67642 Federal Register / Vol. 75, No. 212 / Wednesday, November 3, 2010 / Proposed Rules 

1Commission regulations referred to herein are 

found at 17 CFR Ch. 1. 

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

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

4 17 CFR 1.25. 

5This category of permitted investment was later 

amended to read ‘‘corporate notes or bonds.’’ See 70 

FR 28190, 28197 (May 17, 2005). 

6See 65 FR 77993 (Dec. 13, 2000) (publishing 

final rules); and 65 FR 82270 (Dec. 28, 2000) 

(making technical corrections and accelerating 

valid OMB Control Number. The OMB 

Control Number for this information 

collection is 2120–0056. Public reporting for 

this collection of information is estimated to 

be approximately 5 minutes per response, 

including the time for reviewing instructions, 

completing and reviewing the collection of 

information. All responses to this collection 

of information are mandatory. Comments 

concerning the accuracy of this burden and 

suggestions for reducing the burden should 

be directed to the FAA at: 800 Independence 

Ave., SW., Washington, DC 20591, Attn: 

Information Collection Clearance Officer, 

AES–200. 

Related Information 

(h) Refer to Piaggio Aero Industries S.p.A. 

Service Bulletin (Mandatory) N.: SB 80–0275, 

Rev. N. 0, dated June 15, 2009, and Piaggio 

Aero Industries P180–Service Letter No. SL– 

80–0202, dated January 30, 2009, for related 

information. For service information related 

to this AD, contact Piaggio Aero Industries 

S.p.A., Via Cibrario, 4–16154 Genoa, Italy; 

phone: +39 010 6481 353; fax: +39 010 6481 

881; email: airworthiness@piaggioaero.it; 

Internet: http://www.piaggioaero.com. You 

may review copies of the referenced service 

information at the FAA, Small Airplane 

Directorate, 901 Locust, Kansas City, 

Missouri 64106. For information on the 

availability of this material at the FAA, call 

816–329–4148. 

Issued in Kansas City, Missouri, on 

October 28, 2010. 

John Colomy, 

Acting Manager, Small Airplane Directorate, 

Aircraft Certification Service. 

[FR Doc. 2010–27723 Filed 11–2–10; 8:45 am] 

BILLING CODE 4910–13–P 

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. 

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

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 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 


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effective date of final rules from February 12, 2001 

to December 28, 2000). 

7 Id. 

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

9 70 FR 28190. 

10 17 CFR 1.25(b). 

11 17 CFR 30.7. 

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

13See 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.’’). 

14 74 FR 23962 (May 22, 2009). 

15The 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. 

16See Dodd-Frank Wall Street Reform and 

Consumer Protection Act, Public Law 111–203, 124 

Stat. 1376 (2010). The text of the Dodd-Frank Act 

Continued 

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

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

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

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. 

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. 

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. 

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. 

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 


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67644 Federal Register / Vol. 75, No. 212 / Wednesday, November 3, 2010 / Proposed Rules 

may be accessed at http://www.cftc.gov./ 

LawRegulation/OTCDERIVATIVES/index.htm. 

17Pursuant to Section 901 of the Dodd-Frank Act, 

Title IX may be cited as the ‘‘Investor Protection and 

Securities Reform Act of 2010.’’ 

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

19See 31 U.S.C. 9101 (defining ‘‘government 

corporation’’). 

20Frank J. Fabozzi with Steven V. Mann, The 

Handbook of Fixed Income Securities, 242–245 

(McGraw Hill 7th ed. 2005). 

21Although 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. 

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

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

24Commercial 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. 

Dodd-Frank Act 17 was promulgated in 

order to increase investor protection, 

promote transparency and improve 

disclosure. 

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). 

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. 

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. 

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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25The 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. 

26Letter 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). 

27The 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. 

28The 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. 

29FIA, 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. 

30See discussion infra at Section II.D, regarding 

proposed Regulation 1.25(d)(3). 

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. 

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

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. 

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

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

In 2005, two commenters 

recommended that the Commission 

permit FCMs that are dually registered 

as securities brokers or dealers to engage 


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31See 70 FR at 28193 (FIA and Lehman Brothers 

supporting in-house transactions). 32 70 FR 5577, 5581 (Feb. 3, 2005). 33See Regulation 1.25(a)(3) and (e). 34Regulation 1.25(a)(3)(i)–(iii). 35MMMFs are discussed in greater detail infra, in 

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

36An 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 triparty 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. 

37Regulation 1.25(b). 

38See 17 CFR 240.15c3–1(c)(11)(i) (SEC 

regulation defining ‘‘ready market’’). 

39Related 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 § 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.’’ 

40FIA, MF Global and Newedge mentioned 

marketability in their letters but no significant 

changes were recommended. 

41The 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). 

in in-house transactions.31 At the time, 

the Commission concluded that inhouse 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

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

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. 

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 

§ 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

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. 

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 


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42The Commission received three letters 

regarding rating requirements, but none focused on 

the question of whether or not to retain ratings. 

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

rules and proposing additional rule amendments). 

44See 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). 

46Sections 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)). 

47See infra Section II.E.2 regarding the 

corresponding change in Regulation 30.7. 

48While 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. 

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

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

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. 

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. 

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


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49The 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. 

50See 70 FR at 5581 (discussing the relative risk 

profiles of permitted investments in the context of 

repurchase agreements). 

51The 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. 

52FIA, 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. 

53FIA, 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. 

54See TLGP Letter. 

55FIA, 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. 

56The 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. 

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

58FIA 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. 

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

(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 assetbased 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

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

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

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. 

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

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 


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59See Crane letter, Dreyfus letter, Federated letter 

I, ICI letter, and TSI letter. 

60See CME letter at 5–6. 

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

Newedge letter at 5, and NFA letter at 1. 

62See 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%’’). 

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

64See 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). 

65A ‘‘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. 

asset-based concentration limit is higher 

than 10 percent, what corresponding 

issuer-based concentration limit should 

be adopted. 

(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 issuerbased 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.’’ 

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

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

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. 

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 


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67650 Federal Register / Vol. 75, No. 212 / Wednesday, November 3, 2010 / Proposed Rules 

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). 

67A 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. 

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

69See 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). 

71See 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 nextday redemption requirement under Regulation 

1.25). 

72 17 CFR 270.22e–3. 

73See 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). 

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

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). 

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

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 


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

78See 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.’’). 

79See 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.’’). 

80Newedge letter at 4. 

81FIA letter at 5. 

82Pending 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. 

83See 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. 

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

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. 

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

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. 

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

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

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 


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67652 Federal Register / Vol. 75, No. 212 / Wednesday, November 3, 2010 / Proposed Rules 

85See 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. 

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). 

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

Regulation 30.7 with Regulation 1.25 on 

the topic of NRSROs. 

The Commission requests comment 

on whether there is a standard or 

measure of solvency and creditworthiness 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. 

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. 

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. 

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 


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Federal Register / Vol. 75, No. 212 / Wednesday, November 3, 2010 / Proposed Rules 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 costbenefit 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 § 1.25 to read as follows: 

§ 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 § 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 


srobinson on DSKHWCL6B1PROD with PROPOSALS
67654 Federal Register / Vol. 75, No. 212 / Wednesday, November 3, 2010 / Proposed Rules 

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 assetbased 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 

§ 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 oneday 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 § 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. 


srobinson on DSKHWCL6B1PROD with PROPOSALS
Federal Register / Vol. 75, No. 212 / Wednesday, November 3, 2010 / Proposed Rules 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 § 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 § 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 § 1.26(c). The futures 

commission merchant or the derivatives 

clearing organization shall obtain the 

acknowledgment letter required by 

§ 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 § 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 § 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 


srobinson on DSKHWCL6B1PROD with PROPOSALS
67656 Federal Register / Vol. 75, No. 212 / Wednesday, November 3, 2010 / Proposed Rules 

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 § 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 § 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 §§ 1.25, 

1.26, 1.27, 1.28 and 1.29, investments 

permitted by § 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 § 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 § 30.7, revise paragraph (c) and 

add paragraph (g) to read as follows: 

§ 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 § 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 § 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. 


srobinson on DSKHWCL6B1PROD with PROPOSALS
Federal Register / Vol. 75, No. 212 / Wednesday, November 3, 2010 / Proposed Rules 67657 

1 17 CFR 145.9. 

2See 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. 

3Pursuant to Section 701 of the Dodd-Frank Act, 

Title VII may be cited as the ‘‘Wall Street 

Transparency and Accountability Act of 2010.’’ 

4 7 U.S.C. 1 et seq. (2006). 5 7 U.S.C. 12a(5). 

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 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Part 180 

RIN Number 3038–AD27 

Prohibition of Market Manipulation 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Notice of proposed rulemaking. 

SUMMARY: The Commodity Futures 

Trading Commission is proposing rules 

to implement new anti-manipulation 

authority in section 753 of the DoddFrank Wall Street Reform and Consumer 

Protection Act. The proposed rules 

expand and codify the Commission’s 

authority to prohibit manipulation. 

DATES: Comments must be received on 

or before January 3, 2011. 

ADDRESSES: You may submit comments, 

identified by RIN number AD27, by any 

of the following methods: 

• Agency Web Site, via its Comments 

Online process: Comments may be 

submitted to: http://comments.cftc.gov. 

Follow the instructions for submitting 

comments on 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 is 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

The Commission reserves the right, 

but shall have no obligation, to review, 

pre-screen, filter, redact, refuse or 

remove any or all of your submission 

from www.cftc.gov that it may deem to 

be inappropriate for publication, such as 

obscene language. All submissions that 

have been redacted or removed that 

contain comments on the merits of the 

rulemaking will be retained in the 

public comment file and will be 

considered as required under the 

Administrative Procedure Act and other 

applicable laws, and may be accessible 

under the Freedom of Information Act. 

FOR FURTHER INFORMATION CONTACT: 

Robert Pease, Counsel to the Director of 

Enforcement, 202–418–5863, 

rpease@cftc.gov or Mark D. Higgins, 

Counsel to the Director of Enforcement, 

202–418–5864, mhiggins@cftc.gov, 

Division of Enforcement, Commodity 

Futures Trading Commission, Three 

Lafayette Centre, 1151 21st Street, NW., 

Washington, DC 20581. 

I. Background 

On July 21, 2010, President Obama 

signed the Dodd-Frank Wall Street 

Reform and Consumer Protection Act 

(‘‘Dodd-Frank Act’’).2 Title VII of the 

Dodd-Frank Act 3 amended the 

Commodity Exchange Act (‘‘CEA’’) 4 to 

establish a comprehensive new 

regulatory framework for swaps and 

security-based swaps. The legislation 

was enacted to reduce risk, increase 

transparency, and promote market 

integrity within the financial system by, 

among other things: (1) Providing for the 

registration and comprehensive 

regulation of swap dealers and major 

swap participants; (2) imposing clearing 

and trade execution requirements on 

standardized derivative products; (3) 

creating robust recordkeeping and realtime reporting regimes; and (4) 

enhancing the Commission’s 

rulemaking and enforcement authorities 

with respect to, among others, all 

registered entities and intermediaries 

subject to the Commission’s oversight. 

In addition, Title VII of the DoddFrank Act contains expanded and 

clarified authority to prohibit 

manipulative behavior. 

Section 753 of the Dodd-Frank Act 

amends section 6(c) of the CEA to 

expand the authority of the Commission 

to prohibit fraudulent and manipulative 

behavior. New CEA section 6(c)(1), 

which prohibits the use or employment 

of any manipulative or deceptive device 

or contrivance, requires the Commission 

to promulgate implementing rules 

within one year of enactment of the 

Dodd-Frank Act. The Commission also 

proposes to implement regulations 

pursuant to section 6(c)(3) of the CEA 

under its general rulemaking authority 

in section 8(a)(5) of the CEA.5

Accordingly, the Commission is 

proposing rules to address manipulative 

behavior. The Commission requests 

comment on all aspects of the proposed 

rules, as well as comment on the 

specific provisions and issues 

highlighted in the discussion below. 

II. Manipulation Under Section 753 

A. Section 753’s Amendments to the 

CEA 

Section 753 of the Dodd-Frank Act 

gives the Commission enhanced ‘‘antimanipulation authority’’ as part of its 

expanded enforcement powers. It does 

so by amending section 6(c) of the CEA 

in a number of respects. 

First, section 753 adds a new 

subsection (c)(1). Subsection (c)(1) 

broadly prohibits fraud-based 

manipulative schemes as follows: 

It shall be unlawful for any person, directly 

or indirectly, to use or employ, or attempt to 

use or employ, in connection with any swap, 

or a contract of sale of any commodity in 

interstate commerce, or for future delivery on 

or subject to the rules of any registered entity, 

any manipulative or deceptive device or 

contrivance, in contravention of such rules 

and regulations as the Commission shall 

promulgate by not later than 1 year after the 

date of enactment of the Dodd-Frank Act, 

provided no rule or regulation promulgated 

by the Commission shall require any person 

to disclose to another person nonpublic 

information that may be material to the 

market price, rate, or level of the commodity 

transaction, except as necessary to make any 

statement made to the other person in or in 

connection with the transaction not 

misleading in any material respect. 


srobinson on DSKHWCL6B1PROD with PROPOSALS