Custody Issues Related to Swaps and Other Derivatives Addressed in No-Action Letters

September 27, 2012

The staff of the SEC’s Division of Investment Management issued a series of no-action letters addressing a mutual fund maintaining cash and/or certain securities in the custody of the Chicago Mercantile Exchange (CME), a derivatives clearing organization or a clearing member. The cash and other assets are held for purposes of meeting margin requirements for the instruments. In the no-action letter, the staff encouraged mutual funds to weigh carefully the risks and benefits of maintaining assets to effect transactions in CDS with CME or a Clearing Member. In particular, we expect that each Clearing Member that holds assets for a Fund wishing to clear swap transactions on the CME will comply with the CFTC’s applicable regulations and guidance regarding the manner in which cleared swaps collateral of a customer must be treated prior to and after a bankruptcy of a futures commission merchant or a derivatives clearing organization. The SEC issued similar letters addressing custody issues at ICE Clear Credit LLC and LCH, Clearnet Limited.

Click and to access the Chicago Mercantile Exchange letters.

Click to access the ICE Clear Credit LLC letter.

Click to access the LCH, Clearnet Limited no-action letter.


Investment Advisers, Investment Companies, Regulatory