capital — could be debt-like, could be equity-like,” said David Miller, head of the firm’s private credit and equity business, at a Thursday virtual panel. “So credit opportunity broadly is the most attractive it’s been in a decade and that’s going to continue well into 2021.”

A “big need for rescue capital” is likely to continue into next year, he said.

Mid-sized companies have been mostly shut out of the liquid credit markets, which larger firms have been able to tap due in large part to action taken by the Federal Reserve. Their need for funding is an opening for managers sitting atop piles of cash, and an opportunity to capitalize on dislocations and undervalued assets.

“Putting aside some of the chop today, it’s been really strong based on the Fed, just based on the markets working, but the private and the middle market are a little bit different,” Miller said.

A similar dynamic is emerging in real estate investing.

“In private real estate, we’re seeing wide dispersion in both operating performance as well as the pricing across asset classes,” said Lauren Hochfelder Silverman, deputy chief investment officer of Morgan Stanley Real Estate Investing.

Silverman said there’s “significant stress” in certain sectors of the industry, such as retail and hotels, as well as meaningful shortfalls in cash flows. However there are areas, such as those tied to e-commerce, that present more lucrative opportunities.

In the private debt market, Miller sees a much more “accommodative” market place when it comes to stress than in the last crisis. Lenders have largely been flexible with borrowers that have been hammered by the pandemic, agreeing to amendments, sometimes in concert with sponsors kicking in more equity.

“By and large balance sheets were much better than before the last crisis, there is more equity invested, people are more prudent,” he said. “And so there was a little bit more flexibility and frankly, more liquidity.”

Morgan Stanley Investment Management had $665 billion in assets under management, with $17 billion specifically for private credit and equity, and $49 billion for real assets, as of June 30, according to the firm’s website. The unit had $715 billion in overall assets under management or supervision as of Sept. 30.

(Adds unit’s assets under management as of Sept. 30 in final paragraph.)

©2020 Bloomberg L.P.

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Uniquely Canadian Regulatory Expectations For Investment Fund Liquidity Risk Management – Finance and Banking – Canada – Mondaq News Alerts

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On September 18, 2020, the Canadian Securities Administrators
(CSA) released CSA Staff Notice 81-333 Guidance on Effective
Liquidity Risk Management for Investment Funds
. The Notice
provides guidance for investment fund managers (IFMs) and portfolio
managers (PMs) on the CSA’s expectations that those firms
develop and maintain effective liquidity risk management (LRM)
frameworks in respect of the investment funds they manage. An LRM
framework supports the ability of investment funds to satisfy
redemption requests without significantly diluting remaining fund
investors and maintain the funds’ liquidity profiles. The
guidance provided in the Notice is aimed at IFMs of investment
funds that are subject to National Instrument 81-102 Investment
Funds
, although the CSA note that many of the LRM practices
and examples contained in the Notice may also be relevant for other
types of investment funds.

Background

Through the Notice, the CSA respond to international initiatives
over a number of years relating to LRM practices from the Financial
Stability Board (FSB) and the International Organization of
Securities Commissions (IOSCO)1. These initiatives took
into account lessons learned from the financial crisis of 2007 with
an initial focus on LRM of open-ended collective investment
schemes. IOSCO’s 2018 Recommendations for Liquidity Risk
Management for Collective Investment Schemes – Final
Report
, prompted the two Canadian participants in IOSCO
– L’Autorité des marchés financiers (AMF)
and the Ontario Securities Commission (OSC) – to seek input
from various Canadian market participants in responding to
IOSCO’s recommendations and developing the principles set out
in the Notice2.

No “one size fits all”

Liquidity risk refers to “the risk that a fund is unable to
satisfy redemption requests without having a material impact on the
remaining securityholders of a fund” (ie. the potential
mismatch between the liquidity of underlying portfolio assets of
the investment fund and the redemption terms and conditions
afforded to fund investors). The CSA emphasize that materiality
varies between funds and that different approaches to effectively
manage liquidity risk can be used according to a fund’s
characteristics such as size, structure, investment objectives and
strategies and investor base. The CSA expressly state that the
guidance does not suggest or endorse a “one size fits
all” approach to LRM, given that each investment fund has its
own unique characteristics, including liquidity risk. This will be
welcome news particularly for smaller managers.

CSA expectations and existing regulatory requirements

While the Notice is intended as guidance for IFMs and PMs, it is
clear from the language used that the CSA’s expectations will
be used as a reference point in their future compliance reviews of
LRM policies and procedures, as well as fund disclosure.

The CSA expects each IFM to establish and maintain an effective
LRM framework that is consistent with its statutory standard of
care, as well as its obligations, as applicable, under National
Instrument 31-103 and NI 81-102. By linking a fund’s liquidity
risk with the “business of the fund” and the internal
control and compliance requirements contained in NI 31-103, the CSA
highlight that registrant firms have an obligation to establish LRM
controls and supervision sufficient to manage the liquidity risks
associated with their funds.

The Notice reiterates the CSA’s views that managers of
investment funds subject to NI 81-102 must establish an effective
LRM policy that considers the liquidity of the types of assets in
which the investment fund will be invested and the fund’s
obligations and other liabilities. IFMs should regularly measure,
monitor and manage the liquidity of the investment fund’s
underlying portfolio assets, keeping in mind the time to liquidate
each portfolio asset, the price at which the asset may be sold and
the pattern of redemption requests.3

LRM framework

The CSA highlight five important key areas for an effective LRM
framework:

1. Strong and effective governance

IFMs should assess whether an existing governance body or new
committee needs to be established in order to provide adequate
oversight of the LRM function. Such assessment should consider
whether new or enhanced reporting and other compliance mechanisms
need to be implemented to ensure the necessary information is being
monitored and shared with relevant parties.

The CSA set out potential responsibilities of such an oversight
committee, including reporting and escalation procedures,
valuation, conflicts of interest, ongoing review of LRM policies
and procedures as well as establishing stress testing and reviewing
the results of such stress testing.

2. Creation and ongoing maintenance of LRM procedures

An LRM process should begin with the design phase of investment
products to ensure alignment of redemption terms and investment
strategy taking into consideration the lifecycle of the fund. An
effective LRM process may include the regular assessment of the
liquidity profile of the fund’s assets and liabilities taking
into consideration current market conditions, redemption activity,
and investor behaviour and periodic communication and review by
senior management and/or relevant personnel. A number of principles
and practical implementation strategies are set out in the Notice,
including:

  • Aligning investment objectives,
    strategies and the redemption policy of a fund with the liquidity
    profile of its underlying portfolio assets and redemption demands
    of the investor. For example, in cases where the fund holds
    substantial amounts of thinly traded securities, or whose
    securities have longer settlement periods, an IFM could elect to
    have the fund offer less frequent redemption opportunities to
    investors;
  • Performing active, ongoing portfolio
    monitoring using qualitative and quantitative metrics to ensure
    adequate levels of liquidity exist to meet redemption needs and
    other obligations; and
  • Setting internal liquidity thresholds
    and targets that management can use to assess the liquidity profile
    of a fund and make any necessary adjustments.

3. Stress testing

The CSA explain that stress testing may be an effective aspect
of an IFM’s LRM process, given that it will enable an IFM to
assess and respond to liquidity risks. Some of the key factors for
stress testing include:

  • Identification of risks including
    market and redemption risks such as market stress affecting a class
    or subclass of asset, interest rate risk, geopolitical risk;
  • Scenario analyses that are diverse
    and reflect material risks relevant to the fund. IFMs may consider
    factors such as a downgrade of the credit rating of an underlying
    portfolio asset or of the related issuer, changes in interest
    rates, widening of bid-ask spreads and economic shocks;
  • Historical stress testing that
    include factors such as the comparison of historical cash flows
    with industry-wide cash flows for funds of similar size and
    strategy, or the redemption activity of the largest investor or
    group of investors; and
  • Hypothetical stress testing which
    attempts to measure the potential impact of an event that has not
    yet occurred, such as interest rate changes or the potential for
    counterparty default.

Frequency of stress testing will depend on the specific
attributes of a fund such as fund size, redemption frequency and
investor base. It will be important to document and analyse testing
results and communicate the results to the committee overseeing
liquidity risk.

4. Disclosure of liquidity risks

The CSA consider that disclosure of material liquidity risk is
part of full, true and plain disclosure required to be made to
investors in an investment fund. The existing disclosure
requirements of National Instrument 81-101 provide for specified
mandated disclosure of liquidity risk for public investment funds,
including the risk that redemptions may be suspended and the
specific risks associated with redemptions by holders of large
positions in the funds. The CSA expect that LRM governance matters
relating to the funds will be included in the prospectus disclosure
and if an IFM does not have written policies and procedures around
LRM, this fact should then be disclosed to investors. The Notice
gives examples of the CSA’s expectations for such disclosure
that IFMs should review in connection with prospectus filings and
renewals.

Liquidity risks should also be addressed in a fund’s
continuous disclosure documents, including the management reports
of fund performance mandated by National Instrument 81-106. This
would include disclosure of any liquidity challenge during the
period and how those challenges were addressed, along with changes
in risk level of a fund due to market conditions, significant
redemptions or liquidity of underlying portfolio assets.

5. Use of LRM tools to manage potential and actual liquidity
issues

Any use of LRM tools (such as suspension of redemptions and
borrowing) to aid in the liquidity management of a fund are subject
to certain overarching principles:

  • The use of a mechanism that affects
    redemption rights is only justified in open-ended funds in
    exceptional circumstances. Such circumstances are rare, such as
    where a fair and robust valuation of the assets in which the fund
    is invested is difficult or impossible to carry out, or where
    redemption demands are so large/exceptional that liquidity cannot
    be raised in the timeframe required to meet the demands.
  • The use of extraordinary LRM tools
    must be in the best interest of the fund investors collectively. A
    fund should only use such tools when it is in the best interest of
    investors and when the fair and equal treatment of incoming,
    ongoing and outgoing investors is maintained.

The CSA guidance contained in the Notice provides a uniquely
Canadian flexible response to IOSCO’s 2018 recommendations for
liquidity risk management of collective investment schemes, among
other international developments. The Notice will serve as a useful
checklist for IFMs and PMs to establish and evaluate their LRM
polices and procedures having regard to the nature of their funds.
The guidance should be applied to investment funds that are subject
to NI 81-102; however, we expect the CSA will also consider that
managers of private pooled funds and other commingled vehicles
should apply these principles.

Footnotes

1.  IOSCO, Principles of Liquidity Risk Management
for Collective Investment Schemes
, Final Report, Report of the
Board of IOSCO, March 2013
. FSB, Policy Recommendations to
Address Structural Vulnerabilities from Asset Management
Activities
, 2017. IOSCO, Recommendations for Liquidity
Risk Management for Collective Investment Schemes – Final
Report
, 2018; and IOSCO, Open-Ended Fund Liquidity and
Risk Management – Good Practices and Issues for
Consideration
, 2018.

2.  Including a Task Force struck by The Investment
Funds Institute of Canada to survey its mutual fund manager members
between October and December, 2018. The mandate of the Task Force
was to identify questions that would survey investment fund
managers on their policies and procedures for managing portfolio
liquidity risk.

3.  See also OSC Staff Notice 81-727 Report on
Staff’s Continuous Disclosure Review of Mutual Fund Practices
Relating to Portfolio Liquidity
.


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