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2010-27657

  • FR Doc 2010-27657[Federal Register: November 3, 2010 (Volume 75, Number 212)]

    [Proposed Rules]

    [Page 67642-67657]

    From the Federal Register Online via GPO Access [wais.access.gpo.gov]

    [DOCID:fr03no10-21]

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    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Parts 1 and 30

    RIN 3038-AC15

    Investment of Customer Funds and Funds Held in an Account for

    Foreign Futures and Foreign Options Transactions

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Proposed rule.

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    SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC)

    is proposing to amend its regulations regarding the investment of

    customer segregated funds and funds held in an account subject to

    Commission Regulation 30.7 (30.7 funds). Certain amendments reflect the

    implementation of new statutory provisions enacted under Title IX of

    the Dodd-Frank Wall Street Reform and Consumer Protection Act. The

    proposed rules address: Certain changes to the list of permitted

    investments, a clarification of the liquidity requirement, the removal

    of rating requirements, an expansion of concentration limits including

    asset-based, issuer-based, and counterparty concentration restrictions.

    It also addresses revisions to the acknowledgment letter requirement

    for investment in a money market mutual fund (MMMF), revisions to the

    list of exceptions to the next-day redemption requirement for MMMFs,

    the application of customer segregated funds investment limitations to

    30.7 funds, the removal of ratings requirements for depositories of

    30.7 funds, and the elimination of the option to designate a depository

    for 30.7 funds.

    DATES: Comments must be received on or before December 3, 2010.

    ADDRESSES: You may submit comments, identified by RIN number, by any of

    the following methods:

    Agency Web site, via its Comments Online process: http://

    comments.cftc.gov. Follow the instructions for submitting comments

    through the Web site.

    Mail: David A. Stawick, Secretary of the Commission,

    Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st

    Street, NW., Washington, DC 20581.

    Hand Delivery/Courier: Same as mail above.

    Federal eRulemaking Portal: http://www.regulations.gov.

    Follow the instructions for submitting comments.

    All comments must be submitted in English, or if not, accompanied

    by an English translation. Comments will be posted as received to

    http://www.cftc.gov. You should submit only information that you wish

    to make available publicly. If you wish the Commission to consider

    information that may be exempt from disclosure under the Freedom of

    Information Act, a petition for confidential treatment of the exempt

    information may be submitted according to the established procedures in

    CFTC Regulation 145.9.\1\

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    \1\ Commission regulations referred to herein are found at 17

    CFR Ch. 1.

    FOR FURTHER INFORMATION CONTACT: Phyllis P. Dietz, Associate Director,

    202-418-5449, pdietz@cftc.gov, or Jon DeBord, Attorney-Advisor, 202-

    418-5478, jdebord@cftc.gov, or Division of Clearing and Intermediary

    Oversight, Commodity Futures Trading Commission, Three Lafayette

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    Centre, 1151 21st Street, NW., Washington, DC 20581.

    SUPPLEMENTARY INFORMATION:

    Table of Contents

    I. Background

    A. Regulation 1.25

    B. Regulation 30.7

    C. Advance Notice of Proposed Rulemaking

    D. The Dodd-Frank Act

    II. Discussion of the Proposed Rules

    A. Permitted Investments

    1. Government Sponsored Enterprise Securities

    2. Commercial Paper and Corporate Notes or Bonds

    3. Foreign Sovereign Debt

    4. In-House Transactions

    B. General Terms and Conditions

    1. Marketability

    2. Ratings

    3. Restrictions on Instrument Features

    4. Concentration Limits

    (a) Asset-Based Concentration Limits

    (b) Issuer-Based Concentration Limits

    (c) Counterparty Concentration Limits

    C. Money Market Mutual Funds

    1. Acknowledgment Letters

    2. Next-Day Redemption Requirement

    D. Repurchase and Reverse Repurchase Agreements

    E. Regulation 30.7

    1. Harmonization

    2. Ratings

    3. Designation as a Depository for 30.7 Funds

    III. Related Matters

    A. Regulatory Flexibility Act

    B. Paperwork Reduction Act

    C. Costs and Benefits of the Proposed Rules

    Text of Rules

    I. Background

    A. Regulation 1.25

    Under Section 4d(a)(2) of the Commodity Exchange Act (Act),\2\ the

    investment of customer segregated funds is limited to obligations of

    the United States and obligations fully guaranteed as to principal and

    interest by the United States (U.S. government securities), and general

    obligations of any State or of any political subdivision thereof

    (municipal securities). Pursuant to authority under Section 4(c) of the

    Act,\3\ the Commission substantially expanded the list of permitted

    investments by amending Commission Regulation 1.25 \4\ in December 2000

    to permit investments in general obligations issued by any enterprise

    sponsored by the United States (government sponsored enterprise

    securities or GSE securities), bank certificates of deposit (CDs),

    commercial paper, corporate notes,\5\ general obligations of a

    sovereign nation, and interests in MMMFs.\6\ In connection

    [[Page 67643]]

    with that expansion, the Commission included several provisions

    intended to control exposure to credit, liquidity, and market risks

    associated with the additional investments, e.g., requirements that the

    investments satisfy specified rating standards and concentration

    limits, and be readily marketable and subject to prompt liquidation.\7\

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    \2\ 7 U.S.C. 6d(a)(2).

    \3\ 7 U.S.C. 6(c).

    \4\ 17 CFR 1.25.

    \5\ This category of permitted investment was later amended to

    read ``corporate notes or bonds.'' See 70 FR 28190, 28197 (May 17,

    2005).

    \6\ See 65 FR 77993 (Dec. 13, 2000) (publishing final rules);

    and 65 FR 82270 (Dec. 28, 2000) (making technical corrections and

    accelerating effective date of final rules from February 12, 2001 to

    December 28, 2000).

    \7\ Id.

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    The Commission further modified Regulation 1.25 in 2004 and 2005.

    In February 2004, the Commission adopted amendments regarding

    repurchase agreements using customer-deposited securities and time-to-

    maturity requirements for securities deposited in connection with

    certain collateral management programs of derivatives clearing

    organizations (DCOs).\8\ In May 2005, the Commission adopted amendments

    related to standards for investing in instruments with embedded

    derivatives, requirements for adjustable rate securities, concentration

    limits on reverse repurchase agreements, transactions by futures

    commission merchants (FCMs) that are also registered as securities

    brokers or dealers (in-house transactions), rating standards and

    registration requirements for MMMFs, an auditability standard for

    investment records, and certain technical changes.\9\

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    \8\ 69 FR 6140 (Feb. 10, 2004).

    \9\ 70 FR 28190.

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    The Commission has been, and continues to be, mindful that customer

    segregated funds must be invested in a manner that minimizes their

    exposure to credit, liquidity, and market risks both to preserve their

    availability to customers and DCOs and to enable investments to be

    quickly converted to cash at a predictable value in order to avoid

    systemic risk. Toward these ends, Regulation 1.25 establishes a general

    prudential standard by requiring that all permitted investments be

    ``consistent with the objectives of preserving principal and

    maintaining liquidity.'' \10\

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    \10\ 17 CFR 1.25(b).

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    In 2007, the Commission's Division of Clearing and Intermediary

    Oversight (Division) launched a review of the nature and extent of

    investments of customer segregated funds and 30.7 funds (2007 Review)

    in order to further its understanding of investment strategies and

    practices and to assess whether any changes to the Commission's

    regulations would be appropriate. As part of this review, all

    registered DCOs and FCMs carrying customer accounts provided responses

    to a series of questions. As the Division was conducting follow-up

    interviews with respondents, the market events of September 2008

    occurred and changed the financial landscape such that much of the data

    previously gathered no longer reflected current market conditions.

    However, much of that data remains useful as an indication of how

    Regulation 1.25 was implemented in a more stable financial environment,

    and recent events in the economy have underscored the importance of

    conducting periodic reassessments and, as necessary, revising

    regulatory policies to strengthen safeguards designed to minimize risk.

    B. Regulation 30.7

    Regulation 30.7 \11\ governs an FCM's treatment of customer money,

    securities, and property associated with positions in foreign futures

    and foreign options. Regulation 30.7 was issued pursuant to the

    Commission's plenary authority under Section 4(b) of the Act.\12\

    Because Congress did not expressly apply the limitations of Section 4d

    of the Act to 30.7 funds, the Commission historically has not subjected

    those funds to the investment limitations applicable to customer

    segregated funds.

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    \11\ 17 CFR 30.7.

    \12\ 7 U.S.C. 6(b).

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    The investment guidelines for 30.7 funds are general in nature.\13\

    Although Regulation 1.25 investments offer a safe harbor, the

    Commission does not currently limit investments of 30.7 funds to

    permitted investments under Regulation 1.25. Appropriate depositories

    for 30.7 funds currently include certain financial institutions in the

    United States, financial institutions in a foreign jurisdiction meeting

    certain capital and credit rating requirements, and any institution not

    otherwise meeting the foregoing criteria, but which is designated as a

    depository upon the request of a customer and the approval of the

    Commission.

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    \13\ See Commission Form 1-FR-FCM Instructions at 12-9 (Mar.

    2010) (``In investing funds required to be maintained in separate

    section 30.7 account(s), FCMs are bound by their fiduciary

    obligations to customers and the requirement that the secured amount

    required to be set aside be at all times liquid and sufficient to

    cover all obligations to such customers. Regulation 1.25 investments

    would be appropriate, as would investments in any other readily

    marketable securities.'').

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    C. Advance Notice of Proposed Rulemaking

    In May 2009, the Commission issued an advance notice of proposed

    rulemaking (ANPR) \14\ to solicit public comment prior to proposing

    amendments to Regulations 1.25 and 30.7. The Commission stated that it

    was considering significantly revising the scope and character of

    permitted investments for customer segregated funds and 30.7 funds. In

    this regard, the Commission sought comments, information, research, and

    data regarding regulatory requirements that might better safeguard

    customer segregated funds. It also sought comments, information,

    research, and data regarding the impact of applying the requirements of

    Regulation 1.25 to investments of 30.7 funds.

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    \14\ 74 FR 23962 (May 22, 2009).

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    The Commission received twelve comment letters in response to the

    ANPR, and it has considered those comments in formulating its

    proposal.\15\ Eleven of the 12 letters supported maintaining the

    current list of permitted investments and/or specifically ensuring that

    MMMFs remain a permitted investment. Five of the letters were dedicated

    solely to the topic of MMMFs, providing detailed discussions of their

    usefulness to FCMs. Several letters addressed issues regarding ratings,

    liquidity, concentration, and portfolio weighted average time to

    maturity. The alignment of Regulation 30.7 with Regulation 1.25 was

    viewed as non-controversial.

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    \15\ The Commission received comment letters from CME Group Inc.

    (CME), Crane Data LLC (Crane), The Dreyfus Corporation (Dreyfus),

    FCStone Group Inc. (FCStone), Federated Investors, Inc. (Federated),

    Futures Industry Association (FIA), Investment Company Institute

    (ICI), MF Global Inc. (MF Global), National Futures Association

    (NFA), Newedge USA, LLC (Newedge), and Treasury Strategies, Inc.

    (TSI). Two letters were received from Federated: A July 10, 2009

    letter (Federated letter I) and an August 24, 2009 letter.

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    The FIA's comment letter expressed its view that ``all of the

    permitted investments described in Rule 1.25(a) are compatible with the

    Commission's objectives of preserving principal and maintaining

    liquidity.'' This opinion was echoed by MF Global, Newedge and FC

    Stone. CME asserted that only ``a small subset of the complete list of

    Regulation 1.25 permitted investments are actually used by the

    industry. * * *'' NFA also wrote that investments in instruments other

    than U.S. government securities and MMMFs are ``negligible'' and

    recommended that the Commission eliminate asset classes not ``utilized

    to any material extent.''

    D. The Dodd-Frank Act

    On July 21, 2010, President Obama signed the Dodd-Frank Wall Street

    Reform and Consumer Protection Act (Dodd-Frank Act).\16\ Title IX of

    the

    [[Page 67644]]

    Dodd-Frank Act \17\ was promulgated in order to increase investor

    protection, promote transparency and improve disclosure.

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    \16\ See Dodd-Frank Wall Street Reform and Consumer Protection

    Act, Public Law 111-203, 124 Stat. 1376 (2010). The text of the

    Dodd-Frank Act may be accessed at http://www.cftc.gov./

    LawRegulation/OTCDERIVATIVES/index.htm.

    \17\ Pursuant to Section 901 of the Dodd-Frank Act, Title IX may

    be cited as the ``Investor Protection and Securities Reform Act of

    2010.''

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    Section 939A of the Dodd-Frank Act obligates federal agencies to

    review their respective regulations and make appropriate amendments in

    order to decrease reliance on credit ratings. The Dodd-Frank Act

    requires the Commission to conduct this review within one year after

    the date of enactment.\18\ The Commission is proposing amendments to

    Regulations 1.25 and 30.7 that include removal of provisions setting

    forth credit rating requirements. Separate rulemakings proposed today

    address the elimination of credit ratings from Regulations 1.49 and

    4.24 and the removal of Appendix A to Part 40 (which contains a

    reference to credit ratings).

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    \18\ See Section 939A(a) of the Dodd-Frank Act.

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    The Commission is now proposing amendments to Regulations 1.25 and

    30.7 and requests comment on all aspects of the proposed rules, as well

    as comment on the specific provisions and issues highlighted in the

    discussion below. In addition, commenters are welcome to offer their

    views regarding any other related matters that are raised by the

    proposed amendments.

    II. Discussion of the Proposed Rules

    A. Permitted Investments

    In proposing amendments to Regulation 1.25, the Commission seeks to

    simplify the regulation and impose requirements that can better ensure

    the preservation of principal and maintenance of liquidity. The

    Commission has endeavored to tailor its proposal to achieve these goals

    while retaining an appropriate degree of investment flexibility and

    opportunities for attaining capital efficiency for DCOs and FCMs

    investing customer segregated funds.

    The Commission seeks to simplify Regulation 1.25 by narrowing the

    scope of investment choices in order to eliminate the potential use of

    instruments that may pose an unacceptable level of risk. In their July

    2009 comment letters, both NFA and CME suggested contracting the scope

    of permitted investments by eliminating asset classes used negligibly

    as investment vehicles.

    The Commission seeks to increase the safety of Regulation 1.25

    investments by promoting diversification. For example, issuer-specific

    concentration limits control how much exposure an FCM or DCO has to the

    credit risk of any one investment. The Commission believes that greater

    diversification can be achieved through instituting two additional

    types of concentration limits. First, asset-based concentration limits,

    suggested by the FIA, MF Global and Newedge in their comment letters,

    reduce market risk by limiting how much of any one class of instrument

    an FCM or DCO can have in its portfolio at any one time. Second,

    repurchase agreement counterparty concentration limits serve to cap an

    FCM or DCO's exposure to the credit risk of a counterparty.

    Below, the Commission details its proposal to remove government

    sponsored enterprise (GSE) securities that are not backed by the full

    faith and credit of the United States, corporate debt obligations not

    guaranteed by the United States, general obligations of a sovereign

    nation (foreign sovereign debt), and in-house transactions from the

    list of permitted investments. These proposed changes reflect the

    position of the Commission that the safety of a particular instrument

    or transaction must be viewed through the lens of its likely

    performance during a period of market volatility and financial

    instability.

    1. Government Sponsored Enterprise Securities

    The Commission proposes to amend paragraph (a)(1)(iii) to expressly

    add U.S. government corporation obligations \19\ to GSE securities

    (together, U.S. agency obligations) and to add the requirement that the

    U.S. agency obligations must be fully guaranteed as to principal and

    interest by the United States. GSEs are chartered by Congress but are

    privately owned and operated. Securities issued by GSEs do not have an

    explicit federal guarantee although they are considered by some to have

    an ``implicit'' guarantee due to their federal affiliation.\20\

    Obligations of U.S. government corporations, such as the Government

    National Mortgage Association (known as Ginnie Mae), are explicitly

    backed by the full faith and credit of the United States. Although the

    Commission is not aware of any GSE securities that have an explicit

    federal guarantee, it believes that GSE securities should remain on the

    list of permitted investments in the event this status changes in the

    future.

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    \19\ See 31 U.S.C. 9101 (defining ``government corporation'').

    \20\ Frank J. Fabozzi with Steven V. Mann, The Handbook of Fixed

    Income Securities, 242-245 (McGraw Hill 7th ed. 2005).

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    The failure of two GSEs during the financial crisis has moved the

    Commission to view the securities of such GSEs as inappropriate for

    investments of customer funds. In 2008, the Federal National Mortgage

    Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation

    (Freddie Mac) failed due to problems in the subprime mortgage market.

    While Fannie Mae and Freddie Mac were bailed out in 2008, the U.S.

    government had no obligation to do so and investors cannot rely on

    another bailout should a GSE fail in the future.

    In consideration of the above, the Commission proposes to amend

    paragraph (a)(1)(iii) of Regulation 1.25 by permitting investments in

    only those U.S. agency obligations that are fully guaranteed as to

    principal and interest by the United States.\21\ The Commission

    requests comment on whether GSE securities should remain as permitted

    investments under Regulation 1.25, either subject to a Federal

    guarantee requirement or not.

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    \21\ Although U.S. Government corporation obligations backed by

    the full faith and credit of the United States could also be

    categorized as U.S. Government securities under Regulation

    1.25(a)(1)(i), the Commission is distinguishing them from other

    government securities, such as Treasury securities, because they

    cannot be expected to have the same liquidity even if they satisfy

    the ``highly liquid'' requirement under proposed. Regulation

    1.25(b)(1). See also discussion of concentration limits in Section

    II.B.4. of this notice.

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    2. Commercial Paper and Corporate Notes or Bonds

    In order to simplify the regulation by eliminating rarely-used

    instruments, and in light of the credit, liquidity, and market risks

    posed by corporate debt securities, the Commission proposes to limit

    investments in ``commercial paper'' \22\ and ``corporate notes or

    bonds'' \23\ to commercial paper and corporate notes or bonds that are

    federally guaranteed as to principal and interest under the Temporary

    Liquidity Guarantee Program (TLGP) and meet certain other prudential

    standards.\24\

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    \22\ Regulation 1.25(a)(1)(v).

    \23\ Regulation 1.25(a)(1)(vi).

    \24\ Commercial paper would remain available as a direct

    investment for MMMFs and corporate notes or bonds would remain

    available as indirect investments for MMMFs by means of a repurchase

    agreement. Additionally, it should be noted that two commenters

    suggested expanding the list of permitted investments to include

    commercial paper and corporate notes or bonds guaranteed by foreign

    sovereign governments. However, as the Commission has determined

    that foreign sovereign debt is itself unsuitable as a permitted

    investment, going forward (explained in more detail below), it

    follows that corporate debt guaranteed by a foreign sovereign

    government would also not be permissible.

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    [[Page 67645]]

    Information obtained during the 2007 Review indicated that

    commercial paper and corporate notes or bonds were not widely used by

    FCMs or DCOs.\25\ Consistent with this, the NFA states in its comment

    letter that most firms invest about 33 percent of their customer funds

    in government securities, 10 percent in MMMFs, and the balance

    maintained in bank accounts or on deposit with a carrying broker.

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    \25\ The 2007 Review indicated that out of 87 FCM respondents,

    only nine held commercial paper and seven held corporate notes/bonds

    as direct investments during the November 30, 2006-December 1, 2007

    period. Further, 26 FCM respondents engaged in reverse repurchase

    agreements as of December 1, 2007 and none received commercial paper

    or corporate notes or bonds in those transactions.

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    In the fall of 2008, the Federal Deposit Insurance Corporation

    (FDIC) created the TLGP, which guarantees principal and interest on

    certain types of corporate debt. Although the TLGP debt securities are

    backed by the full faith and credit of the U.S. Government and

    therefore pose minimal credit risk to the buyer for the period during

    which the guarantee is effective, initially there was concern as to

    whether the securities were readily marketable and sufficiently liquid

    so that the holders of such securities would be able to liquidate them

    quickly and easily without having to incur a substantial discount.

    In February 2010, having evaluated the growing market for TLGP debt

    securities, the Division issued an interpretative letter concluding

    that TLGP debt securities are sufficiently liquid, and might therefore

    qualify as permitted investments under Regulation 1.25 if they meet the

    following criteria in addition to satisfying the pre-existing

    requirements imposed by Regulation 1.25: (1) The size of the issuance

    is greater than $1 billion; (2) the debt security is denominated in

    U.S. dollars; and (3) the debt security is guaranteed for its entire

    term.\26\

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    \26\ Letter from Ananda Radhakrishnan, Director, Division of

    Clearing and Intermediary Oversight, CFTC, to Debra Kokal, Chairman

    of the Joint Audit Committee (Jan. 15, 2010) (TLGP Letter).

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    Although the TLGP expires in 2012, the Commission believes it is

    useful to include commercial paper and corporate notes or bonds that

    are fully guaranteed as to principal and interest by the United States

    as permitted investments because this would permit continuing

    investment in TLGP debt securities, even though the Commission has

    proposed to otherwise eliminate commercial paper and corporate notes or

    bonds. Therefore, the Commission proposes to limit the commercial paper

    and corporate notes or bonds that can qualify as permitted investments

    to only those guaranteed as to principal and interest under the TLGP

    and that meet the criteria set forth in the Division's interpretation.

    As a result of this limitation, paragraph (b)(3)(iv), which relates to

    adjustable rate securities, is no longer necessary.\27\ The Commission

    proposes to delete current paragraph (b)(3)(iv) and replace it with

    language codifying the criteria for federally backed commercial paper

    and corporate notes or bonds. Accordingly, the Commission proposes to

    delete paragraph (b)(3)(i)(B) and amend paragraph (b)(3)(iii) to remove

    references to paragraph (b)(3)(iv). The Commission requests comment on

    the proscription of commercial paper and corporate notes or bonds that

    are not federally guaranteed under the TLGP, the liquidity of TLGP

    debt, and whether the removal of the requirements for adjustable rate

    securities will have any unintended or detrimental effects on

    Regulation 1.25 investments.

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    \27\ The original purpose of this paragraph was to set

    parameters for adjustable rate securities issued by corporations

    and, to a lesser extent, GSEs. As proposed, Regulation 1.25 would

    only permit corporate and GSE securities that had explicit U.S.

    Government guarantees. Therefore, the mechanics of an adjustable

    rate component for these instruments would no longer require

    oversight for Regulation 1.25 purposes.

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    3. Foreign Sovereign Debt

    The Commission proposes to remove foreign sovereign debt as a

    permitted investment in the interests of both simplifying the

    regulation and safeguarding customer funds. The 2007 Review revealed

    negligible investment in foreign sovereign debt \28\ and that fact, in

    combination with recent events undermining confidence in the solvency

    of a number of foreign countries, supports the Commission's proposed

    action. Removal of foreign sovereign debt from the list of permitted

    investments is not expected to significantly impact FCM and DCO

    investment strategies for customer funds. The Commission notes that,

    aside from general appeals to maintain the current list of permitted

    investments, only one commenter specifically addressed foreign

    sovereign debt.\29\

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    \28\ The 2007 Review indicated that out of 87 FCM respondents,

    only three held an investment in foreign sovereign debt at any time

    during that year. It should also be noted that only one FCM invested

    in such debt under Regulation 30.7.

    \29\ FIA, in its comment letter, recommended expanding

    investment in foreign sovereign debt beyond the current rule, which

    limits an FCM's investment in foreign sovereign debt to the amount

    of its liabilities to its clients in that foreign country's currency

    (FIA letter at 5). As the Commission is prepared to remove foreign

    sovereign debt entirely, a more detailed analysis of this

    recommendation is unnecessary.

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    Currently, an FCM or DCO can invest customer funds in foreign

    sovereign debt subject to two limitations: (1) The debt must be rated

    in the highest category by at least one nationally recognized

    statistical rating organization (NRSRO) and (2) the FCM or DCO may

    invest in such debt only to the extent it has balances in segregated

    accounts owed to its customers or its clearing member FCMs,

    respectively, denominated in that country's currency. The purpose of

    permitting investments in foreign sovereign debt is to facilitate

    investments of customer funds in the form of foreign currency without

    the need to convert that foreign currency to a U.S. dollar denominated

    asset, which would increase the FCM or DCO's exposure to currency risk.

    An investment in the sovereign debt of the same country that issues the

    foreign currency would limit the FCM or DCO's exposure to sovereign

    risk, i.e., the risk of the sovereign's default.

    Both the lack of investment in foreign sovereign debt and the

    recent global financial volatility have caused the Commission to

    reevaluate this provision. First, as noted above, it appears that

    foreign sovereign debt is rarely used as an investment tool by FCMs.

    Second, the financial crisis has highlighted the fact that certain

    countries' debt can exceed an acceptable level of risk.

    In consideration of the above, the Commission proposes to remove

    foreign sovereign debt as a permitted investment under Regulation 1.25

    and renumber paragraph (a)(1) accordingly. The Commission requests

    comment on whether foreign sovereign debt should remain, to any extent,

    as a permitted investment and, if so, what requirements or limitations

    might be imposed in order to minimize sovereign risk.

    4. In-House Transactions

    The Commission proposes to eliminate in-house transactions

    permitted under paragraph (a)(3) and subject to the requirements of

    paragraph (e) of Regulation 1.25. This proposal is consistent with the

    Commission's proposed prohibition on an FCM or DCO entering into a

    repurchase or reverse repurchase agreement with a counterparty that is

    an affiliate of the FCM or DCO.\30\

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    \30\ See discussion infra at Section II.D, regarding proposed

    Regulation 1.25(d)(3).

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    In 2005, two commenters recommended that the Commission permit FCMs

    that are dually registered as securities brokers or dealers to engage

    [[Page 67646]]

    in in-house transactions.\31\ At the time, the Commission concluded

    that in-house transactions would allow FCMs to realize ``greater

    capital efficiency'' and further reasoned that ``the substitution of

    one permitted investment for another in an in-house transaction [would]

    not present an unacceptable level of risk to the customer segregated

    account.'' \32\ The Commission therefore amended Regulation 1.25 to

    allow an FCM/broker-dealer to enter into transactions that are the

    economic equivalent of a repurchase or reverse repurchase agreement,

    subject to certain requirements.\33\ More specifically, an FCM may

    exchange customer money for permitted investments held in its capacity

    as a broker-dealer, it may exchange customer securities for permitted

    investments held in its capacity as a broker-dealer, and it may

    exchange customer securities for cash held in its capacity as a broker-

    dealer.\34\

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    \31\ See 70 FR at 28193 (FIA and Lehman Brothers supporting in-

    house transactions).

    \32\ 70 FR 5577, 5581 (Feb. 3, 2005).

    \33\ See Regulation 1.25(a)(3) and (e).

    \34\ Regulation 1.25(a)(3)(i)-(iii).

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    Recent market events have, however, increased concerns about the

    concentration of credit risk within the FCM/broker-dealer corporate

    entity in connection with in-house transactions. Therefore, consistent

    with the Commission's proposal to prohibit FCMs from entering into

    repurchase and reverse repurchase agreements with affiliates, the

    Commission is proposing to eliminate in-house transactions as permitted

    investments for customer funds under paragraph (a)(3) of Regulation

    1.25 and rescind paragraph (e), which sets forth the requirements for

    in-house transactions. Accordingly, paragraph (f) will be redesignated

    as new paragraph (e).

    The Commission requests comment on the impact of this proposal on

    the business practices of FCMs and DCOs. Specifically, the Commission

    requests that commenters present scenarios in which a repurchase or

    reverse repurchase agreement with a third party could not be

    satisfactorily substituted for an in-house transaction.

    The Commission requests comment on any other aspect of the proposed

    changes to paragraph (a) of Regulation 1.25. In particular, the

    Commission solicits comment on whether MMMFs should be eliminated as a

    permitted investment.\35\ In discussing whether MMMF investments

    satisfy the overall objective of preserving principal and maintaining

    liquidity, the Commission specifically requests comment on whether

    changes in the settlement mechanisms for the tri-party repo market

    might impact a MMMF's ability to meet the requirements of Regulation

    1.25.\36\

    ---------------------------------------------------------------------------

    \35\ MMMFs are discussed in greater detail infra, in Sections

    II.B.4 and II.C of this notice.

    \36\ An industry task force recently concluded an extensive

    review of the tri-party repo market to identify ways in which it

    could be improved. See Payments Risk Committee, Task Force on Tri-

    Party Repo Infrastructure, http://www.newyorkfed.org/tripartyrepo/

    task_force_report.html (May 17, 2010). In contrast to current

    practice, under which funds from maturing repos are available early

    in the day, modifications to the settlement arrangements for tri-

    party repo transactions may result in payments occurring later in

    the day. To the extent that MMMFs invest in tri-party repos, this

    change could impact their ability to pay out large amounts of cash

    early in the day.

    ---------------------------------------------------------------------------

    B. General Terms and Conditions

    FCMs and DCOs may invest customer funds only in enumerated

    permitted investments ``consistent with the objectives of preserving

    principal and maintaining liquidity * * *.'' \37\ In furtherance of

    this general standard, paragraph (b) of Regulation 1.25 establishes

    various specific requirements designed to minimize credit, market, and

    liquidity risk. Among them are a requirement that the investment be

    ``readily marketable,'' that it meet specified rating requirements, and

    that it not exceed specified issuer concentration limits. The

    Commission is proposing to amend these standards to facilitate the

    preservation of principal and maintenance of liquidity by establishing

    clear, prudential standards that further investment quality and

    portfolio diversification. The Commission notes that an investment that

    meets the technical requirements of Regulation 1.25 but does not meet

    the overarching prudential standard cannot qualify as a permitted

    investment.

    ---------------------------------------------------------------------------

    \37\ Regulation 1.25(b).

    ---------------------------------------------------------------------------

    1. Marketability

    Regulation 1.25(b)(1) states that ``[e]xcept for interests in money

    market mutual funds, investments must be `readily marketable' as

    defined in Sec. 240.15c3-1 of this title.'' \38\ The Commission

    proposes to remove the ``readily marketable'' requirement from

    paragraph (b)(1) and substitute in its place a ``highly liquid''

    standard.\39\ The Commission did not receive any comment letters

    specifically discussing the meaning and application of the ``readily

    marketable'' requirement.\40\

    ---------------------------------------------------------------------------

    \38\ See 17 CFR 240.15c3-1(c)(11)(i) (SEC regulation defining

    ``ready market'').

    \39\ Related to this proposed new standard, the provision in

    paragraph (a)(2)(ii)(A) that requires securities subject to

    repurchase agreements to be `` `readily marketable' as defined in

    Sec. 240.15c-1 of this title'' also would be amended to provide

    that securities subject to repurchase agreements must be `` `highly

    liquid' as defined in paragraph (b)(2) of this section.''

    \40\ FIA, MF Global and Newedge mentioned marketability in their

    letters but no significant changes were recommended.

    ---------------------------------------------------------------------------

    The term ``ready market'' is borrowed from the Securities and

    Exchange Commission (SEC) capital rules and is interpreted by the

    SEC.\41\ That standard is used in setting appropriate haircuts for the

    purpose of calculating capital. Although its inclusion in Regulation

    1.25 was intended to be a proxy for the concept of liquidity, it is not

    a concept that is otherwise easily applied as a prudential standard in

    determining the appropriateness of a debt instrument for investment of

    customer funds.

    ---------------------------------------------------------------------------

    \41\ The term ``ready market'' is defined, in relevant part, to

    ``include a recognized established securities market in which there

    exists independent bona fide offers to buy and sell so that a price

    reasonably related to the last sales price or current bona fide

    competitive bid and offer quotations can be determined for a

    particular security almost instantaneously and where payment will be

    received in settlement of a sale at such price within a relatively

    short time conforming to trade custom.'' 17 CFR 240.15c3-

    1(c)(11)(i).

    ---------------------------------------------------------------------------

    It is the Commission's view that the ``readily marketable''

    language should be eliminated as it creates an overlapping and

    confusing standard when applied in the context of the express objective

    of ``maintaining liquidity.'' While ``liquidity'' and ``ready market''

    appear to be interchangeable concepts, they have distinctly different

    origins and uses: The objective of ``maintaining liquidity'' is to

    ensure that investments can be promptly liquidated in order to meet a

    margin call, pay variation settlement, or return funds to the customer

    upon demand. As noted above, the SEC's ``ready market'' standard is

    intended for a different purpose and is easier to apply to exchange

    traded equity securities than debt securities.

    Although Regulation 1.25 requires that investments be consistent

    with the objective of maintaining liquidity, the Commission has not

    articulated an explanation or a definition of the concept of

    ``liquidity.'' The Commission therefore proposes to define ``highly

    liquid'' functionally, as having the ability to be converted into cash

    within one business day, without a material discount in value. This

    approach focuses on outcome rather than process, and the Commission

    believes it will be easier to apply to debt securities than the current

    ``readily marketable'' standard.

    An alternative to using a materiality standard in the definition of

    highly liquid is to employ a more formulaic and measurable approach. An

    example of a calculable standard would be one that provides that an

    instrument is

    [[Page 67647]]

    highly liquid if there is a reasonable basis to conclude that, under

    stable financial conditions, the instrument has the ability to be

    converted into cash within one business day, without greater than a 1

    percent haircut off of its book value.

    The Commission proposes to amend paragraph (b)(1) to eliminate the

    marketability standard and in its place establish a requirement that

    permitted investments be highly liquid. The Commission requests comment

    on whether the proposed definition of ``highly liquid'' accurately

    reflects the industry's understanding of that term, and whether the

    term ``material'' might be replaced with a more precise or, perhaps,

    even calculable standard. The Commission welcomes comment on the ease

    or difficulty in applying the proposed or alternative ``highly liquid''

    standards.

    2. Ratings

    The Commission proposes to remove all rating requirements from

    Regulation 1.25. This proposal is mandated by Section 939A of the Dodd-

    Frank Act. Further, the proposal reflects the Commission's views that

    ratings are not sufficiently reliable as currently administered, that

    there is reduced need for a measure of credit risk given the proposed

    elimination of certain permitted investments, and that FCMs and DCOs

    should bear greater responsibility for understanding and evaluating

    their investments.\42\

    ---------------------------------------------------------------------------

    \42\ The Commission received three letters regarding rating

    requirements, but none focused on the question of whether or not to

    retain ratings.

    ---------------------------------------------------------------------------

    The original purpose of imposing rating requirements was to

    mitigate credit risk associated with permitted investments which

    included commercial paper and corporate notes. Recent events in the

    financial markets, however, revealed significant weaknesses in the

    ratings industry.

    Eliminating or restricting rating requirements has been considered

    by Congress and regulators with some frequency during the past two

    years. This has been motivated, at least in part, by public sentiment

    that credit rating agencies did not accurately rate debt in the months

    and years leading up to the financial crisis, worsening the financial

    crisis and increasing investors' losses. The SEC, in September 2009,

    adopted rule amendments that removed references to NRSROs from a

    variety of SEC rules and forms promulgated under the Securities

    Exchange Act of 1934 and from certain rules promulgated under the

    Investment Company Act of 1940 (Investment Company Act).\43\ In

    November 2009, the SEC adopted rules imposing enhanced disclosure and

    conflict of interest requirements for NRSROs.\44\ The SEC also has

    opened comment periods on other proposed amendments, including one that

    would remove references to NRSROs from its net capital rule.\45\

    ---------------------------------------------------------------------------

    \43\ See 74 FR 52358 (Oct. 9, 2009) (publishing final rules and

    proposing additional rule amendments).

    \44\ See 74 FR 63832 (Dec. 4, 2009) (publishing final rules and

    proposing additional rule amendments).

    \45\ 74 FR at 52377-78 (proposing removal of certain references

    to NRSROs in the SEC's net capital rules for broker-dealers).

    ---------------------------------------------------------------------------

    The Dodd-Frank Act contains several measures that focus both on

    decreasing reliance on NRSROs and improving the performance of NRSROs

    when they must be relied upon. Section 939 of the Dodd-Frank Act

    mandates the removal of certain references to NRSROs in several

    statutes,\46\ and Section 939A requires all Federal agencies to review

    references to NRSROs in their regulations, to remove reliance on credit

    ratings and, if appropriate, to replace such reliance with other

    standards of credit-worthiness.

    ---------------------------------------------------------------------------

    \46\ Sections 7(b)(1)(E)(i), 28(d) and 28(e) of the Federal

    Deposit Insurance Act (12 U.S.C. 1811 et seq.), Section 1319 of the

    Federal Housing Enterprises Financial Safety and Soundness Act of

    1992 (12 U.S.C. 4519), Section 6(a)(5)(A)(iv)(I) of the Investment

    Company Act of 1940 (15 U.S.C. 80a-6(a)(5)(A)(iv)(I)), Section 5136A

    of title LXII of the Revised Statutes of the United States (12

    U.S.C. 24a), and Section 3(a) of the Securities Exchange Act of 1934

    (15 U.S.C. 78a(3)(a)).

    ---------------------------------------------------------------------------

    The Commission, therefore, intends to remove credit rating

    requirements from Regulation 1.25.\47\ Alternative standards of credit-

    worthiness are not being proposed. Evidence that rating agencies have

    not reliably gauged the safety of debt instruments in the past and the

    fact that other Regulation 1.25 proposed amendments published in this

    notice obviate much of the need for credit ratings, have helped to

    shape the Commission's decision.

    ---------------------------------------------------------------------------

    \47\ See infra Section II.E.2 regarding the corresponding change

    in Regulation 30.7.

    ---------------------------------------------------------------------------

    While some might argue that imperfect information is better than

    none at all, several factors outweigh the possible risks associated

    with removing rating requirements. First, eliminating commercial paper

    and corporate notes or bonds as permitted investments would take away a

    large class of potentially risky investments for which ratings would be

    relevant. Second, the issuer concentration limits and proposed asset-

    based concentration limits should reduce the likelihood that one

    problem investment would destabilize an entire investment portfolio.

    Finally, removing rating requirements would not absolve FCMs and DCOs

    from investing in safe, highly liquid investments; rather it would

    shift to FCMs and DCOs more of the responsibility to diligently

    research their investments.

    In light of the above analysis, the Commission proposes to

    eliminate paragraph (b)(2) of Regulation 1.25 and renumber the

    subsequent provisions of paragraph (b) accordingly.

    3. Restrictions on Instrument Features

    Currently, both non-negotiable and negotiable CDs are permitted

    under Regulation 1.25. Paragraph (b)(3)(v) details the required

    redemption features of both types of CDs.

    Non-negotiable CDs represent a direct obligation of the issuing

    bank to the purchaser. The CD is wholly owned by the purchaser until

    early redemption or the final maturity of the CD. To be permitted under

    Regulation 1.25, the terms of the CD must allow the purchaser to redeem

    the CD at the issuing bank within one business day, with any penalty

    for early withdrawal limited to any accrued interest earned. Therefore,

    other than in the event of a bank default, an investor is assured of

    the return of its principal.

    Negotiable CDs are considerably different than non-negotiable CDs

    in that they are typically purchased by a broker on behalf of a large

    number of investors. The large size of the purchase by the broker

    results in a more favorable interest rate for the purchasers, who

    essentially own shares of the negotiable CD. Unlike a non-negotiable

    CD, the purchaser of a negotiable CD cannot redeem its interest from

    the issuing bank. Rather, an investor seeking redemption prior to a

    CD's maturity date must liquidate the CD in the secondary market.

    Depending on the negotiated CD terms (interest rate and duration) and

    the current economic conditions, the market for a given CD can be

    illiquid and can result in the inability to redeem within one business

    day and/or a significant loss of principal.

    Therefore, the Commission proposes to amend paragraph (b)(3)(v) by

    restricting CDs to only those instruments which can be redeemed at the

    issuing bank within one business day, with any penalty for early

    withdrawal limited to accrued interest earned according to its written

    terms.\48\

    ---------------------------------------------------------------------------

    \48\ While it proposes to eliminate negotiable CDs as an

    interest bearing vehicle for purposes of Regulation 1.25, the

    Commission notes that Section 627 of the Dodd-Frank Act removes the

    prohibition on payments of interest on demand deposits. Demand

    deposits which meet Regulation 1.25 standards of liquidity may,

    therefore, be a source of interest income to DCOs and FCMs.

    ---------------------------------------------------------------------------

    [[Page 67648]]

    4. Concentration Limits

    Paragraph (b)(4) of Regulation 1.25 currently sets forth issuer-

    based concentration limits for direct investments, securities subject

    to repurchase or reverse repurchase agreements, and in-house

    transactions. The Commission proposes to adopt asset-based

    concentration limits for direct investments and a counterparty

    concentration limit for reverse repurchase agreements in addition to

    amending its issuer-based concentration limits and rescinding

    concentration limits applied to in-house transactions.\49\

    ---------------------------------------------------------------------------

    \49\ The Commission is aware that other diversification methods

    exist or could be devised (such as the diversification requirements

    for MMMF investments in CME's IEF2 collateral management program)

    and believes that such methods can coexist with the proposed

    concentration limits.

    ---------------------------------------------------------------------------

    (a) Asset-based concentration limits. Asset-based concentration

    limits would dictate the amount of funds an FCM or DCO could hold in

    any one class of investments, expressed as a percentage of total assets

    held in segregation. In their comment letters, the FIA, MF Global and

    Newedge specifically suggested the incorporation of asset-based

    concentration limits. The Commission agrees that such limits could

    increase the safety of customer funds by promoting diversification.

    Specifically, the Commission proposes the following asset-based

    limits in light of its evaluation of credit, liquidity, and market

    risk:

    No concentration limit (100 percent) for U.S. government

    securities;

    A 50 percent concentration limit for U.S. agency

    obligations fully guaranteed as to principal and interest by the United

    States;

    A 25 percent concentration limit for TLGP guaranteed

    commercial paper and corporate notes or bonds;

    A 25 percent concentration limit for non-negotiable CDs;

    A 10 percent concentration limit for municipal securities;

    and

    A 10 percent concentration limit for interests in MMMFs.

    Asset-based concentration limits are consistent with the

    Commission's historical view that not all permitted investments have

    identical risk profiles.\50\ In its efforts to increase the safety of

    permitted investments on a portfolio basis, the Commission has decided

    to assign to each permitted investment an asset-based concentration

    limit that correlates to its level of risk and liquidity relative to

    other permitted investments.\51\

    ---------------------------------------------------------------------------

    \50\ See 70 FR at 5581 (discussing the relative risk profiles of

    permitted investments in the context of repurchase agreements).

    \51\ The Commission notes that paragraphs (b)(4)(ii)-(iii) of

    Regulation 1.25 would apply to both asset-based and issuer-based

    concentration limits. Therefore, for the purpose of calculating

    asset-based concentration limits, instruments purchased by an FCM or

    DCO as a result of a reverse repurchase agreement under paragraph

    (b)(4)(iii) would be combined with instruments held by the FCM or

    DCO as direct investments.

    ---------------------------------------------------------------------------

    U.S. government securities are backed by the full faith and credit

    of the U.S. government, are highly liquid, and are the safest of the

    permitted investments. As such, the Commission proposes a 100 percent

    concentration limit, allowing an FCM or DCO to invest all of its

    segregated funds in U.S. government securities.\52\

    ---------------------------------------------------------------------------

    \52\ FIA, MF Global and Newedge each assigned a 100 percent

    concentration limit to U.S. government securities. See FIA letter at

    3, MF Global letter at 2, and Newedge letter at 5.

    ---------------------------------------------------------------------------

    U.S. agency obligations, as proposed, must be fully guaranteed as

    to principal and interest by the United States. The Commission views

    these as sufficiently safe but potentially not as liquid as a Treasury

    security. Because of this concern, and in the interest of promoting

    diversification, the Commission proposes a 50 percent concentration

    limit.\53\

    ---------------------------------------------------------------------------

    \53\ FIA, MF Global and Newedge each assigned a 75 percent

    concentration limit to GSE securities. See FIA letter at 3, MF

    Global letter at 2, and Newedge letter at 5.

    ---------------------------------------------------------------------------

    The Commission categorizes TLGP debt securities as corporate

    securities,\54\ which are riskier than U.S. government securities.

    While TLGP debt securities have an explicit FDIC guarantee, which

    provides confidence for TLGP debt investors that they will receive the

    full amount of principal and interest in the event of an issuer

    default, the timing of such a payment is uncertain. Additionally, while

    TLGP debt securities that meet the Commission's requirements have a

    liquid secondary market, that might not always be the case. The

    Commission therefore proposes to apply a 25 percent concentration limit

    for TLGP debt securities as well.

    ---------------------------------------------------------------------------

    \54\ See TLGP Letter.

    ---------------------------------------------------------------------------

    CDs are safe for relatively small amounts, but the risk increases

    for larger sums. The rise in bank failures since 2008 is a cause for

    concern with regard to CDs because they are FDIC insured to a maximum

    of only $250,000. As a result, the Commission proposes to apply a 25

    percent concentration limit to CDs.

    In evaluating possible asset-based concentration limits for TLGP

    debt securities and CDs, the Commission determined that the same

    concentration limit should apply to both, even though the risk profiles

    of the asset classes are different. The Commission recognizes that TLGP

    debt securities pose no risk to principal, unlike bank CDs which are

    subject to the possible default of the issuing bank. However, a CD

    which must be redeemable within one business day under Regulation

    1.25(b)(3)(v) could prove to be more liquid than TLGP debt securities

    during a time of market stress. The Commission requests comment on

    whether there should be differentiation between asset-based

    concentration limits for TLGP debt securities and CDs and, if so, what

    those different concentration limits should be.

    Municipal securities are backed by the state or local government

    that issues them, and they have traditionally been viewed as a safe

    investment. However, municipal securities have been volatile and, in

    some cases, increasingly illiquid over the past two years. Therefore,

    the Commission proposes to apply a 10 percent concentration limit to

    municipal securities.\55\

    ---------------------------------------------------------------------------

    \55\ FIA, MF Global and Newedge each assigned a 25 percent

    concentration limit to all assets that were not U.S. government

    securities, GSE securities or MMMFs. See FIA letter at 3, MF Global

    letter at 2, and Newedge letter at 5.

    ---------------------------------------------------------------------------

    MMMFs have been widely used as an investment for customer

    segregated funds.\56\ As discussed in the next section, their portfolio

    diversification, administrative ease, and heightened prudential

    standards recently imposed by the SEC, continue to make MMMFs an

    attractive investment option. However, their volatility during the 2008

    financial crisis, which culminated in one fund ``breaking the buck''

    and many more funds requiring infusions of capital, underscores the

    fact that investments in MMMFs are not without risk.\57\ To mitigate

    these risks, the Commission proposes to assign a 10 percent

    concentration limit for MMMFs.\58\ The Commission believes that this

    concentration limit is commensurate with the risks posed by MMMFs. The

    Commission solicits comment regarding whether 10 percent is an

    appropriate asset-based concentration limit for MMMFs. The Commission

    welcomes opinions on what alternative asset-based concentration limit

    might be appropriate for MMMFs and, if such

    [[Page 67649]]

    asset-based concentration limit is higher than 10 percent, what

    corresponding issuer-based concentration limit should be adopted.

    ---------------------------------------------------------------------------

    \56\ The 2007 Review indicated that out of 87 FCM respondents,

    46 had invested customer funds in MMMFs at some point during the

    November 30, 2006-December 1, 2007 period.

    \57\ See 75 FR 10060, 10078 n.234 (Mar. 4, 2010).

    \58\ FIA recommended a 100 percent concentration limit, Newedge

    recommended a 50 percent concentration limit, and MF Global

    recommended a 25 percent concentration limit for MMMFs. See FIA

    letter at 3, Newedge letter at 5, and MF Global letter at 2.

    ---------------------------------------------------------------------------

    (b) Issuer-based concentration limits. The Commission has

    considered the current concentration limits and proposes to amend its

    issuer-based limits for direct investments to include a 2 percent limit

    for an MMMF family of funds, expressed as a percentage of total assets

    held in segregation. Currently, there is no concentration limit applied

    to MMMFs and the Commission believes that it is prudent to require FCMs

    and DCOs to diversify their MMMF portfolios. The 25 percent issuer-

    based limitation for GSEs (now U.S. agency obligations) and the 5

    percent issuer-based limitation for municipal securities, commercial

    paper, corporate notes or bonds, and CDs will remain in place.

    (c) Counterparty concentration limits. Finally, the Commission

    proposes a counterparty concentration limit of 5 percent of total

    assets held in segregation for securities subject to reverse repurchase

    agreements. Under Regulation 1.25(b)(4)(iii), concentration limits for

    reverse repurchase agreements are derived from the concentration limits

    that would have been assigned to the underlying securities had the FCM

    or DCO made a direct investment. Therefore, under current rules, an FCM

    or DCO could have 100 percent of its segregated funds subject to one

    reverse repurchase agreement. The obvious concern in such a scenario is

    the credit risk of the counterparty. This credit risk, while

    concentrated, is significantly mitigated by the fact that in exchange

    for cash, the FCM or DCO is holding Regulation 1.25-permissible

    securities of equivalent or greater value. However, a default by the

    counterparty would put pressure on the FCM or DCO to convert such

    securities into cash immediately and would exacerbate the market risk

    to the FCM or DCO, given that a decrease in the value of the security

    or an increase in interest rates could result in the FCM or DCO

    realizing a loss. Even though the market risk would be mitigated by

    asset-based and issuer-based concentration limits, a situation of this

    type could seriously jeopardize an FCM or DCO's overall ability to

    preserve principal and maintain liquidity with respect to customer

    funds.

    In accordance with the above discussion, the Commission proposes to

    amend paragraph (b)(4) to add a new paragraph (i) setting forth asset-

    based concentration limits for direct investments; amend and renumber

    as new paragraph (ii) issuer-based concentration limits for direct

    investments; amend and renumber as new paragraph (iii) concentration

    limits for reverse repurchase agreements; delete the existing paragraph

    (iv) due to the Commission's proposed elimination of in-house

    transactions; renumber as a new paragraph (iv) the provision regarding

    treatment of customer-owned securities; and add a new paragraph (v)

    setting forth counterparty concentration limits for reverse repurchase

    agreements.

    The Commission requests comment on any and all aspects of the

    proposed concentration limits, including whether asset-based

    concentration limits are an effective means for facilitating investment

    portfolio diversification and whether there are other methods that

    should be considered. In addition, the Commission requests comment on

    whether the proposed concentration levels are appropriate for the

    categories of investments to which they are assigned and whether there

    should be different standards for FCMs and DCOs.

    C. Money Market Mutual Funds

    The continued use of MMMFs was the sole focus of five comment

    letters,\59\ a substantial focus of one,\60\ and referenced positively

    by an additional four.\61\ Taken together, the letters conveyed a

    consensus that MMMFs are both safe and administratively efficient. In

    their respective comment letters, Federated noted that MMMFs are

    subject to the overlapping regulatory regimes overseen by the SEC, and

    ICI highlighted the quality, liquidity and diversity of an MMMF's

    holdings. Further, TSI noted that out of 700-800 MMMFs, only one failed

    during the September 2008 financial turmoil, a crisis which Dreyfus

    likened to a ``1,000 year flood.''

    ---------------------------------------------------------------------------

    \59\ See Crane letter, Dreyfus letter, Federated letter I, ICI

    letter, and TSI letter.

    \60\ See CME letter at 5-6.

    \61\ See FCStone letter at 2, MF Global letter at 2, Newedge

    letter at 5, and NFA letter at 1.

    ---------------------------------------------------------------------------

    While the Commission appreciates the benefits of MMMFs, it also is

    cognizant of their risks. Reserve Primary Fund, the September 2008

    failure referenced by TSI, was an MMMF that satisfied the enumerated

    requirements of Regulation 1.25 and at one point was a $63 billion

    fund. The Reserve Primary Fund's breaking the buck called attention to

    the risk to principal and potential lack of sufficient liquidity of any

    MMMF investment. In the wake of the Reserve Primary Fund problem, the

    Commission has been forced to consider the possibility that any number

    of MMMFs that meet the technical requirements of Regulation 1.25(c)

    might not meet the Regulation 1.25 objective of preserving principal

    and maintaining liquidity, particularly during volatile market

    conditions.\62\ Lending credence to such concerns, the SEC has

    estimated that, in order to avoid breaking the buck, nearly 20 percent

    of all MMMFs received financial support from their money managers or

    affiliates from mid-2007 through the end of 2008.\63\

    ---------------------------------------------------------------------------

    \62\ See 75 FR at 10078 n.234 (SEC final rulemaking adopting

    amendments to regulations governing MMMFs, describing the September

    2008 run on MMMFs: ``On September 17, 2008, approximately 25% of

    prime institutional money market funds experienced outflows greater

    than 5% of total assets; on September 18, 2008, approximately 30% of

    prime institutional money market funds experienced outflows greater

    than 5%; and on September 19, 2008, approximately 22% of prime

    institutional money market funds experienced outflows greater than

    5%'').

    \63\ See 74 FR 32688, 32693 (July 8, 2009).

    ---------------------------------------------------------------------------

    In response to the potential risks posed by investments in MMMFs,

    the Commission is proposing to institute the concentration limits

    discussed above. However, the Commission has decided to refrain from

    further restricting investments in MMMFs at this time. The Commission

    is hopeful that the combination of its asset-based limitations, issuer-

    based limitations applied to a single family of funds, and the SEC's

    recent MMMF reforms will adequately address the risks associated with

    MMMFs.\64\

    ---------------------------------------------------------------------------

    \64\ See 75 FR 10060 (SEC final rulemaking decreasing the

    percentage of second tier securities (which are securities that do

    not receive the highest rating from an NRSRO or, if unrated,

    securities that are comparable in quality to securities that do not

    receive the highest rating from an NRSRO) from 5 percent to 3

    percent, reducing the dollar-weighted average portfolio maturity

    from 90 days to 60 days, introducing a dollar-weighted average life

    to maturity of 120 days, and imposing new daily and weekly liquidity

    requirements, among others).

    ---------------------------------------------------------------------------

    The Commission requests comment on whether MMMF investments should

    be limited to Treasury MMMFs,\65\ or to those MMMFs that have

    portfolios consisting only of permitted investments under Regulation

    1.25.

    ---------------------------------------------------------------------------

    \65\ A ``Treasuries fund'' must have at least 80 percent of its

    assets invested in U.S. treasuries at all times, as required by 17

    CFR 270.35d-1.

    ---------------------------------------------------------------------------

    The Commission is proposing two technical amendments to paragraph

    (c) of Regulation 1.25. First, the Commission is proposing to clarify

    the acknowledgment letter requirement under paragraph (c)(3); and

    second, the Commission is proposing to revise and clarify the

    exceptions to the next-day redemption requirement under paragraph

    (c)(5)(ii).

    1. Acknowledgment Letters

    The Commission is proposing to amend Regulation 1.25(c)(3) to

    clarify

    [[Page 67650]]

    the appropriate party to provide an acknowledgment letter where

    customer funds are invested in MMMFs. Regulation 1.26 requires an FCM

    or DCO which invests customer funds in instruments permitted under

    Regulation 1.25 to create a segregated account at a depository for such

    instruments and to obtain an acknowledgment letter from the depository.

    Because interests in MMMFs generally are not held at a depository in

    the first instance, like other permitted investments, Regulation

    1.25(c)(3) currently provides an exception to the Regulation 1.26

    requirement that an acknowledgment letter be provided by a depository.

    Regulation 1.25(c)(3) requires the ``sponsor of the fund and the fund

    itself'' to provide an acknowledgment letter when the MMMF shares are

    held by a fund's shareholder servicing agent.

    The Commission has received a number of inquiries regarding the

    meaning of this provision and the definition of ``sponsor,'' a term

    that is not defined in the Investment Company Act. While the term is

    not defined, it is nonetheless used throughout the Investment Company

    Act and is generally understood to refer to the entity that organizes

    the fund. Such an entity typically provides seed capital to the

    investment company and may be an affiliated investment adviser or

    underwriter to the investment company.

    The Commission seeks to clarify that the intent of Regulation

    1.25(c)(3) is to require an acknowledgment letter from a party that has

    substantial control over the fund's assets and has the knowledge and

    authority to facilitate redemption and payment or transfer of the

    customer segregated funds invested in shares of an MMMF. The Commission

    has concluded that in many circumstances, the fund sponsor, the

    investment adviser, or fund manager would satisfy this requirement. To

    the extent there are circumstances where an entity such as the

    Administrator would be in this position, proposed Regulation 1.25(c)(3)

    encompasses such an entity. The Commission requests comment on whether

    the proposed standard is appropriate and whether there are other

    entities that could serve as examples.

    The Commission is also proposing to remove the current language in

    Regulation 1.25(c)(3) relating to the issuer of the acknowledgment

    letter when the shares of the fund are held by the fund's shareholder

    servicing agent. This revision is designed to eliminate any confusion

    as to whether the acknowledgment letter requirement is applied

    differently based on the presence or absence of a shareholder servicing

    agent. The Commission requests comment on whether removal of this

    language helps clarify the intent of Regulation 1.25(c)(3).

    The Commission is accordingly proposing to amend Regulation

    1.25(c)(3) to set forth a functional definition accompanied by specific

    examples. The proposed amendment would require an FCM or DCO to obtain

    the acknowledgment letter required by Regulation 1.26 \66\ from an

    entity that has substantial control over the fund's assets and has the

    knowledge and authority to facilitate redemption and payment or

    transfer of the customer segregated funds. The proposed language would

    specify that such an entity may include the fund sponsor or investment

    adviser.\67\

    ---------------------------------------------------------------------------

    \66\ In a related proposed rulemaking, the Commission has

    proposed to add a new paragraph (c) to Regulation 1.26 which would

    specifically govern acknowledgment letters for MMMFs. The Commission

    also has proposed a mandatory form of acknowledgment letter in

    proposed Appendix A to Regulation 1.26. See 75 FR 47738 (Aug. 9,

    2010).

    \67\ A fund sponsor or investment adviser would be identified as

    appropriate entities to provide an acknowledgment letter, because

    they would typically be expected to satisfy the proposed standard.

    However, in any circumstance where the fund sponsor or investment

    adviser does not meet that standard, the acknowledgment letter would

    have to be obtained from another entity that can meet the regulatory

    requirement.

    ---------------------------------------------------------------------------

    2. Next-Day Redemption Requirement

    Regulation 1.25(c) requires that ``[a] fund shall be legally

    obligated to redeem an interest and to make payment in satisfaction

    thereof by the business day following a redemption request.'' \68\ This

    ``next-day redemption'' requirement is a significant feature of

    Regulation 1.25 and is meant to ensure adequate liquidity.\69\

    Regulation 1.25(c)(5)(ii) lists four exceptions to the next-day

    redemption requirement, and incorporates by reference the emergency

    conditions listed in Section 22(e) of the Investment Company Act

    (Section 22(e)).\70\ The Commission has received questions from FCMs

    regarding Regulation 1.25(c)(5), particularly because the exceptions

    listed in paragraph (c)(5)(ii) overlap with some of those appearing in

    Section 22(e).

    ---------------------------------------------------------------------------

    \68\ Regulation 1.25(c)(5)(i).

    \69\ See 70 FR 5585 (noting that ``[t]he Commission believes the

    one-day liquidity requirement for investments in MMMFs is necessary

    to ensure that the funding requirements of FCMs will not be impeded

    by a long liquidity time frame.'').

    \70\ 15 U.S.C. 80a-22(e).

    ---------------------------------------------------------------------------

    Recently, as part of its MMMF reform initiative, the SEC adopted a

    rule that provides the basis for another exception to the next-day

    redemption requirement.\71\ Promulgated under Section 22(e), Rule 22e-3

    \72\ permits MMMFs to suspend redemptions and postpone payment of

    redemption proceeds in order to facilitate an orderly liquidation of

    the fund.\73\ Before Rule 22e-3 may be invoked, the fund's board,

    including a majority of its disinterested directors, must determine

    that the extent of the deviation between the fund's amortized cost per

    share and its current net asset value per share may result in material

    dilution or other unfair results,\74\ and the board, including a

    majority of its disinterested directors, must irrevocably approve the

    liquidation of the fund.\75\ In addition, prior to suspending

    redemption, the fund must notify the SEC of its decision.\76\

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    \71\ See Letter from Ananda Radhakrishnan, Director, Division of

    Clearing and Intermediary Oversight, CFTC, to Debra Kokal, Chairman

    of the Joint Audit Committee (June 3, 2010) (stating that Rule 22e-3

    falls within the exceptions to the next-day redemption requirement

    under Regulation 1.25).

    \72\ 17 CFR 270.22e-3.

    \73\ See 75 FR at 10088.

    \74\ 17 CFR 270.22e-3(a)(1).

    \75\ 17 CFR 270.22e-3(a)(2).

    \76\ 17 CFT 270.22e-3(a)(3).

    ---------------------------------------------------------------------------

    In order to expressly incorporate Rule 22e-3 into the permitted

    exceptions for purposes of clarity, and to otherwise clarify the

    existing exceptions to the next-day redemption requirement, the

    Commission has decided to amend paragraph (c)(5)(ii) of Regulation 1.25

    by more closely aligning the language of that paragraph with the

    language in Section 22(e) and specifically including Rule 22e-3.

    Section 22(e) will, however, continue to be incorporated by reference

    so as to provide for any future amendment or regulatory actions by the

    SEC.

    The Commission will include, as Appendix A to the rule text, safe

    harbor language that can be used by MMMFs to ensure that their

    prospectuses comply with Regulation 1.25(c)(5). The proposed language

    tracks the proposed paragraph (c)(5).

    The Commission requests comment on all aspects of its proposed

    amendments to paragraph (c). The Commission seeks comment specifically

    on any proposed regulatory language that commenters believe requires

    further clarification. In addition, commenters are invited to submit

    views on the usefulness and substance of the proposed safe harbor

    language contained in proposed Appendix A.

    D. Repurchase and Reverse Repurchase Agreements

    The Commission proposes to eliminate repurchase and reverse

    repurchase transactions with affiliate counterparties. This amendment

    forwards the interests of both protecting

    [[Page 67651]]

    customer funds as well as establishing consistency within the

    regulation, which would no longer permit in-house transactions and

    currently prohibits investments in instruments issued by affiliates.

    Repurchase and reverse repurchase transactions were originally

    included as permitted investments to increase the liquidity in the

    portfolio of segregated funds.\77\ By entering into repurchase

    agreements with unaffiliated counterparties, FCMs can convert

    securities holdings into cash or alternatively supply cash to market

    participants in exchange for liquid securities. In the event that a

    counterparty receiving cash defaults, the other party is protected due

    to its holding of the counterparty's securities. Reverse repurchase and

    repurchase agreements contribute generally to increased market

    liquidity and are not inconsistent with the required safety of customer

    funds.

    ---------------------------------------------------------------------------

    \77\ 65 FR 39008, 39015 (June 22, 2000).

    ---------------------------------------------------------------------------

    The benefits of such an arrangement are diminished, however, when

    repurchase agreements are between affiliates. In particular, the

    concentration of credit risk increases the likelihood that the default

    of one party could exacerbate financial strains and lead to the default

    of its affiliate. While such a scenario would be unexpected in calm

    markets, during periods of financial turbulence such problems are

    considerably more likely to occur. It should be noted that the actions

    of market participants suggest that even possession and control of

    liquid securities may be insufficient to alleviate concerns relating to

    transactions with financially troubled counterparties.\78\

    ---------------------------------------------------------------------------

    \78\ See SEC Press Release No. 2008-46, ``Answers to Frequently

    Asked Investor Questions Regarding the Bear Stearns Companies,

    Inc.'' (Mar. 18, 2008), available at http://www.sec.gov/news/press/

    2008/2008-46.htm (noting that rumors of liquidity problems at Bear

    Stearns caused their counterparties to become concerned, creating a

    ``crisis of confidence'' which led to the counterparties'

    ``unwilling[ness] to make secured funding available to Bear Stearns

    on customary terms.'').

    ---------------------------------------------------------------------------

    Further, the interests of consistency of the regulation weigh in

    favor of disallowing repurchase agreements between affiliates.

    Currently, a repurchase agreement between affiliates is allowed under

    Regulation 1.25(d), while investments in debt instruments issued by an

    affiliate--effectively a collateralized loan between affiliates--is

    prohibited by paragraph (b)(6). A repurchase agreement is functionally

    equivalent to a short-term collateralized loan. In both transactions,

    one party provides cash to another party, secured by assets owned by

    the other party, and, in return, the other party repays the cash, plus

    interest, and its assets are returned. The similarity of the two

    transactions would seem to require similar treatment under Regulation

    1.25.

    Therefore, the Commission proposes to amend paragraph (d) by adding

    new paragraph (3) prohibiting repurchase and reverse repurchase

    agreements with affiliates. Current paragraphs (3) through (12) will be

    renumbered as (4) through (13), accordingly. The Commission seeks

    comment on its proposal to eliminate repurchase and reverse repurchase

    transactions with affiliate counterparties.

    E. Regulation 30.7

    1. Harmonization

    The Commission proposes to harmonize Regulation 30.7 with the

    investment limitations of Regulation 1.25. As noted above, the

    Commission has not previously restricted investments of 30.7 funds to

    the permitted investments under Regulation 1.25, although Regulation

    1.25 limitations can be used as a safe harbor for such investments.\79\

    The Commission now believes that it is appropriate to align the

    investment standards of Regulation 30.7 with those of Regulation 1.25

    because many of the same prudential concerns arise with respect to both

    segregated customer funds and 30.7 funds. Such a limitation should

    increase the safety of 30.7 funds and provide clarity for the FCMs,

    DCOs, and designated self-regulatory organizations.

    ---------------------------------------------------------------------------

    \79\ See Commission Form 1-FR-FCM Instructions at 12-9 (Mar.

    2010) (``In investing funds required to be maintained in separate

    section 30.7 account(s), FCMs are bound by their fiduciary

    obligations to customers and the requirement that the secured amount

    required to be set aside be at all times liquid and sufficient to

    cover all obligations to such customers. Regulation 1.25 investments

    would be appropriate, as would investments in any other readily

    marketable securities.'').

    ---------------------------------------------------------------------------

    The Commission anticipates that the impact of this amendment will

    be slight, as it appears that using Regulation 1.25 standards in 30.7

    investments is a common industry practice. For example, Newedge

    commented that the harmonization of Regulations 1.25 and 30.7 ``would

    reflect current market practice * * *'' since, in its opinion, ``* * *

    many if not most FCMs currently invest Part 30.7 funds in the same

    products and transactions in which they invest Rule 1.25 funds.'' \80\

    FIA also noted that its ``member firms generally follow the Rule 1.25

    investment guidelines'' when investing 30.7 funds.\81\ In addition to

    adding new paragraph (g) to Regulation 30.7 to reflect this amendment,

    the Form 1-FR-FCM instruction manual would be revised accordingly.\82\

    ---------------------------------------------------------------------------

    \80\ Newedge letter at 4.

    \81\ FIA letter at 5.

    \82\ Pending adoption of final amendments to Regulation 30.7,

    the Commission will revise the section headed ``Permissible

    Investments of Part 30 Set-Aside Funds'' on page 12-9 to align with,

    and refer back to, the discussion of Regulation 1.25 investments on

    pages 10-7 and 10-8.

    ---------------------------------------------------------------------------

    The Commission solicits comment on applying the requirements of

    Regulation 1.25 to 30.7 funds. In this regard, the Commission seeks

    comment on any differences between customer segregated funds and 30.7

    funds that would warrant the continuing application of different

    standards.

    2. Ratings

    The Commission proposes to remove all rating requirements from

    Regulation 30.7. This proposal is required by Section 939A of the Dodd-

    Frank Act and further reflects the Commission's views on the

    unreliability of ratings as currently administered and its interest in

    aligning Regulation 30.7 with Regulation 1.25.\83\

    ---------------------------------------------------------------------------

    \83\ See discussion supra Section II.B.2 regarding the

    Commission's policy decision to remove references to credit ratings

    from Regulation 1.25 and other regulations.

    ---------------------------------------------------------------------------

    The only reference to credit ratings in Regulation 30.7 is in

    paragraph (c)(1)(ii)(B). Paragraph (c)(1)(ii) permits 30.7 funds to be

    kept in an account with a depository outside the United States if the

    depository meets any of three alternative standards: (1) The depository

    has in excess of $1 billion of regulatory capital, (2) the depository

    or its parent's ``commercial paper or long-term debt instrument * * *

    is rated in one of the two highest rating categories by at least one''

    NRSRO, or (3) if it does not meet either of the first two criteria, the

    depository has been permitted to hold 30.7 funds upon the request of a

    customer.

    The use of the credit rating of the commercial paper or long-term

    debt of the depository institution is comparable to the standard used

    to gauge the safety of an issuer of a CD.\84\ The Commission has viewed

    credit ratings as unreliable to gauge the safety of an issuer of a CD

    and proposed, in Section II.B.2 of this notice, to remove this

    requirement from Regulation 1.25. The Commission now proposes to remove

    paragraph (c)(1)(ii)(B) in Regulation 30.7 as it views an NRSRO rating

    as similarly unreliable to gauge the safety of a depository institution

    for 30.7 funds. This proposal also serves to align

    [[Page 67652]]

    Regulation 30.7 with Regulation 1.25 on the topic of NRSROs.

    ---------------------------------------------------------------------------

    \84\ See Regulation 1.25(b)(2)(i)(E).

    ---------------------------------------------------------------------------

    The Commission requests comment on whether there is a standard or

    measure of solvency and credit-worthiness that can be used as an

    additional test of a bank's safety. Specifically, the Commission seeks

    comment on whether a leverage ratio or a capital adequacy ratio

    requirement consistent with or similar to those in the Basel III

    accords \85\ would be an appropriate additional safeguard for a bank or

    trust company located outside the United States.

    ---------------------------------------------------------------------------

    \85\ See Press Release, Basel Committee on Banking Supervision,

    Group of Governors and Heads of Supervision Announces Higher Global

    Minimum Capital Standards (Sept. 12, 2010), http://bis.org/press/

    p100912.pdf.

    ---------------------------------------------------------------------------

    3. Designation as a Depository for 30.7 Funds

    Under Regulation 30.7(c)(1)(ii)(C), a bank or trust company that

    does not otherwise meet the requirements of paragraph (c)(1)(ii) may

    still be designated as an acceptable depository by request of its

    customer and with the approval of the Commission. The Commission

    proposes to no longer allow a customer to request that a bank or trust

    company located outside the United States be designated as a depository

    for 30.7 funds. The Commission has never allowed a bank or trust

    company located outside the United States to be a depository through

    these means, and believes that it is appropriate to require that all

    depositories meet the regulatory capital requirement under paragraph

    (c)(1)(ii)(A).

    Therefore, the Commission proposes to amend Regulation 30.7 by

    deleting paragraph (c)(1)(ii)(C). The Commission requests comment on

    whether an exception of any kind to Regulation 30.7(c)(1)(ii) is

    appropriate.

    III. Related Matters

    A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) \86\ requires federal

    agencies, in promulgating rules, to consider the impact of those rules

    on small businesses. The rule amendments proposed herein will affect

    FCMs and DCOs. The Commission has previously established certain

    definitions of ``small entities'' to be used by the Commission in

    evaluating the impact of its rules on small entities in accordance with

    the RFA.\87\ The Commission has previously determined that registered

    FCMs \88\ and DCOs \89\ are not small entities for the purpose of the

    RFA. Accordingly, pursuant to 5 U.S.C. 605(b), the Chairman, on behalf

    of the Commission, certifies that the proposed rules will not have a

    significant economic impact on a substantial number of small entities.

    ---------------------------------------------------------------------------

    \86\ 5 U.S.C. 601 et seq.

    \87\ 47 FR 18618 (Apr. 30, 1982).

    \88\ Id. at 18619.

    \89\ 66 FR 45604, 45609 (Aug. 29, 2001).

    ---------------------------------------------------------------------------

    B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA) imposes certain

    requirements on federal agencies (including the Commission) in

    connection with their conducting or sponsoring any collection of

    information as defined by the PRA. The proposed rule amendments do not

    require a new collection of information on the part of any entities

    subject to the proposed rule amendments. Accordingly, for purposes of

    the PRA, the Commission certifies that these proposed rule amendments,

    if promulgated in final form, would not impose any new reporting or

    recordkeeping requirements.

    C. Costs and Benefits of the Proposed Rules

    Section 15(a) of the CEA \90\ requires the Commission to consider

    the costs and benefits of its actions before issuing a rulemaking under

    the Act. By its terms, section 15(a) does not require the Commission to

    quantify the costs and benefits of a rule or to determine whether the

    benefits of the rulemaking outweigh its costs; rather, it requires that

    the Commission ``consider'' the costs and benefits of its actions.

    Section 15(a) further specifies that the costs and benefits shall be

    evaluated in light of five broad areas of market and public concern:

    (1) Protection of market participants and the public; (2) efficiency,

    competitiveness and financial integrity of futures markets; (3) price

    discovery; (4) sound risk management practices; and (5) other public

    interest considerations. The Commission may in its discretion give

    greater weight to any one of the five enumerated areas and could in its

    discretion determine that, notwithstanding its costs, a particular rule

    is necessary or appropriate to protect the public interest or to

    effectuate any of the provisions or accomplish any of the purposes of

    the Act.

    ---------------------------------------------------------------------------

    \90\ 7 U.S.C. 19(a).

    ---------------------------------------------------------------------------

    Summary of proposed requirements. The proposed rules would

    facilitate greater protection of customer funds and 30.7 funds and

    reduction of systemic risk by establishing stricter prudential

    standards for investment of such funds. The proposed amendments

    restrict the scope of permitted investments to reflect the current

    economic environment. During the prior ten-year period, starting with

    the December 2000 rulemaking, Regulation 1.25 was substantially revised

    and expanded. The more restrictive proposals contained herein are based

    on the Commission's experience over the course of the past decade and,

    in particular, since September 2008, during which certain permitted

    investments under Regulation 1.25 were shown to present potentially

    unacceptable levels of risk. In narrowing the scope of Regulation 1.25

    (as to both type and characteristics of permitted investments), the

    Commission's primary purpose is to safeguard the funds of customers

    and, in so doing, to help ease the chain reaction of negative effects

    that can come about during a financial crisis in the broader financial

    marketplace.

    Costs. With respect to costs, the Commission has determined that

    any costs associated with the proposal are outweighed by its benefits.

    The Commission recognizes that scaling back on the type and form of

    permitted investments could result in certain FCMs and DCOs earning

    less income from their investments of customer funds. This, in turn,

    could reduce an FCM or DCO's overall profits and create an incentive

    for them to charge higher fees to customers. The Commission believes,

    however, that the potential loss of income for those FCMs and DCOs

    whose investment strategies will be materially affected by the proposed

    amendments will be outweighed by the reduction in potential risk

    associated with the current regulatory standards for permitted

    investments. To the extent that customers may bear the cost of the

    proposed changes, the customers will nonetheless benefit from greater

    protection of their funds. Eliminating the option of a customer to

    designate, with the Commission's permission, a foreign depository for

    30.7 funds would potentially limit the choices of suitable

    depositories. However, the presence of alternative depositories would

    mitigate any adverse impact. The proposed amendments would not affect

    the efficiency or competitiveness of futures markets, and the proposed

    amendments will not affect price discovery.

    Benefits. With respect to benefits, the Commission has determined

    that the proposal will result in several benefits. First, the risk-

    reducing nature of the proposed amendments would facilitate greater

    financial integrity of FCMs and DCOs and, as a result, futures markets

    more generally. Essential to the proper functioning of futures markets

    is the financial integrity of the clearing

    [[Page 67653]]

    process, which is dependent upon the immediate availability of

    sufficient funds for daily pays and collects and default management.

    The proposed amendments would also raise the standards for risk

    management practices of FCMs and DCOs that invest customer funds. They

    balance the need for investment flexibility and capital efficiency with

    the need to preserve principal and maintain liquidity. In particular,

    the proposal both narrows the scope of permitted investments to only

    those that the Commission considers the safest, and mandates

    diversification well beyond previous requirements. The Commission

    believes that these structural safeguards will decrease the credit,

    market, and liquidity risk exposures of FCMs and DCOs. Moreover, the

    revised requirements will more closely align with the investment

    restrictions contained in Section 4d of the Act.

    Also, the Commission recognizes that many, if not most, FCMs and

    DCOs are already engaging in sound risk management practices and are

    pursuing responsible investment strategies under the existing

    regulatory regime. However, the Commission believes that in an

    environment where many of its previous economic assumptions are called

    into question, it becomes necessary to establish new bright line

    requirements to better ensure proper risk management in connection with

    the investment of customer segregated and 30.7 funds.

    The proposed amendments retain an appropriate degree of flexibility

    in making investments with customer segregated and 30.7 funds, while

    significantly strengthening the rules that protect the safety of such

    funds. In addition, eliminating the option of a customer to designate,

    with the Commission's permission, a foreign depository for 30.7 funds

    that otherwise would not meet the requirements of Regulation 30.7 both

    closes a loophole that might have allowed for a less financially sound

    depository to hold 30.7 funds and eliminates the need for the

    Commission to individually review the safety and soundness of foreign

    depositories.

    Public Comment. The Commission invites public comment on its cost-

    benefit considerations. Commenters are also are invited to submit any

    data or other information that they may have quantifying or qualifying

    the costs and benefits of the Proposal with their comment letters.

    Lists of Subjects

    17 CFR Part 1

    Brokers, Commodity futures, Consumer protection, Reporting and

    recordkeeping requirements.

    17 CFR Part 30

    Commodity futures, Consumer protection, Currency, Reporting and

    recordkeeping requirements.

    In consideration of the foregoing and pursuant to the authority

    contained in the Commodity Exchange Act, in particular, Sections 4d,

    4(c), and 8a(5) thereof, 7 U.S.C. 6d, 6(c) and 12a(5), respectively,

    the Commission hereby proposes to amend Chapter I of Title 17 of the

    Code of Federal Regulations as follows:

    PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

    1. The authority citation for Part 1 is revised to read as follows:

    Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g,

    6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12a, 12c,

    13a, 13a-1, 16, 16a, 19, 21, 23, and 24, as amended by the Dodd-

    Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111-

    203, 124 Stat. 1376 (2010).

    2. Revise Sec. 1.25 to read as follows:

    Sec. 1.25 Investment of customer funds.

    (a) Permitted investments. (1) Subject to the terms and conditions

    set forth in this section, a futures commission merchant or a

    derivatives clearing organization may invest customer money in the

    following instruments (permitted investments):

    (i) Obligations of the United States and obligations fully

    guaranteed as to principal and interest by the United States (U.S.

    government securities);

    (ii) General obligations of any State or of any political

    subdivision thereof (municipal securities);

    (iii) Obligations of any United States government corporation or

    enterprise sponsored by the United States government and fully

    guaranteed as to principal and interest by the United States (U.S.

    agency obligations);

    (iv) Certificates of deposit issued by a bank (certificates of

    deposit) as defined in section 3(a)(6) of the Securities Exchange Act

    of 1934, or a domestic branch of a foreign bank that carries deposits

    insured by the Federal Deposit Insurance Corporation;

    (v) Commercial paper fully guaranteed as to principal and interest

    by the United States under the Temporary Liquidity Guarantee Program as

    administered by the Federal Deposit Insurance Corporation (commercial

    paper);

    (vi) Corporate notes or bonds fully guaranteed as to principal and

    interest by the United States under the Temporary Liquidity Guarantee

    Program as administered by the Federal Deposit Insurance Corporation

    (corporate notes or bonds); and

    (vii) Interests in money market mutual funds.

    (2)(i) In addition, a futures commission merchant or derivatives

    clearing organization may buy and sell the permitted investments listed

    in paragraphs (a)(1)(i) through (vii) of this section pursuant to

    agreements for resale or repurchase of the instruments, in accordance

    with the provisions of paragraph (d) of this section.

    (ii) A futures commission merchant or a derivatives clearing

    organization may sell securities deposited by customers as margin

    pursuant to agreements to repurchase subject to the following:

    (A) Securities subject to such repurchase agreements must be

    ``highly liquid'' as defined in paragraph (b)(1) of this section.

    (B) Securities subject to such repurchase agreements must not be

    ``specifically identifiable property'' as defined in Sec. 190.01(kk)

    of this chapter.

    (C) The terms and conditions of such an agreement to repurchase

    must be in accordance with the provisions of paragraph (d) of this

    section.

    (D) Upon the default by a counterparty to a repurchase agreement,

    the futures commission merchant or derivatives clearing organization

    shall act promptly to ensure that the default does not result in any

    direct or indirect cost or expense to the customer.

    (b) General terms and conditions. A futures commission merchant or

    a derivatives clearing organization is required to manage the permitted

    investments consistent with the objectives of preserving principal and

    maintaining liquidity and according to the following specific

    requirements:

    (1) Liquidity. Investments must be ``highly liquid'' such that they

    have the ability to be converted into cash within one business day

    without material discount in value.

    (2) Restrictions on instrument features. (i) With the exception of

    money market mutual funds, no permitted investment may contain an

    embedded derivative of any kind, except that the issuer of an

    instrument otherwise permitted by this section may have an option to

    call, in whole or in part, at par, the principal amount of the

    instrument before its stated maturity date; provided, however, that the

    terms of such instrument obligate the issuer to

    [[Page 67654]]

    repay the principal amount of the instrument at not less than par value

    upon maturity.

    (ii) No instrument may contain interest-only payment features.

    (iii) No instrument may provide payments linked to a commodity,

    currency, reference instrument, index, or benchmark, and it may not

    otherwise constitute a derivative instrument.

    (iv) Commercial paper and corporate notes or bonds must meet the

    following criteria:

    (A) The size of the issuance must be greater than $1 billion;

    (B) The instrument must be denominated in U.S. dollars; and

    (C) The instrument must be fully guaranteed as to principal and

    interest by the United States for its entire term.

    (v) Certificates of deposit must be redeemable at the issuing bank

    within one business day, with any penalty for early withdrawal limited

    to any accrued interest earned according to its written terms.

    (3) Concentration. (i) Asset-based concentration limits for direct

    investments. (A) Investments in U.S. government securities shall not be

    subject to a concentration limit.

    (B) Investments in U.S. agency obligations may not exceed 50

    percent of the total assets held in segregation by the futures

    commission merchant or derivatives clearing organization.

    (C) Investments in each of commercial paper, corporate notes or

    bonds and certificates of deposit may not exceed 25 percent of the

    total assets held in segregation by the futures commission merchant or

    derivatives clearing organization.

    (D) Investments in each of municipal securities and money market

    mutual funds may not exceed 10 percent of the total assets held in

    segregation by the futures commission merchant or derivatives clearing

    organization.

    (ii) Issuer-based concentration limits for direct investments. (A)

    Securities of any single issuer of U.S. agency obligations held by a

    futures commission merchant of derivatives clearing organization may

    not exceed 25 percent of total assets held in segregation by the

    futures commission merchant or derivatives clearing organization.

    (B) Securities of any single issuer of municipal securities,

    certificates of deposit, commercial paper, or corporate notes or bonds

    held by a futures commission merchant or derivatives clearing

    organization may not exceed 5 percent of total assets held in

    segregation by the futures commission merchant or derivatives clearing

    organization.

    (C) Interests in any single family of money market mutual funds may

    not exceed 2 percent of total assets held in segregation by the futures

    commission merchant or derivatives clearing organization.

    (D) For purposes of determining compliance with the issuer-based

    concentration limits set forth in this section, securities issued by

    entities that are affiliated, as defined in paragraph (b)(5) of this

    section, shall be aggregated and deemed the securities of a single

    issuer. An interest in a permitted money market mutual fund is not

    deemed to be a security issued by its sponsoring entity.

    (iii) Concentration limits for agreements to repurchase. (A)

    Repurchase agreements. For purposes of determining compliance with the

    asset-based and issuer-based concentration limits set forth in this

    section, securities sold by a futures commission merchant or

    derivatives clearing organization subject to agreements to repurchase

    shall be combined with securities held by the futures commission

    merchant or derivatives clearing organization as direct investments.

    (B) Reverse repurchase agreements. For purposes of determining

    compliance with the asset-based and issuer-based concentration limits

    set forth in this section, securities purchased by a futures commission

    merchant or derivatives clearing organization subject to agreements to

    resell shall be combined with securities held by the futures commission

    merchant or derivatives clearing organization as direct investments.

    (iv) Treatment of customer-owned securities. For purposes of

    determining compliance with the asset-based and issuer-based

    concentration limits set forth in this section, securities owned by the

    customers of a futures commission merchant and posted as margin

    collateral are not included in total assets held in segregation by the

    futures commission merchant, and securities posted by a futures

    commission merchant with a derivatives clearing organization are not

    included in total assets held in segregation by the derivatives

    clearing organization.

    (v) Counterparty concentration limits. Securities purchased by a

    futures commission merchant or derivatives clearing organization from a

    single counterparty, subject to an agreement to resell to that

    counterparty, shall not exceed 5 percent of total assets held in

    segregation by the futures commission merchant or derivatives clearing

    organization.

    (4) Time-to-maturity. (i) Except for investments in money market

    mutual funds, the dollar-weighted average of the time-to-maturity of

    the portfolio, as that average is computed pursuant to Sec. 270.2a-7

    of this title, may not exceed 24 months.

    (ii) For purposes of determining the time-to-maturity of the

    portfolio, an instrument that is set forth in paragraphs (a)(1)(i)

    through (vii) of this section may be treated as having a one-day time-

    to-maturity if the following terms and conditions are satisfied:

    (A) The instrument is deposited solely on an overnight basis with a

    derivatives clearing organization pursuant to the terms and conditions

    of a collateral management program that has become effective in

    accordance with Sec. 39.4 of this chapter;

    (B) The instrument is one that the futures commission merchant owns

    or has an unqualified right to pledge, is not subject to any lien, and

    is deposited by the futures commission merchant into a segregated

    account at a derivatives clearing organization;

    (C) The derivatives clearing organization prices the instrument

    each day based on the current mark-to-market value; and

    (D) The derivatives clearing organization reduces the assigned

    value of the instrument each day by a haircut of at least 2 percent.

    (5) Investments in instruments issued by affiliates. (i) A futures

    commission merchant shall not invest customer funds in obligations of

    an entity affiliated with the futures commission merchant, and a

    derivatives clearing organization shall not invest customer funds in

    obligations of an entity affiliated with the derivatives clearing

    organization. An affiliate includes parent companies, including all

    entities through the ultimate holding company, subsidiaries to the

    lowest level, and companies under common ownership of such parent

    company or affiliates.

    (ii) A futures commission merchant or derivatives clearing

    organization may invest customer funds in a fund affiliated with that

    futures commission merchant or derivatives clearing organization.

    (6) Recordkeeping. A futures commission merchant and a derivatives

    clearing organization shall prepare and maintain a record that will

    show for each business day with respect to each type of investment made

    pursuant to this section, the following information:

    (i) The type of instruments in which customer funds have been

    invested;

    (ii) The original cost of the instruments; and

    (iii) The current market value of the instruments.

    [[Page 67655]]

    (c) Money market mutual funds. The following provisions will apply

    to the investment of customer funds in money market mutual funds (the

    fund).

    (1) The fund must be an investment company that is registered under

    the Investment Company Act of 1940 with the Securities and Exchange

    Commission and that holds itself out to investors as a money market

    fund, in accordance with Sec. 270.2a-7 of this title.

    (2) The fund must be sponsored by a federally-regulated financial

    institution, a bank as defined in section 3(a)(6) of the Securities

    Exchange Act of 1934, an investment adviser registered under the

    Investment Advisers Act of 1940, or a domestic branch of a foreign bank

    insured by the Federal Deposit Insurance Corporation.

    (3) A futures commission merchant or derivatives clearing

    organization shall maintain the confirmation relating to the purchase

    in its records in accordance with Sec. 1.31 and note the ownership of

    fund shares (by book-entry or otherwise) in a custody account of the

    futures commission merchant or derivatives clearing organization in

    accordance with Sec. 1.26(c). The futures commission merchant or the

    derivatives clearing organization shall obtain the acknowledgment

    letter required by Sec. 1.26(c) from an entity that has substantial

    control over the fund's assets and has the knowledge and authority to

    facilitate redemption and payment or transfer of the customer

    segregated funds. Such entity may include the fund sponsor or

    investment adviser.

    (4) The net asset value of the fund must be computed by 9 a.m. of

    the business day following each business day and made available to the

    futures commission merchant or derivatives clearing organization by

    that time.

    (5)(i) General requirement for redemption of interests. A fund

    shall be legally obligated to redeem an interest and to make payment in

    satisfaction thereof by the business day following a redemption

    request, and the futures commission merchant or derivatives clearing

    organization shall retain documentation demonstrating compliance with

    this requirement.

    (ii) Exception. A fund may provide for the postponement of

    redemption and payment due to any of the following circumstances:

    (A) For any period during which there is a non-routine closure of

    the Fedwire or applicable Federal Reserve Banks;

    (B) For any period:

    (1) During which the New York Stock Exchange is closed other than

    customary week-end and holiday closings; or

    (2) During which trading on the New York Stock Exchange is

    restricted;

    (C) For any period during which an emergency exists as a result of

    which:

    (1) Disposal by the company of securities owned by it is not

    reasonably practicable; or

    (2) It is not reasonably practicable for such company fairly to

    determine the value of its net assets;

    (D) For any period as the Securities and Exchange Commission may by

    order permit for the protection of security holders of the company;

    (E) For any period during which the Securities and Exchange

    Commission has, by rule or regulation, deemed that:

    (1) Trading shall be restricted; or

    (2) An emergency exists; or

    (F) For any period during which each of the conditions of Sec.

    270.22e-3(a)(1) through (3) of this title are met.

    (6) The agreement pursuant to which the futures commission merchant

    or derivatives clearing organization has acquired and is holding its

    interest in a fund must contain no provision that would prevent the

    pledging or transferring of shares.

    (7) Appendix A to this section sets forth language that will

    satisfy the requirements of paragraph (c)(5) of this section.

    (d) Repurchase and reverse repurchase agreements. A futures

    commission merchant or derivatives clearing organization may buy and

    sell the permitted investments listed in paragraphs (a)(1)(i) through

    (vii) of this section pursuant to agreements for resale or repurchase

    of the securities (agreements to repurchase or resell), provided the

    agreements to repurchase or resell conform to the following

    requirements:

    (1) The securities are specifically identified by coupon rate, par

    amount, market value, maturity date, and CUSIP or ISIN number.

    (2) Permitted counterparties are limited to a bank as defined in

    section 3(a)(6) of the Securities Exchange Act of 1934, a domestic

    branch of a foreign bank insured by the Federal Deposit Insurance

    Corporation, a securities broker or dealer, or a government securities

    broker or government securities dealer registered with the Securities

    and Exchange Commission or which has filed notice pursuant to section

    15C(a) of the Government Securities Act of 1986.

    (3) A futures commission merchant or derivatives clearing

    organization shall not enter into an agreement to repurchase or resell

    with a counterparty that is an affiliate of the futures commission

    merchant or derivatives clearing organization, respectively. An

    affiliate includes parent companies, including all entities through the

    ultimate holding company, subsidiaries to the lowest level, and

    companies under common ownership of such parent company or affiliates.

    (4) The transaction is executed in compliance with the

    concentration limit requirements applicable to the securities

    transferred to the customer segregated custodial account in connection

    with the agreements to repurchase referred to in paragraphs

    (b)(3)(iii)(A) and (B) of this section.

    (5) The transaction is made pursuant to a written agreement signed

    by the parties to the agreement, which is consistent with the

    conditions set forth in paragraphs (d)(1) through (13) of this section

    and which states that the parties thereto intend the transaction to be

    treated as a purchase and sale of securities.

    (6) The term of the agreement is no more than one business day, or

    reversal of the transaction is possible on demand.

    (7) Securities transferred to the futures commission merchant or

    derivatives clearing organization under the agreement are held in a

    safekeeping account with a bank as referred to in paragraph (d)(2) of

    this section, a derivatives clearing organization, or the Depository

    Trust Company in an account that complies with the requirements of

    Sec. 1.26.

    (8) The futures commission merchant or the derivatives clearing

    organization may not use securities received under the agreement in

    another similar transaction and may not otherwise hypothecate or pledge

    such securities, except securities may be pledged on behalf of

    customers at another futures commission merchant or derivatives

    clearing organization. Substitution of securities is allowed, provided,

    however, that:

    (i) The qualifying securities being substituted and original

    securities are specifically identified by date of substitution, market

    values substituted, coupon rates, par amounts, maturity dates and CUSIP

    or ISIN numbers;

    (ii) Substitution is made on a ``delivery versus delivery'' basis;

    and

    (iii) The market value of the substituted securities is at least

    equal to that of the original securities.

    (9) The transfer of securities to the customer segregated custodial

    account is made on a delivery versus payment basis in immediately

    available funds. The transfer of funds to the customer segregated cash

    account is made on a payment versus delivery basis. The transfer is not

    recognized as accomplished until the funds and/or

    [[Page 67656]]

    securities are actually received by the custodian of the futures

    commission merchant's or derivatives clearing organization's customer

    funds or securities purchased on behalf of customers. The transfer or

    credit of securities covered by the agreement to the futures commission

    merchant's or derivatives clearing organization's customer segregated

    custodial account is made simultaneously with the disbursement of funds

    from the futures commission merchant's or derivatives clearing

    organization's customer segregated cash account at the custodian bank.

    On the sale or resale of securities, the futures commission merchant's

    or derivatives clearing organization's customer segregated cash account

    at the custodian bank must receive same-day funds credited to such

    segregated account simultaneously with the delivery or transfer of

    securities from the customer segregated custodial account.

    (10) A written confirmation to the futures commission merchant or

    derivatives clearing organization specifying the terms of the agreement

    and a safekeeping receipt are issued immediately upon entering into the

    transaction and a confirmation to the futures commission merchant or

    derivatives clearing organization is issued once the transaction is

    reversed.

    (11) The transactions effecting the agreement are recorded in the

    record required to be maintained under Sec. 1.27 of investments of

    customer funds, and the securities subject to such transactions are

    specifically identified in such record as described in paragraph (d)(1)

    of this section and further identified in such record as being subject

    to repurchase and reverse repurchase agreements.

    (12) An actual transfer of securities to the customer segregated

    custodial account by book entry is made consistent with Federal or

    State commercial law, as applicable. At all times, securities received

    subject to an agreement are reflected as ``customer property.''

    (13) The agreement makes clear that, in the event of the bankruptcy

    of the futures commission merchant or derivatives clearing

    organization, any securities purchased with customer funds that are

    subject to an agreement may be immediately transferred. The agreement

    also makes clear that, in the event of a futures commission merchant or

    derivatives clearing organization bankruptcy, the counterparty has no

    right to compel liquidation of securities subject to an agreement or to

    make a priority claim for the difference between current market value

    of the securities and the price agreed upon for resale of the

    securities to the counterparty, if the former exceeds the latter.

    (e) Deposit of firm-owned securities into segregation. A futures

    commission merchant shall not be prohibited from directly depositing

    unencumbered securities of the type specified in this section, which it

    owns for its own account, into a segregated safekeeping account or from

    transferring any such securities from a segregated account to its own

    account, up to the extent of its residual financial interest in

    customers' segregated funds; provided, however, that such investments,

    transfers of securities, and disposition of proceeds from the sale or

    maturity of such securities are recorded in the record of investments

    required to be maintained by Sec. 1.27. All such securities may be

    segregated in safekeeping only with a bank, trust company, derivatives

    clearing organization, or other registered futures commission merchant.

    Furthermore, for purposes of Sec. Sec. 1.25, 1.26, 1.27, 1.28 and

    1.29, investments permitted by Sec. 1.25 that are owned by the futures

    commission merchant and deposited into such a segregated account shall

    be considered customer funds until such investments are withdrawn from

    segregation.

    Appendix to Sec. 1.25--Money Market Mutual Fund Prospectus Provisions

    Acceptable for Compliance With Paragraph (c)(5)

    Upon receipt of a proper redemption request submitted in a

    timely manner and otherwise in accordance with the redemption

    procedures set forth in this prospectus, the [Name of Fund] will

    redeem the requested shares and make a payment to you in

    satisfaction thereof no later than the business day following the

    redemption request. The [Name of Fund] may postpone and/or suspend

    redemption and payment beyond one business day only as follows:

    a. For any period during which there is a non-routine closure of

    the Fedwire or applicable Federal Reserve Banks;

    b. For any period (1) during which the New York Stock Exchange

    is closed other than customary week-end and holiday closings or (2)

    during which trading on the New York Stock Exchange is restricted;

    c. For any period during which an emergency exists as a result

    of which (1) disposal of securities owned by the [Name of Fund] is

    not reasonably practicable or (2) it is not reasonably practicable

    for the [Name of Fund] to fairly determine the net asset value of

    shares of the [Name of Fund];

    d. For any period during which the Securities and Exchange

    Commission has, by rule or regulation, deemed that (1) trading shall

    be restricted or (2) an emergency exists;

    e. For any period that the Securities and Exchange Commission,

    may by order permit for your protection; or

    f. For any period during which the [Name of Fund,] as part of a

    necessary liquidation of the fund, has properly postponed and/or

    suspended redemption of shares and payment in accordance with

    federal securities laws.

    PART 30--FOREIGN FUTURES AND FOREIGN OPTIONS TRANSACTIONS

    3. The authority citation for part 30 continues to read as follows:

    Authority: 7 U.S.C. 1a, 2, 6, 6c, and 12a, unless otherwise

    noted.

    4. In Sec. 30.7, revise paragraph (c) and add paragraph (g) to

    read as follows:

    Sec. 30.7 Treatment of foreign futures or foreign options secured

    amount.

    * * * * *

    (c)(1) The separate account or accounts referred to in paragraph

    (a) of this section must be maintained under an account name that

    clearly identifies them as such, with any of the following

    depositories:

    (i) A bank or trust company located in the United States;

    (ii) A bank or trust company located outside the United States that

    has in excess of $1 billion of regulatory capital;

    (iii) A futures commission merchant registered as such with the

    Commission;

    (iv) A derivates clearing organization;

    (v) A member of any foreign board of trade; or

    (vi) Such member or clearing organization's designated

    depositories.

    (2) Each futures commission merchant must obtain and retain in its

    files for the period provided in Sec. 1.31 of this chapter an

    acknowledgment from such depository that it was informed that such

    money, securities or property are held for or on behalf of foreign

    futures and foreign options customers and are being held in accordance

    with the provisions of these regulations.

    * * * * *

    (g) Each futures commission merchant that invests customer funds

    held in the account or accounts referred to in paragraph (a) of this

    section must invest such funds pursuant to the requirements of Sec.

    1.25 of this chapter.

    Issued in Washington, DC, on October 26, 2010, by the

    Commission.

    David A. Stawick,

    Secretary of the Commission.

    Note: The following statement will not appear in the Code of

    Federal Regulations.

    [[Page 67657]]

    Statement of Chairman Gary Gensler

    Investment of Customer Funds and Funds Held in an Account for Foreign

    Futures and Foreign Options Transactions

    October 26, 2010

    I support today's Commission vote on the proposed rulemaking

    regarding the investment of customer segregated and secured amount

    funds. This rulemaking fulfills part of the Dodd-Frank Act's

    requirement that the Commission remove all reliance on credit ratings

    from its regulations. In addition, the rule enhances protections

    regarding where derivatives clearing organizations (DCOs) and futures

    commission merchants (FCMs) can invest customer funds. The market

    events of the last two years have underscored the importance of prudent

    investment standards to ensure the financial integrity of DCOs and FCMs

    and of maximizing protection of customer funds.

    [FR Doc. 2010-27657 Filed 11-2-10; 8:45 am]

    BILLING CODE P

    Last Updated: November 3, 2010



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