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**December 19, 2014**

RESPONSE OF THE OFFICE OF CHIEF COUNSELDIVISION OF INVESTMENT MANAGEMENT

Our Ref. No. 201412181148File No. 132-3 

	In letters to you dated December 26, 2013 and July 10, 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 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 a 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, 2015.

	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, 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.
	Rachel Loko	Senior Counsel
[1]*See*, *e.g.*, Chicago Mercantile Exchange, SEC Staff No-Action Letters (Dec. 26, 2013) (relating to CDS and IRS), (July 10, 2013) (relating to CIS and FXS), (Sept. 27, 2012) (relating to IRS), (Sept. 27, 2012) (relating to CDS), (July 29, 2011) (relating to IRS), (July 29, 2011) (relating to CDS) and (Mar. 24, 2011) (relating to IRS). 

[2] These representations were confirmed by Christopher K. Bowen of CME to Rachel Loko of the staff on December 8, 2014**.**

[3]*S**ee* Rule 17f-6(a)(1) under the 1940 Act.

[4]*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, CDS, CIS and FXS (“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. 

[5]*See* Rule 17f-6(a)(1)(ii) under the 1940 Act.

[6]*See* Rule 17f-6(a)(1)(iii) under the 1940 Act.

[7]*See* Rule 17f-6(a)(2) under the 1940 Act.

[8]*See* Rule 17f-6(a)(3) under the 1940 Act.

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

*http://www.sec.gov/divisions/investment/noaction/2014/chicago-mercantile-exchange-121914.htm*Home | Previous PageModified: 12/19/2014 |
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