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News April 4, 2011 Issue

Mutual Funds Get Relief To Conduct Certain Transactions On CME And ICE

No need to wait for rulemaking, the SEC wants funds to take the plunge now.

The SEC recently released two no-action letters that will facilitate the ability of mutual funds to engage in certain derivatives transactions on exchanges.

The Dodd-Frank Act mandated in part that the markets in derivatives transactions should be made more transparent by bringing the primarily private transactions onto exchanges with central clearing facilities. In advance of rulemaking that will flesh out the details of the new law, the SEC is paving the way for voluntary exchange trading of certain contracts.

The stumbling block for mutual funds is the custody rule under the Investment Company Act (ICA), which requires certain safeguards for assets deposited with exchanges to effect derivatives transactions.

In a letter to the Chicago Mercantile Exchange (CME) dated March 24, the SEC permitted mutual funds to place and maintain assets with a CME futures commission merchant (FCM) to effect transactions in interest rate swap contracts. Rule 17f-6 under the ICA only permits Funds to place and maintain assets with an FCM to effect a Fundís transactions in exchange-traded futures contracts or commodity options.

Similarly, in a letter to ICE (Intercontinental Exchange) Trust on March 1, the SEC granted relief for funds to effect transactions in credit default swaps on ICE. There, the Rule 17f-6 issue is that ICE does not meet the FCM criteria under the rule, although ICE successfully argued that it maintains similar safeguards for fund assets.

ICE noted that the Commission stated: "We have ... found that taking action to help foster the prompt development of central counterparties, including granting temporary conditional exemptions from certain provisions of the federal securities laws, is in the public interest."

The CME relief is effective only through July 16, 2011. The ICE Trust relief is effective concurrently with certain other orders applicable to it.