No-Action Relief Granted to Several Derivative Clearing Organizations in Connection with the Custody of Investment Company Assets

December 27, 2013

The SEC staff granted no-action relief to three derivatives clearing organizations registered with the CFTC permitting an investment company or its custodian to maintain investment company cash and securities with a clearing organization (“Exchange”) or its clearing members (“Clearing Members”) for the purpose of meeting the Exchange’s or Clearing Member’s margin requirements. The no-action letters address the clearing of interest rate swaps (“IRS”) and credit default swaps (“CDS”).

Rule 17f-6 under the 1940 Act permits registered investment companies to maintain their assets with futures commission merchants and certain other entities in connection with futures contracts and commodity options traded on U.S. and foreign exchanges.  In the no-action letters, the Clearing Members represent that they hold assets for an unaffiliated investment company customer wishing to clear IRS and CDS transactions on the Exchange, they will address each of the requirements of Rule 17f-6 under the 1940 Act as follows:

  • the Clearing Member will comply with the requirements relating to the separate treatment of customer funds and property of the Exchange and the CFTC segregation rules for swap collateral, under Part 22 of the CFTC’s Regulations, specifying the substantive requirements for the treatment of cleared over-the-counter derivatives in the Cleared Swaps Customer Account and the cleared swaps account class prior to any bankruptcy;
  • the Clearing Member may place and maintain the investment company’s assets as appropriate to effect the investment company’s cleared IRS and CDS transactions through the Exchange and in accordance with the Commodity Exchange Act and the CFTC’s rules thereunder, and will obtain an acknowledgement, to the extent required under CFTC Rules 22.5 and 1.20(a), that such assets are held on behalf of the Clearing Member’s customers in accordance with the provisions of the Commodity Exchange Act;
  • the Clearing Member will promptly furnish copies of or extracts from its records or such other information pertaining to the investment company’s assets as the SEC may request;
  • any gains on the investment company’s transactions (other than de minimis amounts) may be maintained with the Clearing Member only until the next business day following receipt; and
  • the investment company will have the ability to withdraw its assets from the Clearing Member as soon as reasonably practicable if the custodial arrangement no longer meets the requirements of Rule 17f-6.

In addition, the SEC staff required that the contract between the investment company and the Clearing Member specify the manner in which the parties would meet the conditions listed above.

Lastly, the SEC staff stated that the no-action relief would expire on December 31, 2014.

Click for the no-action letter issued to the Chicago Mercantile Exchange.

Click for the no-action letter issued to ICE Clear Credit LLC.

Click for the no-action letter issued to LCH, Clearnet Limited and LCH, Clearnet LLC.


Investment Advisers, Investment Companies