LCH.Clearnet Limited and LCH.Clearnet LLC
December 19, 2014
RESPONSE OF THE OFFICE OF CHIEF COUNSEL
Our Ref. No. 20141218162
In a letter to you dated December 26, 2013, 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 Limited”) or LCH.Clearnet LLC (LCH Limited and LCH.Clearnet LLC being referred to herein collectively and individually as “LCH”), each of which is a derivatives clearing organization registered with the Commodity Futures Trading Commission (“CFTC ”) or a clearing member (an “LCH Clearing Member”) that is a futures commission merchant registered with the CFTC (“FCM”), for purposes of meeting LCH’s or an LCH Clearing Member’s margin requirements for certain interest rate swaps (“IRS”) that are cleared by LCH (“Letter”). We extended these temporary no-action assurances and now extend them until December 31, 2015 with respect to LCH and LCH’s Clearing Members.
In particular, we rely on your representations in the Letter, as updated to reflect rules adopted by the CFTC, that each LCH Clearing Member that holds assets for an unaffiliated Fund customer wishing to clear IRS transactions on LCH will address each of the requirements of Rule 17f-6 under the 1940 Act, as follows:
As the Commission stated in adopting Rule 17f-6 under the 1940 Act, maintaining assets in an FCM’s custody is not without risk. As a result, we encourage Funds to weigh carefully the risks and benefits of maintaining assets to effect transactions in IRS with LCH or an LCH Clearing Member.
Based on your facts and representations, we would not recommend enforcement action to the Commission under Section 17(f) of the 1940 Act against a Fund if the Fund or its custodian places and maintains assets in the custody of LCH or an LCH Clearing Member for purposes of meeting LCH’s or an LCH Clearing Member’s margin requirements for IRS that are cleared by LCH.
Our position herein is temporary, and will expire December 31, 2015. Because our position is based on your facts and representations, you should note that any different facts or circumstances might require a different conclusion. This letter represents only the Division’s position on enforcement action and does not purport to express any legal conclusion on the questions presented.
 You have advised us that LCH.Clearnet LLC, an affiliate of LCH Limited, is also registered as a derivatives clearing organization with the CFTC. LCH Limited and LCH LLC are each wholly-owned subsidiaries of LCH.Clearnet Group, Ltd.
 See, e.g., LCH. Clearnet Limited and LCH. Clearnet LLC, SEC Staff No-Action Letter (Dec. 26, 2013), LCH.Clearnet Limited, SEC Staff No-Action Letters (Sept. 27, 2012) and (July 29, 2011).
 These representations were confirmed by Kathleen Peacock, U.S. General Counsel, on behalf of LCH to Holly Hunter-Ceci of the staff on November 5, 2014.
 See Rule 17f-6(a)(1) under the 1940 Act.
 See Rule 17f-6(a)(1)(i) under the 1940 Act. In February 2012 the CFTC adopted final rules implementing the segregation requirements for swap collateral, including collateral securing IRS (“Collateral Protection Rules”) and conforming amendments to its Part 190 Bankruptcy Rules. The CFTC had originally adopted amendments to its Part 190 Bankruptcy Rules to create a separate “cleared over-the-counter derivatives” account class (“OTC Derivatives Account Class”) that would apply in the event of a bankruptcy of an FCM that became effective May 6, 2010. See 75 Fed. Reg. 17297 (Apr. 6, 2010). The Collateral Protection Rules and conforming amendments to the CFTC’s Part 190 Bankruptcy Rules replace the OTC Derivatives Account Class with a new cleared swap account class. See 77 Fed. Reg. 6336 (Feb. 7, 2012) (adopting final rules regarding the protection of cleared swaps customer collateral and conforming bankruptcy provisions). In addition, the CFTC has adopted Part 22 of its Rules, governing the treatment of cleared swaps margin by FCMs and derivatives clearing organizations, including FCMs’ custody of Cleared Swaps Customer Accounts, as defined in CFTC Rule 22.1.
 See Rule 17f-6(a)(1)(ii) under the 1940 Act.
 See Rule 17f-6(a)(1)(iii) under the 1940 Act.
 See Rule 17f-6(a)(2) under the 1940 Act.
 See Rule 17f-6(a)(3) under the 1940 Act.
 See Custody of Investment Company Assets with Futures Commission Merchants, Investment Company Act Release No. 22389 (Dec. 11, 1996).