Public Statements & Remarks

Statement of Commissioner Kristin N. Johnson on Extension of Staff No-Action Letter Regarding Investments in Securities with Adjustable Rate of Interest Benchmarked to SOFR

December 23, 2022

Commission regulation 1.25 is a seminal provision governing futures commission merchant (“FCM”) and derivatives clearing organization (“DCO”)[1] investment of customer funds.  The regulation authorizes FCMs and DCOs to investment customer funds in a sensibly limited set of permitted investments consistent with the prudential objectives of preserving customer funds and maintaining liquidity.[2]

Commission regulation 1.25 is fundamentally interconnected with the Commodity Exchange Act’s requirement to segregate customer funds from the funds of other customers and the holding institution’s proprietary assets.  As historic and current events demonstrate, Commission regulation 1.25 is exceptionally consequential and significant.  The Commission’s authority to introduce and enforce regulations that ensure the preservation of customers’ assets, particularly in instances where FCMs and DCOs may experience liquidity crises, is foundational to protecting market participants from fraudulent and other abusive conduct and the misuse of customer assets.  Effectively exercising this authority is equally central to the Commission’s role in supporting sound risk management practices and ensuring the stability of the broader financial system.

I therefore support Staff re-issuing no-action relief authorizing FCMs and DCOs to invest customer funds in qualifying securities with adjustable rates of interest benchmarked to the Secured Overnight Financing Rate (“SOFR”).  Evidence revealed through a number of CFTC enforcement actions over the past decade demonstrated deeply concerning manipulation of LIBOR rates.[3]  In order to protect investors from this misconduct and to preserve market integrity, the CFTC and other regulators, including the Bank of England, initiated a market transition away from LIBOR and other IBORs to assets linked to replacement rates based primarily on overnight indexes including SOFR.[4]  

The Alternative Reference Rates Committee (“ARRC”) was organized by the Federal Reserve Board and the Federal Reserve Bank of New York to develop a Paced Transition Plan away from LIBOR and in due course selected SOFR as the  preferred alternative to USD LIBOR.[5]  Since 2018, the Commission has provided complimentary assistance to the ARRC in its stewardship of the transition plan, including through the Market Risk Advisory Committee’s Subcommittee on Interest Rate Benchmark Reform.  For the Commission, these efforts most recently culminated in final rules updating the set of interest rate swaps that are required to be submitted for clearing to include SOFR-linked swaps and swaps based on other critical risk-free reference rates.[6]  

In supporting the Staff’s re-issuance of the no-action letter, I highlight the relief’s expiration which is the earlier of December 31, 2024 or the effective date of final Commission action addressing the addition of SOFR-linked assets as permitted investments of customer funds.  While Staff relief serves a critical function, it may be important, in appropriate contexts, for the Commission to offer definitive solutions. Practical actions that are overwhelmingly consistent with Commission priorities are readily amenable to codification.  I look forward to working with Staff and my fellow Commissioners in updating Commission regulation of 1.25 to expressly recognize the growing prominence of SOFR-linked products.

[1] The Commodity Exchange Authority, the predecessor to the Commodity Futures Trading Commission, amended the regulation in 1968 to include the clearing organizations of contract markets.  See General Regulations Under the Commodity Exchange Act, 33 FR 14455 (Sept. 26, 1968).

[2] 17 CFR 1.25(b).  

[3] See Clearing Requirement Determination Under Section 2(h) of the Commodity Exchange Act for Interest Rate Swaps to Account for the Transition from LIBOR and Other IBORs to Alternative Reference Rates, 87 FR 52182, 2899–32900 (Aug. 24, 2022) (RFR Clearing Requirement).

[4] Id. at 32901; see also CFTC, CFTC Market Risk Advisory Committee Adopts SOFR First Recommendation at Public Meeting, July 13, 2021,

[5] The ARRC Selects a Broad Repo Rate as its Preferred Alternative Reference Rate, June 22, 2017,

[6] See generally RFR Clearing Requirement.