On December 29, 2015, the SEC staff issued three no-action letters1 that extend previously issued no-action assurance for any registered fund that maintains assets in the custody of certain derivatives clearing organizations (“DCOs”), or certain DCO-member futures commission merchants (“FCMs”), registered with the Commodities Futures Trading Commission (“CFTC”). In the three letters, the staff extended, until December 31, 2017, its assurance that it would not recommend enforcement under Section 17(f) of the 1940 Act if a fund deposits fund assets as margin with a DCO or FCM for purposes of meeting the DCO’s or FCM’s margin requirements in certain interest rate swap, credit default swap, cash-settled commodity index swap and foreign currency swap contracts. In general, Section 17(f) of the 1940 Act requires a fund to maintain custody of its assets only with certain types of entities (usually, banks). Rule 17f-6 permits a fund to maintain assets with a futures commission merchant when necessary to effect transactions in exchange-traded futures contracts and option contracts on futures, provided various conditions of the rule are satisfied, including the requirement that the futures commission merchant maintains fund assets pursuant to a written contract. By its terms, Rule 17f-6 does not provide relief for other types of derivatives, such as swaps.
The SEC staff relied on the DCOs’ representations that each of the requirements of Rule 17f-6 would be addressed. Specifically, each DCO represented that each fund’s assets would be governed by a written contract between the fund and each FCM, which (i) prohibits commingling fund customer assets with FCM/DCO assets and requires compliance with CFTC swap collateral segregation rules; (ii) for each fund transaction, requires the FCM to place and maintain the fund’s assets with the relevant DCO only in accordance with the Commodity Exchange Act and the CFTC’s rules thereunder; (iii) upon the SEC’s request, requires each FCM to provide records concerning a fund’s transactions to the SEC; (iv) specifies that any transaction gains by a fund can be maintained with the DCO only until the next business day following the receipt of the gains; and (v) provides that a fund may withdraw assets as soon as practicable, if the custodial requirements of 17f-6 are no longer satisfied.