XXIX. Alternatives to Credit Ratings


The Commission proposes to restrict the permitted investment of customer assets to
(i) obligations of the United States and obligations guaranteed as to principal and interest by the United States, (ii) general obligations of any State or any political subdivision thereof (municipal securities), and (iii) non-negotiable certificates of deposit that are redeemable by the issuing bank within one business day. Securities issued by government sponsored enterprises (agency securities), foreign sovereign debt, corporate notes and bonds, commercial paper, and negotiable certificates of deposit would no longer be permitted investments.

We are particularly troubled by the proposals to:

    • Prohibit entirely investments in the securities of government sponsored enterprises (“GSEs”) and corporate obligations (unless such securities are guaranteed as to principal and interest by the United States) and all foreign sovereign debt.

    o GSE’s been found by Congress to perform activities critical to the public interest. To fund these activities, these GSEs rely on investments from both foreign and domestic investors. We are concerned that the Proposed Amendments may result in a loss of investor confidence in the securities of these entities and a concomitant rise in the cost of borrowing.

    o Provided trading in the relevant security remains highly liquid, we believe corporate notes and bonds, commercial paper, and negotiable certificates of deposit should continue to be eligible investments under Rule 1.25.

    o The Commission’s concern over foreign sovereign debt should not apply to the debt of the money center countries.

    • Limit the investment in money market mutual funds to 10 percent of investible assets held in segregation

    o We suggest that Rule 1.25 be amended to provide that (i) an FCM’s investment in any one money market mutual fund may not exceed 5 percent of assets under management in that fund (unchanged from our earlier recommendation), and (ii) no more than 15 percent of the total assets held in segregation may be invested in any one family of money market mutual funds. In addition, investments in money market mutual funds would not be permitted to exceed 50 percent of the total assets held in segregation

    • Prohibit repurchase and reverse repurchase transactions with affiliated banks and registered broker-dealers (as well as so-called “in-house” transactions).

    o We are concerned that imposing a concentration limit of 5 percent may actually decrease liquidity and increase operational and systemic risk. The proposed concentration limit would require an FCM seeking to actively manage customer assets through the use of repurchase and reverse repurchase agreements to maintain accounts at approximately 25 different banks or broker-dealers to assure that the 5 percent limit is never hit.

    o Although affiliates within a financial holding company are not immune from the strains that another affiliate may experience, it does not follow that assets held in an FCM’s customer segregated account would be at greater risk.

    o The terms and conditions governing internal transactions should be more than sufficient to assure that the customer segregated account and foreign futures and foreign options secured amount account are protected in the event of an FCM bankruptcy

    • In determining whether a security is highly liquid, an FCM should be able to make reference to securities that are directly comparable, particularly for those issuers with many classes of securities outstanding. Further, FCMs should be able to rely on publicly-available prices as well as third-party pricing vendors.