CFTC Final Rule: Investment of Customer Funds by Futures Commission Merchants and Derivatives Clearing Organizations

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Gavel.png FINAL RULE: Investment of Customer Funds by Futures Commission Merchants and Derivatives Clearing Organizations Approved at CFTC Open Meeting, December 5, 2011
Dodd-Frank Timeline, Investment of Customer Funds
Final Rule Issue Effective Date Compliance Deadline
December 19, 2011 February 17, 2012 June 18, 2012

At its December 5, 2011 meeting, the CFTC approved its final rules on changes to Regulation 1.25, the investment of customer funds and protection of collateral. The rule is designed to ensure the safety of customer collateral held on deposit at futures commission merchants and derivatives clearing organizations while allowing investment flexibility and capital efficiency to those entities.[1] To that end, the commission has narrowed the available choices for the investment of collateral, raised certain standards for investment, and enacted concentration limits to encourage portfolio diversification.

Summary of the Rule

  • Money market mutual funds (MMMFs):
    • FCMs and DCOs may invest up to 10% of their customer segregated funds in MMMFs with less than $1 billion in MMMF assets and/or a management company with less than $25 billion of MMMF assets under management.
    • FCMs and DCOs may invest up to 50% of their segregated funds in non-Treasury-only MMMFs.
    • FCMs and DCOs investing in non-Treasury-only MMMFs may invest no more than 25% in one family of funds and no more than 10% in any individual MMMF.
  • The rule eliminates foreign sovereign debt as a permitted investment.
  • The rulemaking eliminates in-house transactions and repurchase agreements with affiliates. Repurchase agreements with third-parties are still allowed, subject to a 25% counterparty concentration limit.

Background

Prior to December 2000, funds held by futures commission merchants and and clearing houses were only permitted to be invested in U.S. government securities. In December 2000, and continuing in 2004 and 2005, the commission modified Regulation 1.25 to expand the list of permitted investments to include certain previously exempt instruments, so long as said instruments had received the highest rating by a nationally-recognized statistical ratings organization (NRSOS) such as (Moody's, Standard & Poor's, or Fitch). The changes expanded the list to include:

  • obligations of government sponsored entities ("GSE debt"),
  • bank certificates of deposit (CDs),
  • commercial paper,
  • corporate notes,
  • general obligations of a sovereign nation, ("sovereign debt"), and
  • interests in money market mutual funds (MMMFs).[2]

Subsequent to the financial crisis of 2008, in which conflicts of interest in issued credit ratings was identified as one of the causes, Congress moved to alter the link between credit ratings and asset concentration. Among the provisions of the Dodd-Frank Act is a mandate that regulators create a framework that removes a reliance on credit ratings, in favor of other criteria.[3] At its October 26, 2010 open meeting, the CFTC approved a proposed framework for the investment of customer funds. The proposals are summarized in a table HERE.

Related Documents: Q&A; Federal Register Entry

References

  1. Regulation 1.25 Q&A. CFTC. Retrieved on December 5, 2011.
  2. Title 17: Commodity and Securities Exchanges. Electronic Code of Federal Regulations. Retrieved on November 2, 2011.
  3. Dodd Frank: How rating agencies contributed to the financial crisis. Sunlight Foundation. Retrieved on December 10, 2011.

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