Investment Company Act of 1940 — Section 17(f) and Rule 17f-6
LCH.Clearnet Limited

September 27, 2012

RESPONSE OF THE OFFICE OF CHIEF COUNSEL
DIVISION OF INVESTMENT MANAGEMENT

IM Ref. No. 20129261714
LCH.Clearnet Limited
File No. 132-3

In a letter to you dated July 29, 2011, the staff of the Division of Investment Management indicated that we would not recommend enforcement action to the Commission under Section 17(f) of the Investment Company Act of 1940 (“1940 Act”) against any registered investment company (a “Fund”) if the Fund or its custodian places and maintains cash and/or certain securities (“assets”) in the custody of LCH.Clearnet Limited (“LCH”), a derivatives clearing organization registered with the Commodity Futures Trading Commission (“CFTC”) or a clearing member (a “Clearing Member”) that is a futures commission merchant registered with the CFTC, for purposes of meeting LCH’s or a Clearing Member’s margin requirements for certain interest rate swaps (“IRS”) that are cleared by LCH.¹ We extended these temporary no-action assurances and now extend them until December 31, 2013.²

Since the issuance of this relief, the CFTC has been actively working to improve protections for customer assets.³ As the Commission stated in adopting Rule 17f-6 under the 1940 Act, maintaining assets in a futures commission merchant’s custody is not without risk.⁴ As a result, we encourage Funds to weigh carefully the risks and benefits of maintaining assets to effect transactions in IRS with LCH or a Clearing Member. In particular, we expect that each Clearing Member that holds assets for a Fund wishing to clear IRS transactions on the LCH will comply with the CFTC’s applicable regulations and guidance regarding the manner in which cleared IRS collateral of a customer must be treated prior to and after a bankruptcy of a futures commission merchant or a derivatives clearing organization.⁵

¹ See LCH.Clearnet Limited, SEC Staff No-Action Letter (July 29, 2011). See also LCH.Clearnet Limited, SEC Staff No-Action Letter (Mar. 16, 2011).

² Telephone conversation between David J. Gilberg, Sullivan & Cromwell LLP and Holly Hunter-Ceci, Division of Investment Management on December 29, 2011.

³ See, e.g., CFTC, Protection of Cleared Swaps Customer Contracts and Collateral; Conforming Amendments to the Commodity Broker Bankruptcy Protections, 77 FR 6336 (Feb. 7, 2012) (“CFTC Release”) (adopting requirements regarding the separate treatment of customer funds and property (i.e., the Legally Segregated Operationally Commingled Model) which specify the substantive requirements for the treatment of Cleared Swaps Customer Collateral in the Cleared Swaps Customer Account class, as these terms are defined in the CFTC Release); the CFTC’s public roundtable addressing additional customer protections for futures commission merchants (Aug. 9, 2012) and testimony of CFTC Chairman Gary Gensler before the U.S. Senate Committee on Agriculture (Aug. 1, 2012).

⁴ See Custody of Investment Company Assets with Futures Commission Merchants, Investment Company Act Release No. 22389 (Dec. 11, 1996).

⁵ See CFTC Release, supra note 3. In addition, we expect that a Clearing Member will also comply with applicable rules of the National Futures Association and LCH.