On December 19, 2014 the SEC extended the expiration date of a series of no-action letters which provide that the staff of the SEC will not recommend enforcement action under section 17 of the Investment Company Act of 1940 if, subject to certain conditions, registered investment companies post margin with certain derivatives clearing organizations or a futures commission merchant (“FCM”) in connection with cleared swap transactions. The relief essentially extends Rule 17f-6 of the 1940 Act to cleared swap transactions. As adopted Rule 17f-6 only permits registered investment companies to post margin with an FCM for futures transactions and options on futures.
The following letters were extended:
- LCH.Clearnet Limited and LCH.Clearnet LLC with respect to certain cleared interest rate swaps. The extension letter can be found here.
- ICE Clear Credit LLC with respect to certain cleared credit default swaps. The extension letter can be found here.
- Chicago Mercantile Exchange with respect to certain interest rate swaps, credit default swaps, cash-settled commodity index swap contracts and foreign currency swap contracts. The extension letter can be found here.
Each of the above letters was extended to December 31, 2015.
As a reminder the relief granted in the letters requires that there be a written contract between the investment company and the FCM which provides for the following:
- The FCM will comply with the segregation requirements under Part 22 of the CFTC’s regulations (e.g. legal segregation with operational commingling);
- The FCM may place the investment company’s assets with the applicable derivatives clearing organization in order to effect cleared swaps and will obtain an acknowledgement letter from the derivatives clearing organization, to the extent required under CFTC Rule 22.5 and 1.20(a), stating that such assets are held on behalf of the derivatives clearing organization’s customers in accordance with the Commodity Exchange Act;
- The FCM will promptly furnish copies of records as the SEC shall request;
- Any gains on the investment company’s transactions, other than de minimus amounts, may only be maintained by the FCM till the next business day following receipt of such gains; and
- The investment company has the ability to withdraw its margin from the FCM as soon as reasonably practicable if the conditions of Rule 17f-6 are no longer met.
The extension is a good reminder for investment companies to check their FCM agreements to ensure that the applicable requirements of the relief are embedded in such contracts.
Good Extension. Good Day DR2.