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SEC Grants No Action Relief for Funds re Interest Rate Swaps

The SEC's Division of Investment Management extended temporary no-action relief under Section 17(f) of the Investment Company Act of 1940 to any registered investment company if the fund or its custodian places assets in the custody of LCH.Clearnet Limited (LCH Ltd), a derivatives clearing organization in the United Kingdom.  The relief also extends to fund assets placed with an LCH Ltd clearing member that is a "futures commission merchant" registered with the CFTC for purposes of meeting LCH's or a clearing member's margin requirements for certain cleared interest rate swap contracts.  In shourt, the no action relief allows funds to post collateral for meeting margin requirements for over-the-counter centrally cleared interest rate swaps directly with futures commission merchants like LCH Ltd and others.

In granting this no action relief for registered investment companies, the SEC relied, among other things, upon the representations by LCH Ltd that: 


  1.  LCH Ltd and clearing members will adhere to each of the requirements of Rule 17f-6 under the 1940 Act;
  2. each clearing member will hold mutual fund assets as part of the over-the-counter derivatives account class; and
  3. each clearing member will be required to segregate customer funds and securities from the clearing member's own assets.


The Commission stresses, however, that funds taking advantage of this relief should be mindful of the risks associated with placing assets with a futures commission merchant, and should weigh those risks carefully. 

In taking this position, we note that, as the Commission stated in adopting Rule 17f-6 and as you acknowledge, maintaining assets in an FCM's custody is not without risk.[citation omitted] Therefore, we strongly encourage Funds to weigh carefully the risks and the benefits of maintaining assets to effect transactions in IRS with a Clearing Member and LCH.

This no action relief is temporary, and will expire on July 16, 2011, the date upon which the one-year transition period following the effective date of the Dodd-Frank Wall Street Reform and Consumer Protection Act expires.  Presumably, after July 16, 2011, the SEC will consider amending rules under Section 17(f) to allow mutual funds to post collateral in respect of OTC centrally cleared interest rate swaps directly with their futures commission merchants.

The full text of the LCH.Clearnet Limited letter is available at: