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e9-12020

  • [Federal Register: May 22, 2009 (Volume 74, Number 98)]

    [Proposed Rules]

    [Page 23962-23964]

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

    [DOCID:fr22my09-11]

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    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Parts 1 and 30

    RIN 3038-AC79

    Investment of Customer Funds and Funds Held in an Account for

    Foreign Futures and Foreign Options Transactions

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Advance notice of proposed rulemaking; request for public

    comment.

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    SUMMARY: The Commodity Futures Trading Commission (Commission) is

    seeking public comment on possible changes to its regulations regarding

    the investment of customer funds segregated pursuant to Section 4d of

    the Commodity Exchange Act (customer segregated funds) and funds held

    in an account subject to Commission Regulation 30.7 (30.7 funds).

    Commission Regulation 1.25 provides that a derivatives clearing

    organization (DCO) or a futures commission merchant (FCM) holding

    customer segregated funds may invest those funds in certain permitted

    investments subject to specified requirements that are designed to

    minimize exposure to credit, liquidity, and market risks. The

    Commission is considering significantly revising the scope and

    character of these permitted investments and is seeking public comment

    before issuing proposed rule amendments. Additionally, in conjunction

    with its consideration of possible amendments to Regulation 1.25, the

    Commission is considering applying the investment requirements of

    Regulation 1.25, including any prospective amendments, to investments

    of 30.7 funds. The Commission is seeking public comment on this action

    before issuing proposed rule amendments.

    DATES: Comments must be received on or before July 21, 2009.

    ADDRESSES: Comments may be submitted by any of the following methods:

    Federal eRulemaking Portal: http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://www.regulations.gov/http://frwebgate.access.gpo/cgi-bin/leaving http://www.regulations.gov/

    http://frwebgate.access.gpo/cgi-bin/leaving. Follow the instructions

    for submitting comments.

    E-mail: secretary@cftc.gov. Include ``Advance Notice of

    Proposed Rulemaking for Regulations 1.25 and 30.7'' in the subject line

    of the message.

    Fax: 202-418-5521.

    Mail: Send to David A. Stawick, Secretary, Commodity

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

    NW., Washington, DC 20581.

    Courier: Same as mail above.

    All comments received will be posted without change to http://

    www.CFTC.gov/. Reference should be made to ``Advance Notice of Proposed

    Rulemaking for Regulations 1.25 and 30.7.''

    FOR FURTHER INFORMATION CONTACT: Sarah E. Josephson, Special Counsel,

    202-418-5684, sjosephson@cftc.gov, or Phyllis P. Dietz, Associate

    Director, 202-418-5449, pdietz@cftc.gov, Division of Clearing and

    Intermediary Oversight, Commodity Futures Trading Commission, Three

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

    SUPPLEMENTARY INFORMATION:

    I. Background

    A. Regulation 1.25

    Under Section 4d(a)(2) of the Commodity Exchange Act (Act),\1\ the

    [[Page 23963]]

    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,\2\ the Commission substantially expanded the list of permitted

    investments by amending Commission Regulation 1.25 in December 2000 to

    permit investments in general obligations issued by any enterprise

    sponsored by the United States (government sponsored enterprise

    securities), bank certificates of deposit, commercial paper, corporate

    notes, general obligations of a sovereign nation, and interests in

    money market mutual funds.\3\ In connection 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.\4\

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    \1\ 7 U.S.C. 6d(a)(2).

    \2\ 7 U.S.C. 6(c).

    \3\ 17 CFR 1.25. 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).

    \4\ 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 with customer-deposited securities and time-to-

    maturity requirements for securities deposited in connection with

    certain collateral management programs of DCOs.\5\ 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 FCMs that are also registered as securities brokers or

    dealers (in-house transactions), rating standards and registration

    requirements for money market mutual funds, an auditability standard

    for investment records, and certain technical changes.\6\

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    \5\ 69 FR 6140 (Feb. 10, 2004).

    \6\ 70 FR 28190 (May 17, 2005).

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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 upon demand and to enable these assets to be

    quickly converted to cash at a predictable value to minimize 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.'' \7\

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    \7\ 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 in order to

    obtain an up-to-date understanding of investment strategies and

    practices and to assess whether any changes to the regulations would be

    appropriate. As part of this review, all Commission-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 the data previously gathered no

    longer reflected current market conditions. Recent events in the

    economy have underscored the importance of conducting periodic

    reassessments, and through this advance notice of proposed rulemaking

    the Commission is refocusing its review of permitted investments for

    customer segregated funds and 30.7 funds.

    The Commission believes that DCOs and FCMs have managed customer

    segregated funds and 30.7 funds responsibly during this difficult

    economic time. Nonetheless, the market events of the past year, notably

    the failures of certain government sponsored enterprises, difficulties

    encountered by certain money market mutual funds in honoring redemption

    requests, illiquidity of certain adjustable rate securities, and

    turmoil in the credit ratings industry, have challenged many of the

    fundamental assumptions regarding investments. As a result, the

    Commission believes it is an especially appropriate time to review

    permitted investments for customer segregated funds and 30.7 funds.

    B. Regulation 30.7

    Regulation 30.7 \8\ 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.\9\

    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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    \8\ 17 CFR 30.7.

    \9\ 7 U.S.C. 6(b).

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    The investment guidelines for 30.7 funds are general in nature.\10\

    Although Regulation 1.25 investments offer a safe harbor, the

    Commission has not limited investments of 30.7 funds to permitted

    investments under Regulation 1.25. The Commission believes that it may

    be appropriate to impose such a limitation because the same prudential

    concerns that arise in the context of customer segregated funds also

    arise in the context of 30.7 funds. Applying the same standards to both

    types of funds would be consistent with the Act and would establish a

    bright line for the industry and the Commission.

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    \10\ See Commission Form 1-FR-FCM Instructions at 12-9 (Mar. 31,

    2007) (``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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    II. Public Comment Solicited

    The Commission is considering significantly revising the scope and

    character of permitted investments for customer segregated funds and

    30.7 funds and is seeking public comment before issuing any proposed

    amendments to Regulations 1.25 or 30.7.

    In the interest of gathering as much information as possible before

    reaching any conclusions, the Commission is soliciting comments from

    the public regarding which instruments should continue to be permitted

    investments for customer segregated funds under Regulation 1.25. The

    Commission welcomes comments on which instruments no longer merit

    inclusion as permitted investments, as well as comments in support of

    any new instruments that might qualify as permitted investments. The

    Commission also requests comment on appropriate limitations or

    safeguards that should be applied to permitted investments.

    The Commission is particularly interested in relevant data that

    commenters can provide regarding the credit, liquidity, and market risk

    of various investment choices. The Commission is open both to evidence

    in support of retaining current permitted investments and evidence

    indicating a need to eliminate certain permitted investments.

    Additionally, the Commission urges commenters to analyze the benefits

    and burdens of any

    [[Page 23964]]

    potential regulatory modifications in light of current market

    realities.

    Given the substantive and practical concerns that may arise from

    altering the current list of permitted investments, the Commission is

    seeking the views of all interested parties before regulatory changes,

    if any, are proposed. The Commission also will conduct its own research

    and analysis. Before any regulatory changes are adopted there will be

    an opportunity for additional public comment.

    The Commission requests comment on all aspects of Regulation 1.25,

    as follows:

    A. Permitted Investments Under the Act. U.S. government securities

    and municipal securities are permitted investments under Section

    4d(a)(2) of the Act and Regulation 1.25(a)(1)(i)-(ii). Please provide

    any comments, information, research, or data regarding appropriate

    regulatory requirements that might be imposed in order to better

    safeguard customer segregated funds.

    B. Other Permitted Investments Under Regulation 1.25. Please

    provide any comments, information, research, or data in support of

    retaining, rescinding, or modifying authorization to invest customer

    segregated funds in the following instruments:

    1. Government sponsored enterprise securities (Regulation

    1.25(a)(1)(iii));

    2. Certificates of deposit issued by a bank as defined in section

    3(a)(6) of the Securities Exchange Act of 1934,\11\ or a domestic

    branch of a foreign bank that carries deposits insured by the Federal

    Deposit Insurance Corporation (Regulation 1.25(a)(1)(iv));

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    \11\ 15 U.S.C. 78c(a)(6).

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    3. Commercial paper (Regulation 1.25(a)(1)(v));

    4. Corporate notes or bonds (Regulation 1.25(a)(1)(vi));

    5. General obligations of a sovereign nation (Regulation

    1.25(a)(1)(vii)); and

    6. Interests in money market mutual funds (Regulation

    1.25(a)(1)(viii)).

    C. Transactions in Permitted Investments. Please provide any

    comments, information, research, or data in support of retaining,

    rescinding, or modifying authorization to enter into the following

    transactions, and please consider the effect that a more limited list

    of permitted investments would have on:

    1. Repurchase and reverse repurchase transactions using customer

    cash or securities purchased with customer cash (Regulation

    1.25(a)(2)(i));

    2. Repurchase transactions using customer-deposited securities

    (Regulation 1.25(a)(2)(ii)); and

    3. In-house transactions by FCMs that are also registered as

    securities brokers or dealers (Regulation 1.25(a)(3)(i)-(iii)).

    D. Limitations and Safeguards. Please provide any comments,

    information, research, or data regarding the general terms and

    conditions of permitted instruments, including:

    1. Marketability/liquidity (Regulation 1.25(b)(1));

    2. Rating requirements (Regulation 1.25(b)(2));

    3. Restrictions on instrument features, such as instruments that

    contain an embedded derivative and adjustable rate securities

    (Regulation 1.25(b)(3));

    4. Issuer concentration limits (Regulation 1.25(b)(4));

    5. Time-to-maturity (for an investment portfolio or individual

    instruments) (Regulation 1.25(b)(5));

    6. Investments in instruments issued by affiliates (Regulation

    1.25(b)(6));

    7. Requirements specific to interests in money market mutual funds

    (Regulation 1.25(c));

    8. Requirements specific to repurchase agreements and reverse

    repurchase agreements (Regulation 1.25(d)); and

    9. Requirements specific to in-house transactions (Regulation

    1.25(e)).

    The Commission requests comment on Regulation 30.7, as follows:

    Please provide comments, information, research, or data on the

    effect of applying the requirements of Regulation 1.25 to investments

    of 30.7 funds. The Commission also requests comments, information,

    research, or data relating to whether there is any basis supporting the

    continued application of two different investment standards.

    Issued in Washington, DC, on May 19, 2009, by the Commission.

    David A. Stawick,

    Secretary of the Commission.

    [FR Doc. E9-12020 Filed 5-21-09; 8:45 am]

    Last Updated: May 9, 2012



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