Attached is a comment letter (available here)  that Steve Keen and I recently submitted to the SEC on the topic of the custody of OTC derivatives by registered investment companies and their advisers. 

In the letter, we identify an issue - what constitutes custody of an over-the-counter derivative by a registered investment adviser (Rule 206(4)-2 of the Advisers Act). Although this issue is raised in response to the SEC's August 31st Derivatives Concept Release on the Use of Derivatives by Mutual Funds, it is an issue that turns on the definition of custody under the Investment Advisers Act and, as such, applies to any registered investment adviser.

After identifying this issue, we note how some investment advisers address the issue and then offer two solutions to address the issue:

1) The first solution would utilize the documentation entered into between the parties to the derivative contract by amending the ISDA Master Agreement; and

2) The second solution would utilize existing and emerging technologies, some of which will only be fully understood after the Dodd-Frank derivatives regulatory reforms have been implemented.

These are not the only solutions and we hope that this comment letter will be the starting point of an industry-wide discussion that results in the resolution of this issue.

Good day. Good reading. TSR