Investment Company Act of 1940 — Section 17(f); Rule 17f-6
Chicago Mercantile Exchange

December 29, 2015

RESPONSE OF THE OFFICE OF CHIEF COUNSEL
DIVISION OF INVESTMENT MANAGEMENT

Our Ref. No. 201512291256
File No. 132-3

In a letter to you dated December 19, 2014, 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 the Chicago Mercantile Exchange (“CME”), a derivatives clearing organization registered with the Commodity Futures Trading Commission (“CFTC”) or a CME or Board of Trade of the City of Chicago (“CBOT”) clearing member (a “CME Clearing Member”) that is a futures commission merchant registered with the CFTC (“FCM”), for purposes of meeting CME’s or the CME Clearing Member’s margin requirements for certain interest rate swaps (“IRS”), credit default swaps (“CDS”), cash-settled commodity index swap contracts (“CIS”) and foreign currency swap contracts (“FXS”) that are cleared by CME (“Letters”).[1] We extended these temporary no-action assurances and now extend them until December 31, 2017.

In particular, we rely on your representations in the Letters, as updated to reflect rules adopted by the CFTC, that each CME Clearing Member that holds assets for an unaffiliated Fund customer wishing to clear IRS, CDS, CIS and FXS transactions on the CME will address each of the requirements of Rule 17f-6 under the 1940 Act, as follows:[2]

• The manner in which a CME Clearing Member will maintain such a Fund’s assets will be governed by a written contract between the Fund and the CME Clearing Member, which provides that:[3]
  • the CME Clearing Member will comply with the requirements relating to the separate treatment of customer funds and property of CME and the CFTC segregation rules for swap collateral (i.e., legal segregation with operational commingling), 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;[4]
    
  • the CME Clearing Member may place and maintain the Fund’s assets as appropriate to effect the Fund’s cleared IRS, CDS, CIS and FXS transactions through CME and in accordance with the Commodity Exchange Act (“CEA”) 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 CME Clearing Member’s customers in accordance with the provisions of the CEA;[5]
    
  • the CME Clearing Member will promptly furnish copies of or extracts from its records or such other information pertaining to the Fund’s assets as the Commission through its employees or agents may request;[6]
    
  • any gains on the Fund’s transactions, other than de minimis amounts, may be maintained with the CME Clearing Member only until the next business day following receipt;[7] and
    
  • the Fund has the ability to withdraw its assets from the CME Clearing Member as soon as reasonably practicable if the custodial arrangement no longer meets the requirements of Rule 17f-6, as applicable.[8]

As the Commission stated in adopting Rule 17f-6 under the 1940 Act, maintaining assets in an FCM’s custody is not without risk.[9] As a result, we encourage Funds to weigh carefully the risks and benefits of maintaining assets to effect transactions in IRS, CDS, CIS and FXS with CME or a CME 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 CME or a CME Clearing Member for purposes of meeting CME’s or a CME Clearing Member’s margin requirements for IRS, CDS, CIS and FXS that are cleared by CME.

Our position herein is temporary, and will expire December 31, 2017. 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.

http://www.sec.gov/divisions/investment/noaction/2015/chicago-mercantile-exchange-122915.htm