CFTC issued a notice of proposed rulemaking for comment, Investment of customer funds by futures commission merchants and derivatives clearing organizations.
Would amend regulations governing safeguarding and investment by FCMs and Derivatives clearing organizations (DCOs) of funds held for the benefit of customers.
Specifically customers engaging in futures, foreign futures, cleared swaps transactions.
Proposed Amendments
Revises list of permitted investments in Regulation 1.25 and certain related changes.
Adds 2 classes, certain foreign sovereign debt instruments issued by Canada, France, Germany, Japan, and the United Kingdom, and certain short-term US Treasury ETFs.
Additionally, limits the scope of MMFs whose interests qualify as permitted investments; and removes corporate notes, corporate bonds, and commercial paper.
Also, specified market risk capital charges that an FCM would be required to take on the revised permitted investments in computing the firm’s adjusted net capital.
Would require each FCM to report to the CFTC and to firm’s designated self-regulatory organization name, location, and amount of customer funds held by each depository.
Which would include any investments of customer funds held by the depository.
Eliminates requirement to provide CFTC with read-only electronic access to accounts for FCM to treat the funds held in the accounts as customer segregated fund accounts.
Petitions
Follows FIA and CME joint petition requesting CFTC issue order or to take such other action to expand investments that FCMs, DCOs may enter into with customer funds.
CFTC also received petition from Invesco Capital Management LLC, which serves as a sponsor of ETFs, advocating for addition of securities to list of permitted investments.
Chairman and Commissioners' Statements
Behnam looked forward to comments for further guidance on how to strengthen regulation, while also making derivatives markets more resilient and less concentrated.
Goldsmith Romero supported putting proposal out for comment, but believed CFTC should be cautious in overturning post-crisis reforms, should engage in more analysis.
Suggested enhancements such as FCMs and DCOs should be permitted to use third-party authorized participants (APs)as their agent to purchase/redeem Treasury ETFs.
The AP should also be able to purchase such shares on the secondary market.
SIFMA also proposed to allow redemptions in-kind of US Treasury ETF shares.
Limitation of ETFs to those that DCO accepts as performance bond should be removed.
The concentration limits of ETFs and permissible MMFs should also be less restrictive.
Due to Treasury clearing rules, Regulation 1.25 should be updated to reflect changes.
Jan. 18, 2024 FIA, CME Comments
On Jan. 18, 2024, FIA, CME issued letter in support of CFTC efforts to give safe, liquid investment options for FCMs, DCOs to improve collateral, risk management processes.
Offered refinements to proposed conditions for investments in foreign sovereign debt.
Also, treasury ETFs, government MMFs to bring in line with market, industry practices.
Dec. 2024 CFTC Final Rule
On Dec. 17, 2024, CFTC issued final rule on safeguarding, investment customer funds.
Published fact sheet and Q&A regarding the amendments made by the final rule.
Revised list of permitted investments, removed Prime MMF, Electing Government MMF.
To eliminate MMFs whose redemptions may be subject to a liquidity fee, replaced the term money market mutual fund with the term government money market funds.
Also made additional conforming changes in response to stakeholder feedback.
The final rule is effective 30 days after publication in the federal register, compliance dates vary, ranging from 30 days after federal register publication to Mar. 31, 2025.
