The piRNA pathway is a conserved germline-specific small RNA pathway that ensures genomic integrity and continued fertility. In C. elegans and other nematodes, Type-I piRNA precursor transcripts are expressed from over 10,000 small, independently regulated genes clustered within two discrete domains of 1.5 and 3.5 MB on Chromosome IV. These large clusters likely play a significant role in promoting germline-specific expression of piRNAs, but the underlying mechanisms are unclear. By examining the chromatin environment specifically in isolated germ nuclei, we demonstrate that piRNA clusters are located in closed chromatin, and confirm the enrichment for the inactive histone modification H3K27me3. We further show that the piRNA biogenesis factor USTC (Upstream Sequence Transcription Complex) plays two roles - it promotes a strong association of nucleosomes throughout the piRNA clusters, and it organizes the local nucleosome environment to direct the exposure of individual piRNA genes. Overall, this work reveals new insight into how chromatin state coordinates transcriptional regulation over large genomic domains, which has implications for understanding global genome organization in the germ line.