[Federal Register Volume 88, Number 223 (Tuesday, November 21, 2023)]
[Proposed Rules]
[Pages 81236-81292]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-24774]



[[Page 81235]]

Vol. 88

Tuesday,

No. 223

November 21, 2023

Part III





Commodity Futures Trading Commission





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17 CFR Parts 1, 22, and 30





Investment of Customer Funds by Futures Commission Merchants and 
Derivatives Clearing Organizations; Proposed Rule

Federal Register / Vol. 88 , No. 223 / Tuesday, November 21, 2023 / 
Proposed Rules

[[Page 81236]]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 1, 22, and 30

RIN 3038-AF24


Investment of Customer Funds by Futures Commission Merchants and 
Derivatives Clearing Organizations

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') is proposing to amend its regulations governing the types of 
investments that futures commission merchants (``FCMs'') and 
derivatives clearing organizations may make with funds held for the 
benefit of customers trading futures, foreign futures, and cleared swap 
transactions. The Commission is also specifying market risk capital 
charges that an FCM would be required to take on the revised permitted 
investments in computing the firm's adjusted net capital. The proposed 
amendments would also amend regulations that require each FCM to report 
to the Commission and to the firm's designated self-regulatory 
organization the name, location, and amount of customer funds held by 
each depository, including any investments of customer funds held by 
the depository. Lastly, the Commission is proposing to revise its 
regulations to eliminate the requirement that a depository holding 
customer funds must provide the Commission with read-only electronic 
access to such accounts for the FCM to treat the funds held in the 
accounts as customer segregated fund accounts.

DATES: Comments must be received on or before January 17, 2024.

ADDRESSES: You may submit comments, identified by RIN 3038-AF24, by any 
of the following methods:
    <bullet> CFTC Comments Portal: https://comments.cftc.gov. Select 
the ``Submit Comments'' link for this rulemaking and follow the 
instructions on the Public Comment Form.
    <bullet> Mail: Send to Christopher Kirkpatrick, Secretary of the 
Commission, Commodity Futures Trading Commission, Three Lafayette 
Center, 1155 21st Street NW, Washington, DC 20581.
    <bullet> Hand Delivery/Courier: Follow the same instructions as for 
Mail, above.
    Please submit your comments using only one of these methods. 
Submissions through the CFTC Comments Portal are encouraged.
    All comments must be submitted in English, or if not, accompanied 
by an English translation. Comments will be posted as received to 
https://comments.cftc.gov. You should submit only information that you 
wish to make available publicly. If you wish the Commission to consider 
information that you believe is exempt from disclosure under the 
Freedom of Information Act (``FOIA''), a petition for confidential 
treatment of the exempt information may be submitted according to the 
procedures established in Sec.  145.9 of the Commission's 
regulations.\1\
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    \1\ 17 CFR 145.9. Commission Regulations referred to herein are 
found at 17 CFR Chapter I, and are accessible on the Commission's 
website: https://www.cftc.gov/LawRegulation/CommodityExchangeAct/index.htm.
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    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 https://comments.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 FOIA.

FOR FURTHER INFORMATION CONTACT: Amanda L. Olear, Director, (202) 418-
5213, <a href="/cdn-cgi/l/email-protection#7617191a131704361510021558111900"><span class="__cf_email__" data-cfemail="1677797a737764567570627538717960">[email protected]</span></a>; Thomas J. Smith, Deputy Director, 202-418-5495, 
<a href="/cdn-cgi/l/email-protection#3a4e4957534e527a595c4e59145d554c"><span class="__cf_email__" data-cfemail="196d6a74706d71597a7f6d7a377e766f">[email protected]</span></a>; Warren Gorlick, Associate Director, 202-418-5195, 
<a href="/cdn-cgi/l/email-protection#95e2f2fae7f9fcf6fed5f6f3e1f6bbf2fae3"><span class="__cf_email__" data-cfemail="2552424a57494c464e65464351460b424a53">[email protected]</span></a>; Liliya Bozhanova, Special Counsel, 202-418-6232, 
<a href="/cdn-cgi/l/email-protection#e38f818c998b828d8c9582a380859780cd848c95"><span class="__cf_email__" data-cfemail="472b25283d2f2629283126072421332469202831">[email protected]</span></a>; Joo Hong, Risk Analyst, (202) 418-6221, 
<a href="/cdn-cgi/l/email-protection#e8828087868fa88b8e9c8bc68f879e"><span class="__cf_email__" data-cfemail="43292b2c2d2403202537206d242c35">[email protected]</span></a>, Market Participants Division, or Lihong McPhail, 
Research Economist, (202) 418-5722, <a href="/cdn-cgi/l/email-protection#ed81808e9d858c8481ad8e8b998ec38a829b"><span class="__cf_email__" data-cfemail="adc1c0ceddc5ccc4c1edcecbd9ce83cac2db">[email protected]</span></a>, Office of the 
Chief Economist, Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street NW, Washington, DC 20581; Scott Sloan, Special 
Counsel, 312-596-0708, <a href="/cdn-cgi/l/email-protection#4330302f2c222d03202537206d242c35"><span class="__cf_email__" data-cfemail="3645455a595758765550425518515940">[email protected]</span></a>, Division of Clearing and Risk, 
Commodity Futures Trading Commission, 77 West Jackson Boulevard, Suite 
800, Chicago, Illinois 60604.

SUPPLEMENTARY INFORMATION: 

Table of Contents

I. Introduction
    A. Background and Statutory Authority
    1. Segregation of Customer Funds by Futures Commission Merchants 
and Derivatives Clearing Organizations
    2. Authority for Futures Commission Merchants and Derivatives 
Clearing Organizations To Invest Customer Funds
II. Requests for Amendments to the List of Permitted Investments
III. Proposal
    A. Investment of Customer Funds
    1. Interests in Money Market Funds
    2. Foreign Sovereign Debt
    3. Interests in U.S. Treasury Exchange-Traded Funds
    4. Investments in Commercial Paper and Corporate Notes or Bonds
    5. Investments in Permitted Investments With Adjustable Rates of 
Interest
    6. Investments in Certificates of Deposit Issued by Banks
    B. Asset-Based and Issuer-Based Concentration Limits for 
Permitted Investments
    C. Futures Commission Merchant Capital Charges on Permitted 
Investments
    D. Segregation Investment Detail Report
    E. Read-Only Electronic Access to Customer Funds Accounts 
Maintained by Futures Commission Merchants
    F. Proposed Conforming Amendments
IV. Section 4(c) of the Act
V. Administrative Compliance
    A. Regulatory Flexibility Act
    B. Paperwork Reduction Act
    C. Cost-Benefit Considerations
    a. Foreign Sovereign Debt, Interests in Exchange-Traded Funds, 
and Associated Capital Charges
    b. Government Money Market Funds, Commercial Paper and Corporate 
Notes or Bonds, and Certificates of Deposit Issued by Banks
    c. SOFR as a Permitted Benchmark
    d. Revision of the Read-Only Access Provisions
    D. Antitrust Laws

I. Introduction

A. Background and Statutory Authority

1. Segregation of Customer Funds by Futures Commission Merchants and 
Derivatives Clearing Organizations
    A primary objective of the Commodity Exchange Act (``Act'') \2\ and 
Commission regulations is the establishment of a framework to safeguard 
funds of customers engaging in CFTC-regulated derivative transactions. 
A core component of the framework is the requirement for a futures 
commission merchant (``FCM'') or a derivatives clearing organization 
(``DCO'') to treat customer funds as belonging to the customers and not 
as the property of the FCM or DCO, and for the FCM or DCO to segregate 
customer funds from its own funds by holding the funds in specially 
designated customer accounts maintained at banks, trust companies, 
FCMs, or DCOs, as applicable. The segregation of customer funds from an 
FCM's or DCO's own funds is intended to ensure that customer funds are 
used

[[Page 81237]]

only to support customer trading and transactions, and to facilitate 
the return of the funds to customers in the event of the insolvency of 
the FCM or DCO.
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    \2\ 7 U.S.C. 1 et seq.
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    Customer funds are classified into one of three distinct regulatory 
frameworks that are based on the derivatives markets on which the 
customers are transacting. Specifically, customer funds are classified 
as either: (i) ``futures customer funds;'' (ii) ``Cleared Swaps 
Customer Collateral;'' or (iii) ``30.7 customer funds.'' \3\ The term 
``futures customer funds'' is defined by Regulation 1.3 to mean, in 
relevant part, all money, securities, and property received by an FCM 
or a DCO from, for, or on behalf of ``futures customers'' \4\ to 
margin, guarantee, or secure futures and options on futures 
transactions traded on a CFTC-designated contract market, and all money 
accruing to futures customers as a result of trading futures and 
options on futures. Section 4d(a)(2) of the Act requires an FCM to 
treat and deal with futures customer funds received to margin, 
guarantee, or secure trades or contracts of any futures customer, or 
accruing to a futures customer as the result of such trades or 
contracts, as belonging to the futures customer.\5\ Section 4d(a)(2) 
further provides that an FCM may not commingle futures customer funds 
of a futures customer with the FCM's own funds, provided, however, that 
the FCM may commingle the futures customer funds of two or more futures 
customers and deposit the funds with any bank, trust company, DCO, or 
other FCM.\6\
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    \3\ See generally, 17 CFR 1.20 (segregation framework for 
futures customer funds); 17 CFR 22.2 and 22.3 (segregation framework 
for Cleared Swaps Customer Collateral); and 17 CFR 30.7 (segregation 
framework for 30.7 customer funds).
    \4\ The term ``futures customer'' is defined by Regulation 1.3 
to mean, in relevant part, any person who uses an FCM as an agent in 
connection with trading in any contract for the purchase or sale of 
a commodity for future delivery or any option on such contract. 17 
CFR 1.3.
    \5\ 7 U.S.C. 6d(a)(2).
    \6\ Id.
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    Section 4d(b) of the Act addresses the duties imposed on DCOs and 
other depositories receiving futures customer funds from FCMs pursuant 
to Section 4d(a)(2) of the Act.\7\ Section 4d(b) provides that it is 
unlawful for any person, including a DCO, that has received futures 
customer funds to hold, dispose of, or use the funds as belonging to 
the depositing FCM or any person other than the futures customers of 
the FCM.\8\ The Commission adopted Regulations 1.20 through 1.30, and 
Regulations 1.32 and 1.49, to implement the segregation requirements 
for futures customer funds mandated by Sections 4d(a)(2) and 4d(b) of 
the Act.\9\
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    \7\ 7 U.S.C. 6d(b).
    \8\ Id.
    \9\ 17 CFR 1.20 through 17 CFR 1.30, 17 CFR 1.32, and 17 CFR 
1.49.
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    The term ``Cleared Swaps Customer Collateral'' is defined by 
Regulations 1.3 and 22.1 \10\ to mean, in relevant part, all money, 
securities, or other property received by an FCM or a DCO from, for, or 
on behalf of, a ``Cleared Swaps Customer'' to margin, guarantee, or 
secure ``Cleared Swap'' positions.\11\ Section 4d(f)(2)(A) of the Act 
requires an FCM to treat Cleared Swaps Customer Collateral received 
from a Cleared Swaps Customer, or accruing to a Cleared Swaps Customer 
as a result of Cleared Swap positions, as belonging to the Cleared 
Swaps Customer.\12\ Section 4d(f)(2)(B) of the Act provides that an FCM 
may not commingle Cleared Swaps Customer Collateral of a Cleared Swaps 
Customer with the FCM's own funds,\13\ provided, however, that the FCM 
may commingle Cleared Swaps Customer Collateral of two or more Cleared 
Swap Customers and deposit the funds in any bank, trust company, DCO, 
or other FCM.\14\ Section 4d(f)(6) of the Act provides that it is 
unlawful for any person, including a DCO and any depository 
institution, that has received Cleared Swaps Customer Collateral to 
hold, dispose of, or use the Cleared Swaps Customer Collateral as 
belonging to the depositing FCM or any person other than the Cleared 
Swaps Customer of the FCM.\15\ The Commission adopted Regulations 22.2 
through 22.13, and Regulations 22.15 through 22.17, to implement the 
segregation requirements for Cleared Swaps Customer Collateral mandated 
by Section 4d(f) of the Act.\16\
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    \10\ 17 CFR 22.1.
    \11\ The term ``Cleared Swaps Customer'' is defined by 
Regulation 22.1 to mean, in relevant part, any customer entering 
into a Cleared Swap. The term ``Cleared Swap'' is defined to mean 
any swap that is, directly or indirectly, submitted to and cleared 
by a DCO registered with the Commission. See 7 U.S.C. 1a(7) and 17 
CFR 22.1.
    \12\ 7 U.S.C. 6d(f)(2)(A).
    \13\ 7 U.S.C. 6d(f)(2)(B).
    \14\ 7 U.S.C. 6d(f)(3)(A)(i).
    \15\ 7 U.S.C. 6d(f)(6).
    \16\ 17 CFR 22.2 through 17 CFR 22.13, 17 CFR 22.15 through 17 
CFR 22.17.
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    The term ``30.7 customer funds'' is defined by Regulation 30.1 to 
mean any money, securities, or other property received by an FCM from, 
for, or on behalf of a U.S. person or foreign-domiciled person (a 
``30.7 customer'') \17\ to margin, guarantee, or secure futures or 
options on futures positions executed on foreign boards of trade 
(``foreign futures'').\18\ Section 4(b)(2)(A) of the Act authorizes the 
Commission to adopt regulations imposing requirements on FCMs regarding 
the safeguarding of 30.7 customer funds deposited by 30.7 customers for 
trading on foreign boards of trade.\19\ The Commission adopted 
Regulation 30.7 pursuant to Section 4(b)(2)(A) of the Act.\20\ 
Regulation 30.7(e)(2) requires an FCM to segregate 30.7 customer funds 
from the FCM's own funds, and Regulation 30.7(b) provides that an FCM 
may hold 30.7 customer funds with designated depositories, including 
banks, trust companies, DCOs, foreign brokers, and clearing 
organizations of foreign boards of trade.\21\
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    \17\ The term ``30.7 customer'' is defined by Regulation 30.1 to 
mean any person located in the U.S., its territories or possessions, 
as well as any foreign-domiciled person, who trades in foreign 
futures or foreign options. 17 CFR 30.1.
    \18\ 17 CFR 30.1.
    \19\ 7 U.S.C. 6(b)(2)(A).
    \20\ 17 CFR 30.7.
    \21\ 17 CFR 30.7(b) and 17 CFR 30.7(e)(2).
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    Throughout this release, the terms ``futures customer funds,'' 
``Cleared Swaps Customer Collateral,'' and ``30.7 customer funds'' are 
collectively referred to as ``Customer Funds,'' unless otherwise 
stated.
2. Authority for Futures Commission Merchants and Derivatives Clearing 
Organizations To Invest Customer Funds
    Section 4d(a)(2) of the Act authorizes FCMs to invest futures 
customer funds in: (i) obligations of the U.S.; (ii) obligations fully 
guaranteed as to principal and interest by the U.S.; and (iii) general 
obligations of any State or of any political subdivision of a 
State.\22\ Regulation 1.25 was initially adopted to implement Section 
4d(a)(2), and authorized FCMs and DCOs to invest futures customer funds 
in the instruments set forth in Section 4d(a)(2) of the Act (the 
``Permitted Investments'').\23\
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    \22\ 7 U.S.C. 6d(a)(2).
    \23\ See Title 17--Commodity and Securities Exchanges, 33 FR 
14454 (Sept. 26, 1968), amending Regulation 1.25 and providing that 
FCMs and clearing organizations may invest customer funds in 
obligations of the U.S., in general obligations of any State or of 
any political subdivision of any State, or in obligations fully 
guaranteed as to principal and interest by the U.S.
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    The Commission, in 2000, expanded the Permitted Investments beyond 
the investments specifically stated in Section 4d(a)(2) of the Act to 
include certificates of deposit, commercial paper, corporate notes, 
foreign sovereign debt, and interests in money market funds.\24\ In 
addition, the Commission

[[Page 81238]]

authorized an FCM or a DCO to buy the Permitted Investments under 
agreements to resell the securities (``reverse repurchase agreements'') 
and to sell the Permitted Investments under agreements to repurchase 
the securities (``repurchase agreements'').\25\ To minimize credit 
risk, market risk, and liquidity risk, the Commission also imposed 
conditions that Permitted Investments were required to meet, including 
a restriction on the dollar-weighted average of the time-to-maturity of 
securities held in the segregated portfolio, asset-based and issuer-
based concentration limits, and prohibitions on certain investments 
containing embedded derivatives.\26\ More generally, Regulation 1.25 
requires all Permitted Investments to be ``consistent with the 
objectives of preserving principal and maintaining liquidity.'' \27\ 
The 2000 Permitted Investments Amendment was adopted under the 
authority of Section 4(c) of the Act.\28\ In adopting the amendment, 
the Commission stated that the expanded list of Permitted Investments 
would enhance the yield available to FCMs, DCOs, and their customers 
without compromising the safety of futures customer funds.\29\
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    \24\ See Rules Relating to Intermediaries of Commodity Interest 
Transactions, 65 FR 77993 (Dec. 13, 2000) (publishing final rules); 
and Investment of Customer Funds, 65 FR 82270 (Dec. 28, 2000) 
(making technical corrections and accelerating the effective date of 
the final rules from February 12, 2001 to December 28, 2000) 
(collectively, the ``2000 Permitted Investments Amendment'').
    \25\ Id. Reverse repurchase agreements and repurchase agreements 
are collectively referred to as ``Repurchase Transactions'' in the 
Proposal.
    \26\ 17 CFR 1.25(b).
    \27\ Id.
    \28\ Section 4(c)(1) of the Act empowers the Commission to 
``promote responsible economic or financial innovation and fair 
competition'' by exempting any transaction or class of transactions 
(including any person or class of persons offering, entering into, 
rendering advice or rendering other services with respect to, the 
agreement, contract, or transaction), from any of the provisions of 
the Act, subject to certain exceptions. The Commission may grant 
such an exemption by rule, regulation, or order, after notice and 
opportunity for hearing, and may do so on application of any person 
or on its own initiative. See 7 U.S.C. 6(c). A further discussion of 
Section 4(c)(1) of the Act is set forth in Section IV of this 
Federal Register release.
    \29\ See 2000 Permitted Investments Amendment at 78007.
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    Following the 2000 Permitted Investments Amendment, the list of 
Permitted Investments has undergone several revisions.\30\ In its 
current form, Regulation 1.25 lists seven categories of investments 
that qualify as Permitted Investments: (i) obligations of the U.S. and 
obligations fully guaranteed as to principal and interest by the U.S. 
(``U.S. government securities''); (ii) general obligations of any State 
or political subdivision of a State (``municipal securities''); (iii) 
obligations of any U.S. government corporation or enterprise sponsored 
by the U.S. (``U.S. agency obligations''); (iv) certificates of deposit 
issued by a bank; (v) commercial paper fully guaranteed by the U.S. 
under the Temporary Liquidity Guarantee Program (``TLGP'') as 
administered by the Federal Deposit Insurance Corporation (``FDIC'') 
(``commercial paper''); (vi) corporate notes and bonds fully guaranteed 
as to principal and interest by the U.S. under the TLGP (``corporate 
notes and bonds''); and (vii) interests in money market mutual 
funds.\31\ In addition, Regulation 1.25(a)(2) permits FCMs and DCOs to 
buy and sell the Permitted Investments under Repurchase 
Transactions.\32\
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    \30\ See Investment of Customer Funds and Record of Investments, 
70 FR 28190 (May 17, 2005) (``2005 Permitted Investments 
Amendment''), and Investment of Customer Funds and Funds Held in an 
Account for Foreign Futures and Foreign Options Transactions, 76 FR 
78776 (Dec. 19, 2011) (``2011 Permitted Investments Amendment'').
    \31\ 17 CFR 1.25(a)(1).
    \32\ 17 CFR 1.25(a)(2).
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    Section 4(b)(2)(A) of the Act grants the Commission the plenary 
authority to adopt rules and regulations regarding an FCM's 
safeguarding of 30.7 customer funds.\33\ Prior to 2011, an FCM was not 
subject to restrictions on the investments that it could enter into 
with 30.7 customer funds.\34\ In 2011, the Commission extended the 
requirements of Regulation 1.25 to an FCM's investment of 30.7 customer 
funds for trading foreign futures positions. Specifically, the 
Commission amended Regulation 30.7 to provide that to the extent an FCM 
invested 30.7 customer funds, it must invest such funds subject to, and 
in compliance with, the terms and conditions of Regulation 1.25.\35\ 
The Commission exercised its plenary authority under Section 4(b) of 
the Act to adopt Regulation 30.7.
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    \33\ 7 U.S.C. 6(b)(2)(A).
    \34\ 2011 Permitted Investments Amendment at 78777, providing 
that because Congress did not expressly apply the investment 
limitations set forth in Section 4d of the Act to 30.7 customer 
funds, the Commission historically has not subjected such funds to 
the investment limitations applicable to futures customer funds.
    \35\ See 17 CFR 30.7. The Commission stated that it was 
appropriate to align the investment standards of Regulation 30.7 
with those of Regulation 1.25 as many of the same prudential 
concerns arise with respect to both futures customer funds and 30.7 
customer funds. See 2011 Permitted Investment Amendment at 78791.
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    The Commission also extended the requirements of Regulation 1.25 to 
FCMs and DCOs investing Cleared Swaps Customer Collateral.\36\ 
Regulations 22.2 and 22.3 were adopted in 2012 under the authority of 
Section 4d(f)(4) of the Act,\37\ which provides that Cleared Swaps 
Customer Collateral may be invested by an FCM or a DCO in: (i) 
obligations of the U.S.; (ii) general obligations of any State or of 
any political subdivision of a State; (iii) obligations fully 
guaranteed as to principal and interest by the U.S.; and, (iv) any 
other investment that the Commission may by rule or regulation 
prescribe.\38\ Section 4d(f)(4) of the Act further provides that the 
investments must be made in accordance with the rules and regulations, 
and subject to any conditions, as the Commission prescribes.\39\
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    \36\ See 17 CFR 22.2(e)(1) and 17 CFR 22.3(d).
    \37\ 7 U.S.C. 6d(f).
    \38\ See Protection of Cleared Swaps Customer Contracts and 
Collateral; Conforming Amendments to the Commodity Amendments to the 
Commodity Broker Bankruptcy Provisions, 77 FR 6336 (Feb. 7, 2012).
    \39\ See 7 U.S.C. 6d(f)(4).
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    In addition to setting forth the Permitted Investments that FCMs 
and DCOs may enter into with Customer Funds, Regulation 1.25 also 
includes several conditions on the investment of Customer Funds. 
Regulation 1.25(b)(3) contains both asset-based and issuer-based 
concentration limits applicable to Permitted Investments. The asset-
based concentration limit restricts the total amount of Customer Funds 
that an FCM or a DCO may invest in a particular Permitted Investment to 
a defined percentage of the total funds held in segregation by the FCM 
or DCO.\40\ The issuer-based concentration limit caps the total amount 
of Customer Funds that may be invested in instruments offered by, or 
managed by, a particular issuer to a defined percentage of the total 
funds held in segregation by the FCM or DCO.\41\
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    \40\ 17 CFR 1.25(b)(3)(i).
    \41\ 17 CFR 1.25(b)(3)(ii).
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    Consistent with the objective of limiting customer risk, Commission 
regulations also provide that FCMs and DCOs are financially responsible 
for any losses resulting from Permitted Investments, and are explicitly 
prohibited from allocating investment losses to customers or clearing 
FCMs, respectively.\42\
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    \42\ Regulation 1.29 provides that FCMs or DCOs, as applicable, 
shall bear sole responsibility for any losses resulting from the 
investment of futures customer funds, and further provides that no 
investment losses shall be borne or otherwise allocated to FCM 
customers or to FCMs clearing customer accounts at DCOs. 17 CFR 
1.29(b).
    Regulation 22.2(e)(1) provides that an FCM shall bear sole 
responsibility for any losses resulting from the investment of 
Cleared Swaps Customer Collateral and may not allocate investment 
losses to Cleared Swaps Customers of the FCM. 17 CFR 22(e)(1).
    Regulation 30.7(i) provides that an FCM shall bear sole 
financial responsibility for any losses resulting from the 
investment of 30.7 customer funds, and further provides that no 
investment losses may be allocated to the 30.7 customers of the FCM. 
17 CFR 30.7(i).
    In addition, Regulation 22.3(d) provides that DCOs may invest 
Cleared Swaps Customer Collateral in Permitted Investments set forth 
in Regulation 1.25. The regulation, however, does not provide that a 
DCO is responsible for investment losses. The Commission is 
proposing to amend Regulation 22.3(d) to explicitly provide that a 
DCO shall bear sole responsibility for any losses resulting from the 
investment of Cleared Swaps Customer Collateral, and may not 
allocate such losses to Cleared Swaps Customers. See Section III.C. 
below. 17 CFR 22.3(d).

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[[Page 81239]]

    The Commission has previously noted the importance of conducting 
periodic reassessments of Regulation 1.25 ``and, as necessary, revising 
regulatory policies to strengthen safeguards designed to minimize risk 
while retaining an appropriate degree of investment flexibility and 
opportunities for capital efficiency for DCOs and FCMs investing 
customer segregated funds.'' \43\ In furtherance of these objectives 
and in consideration of the requests for amendments to Regulation 1.25 
discussed in Section II below, the Commission is proposing to amend the 
list of Permitted Investments in Regulation 1.25 to: (i) add two new 
asset classes (i.e., specified foreign sovereign debt instruments and 
certain exchange-traded funds (``ETFs'')), subject to certain 
conditions, (ii) limit the scope of money market funds (``MMFs'') whose 
interests qualify as Permitted Investments, and (iii) remove corporate 
notes, corporate bonds, and commercial paper. In connection with the 
proposed amendments to the list of Permitted Investments, the 
Commission is further proposing changes to the counterparty and 
depository requirements of Regulation 1.25(d)(2) and (7) and revisions 
to the concentration limits for Permitted Investments set forth in 
Regulation 1.25(b)(3), and is specifying the capital charges that would 
apply to the proposed new categories of Permitted Investments. 
Additionally, the Commission is proposing an amendment to Regulation 
22.3(d) to clarify that DCOs are financially responsible for any losses 
resulting from investments of Cleared Swap Customer Collateral in 
Permitted Investments, consistent with Regulation 1.29, which addresses 
financial responsibility for losses resulting from investment of 
futures customer funds. The proposed amendment reflects the 
Commission's original intent to permit investments of Cleared Swaps 
Customer Collateral within the parameters applicable to investments of 
futures customer funds.\44\ The Commission is also proposing to replace 
the London Interbank Offered Rate (``LIBOR'') with the Secured 
Overnight Financing Rate (``SOFR'') as a permitted benchmark for 
variable and floating interest rates for securities that qualify as 
Permitted Investments. Each of the proposed amendments is discussed 
below.
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    \43\ 2011 Permitted Investments Amendment at 78777.
    \44\ See Enhancing Protections Afforded Customers and Customer 
Funds Held by Futures Commission Merchants and Derivatives Clearing 
Organizations, 78 FR 68506 (Nov. 14, 2013) (``2013 Protections of 
Customer Funds'') at 68556.
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II. Requests for Amendments to the List of Permitted Investments

    The Futures Industry Association (``FIA) and CME Group Inc. 
(``CME'') (collectively, the ``Petitioners'') submitted a joint 
petition requesting the Commission to issue an order under Section 4(c) 
of the Act, or to take such other action as the Commission deems 
appropriate, to expand investments that FCMs and DCOs may enter into 
with Customer Funds.\45\ The Petitioners request that the Commission 
take action to permit FCMs and DCOs to invest Customer Funds in the 
foreign sovereign debt of Canada, France, Germany, Japan, and the 
United Kingdom (``Specified Foreign Sovereign Debt''), subject to the 
condition that the investment in the foreign sovereign debt is limited 
to balances owed by FCMs and DCOs to customers and FCM clearing firms, 
respectively, denominated in the applicable currency of Canada, France, 
Germany, Japan, or the United Kingdom.\46\ The Petitioners further 
request that the Commission exempt FCMs and DCOs from the provisions of 
Regulation 1.25(d)(2) to authorize FCMs and DCOs to enter into 
Repurchase Transactions involving Specified Foreign Sovereign Debt with 
foreign banks and foreign securities brokers or dealers and to hold 
Specified Foreign Sovereign Debt in safekeeping accounts at foreign 
banks.\47\
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    \45\ Petition for Order under Section 4(c) of the Commodity 
Exchange Act, dated May 24, 2023 (the ``Joint Petition''). On 
September 22, 2023, the Petitioners submitted updated data in 
support of the Joint Petition and corrected an inadvertent 
transposition of data items in the Joint Petition. Supplement to 
Petition for Order under Section 4(c) of the Commodity Exchange Act 
(``Supplement to Joint Petition''). The Joint Petition and the 
Supplement to Joint Petition are available on the Commission's 
website, https://www.cftc.gov/media/9531/FIA_CMEPetition_Regulation125_052423/download and https://www.cftc.gov/media/9536/FIALetterSupplementing_Regulation125_092223/download.
    \46\ Joint Petition at p. 4.
    \47\ Joint Petition at p. 5.
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    In support of the request, the Petitioners note that the Commission 
issued an order in 2018 pursuant to Section 4(c) of the Act providing a 
limited exemption to Section 4d of the Act and Regulation 1.25 to 
permit DCOs to invest futures customer funds and Cleared Swaps Customer 
Collateral in the foreign sovereign debt of France and Germany.\48\ The 
exemption for DCOs to invest in French and German sovereign debt is 
subject to conditions, including that: (i) investment in French or 
German sovereign debt is limited to investments made with euro-
denominated balances owed to the futures customers and Cleared Swaps 
Customers of FCM clearing members; (ii) the dollar-weighted average of 
the remaining time-to-maturity of a DCO's portfolio of investments in 
each of French and German sovereign debt may not exceed 60 days; and 
(iii) a DCO may not make a direct investment in any sovereign debt 
instrument of France or Germany that has a remaining time-to-maturity 
in excess of 180 calendar days.\49\ The 2018 Order also provides that 
if the two-year credit default spread of the French or German sovereign 
debt exceeds 45 basis points (``BPS''), the DCO may not make any new 
direct investments in the relevant sovereign debt using futures 
customer funds or Cleared Swaps Customer Collateral, and must 
discontinue investing futures customer funds and Cleared Swaps Customer 
Collateral in the relevant debt through Repurchase Transactions as soon 
as practicable under the circumstances.\50\
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    \48\ Order Granting Exemption from Certain Provisions of the 
Commodity Exchange Act Regarding Investment of Customer Funds and 
from Certain Related Commission Regulations, 83 FR 35241 (Jul. 25, 
2018) (``2018 Order''). The 2018 Order provides an exemption only to 
DCOs. FCMs are not subject to the 2018 Order, and currently may not 
invest Customer Funds in any foreign sovereign debt.
    \49\ Conditions (3)(a), 3(c), and 3(d) of the 2018 Order at 
35245.
    \50\ Condition (3)(b) of the 2018 Order at 35245.
---------------------------------------------------------------------------

    The 2018 Order also grants an exemption from Regulation 1.25(d)(2) 
to permit DCOs to enter into Repurchase Transactions involving French 
or German sovereign debt with foreign banks and foreign securities 
brokers or dealers as counterparties.\51\ A DCO may

[[Page 81240]]

enter into Repurchase Transactions with a foreign bank or foreign 
securities broker or dealer provided that the such firm qualifies as a 
permitted depository under Regulation 1.49(d)(3) and is located in a 
money center country or in another jurisdiction that has adopted the 
euro as its currency.\52\ The 2018 Order further grants an exemption 
from the requirement in Regulation 1.25(d)(7) that securities 
transferred to an FCM or a DCO under reverse repurchase agreements must 
be held in safekeeping accounts with certain U.S.-domiciled banks, a 
Federal Reserve Bank, a DCO, or the Depository Trust Company,\53\ to 
permit DCOs to hold French or German sovereign debt received under 
reverse repurchase agreements in a safekeeping account with foreign 
banks that qualify as depositories for Customer Funds under Regulation 
1.49(d)(3).
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    \51\ As noted above, Regulation 1.25(d)(2) provides that an FCM 
or a DCO may enter into Repurchase Transactions only with the 
following counterparties: (i) a bank as defined in Section 3(a)(6) 
of the Securities Exchange Act of 1934; (ii) a domestic branch of a 
foreign bank insured by the FDIC; (iii) an SEC-registered securities 
broker or dealer; or (iv) an SEC-registered government securities 
broker or dealer. Section 3(a)(6) of the Securities Exchange Act of 
1934 defines the term ``bank'' to mean: (i) a banking institution 
organized under the laws of the U.S. or a Federal savings 
association; (ii) a member bank of the Federal Reserve System; (iii) 
any other banking institution or savings association doing business 
under the laws of any State or the U.S., a substantial portion of 
the business of which consists of receiving deposits or exercising 
fiduciary powers similar to those permitted to national banks under 
the authority of the Comptroller of the Currency, and which is 
supervised and examined by a State or Federal authority having 
supervision over banks or savings associations; and (iv) a receiver, 
conservator, or other liquidating agent of any institution or firm 
included in clauses (i), (ii), or (iii) above (``Section 3(a)(6) 
bank''). 15 U.S.C. 78 et seq. Foreign-domiciled banks and foreign 
securities brokers or dealers are not authorized counterparties for 
Repurchase Transactions under Regulation 1.25(d)(2).
    \52\ Regulation 1.49(d)(3) provides that a foreign depository 
must be a bank or trust company that has in excess of $1 billion in 
regulatory capital, a registered FCM, or a DCO in order to be a 
qualified counterparty to Repurchase Transactions.
    \53\ Specifically, Regulation 1.25(d)(7) provides that 
securities transferred to an FCM or a DCO under a reverse repurchase 
agreement must be held in a safekeeping account only with the 
following depositories: (i) a Section 3(a)(6) bank; (ii) a domestic 
branch of a foreign bank insured by the FDIC; (iii) a Federal 
Reserve Bank; (iv) a DCO; or (v) the Depository Trust Company. A 
foreign-domiciled bank is currently not an authorized depository for 
securities transferred to an FCM or a DCO under Regulation 
1.25(d)(7).
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    The Petitioners further request that FCMs and DCOs be permitted to 
invest Customer Funds in certain ETFs that invest primarily in short-
term U.S. Treasury securities (``U.S. Treasury ETFs'').\54\ In support 
of their request, the Petitioners state that U.S. Treasury ETFs have 
characteristics that may be consistent with those of other Permitted 
Investments and may provide FCMs and DCOs with an opportunity to 
diversify further their investments of customer funds.\55\
---------------------------------------------------------------------------

    \54\ Joint Petition at pp. 8-9.
    \55\ Id.
---------------------------------------------------------------------------

    The Commission also received a petition from Invesco Capital 
Management LLC (``Invesco''), which serves as a sponsor of various 
ETFs, advocating for the addition of U.S. Treasury ETF securities to 
the list of Permitted Investments.\56\ Invesco states that U.S. 
Treasury ETFs will provide FCMs and DCOs with additional investment 
choices for customer funds, promote operational efficiencies and offer 
potentially better investment returns for FCMs, DCOs, and their 
customers, and facilitate financial market innovation.\57\ Invesco 
further states that permitting investments of U.S. Treasury ETFs would 
be consistent with, and promote, the public interest goals enumerated 
in the Act.\58\ Invesco further notes that U.S. Treasury ETFs invest in 
a sub-set of the same high-quality liquid instruments that are 
Permitted Investments under Regulation 1.25 (i.e., U.S. government 
securities), and as such, the ETFs offer an indirect, possibly simpler, 
and more cost-efficient way for FCMs and DCOs to invest Customer Funds 
in U.S. Treasury securities and obligations fully guaranteed as to 
principal and interest by the U.S. as the ETFs eliminate the need for 
FCMs and DCOs to administer investments in individual U.S. government 
securities.\59\
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    \56\ Letter from Anna Paglia, Chief Executive Officer, Invesco 
Capital Management LLC, dated September 28, 2023 (``Invesco 
Petition''). See https://www.cftc.gov/media/9541/Invesco_CFTCPetition_Regulation125_092823/download. Invesco is a 
registered with the Commission as a commodity pool operator and 
commodity trading advisor, and is registered with the Securities and 
Exchange Commission (``SEC'') as an investment adviser.
    \57\ Invesco Petition at p. 1.
    \58\ Id.
    \59\ See Invesco Petition at p. 2.
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    Finally, the Petitioners also request that the Commission amend its 
regulations consistent with CFTC Staff Letter 21-02 and CFTC Staff 
Letter 22-21,\60\ to permit FCMs and DCOs to invest Customer Funds in 
qualifying Permitted Investments that have adjustable rates of interest 
that correlate closely to SOFR.\61\
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    \60\ CFTC Staff Letter 21-02--CFTC Regulation 1.25--Investment 
of Customer Funds--Time-Limited No-Action Position for Investments 
in Securities with an Adjustable Rate of Interest Benchmarked to the 
Secured Overnight Financing Rate, issued January 4, 2021 (``Staff 
Letter 21-02''); CFTC Staff Letter 22-21--CFTC Regulation 1.25--
Investment of Customer Funds in Securities with an Adjustable Rate 
of Interest Benchmarked to the Secured Overnight Financing Rate--
Extension of Time-Limited No-Action Position Concerning Investments 
by Futures Commission Merchants and No-Action Position Concerning 
Investments by Derivatives Clearing Organizations, issued December 
23, 2022 (``Staff Letter 22-21'').
    \61\ See Joint Petition at p. 4.
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III. Proposal

    As part of its periodic assessment of Regulation 1.25 and in 
consideration of the information set forth in the Joint Petition and 
the Invesco Petition, the Commission is proposing to amend the list of 
Permitted Investments, subject to certain terms and conditions, as 
discussed in detail below. In connection with the proposed amendments 
to the list of Permitted Investments, the Commission is further 
proposing changes to the counterparty and depository requirements of 
Regulation 1.25(d)(2) and (7), and revisions to the concentration 
limits for Permitted Investments set forth in Regulation 1.25(b)(3). 
Separately, the Commission is specifying capital charges that FCMs 
would apply to the revised list of Permitted Investments as proposed, 
and is proposing a clarifying amendment to Regulation 22.3(d) to 
specify that DCOs bear the financial responsibility for losses 
resulting from Permitted Investments. The Commission is also proposing 
to replace LIBOR with SOFR as a permitted benchmark for the interest 
rate of adjustable rate securities that qualify as Permitted 
Investments. Lastly, the Commission is proposing to revise its 
regulations to eliminate the requirement that a depository holding 
customer funds must provide the Commission with read-only electronic 
access to such accounts for the FCM to treat the accounts as customer 
segregated fund accounts. Collectively, the proposed revisions and 
amendments are referred to as the ``Proposal.''

A. Investment of Customer Funds

1. Interests in Money Market Funds
    Regulation 1.25(a)(1)(vii) currently provides that FCMs and DCOs 
may invest Customer Funds in interests in MMFs, subject to specified 
terms and conditions.\62\ To qualify as a Permitted Investment, a MMF 
must: (i) be an investment company that is registered with the SEC 
under the Investment Company Act of 1940 \63\ and hold itself out to 
investors as a MMF in accordance with SEC Rule 2a-7; \64\ (ii) be 
sponsored by a federally-regulated financial institution, a Section 
3(a)(6) bank,\65\ an investment adviser registered under the Investment 
Advisers Act of 1940,\66\ or a domestic branch of a foreign bank 
insured by the FDIC; and (iii) compute the net asset value (``NAV'') of 
the fund by 9 a.m. of the business day following each business day and 
make the NAV available to MMF shareholders by that time.\67\
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    \62\ 17 CFR 1.25(a)(vii).
    \63\ 15 U.S.C. 80a-1--80a-64.
    \64\ 17 CFR 270.2a-7.
    \65\ For a definition of Section 3(a)(6) bank, see supra note 
51.
    \66\ 15 U.S.C. 80b-1--80b-21.
    \67\ 17 CFR 1.25(c).
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    The Commission is proposing to amend Regulation 1.25(a)(1)(vii) to 
limit the scope of MMFs whose interests qualify as Permitted 
Investments to ``government money market funds,'' as defined in SEC 
Rule 2a-7, in response to two sets of amendments that the SEC adopted 
to its rules governing MMFs

[[Page 81241]]

discussed below.\68\ A Government MMF is defined in SEC Rule 2a-7 as a 
fund that invests 99.5 percent or more of its total assets in cash, 
``government securities,'' and/or Repurchase Transactions that are 
collateralized fully by cash or ``government securities.'' \69\ A 
``government security'' is defined as ``any security issued or 
guaranteed as to principal or interest by the United States, or by a 
person controlled or supervised by and acting as instrumentality of the 
Government of the United States pursuant to authority granted by the 
Congress of the United States; or any certificate of deposit of any of 
the foregoing.'' \70\ Therefore, a ``government security'' encompasses 
``U.S. government securities'' and ``U.S. agency obligations'' as 
defined under Regulation 1.25(a)(1)(i) and (iii), respectively.\71\
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    \68\ SEC Rule 2a-7 addresses MMFs that primarily invest in 
securities issued or guaranteed by the U.S. government (``government 
money market funds'' or ``Government MMFs''), MMFs that primarily 
invest in short-term corporate debt securities (``Prime MMFs''), and 
other types of MMFs that are not relevant to this Proposal, such as 
tax-exempt funds. 17 CFR 270.2a-7.
    \69\ 17 CFR 270.2a-7(a)(14).
    \70\ 15 U.S.C. 80a-2(a)(16).
    \71\ Regulation 1.25(a)(1)(i) and (iii) defines ``U.S. 
government securities'' as obligations of the U.S. and obligations 
fully guaranteed as to principal and interest by the U.S. and ``U.S. 
agency obligations'' as obligations of any U.S. government 
corporation or enterprise sponsored by the U.S. government, 
respectively.
---------------------------------------------------------------------------

    As noted above, the Commission is proposing to amend Regulation 
1.25 to limit the scope of MMFs that qualify as Permitted Investments 
in response to SEC revisions to its MMF rules. In that regard, in 2014, 
the SEC amended Rule 2a-7 to permit an MMF to impose liquidity fees on 
participant redemptions or to temporarily suspend participant 
redemptions if the MMF's investment portfolio triggered certain 
liquidity thresholds.\72\ The 2014 SEC MMF Final Rule was adopted to 
mitigate the adverse effects on fund liquidity resulting from increased 
participant redemptions during times of financial stress.\73\
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    \72\ Money Market Fund Reform; Amendments to Form PF, 79 FR 
47736 (Aug. 14, 2014) (``2014 SEC MMF Final Rule''). See 17 CFR 
270.2a-7(c)(2).
    \73\ 2014 SEC MMF Final Rule at 47747.
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    The 2014 SEC MMF Final Rule provides that a MMF that invests less 
than 30 percent of its total assets in instruments defined as ``weekly 
liquid assets'' \74\ may impose a liquidity fee of up to two percent of 
the value of any shares redeemed, or may temporarily suspend 
participants' redemptions for up to 10 business days in a 90-day 
period, if the MMF's board of directors determines that imposing the 
liquidity fee or suspending redemptions is in the best interest of the 
MMF.\75\ In addition, if a MMF invests less than 10 percent of its 
total assets in weekly liquid assets, the MMF must impose a liquidity 
fee of at least one percent, and not more than two percent, on the 
value of any shares redeemed, unless the MMF's board of directors 
determines that the fee is not in the best interest of the MMF.\76\ The 
SEC Redemption Provisions are directly applicable to Prime MMFs, and 
Government MMFs may voluntarily elect to impose such provisions 
(``Electing Government MMFs'').\77\
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    \74\ The term ``weekly liquid assets'' is generally defined as: 
(i) cash; (ii) direct obligations of the U.S. Government; (iii) U.S. 
Agency securities that are issued at a discount to the principal 
amount to be repaid at maturity and have a remaining time to 
maturity of 60 days or less; (iv) securities that mature, or are 
subject to a demand feature that is exercisable and payable, within 
5 business days; or (v) amounts receivable and due unconditionally 
within 5 business days on pending sales of portfolio securities. 17 
CFR 270-2a-7(c)(a)(28).
    \75\ 17 CFR 270.2a-7(c)(2)(i).
    \76\ 17 CFR 270.2a-7(c)(2)(ii). (The liquidity fees and 
suspension of redemptions provisions of SEC Rule 2a-7(c)(2) are 
referred to as the ``SEC Redemption Provisions'' in this document.)
    \77\ 17 CFR 270.2a-7(c)(2)(iii).
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    Commission staff subsequently received inquiries from market 
participants concerning the permissibility of investing Customer Funds 
in MMF interests under Regulation 1.25 in light of the SEC Redemption 
Provisions. The Commission's Division of Swap Dealer and Intermediary 
Oversight (``DSIO''), currently known as the Market Participants 
Division (``MPD'') issued CFTC Staff Letter 16-68 \78\ and the 
Commission's Division of Clearing and Risk (``DCR'') issued CFTC Staff 
Letter 16-69 \79\ addressing the SEC Redemption Provisions and the 
investment of Customer Funds in MMFs by FCMs and DCOs, respectively. 
Staff Letter 16-68 \80\ expressed DSIO staff's view that the SEC 
Redemption Provisions conflict with paragraphs (b)(1) \81\ and 
(c)(5)(i) \82\ of Regulation 1.25, as the Redemption Provisions have 
the effect of potentially reducing the liquidity of Prime MMFs and 
Electing Government MMFs. Therefore, in connection with the no-action 
position taken in the staff letter, DSIO indicated that FCMs may no 
longer invest Customer Funds in such MMFs.\83\
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    \78\ CFTC Letter No. 16-68, No-Action Relief with Respect to 
CFTC Regulation 1.25 Regarding Money Market Funds (Aug. 8, 2016) 
(``Staff Letter 16-68''). CFTC Staff Letters are available at the 
Commission's website, www.cftc.gov.
    As noted above, Staff Letter 16-68 was issued by DSIO, which was 
subsequently renamed MPD. For purposes of clarity, the Commission 
notes that the formal division name change is not reflected in the 
proposed amendments to existing Commission regulations and 
appendices discussed in this Proposal, as the Commission plans to 
address the name change in a separate Commission rulemaking. The new 
division name, however, appears in the newly introduced proposed 
appendices H and I to Part 1 and Appendix G to Part 30, as these 
appendices do not currently exist in Commission's regulations and 
would not be addressed in the above-referenced separate rulemaking.
    \79\ CFTC Letter No. 16-69, Staff Interpretation Regarding CFTC 
Part 39 In Light Of Revised SEC Rule 2a-7 (Aug. 8, 2016) (``Staff 
Letter 16-69'').
    \80\ See also CFTC Staff Advisory No. 16-75, Practical 
Application of No-Action Letter No. 16-68 Regarding the Investments 
in Money Market Mutual Funds (Oct. 18, 2016) (``Staff Letter 16-
75'') (discussing the practical applicability and effect of Staff 
Letter 16-68).
    \81\ 17 CFR 1.25(b)(1) (providing that investments of customer 
funds must be highly liquid such that the investments must have the 
ability to be liquidated and converted into cash within one business 
day without material discount in value).
    \82\ 17 CFR 1.25(c)(5)(i) (providing that to qualify as a 
Permitted Investment an MMF must be legally obligated to pay a fund 
investor (including an FCM) by the close of business on the day 
following a redemption request).
    \83\ Staff Letter 16-68 at p. 2.
---------------------------------------------------------------------------

    Staff Letter 16-69 set forth DCR staff's interpretation that 
Regulations 39.15(c) and (e) \84\ prohibit a DCO from holding funds 
belonging to clearing members or their customers in Prime MMFs or 
Electing Government MMFs. DCR staff stated that the SEC Redemption 
Provisions were not consistent with Regulation 39.15(c), which requires 
a DCO to hold funds and assets belonging to clearing members and their 
customers in a manner that minimizes the risk of loss or of delay in 
the access by the DCO to such funds and assets. DCR staff further 
stated that the SEC Redemption Provisions were inconsistent with 
Regulation 39.15(e), which limits a DCO to investing funds and assets 
belonging to clearing members and their customer in instruments with 
minimal credit, market, and liquidity risk. Therefore, FCMs and DCOs 
have not invested customer funds in Prime MMFs or Electing Government 
MMFs since the issuance of the aforementioned Staff Letters in 2016.
---------------------------------------------------------------------------

    \84\ 17 CFR 39.15(c) and (e).
---------------------------------------------------------------------------

    The SEC has recently adopted additional amendments to its MMF 
rules, including amendments revising the SEC Redemption Provisions 
discussed above.\85\ The SEC MMF Reforms are intended to address issues 
observed by the SEC with MMFs in connection with the economic shock 
from the onset of the COVID-19 pandemic. Specifically, the SEC stated 
in March 2020, that concerns about the impact of COVID-19 pandemic led

[[Page 81242]]

investors to reallocate their assets into cash and short-term 
government securities. Certain Prime MMFs, in particular, experienced 
significant outflows, contributing to stress on short-term funding 
markets that resulted in government intervention to enhance the 
liquidity of such markets.\86\ The events of March 2020 led the SEC to 
re-evaluate certain aspects of the regulatory framework applicable to 
MMFs. In considering the potential factors that caused the increased 
redemption activity in March 2020, the SEC noted that, among other 
concerns, fears about the potential imposition of redemption gates and 
liquidity fees based on observed declines in some funds' weekly liquid 
assets appear to have incentivized investors to redeem from certain 
MMFs.\87\ Further, according to the SEC, the presence of a liquidity 
threshold for consideration of fees and gates appears to have affected 
fund managers' behavior, encouraging the sale of long-term portfolio 
assets to maintain weekly liquid assets above the 30 percent threshold. 
The SEC also cited to evidence suggesting that investors are 
particularly sensitive to the potential imposition of redemption gates, 
which fully inhibit the redeemability of MMF shares for the duration of 
the gate.\88\ In the SEC's view, generally supported by commenters' 
feedback, the gates and liquidity fees associated with predictable 
weekly liquid asset triggers proved counterproductive in stemming heavy 
redemptions from certain MMFs.\89\ As such, the SEC concluded that MMFs 
needed better functioning tools for managing through stress while 
mitigating harm to shareholders.\90\
---------------------------------------------------------------------------

    \85\ Money Market Fund Reforms; Form PF Reporting Requirements 
for Large Liquidity Fund Advisers, Technical Amendments to Form N-
CSR and Form N-1A, 88 FR 51404 (Aug. 3, 2023) (``SEC MMF Reforms''). 
The SEC MMF Reforms have an effective date of October 2, 2023.
    \86\ As noted in the SEC MMF Reforms' adopting release, to 
support the short-term funding markets, on March 18, 2020, the 
Federal Reserve, with the approval of the Department of the 
Treasury, established the Money Market Mutual Fund Liquidity 
Facility. The facility provided loans to financial institutions on 
advantageous terms to purchase securities from MMFs that were 
raising liquidity. See SEC MMF Reforms at 51408.
    \87\ SEC MMF Reforms at 51407.
    \88\ Id. at 51409.
    \89\ Id.
    \90\ Id. at 51408.
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    Accordingly, in an effort to improve the resilience of MMFs and 
address the issue of preemptive investor redemption behavior, 
particularly in times of stress, the SEC adopted changes to the fee and 
gate provisions in SEC Rule 2a-7. The SEC MMF Reforms, among other 
things, amend the SEC Redemption Provisions by removing a Prime MMF's 
ability to temporarily suspend participant redemptions and by removing 
an Electing Government MMF's ability to voluntarily retain authority to 
suspend participant redemptions. The SEC MMF Reforms will also require 
Prime MMFs to impose a liquidity fee when the fund experiences net 
redemptions that exceed 5 percent of the fund's net assets, and will 
permit Prime MMFs to impose a discretionary liquidity fee if the fund's 
board of directors determines that a fee is in the best interest of the 
fund.\91\ Government MMFs will not be required to implement the 
mandatory liquidity fee but, consistent with the current SEC Redemption 
Provisions, may choose to rely on the ability to impose discretionary 
liquidity fees.\92\ Such fees, however, are no longer tied to the 
weekly liquid asset threshold.\93\
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    \91\ 17 CFR 270.2a-7(c)(2)(i) and (ii) (as amended by the SEC 
MMF Reforms). In describing the different types of MMFs, the SEC 
distinguishes between Prime MMFs, Government MMFs, and tax-exempt 
(or municipal) MMFs. See SEC MMF Reforms at 51406. Tax-exempt MMFs 
primarily hold obligations of state and local governments and their 
instrumentalities, and pay interest that is generally exempt from 
Federal income tax for individual taxpayers. Within the category of 
Prime and tax-exempt MMFs, the SEC also treats retail and 
institutional funds separately. The new mandatory liquidity fee 
framework will apply to institutional Prime and institutional tax-
exempt MMFs. Tax-exempt MMFs are not specifically discussed in this 
Proposal, though the Commission notes that these funds would be 
subject to the same restrictions as those proposed with respect to 
Prime MMFs. Retail MMFs are held only by natural persons, and as 
such, are not discussed in this Proposal either.
    \92\ 17 CFR 270.2a-7(c)(2)(i)(B) (as amended by the SEC MMF 
Reforms).
    \93\ 17 CFR 270.2a-7(c)(2)(i) (as amended by the SEC MMF 
Reforms).
---------------------------------------------------------------------------

    The SEC's liquidity fee mechanism is designated to address 
shareholder dilution and the potential for first-mover advantage by 
allocating liquidity costs to redeeming investors. Although the 
mechanism may contribute to decreasing outflows from certain MMFs, the 
Commission preliminarily believes that the potential imposition of a 
fee will nonetheless have the effect of reducing the liquidity of such 
funds and will reduce the principal of an FCM's or DCO's investment in 
MMF shares. Therefore, consistent with the positions taken in Staff 
Letter 16-68 and Staff Letter 16-69, the Commission is preliminarily of 
the view that FCMs and DCOs should be allowed to invest Customer Funds 
only in MMFs that will not be subject to a liquidity fee (i.e., 
Government MMFs that do not elect to apply a discretionary liquidity 
fee). Thus, the proposed amendments would remove Prime MMFs and 
Electing Government MMFs, as participants in such funds may be subject 
to liquidity fees in certain circumstances. Therefore, the Commission 
is proposing amendments to Regulation 1.25(a)(1)(vii) that would limit 
the scope of MMFs whose interests qualify as Permitted Investments to 
Government MMFs that are not Electing Government MMFs (``Permitted 
Government MMFs'').\94\ To qualify as a Permitted Government MMF, at 
least 99.5 percent of the fund's investment portfolio must be comprised 
of cash, government securities (i.e., U.S. Treasury securities, 
securities fully-guaranteed as to principal and interest by the U.S. 
Government, and U.S. agency obligations), and/or Repurchase 
Transactions that are fully collateralized by government securities as 
set forth in SEC Rule 2a-7. The Commission preliminarily believes that 
the proposed amendment would ensure that FCMs and DCOs invest Customer 
Funds in instruments that are consistent with the objectives of 
Regulation 1.25 of preserving principal and maintaining liquidity of 
the investments.
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    \94\ See proposed paragraph (a)(1)(iv) of Regulation 1.25. As 
discussed in Section III.A, the Commission is proposing to renumber 
paragraph (a)(1) of Regulation 1.25 to reflect proposed revisions to 
the list of Permitted Investments. The proposed revisions would 
result in the renumbering of current paragraph (a)(1)(vii) to 
paragraph (a)(1)(v) of Regulation 1.25.
---------------------------------------------------------------------------

    The Commission also notes that the proposed amendments to remove 
from the scope of Permitted Investments the interests in MMFs whose 
redemptions may be subject to a liquidity fee would prohibit an FCM 
from depositing proprietary interests in such MMFs into Customer Funds 
accounts. Regulations 1.23(a)(1), 22.2(e)(3)(i), and 30.7(g)(1) permit 
FCMs to deposit proprietary cash and unencumbered securities into the 
accounts of futures customers, Cleared Swaps Customers, and 30.7 
customers, respectively, to help ensure that at all times the accounts 
maintain sufficient funds to cover the amounts due to all customers and 
prevent the accounts from becoming undersegregated.\95\ The securities 
deposited by FCMs, however, must be Permitted Investments as set forth 
in Regulation 1.25.\96\ Therefore, with respect to MMFs, FCMs would 
only be permitted to deposit proprietary interest in Permitted 
Government MMFs in the accounts of futures customers, Cleared Swaps 
Customers, and 30.7 customers under the Proposal.
---------------------------------------------------------------------------

    \95\ 17 CFR 1.23(a)(1), 22.2(e)(3)(i), and 30.7(g)(1).
    \96\ Id.
---------------------------------------------------------------------------

    To eliminate MMFs whose redemptions may be subject to a liquidity 
fee from the scope of Permitted Investments under Regulation 1.25, the 
Commission proposes to revise Regulation 1.25(a)(1)(vii), which would 
be redesignated Regulation 1.25(a)(1)(v) to accommodate other 
amendments to Regulation 1.25(a) discussed in this Proposal, by 
replacing the term ``money

[[Page 81243]]

market mutual fund'' with the term ``government money market funds as 
defined in Sec.  270.2a-7 of this title, provided that the funds do not 
elect to be subject to liquidity fees in accordance with Sec.  270.2a-7 
of this title (government money market fund).'' The Commission also 
proposes to make further conforming changes throughout Regulation 1.25 
and the Appendix to Regulation 1.25 by replacing all references to 
``money market mutual fund'' with ``government money market fund.'' In 
addition, the Appendix to Regulation 1.25 would be redesignated as 
Appendix E to Part 1 to address a change in the rules of the Office of 
the Federal Register regarding the structure of regulatory text to be 
codified in the Code of Federal Regulations.
    Request for comment: The Commission seeks comment on all aspects of 
the Proposal to limit the scope of MMFs whose interests qualify as 
Permitted Investments to certain Government MMFs to address changes to 
SEC rules governing MMFs as described above, including:
    1. Other than concentration limits that are discussed further 
below, should any other safeguards be considered for Government MMFs 
whose interests qualify as Permitted Investments under the Proposal to 
ensure that the credit, liquidity, and market risk of those investments 
is maintained at an acceptable level, particularly in light of the 
history of runs in the Prime MMF markets and the potential for 
contagion?
    2. Regulation 1.25(b)(5)(ii) currently provides that an FCM or a 
DCO may invest Customer Funds in a fund affiliated with that FCM or 
DCO. Should the Commission revise Regulation 1.25(b)(5)(ii) to prohibit 
an FCM or a DCO from investing Customer Funds in affiliated funds? Are 
there other Commission or SEC rules that mitigate any potential 
conflicts of interest that may arise from an FCM or a DCO investing 
Customer Funds in affiliated funds?
2. Foreign Sovereign Debt
    Regulation 1.25(a)(1) currently permits FCMs and DCOs to invest in 
the sovereign debt of the U.S. only. Regulation 1.25 previously 
permitted FCMs and DCOs to invest Customer Funds in the foreign 
sovereign debt of any country, provided that the investments were 
limited to balances owed by FCMs or DCOs to customers denominated in 
the currency of the applicable foreign sovereign debt.\97\ The 
Commission subsequently eliminated all foreign sovereign debt as a 
Permitted Investment in 2011, citing an interest in both simplifying 
the regulation and safeguarding Customer Funds in light of economic 
crises experienced by a number of foreign sovereigns.\98\ The 
Commission, however, also stated that it recognized that the safety of 
sovereign debt issuances of one country may vary greatly from the 
sovereign debt issuances of another country, and that investment in 
certain sovereign debt may be consistent with Regulation 1.25's 
objective of preserving principal and maintaining liquidity of 
investments.\99\ The Commission further stated that it was amenable to 
considering requests for Section 4(c) exemptions to permit FCMs and 
DCOs to invest Customer Funds in foreign sovereign debt. Specifically, 
the Commission stated that it would consider permitting Customer Funds 
to be invested in the foreign sovereign debt of a country to the extent 
that: (i) FCMs or DCOs held balances in segregated accounts owed to 
customers denominated in that country's currency; and (ii) the foreign 
sovereign debt serves to preserve principal and maintain liquidity of 
Customer Funds as required for all other investments of Customer Funds 
under Regulation 1.25.\100\
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    \97\ Regulation 1.25(a)(1) (2005).
    \98\ 2011 Permitted Investments Amendment at 78781.
    \99\ Id. at 78782.
    \100\ Id.
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    As discussed in Section II above, the Commission subsequently 
issued the 2018 Order pursuant to Section 4(c) of the Act granting DCOs 
a limited exemption from the provisions of Regulation 1.25(a) to 
authorize the investment of euro-denominated futures customer funds and 
Cleared Swaps Customer Collateral in euro-denominated sovereign debt 
issued by France or Germany subject to specified terms and 
conditions.\101\ The 2018 Order also provides an exemption from 
Regulation 1.25(d) to permit DCOs to enter into Repurchase Transactions 
involving French or German sovereign debt with: (i) the European 
Central Bank; (ii) the Deutsche Bundesbank; (iii) the Banque de France; 
(iv) a foreign bank located in a country that has adopted the euro as 
its currency and maintains in excess of $1 billion in regulatory 
capital; and (v) a foreign dealer located in a country that has adopted 
the euro as its currency and is subject to regulation by a national 
financial regulator.\102\ The 2018 Order also permits DCOs to hold 
German or French foreign sovereign debt purchased under reverse 
repurchase agreements with depositories located in a country that has 
adopted the euro as its currency and that maintain in excess of $1 
billion in regulatory capital, provided that the DCOs separately 
account for the securities purchased as futures customer funds or 
Cleared Swaps Customer Collateral, as applicable.\103\
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    \101\ 2018 Order at 35244-35245. The 2018 Order does not address 
30.7 customer funds.
    \102\ Condition 3(e) of the 2018 Order at 35245.
    \103\ Condition 3(f) of the 2018 Order at 35245.
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    The 2018 Order also contains certain conditions regarding the 
investment of futures customer funds or Cleared Swaps Customer 
Collateral in French or German sovereign debt. Specifically, the 2018 
Order provides that the dollar-weighted average time-to-maturity of a 
DCO's portfolio of investments in either French or German sovereign 
debt may not exceed 60 days.\104\ In addition, the 2018 Order provides 
that a DCO may not make a direct investment in any French or German 
debt instrument with a remaining time-to-maturity of greater than 180 
calendar days.\105\
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    \104\ Condition 3(c) of the 2018 Order at 35245.
    \105\ Condition 3(d) of the 2018 Order at 35245.
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    For the reasons stated below, the Commission is proposing to amend 
Regulation 1.25 to add Specified Foreign Sovereign Debt to the list of 
Permitted Investments. The proposed addition of Specified Foreign 
Sovereign Debt would be subject to certain conditions that are 
consistent with the criteria specified in the 2011 Permitted 
Investments Amendment \106\ and the conditions specified in the 2018 
Order discussed above. The proposed conditions are also consistent with 
the general objectives set forth in Regulation 1.25 of preserving 
principal and maintaining liquidity of Permitted Investments.\107\
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    \106\ See 2011 Permitted Investments Amendment at 78782 (stating 
that the Commission would consider permitting foreign sovereign debt 
investments to the extent that: (i) the petitioner has balances in 
segregated accounts owed to customers or clearing member FCMs in 
that country's currency; and (ii) the sovereign debt serves to 
preserve principal and maintain liquidity of customer funds as 
required for all other investments of customer funds under 
Regulation 1.25).
    \107\ 17 CFR 1.25(b).
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    The proposed amendments would expand the exemptive relief provided 
in the 2018 Order by adding the debt of Canada, Japan, and the United 
Kingdom, in addition to that of France and Germany, to the list of 
Permitted Investments under Regulation 1.25, and by allowing FCMs, in 
addition to DCOs, to invest in the foreign sovereign debt.\108\ FCMs 
collectively held an aggregate of a U.S. dollar equivalent of $51 
billion of Customer Funds denominated in Canadian dollars

[[Page 81244]]

(``CAD''), euros (``EUR''), Japanese yen (``JPY''), and Great British 
pounds (``GBP'') on August 15, 2023. The $51 billion represented 
approximately 10 percent of the total $490 billion of Customer Funds 
held by FCMs in segregated accounts on August 15, 2023.\109\
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    \108\ Proposed Regulation 1.25(a)(1)(vi).
    \109\ The $490 billion represents the U.S. dollar equivalent of 
the total value of margin assets held by FCMs for futures customers, 
Cleared Swaps Customers, and 30.7 customers as reported to CME as of 
August 15, 2023. The breakdown by currency was as follows: CAD 14 
billion; EUR 18 billion; GBP 3 billion; and JPY 16 billion. Some of 
these funds may have been posted by the FCMs to DCOs as margin 
collateral.
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    Having considered the Joint Petition and analyzing the instruments' 
characteristics, the Commission believes that including Specified 
Foreign Sovereign Debt as a Permitted Investment would be consistent 
with the overall objectives set forth in Regulation 1.25 of preserving 
principal and maintaining liquidity of Customer Funds. The Joint 
Petition states that the Specified Foreign Sovereign Debt has credit 
and liquidity characteristics that are comparable to the credit and 
liquidity characteristics of U.S. Treasury securities. Specifically, 
the Joint Petition states that the credit default swaps of Canada, 
France, Germany, Japan, and the United Kingdom have relatively narrow 
spreads similar to the credit default spread of the United States.\110\ 
With respect to liquidity, the Joint Petition states that there were 
substantial amounts of outstanding marketable Canadian, French, German, 
Japanese, and United Kingdom debt and provided data on the amount of 
outstanding debt in instruments with time-to-maturity of two years or 
less issued by each relevant jurisdiction.\111\
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    \110\ See Joint Petition at pp. 6-7.
    \111\ See Appendix A to Joint Petition and Supplement to Joint 
Petition at p. 1 (indicating that the outstanding debt in 
instruments with time-to-maturity of two years or less issued by 
Canada, France, Germany, Japan, and the United Kingdom, based on 
information available on Bloomberg as of July 11, 2023, was equal to 
the USD equivalence of $447 billion, $594 billion, $557 billion, 
$2.6 trillion, and $534 billion, respectively). See also Bank of 
International Settlements' Debt Securities Statistics (including 
data as of the end of 2021), available here: https://www.bis.org/statistics/secstats.htm?m=2615 and 2021 Survey on Liquidity in 
Government Bond Secondary Markets, Organization for Economic Co-
operation and Development, available here: https://www.oecd-ilibrary.org/sites/b2d85ea7-en/1/4/2/index.html?itemId=/content/publication/b2d85ea7-en&_csp_=e3b7b0a57d02c41c597306342c85c8b6&itemIGO=oecd&itemContentType=book (confirming that Specified Foreign Sovereign Debt instruments 
presented good liquidity characteristics in 2021).
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    The Commission also analyzed the volatility of the Specified 
Foreign Sovereign Debt and observed, based on the available data, that 
the price risk of the relevant foreign sovereign debt is comparable to 
that of U.S. Treasury securities. Specifically, using one-year 
sovereign debt instruments yield data for the period September 21, 2018 
to September 20, 2023, the Commission notes that the standard deviation 
of daily yield change for one-year U.S. Treasury bills was 9 BPS, 
whereas the same measure for Canadian, French, German, Japanese, and 
United Kingdom one-year debt instruments ranged from 1 to 7 BPS.\112\ 
The Commission also notes that holding high-quality foreign sovereign 
debt may pose less risk to Customer Funds than the credit risk of 
commercial banks through unsecured bank demand deposit accounts.\113\
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    \112\ The Commission reviewed yield data available through 
Bloomberg, a proprietary financial data provider, for 1-year 
sovereign debt instruments issued by Canada, France, Germany, Japan, 
the United Kingdom, and the U.S.
    \113\ The Commission discussed the preferability from a risk 
management perspective of investing foreign currency in high quality 
foreign sovereign debt relative to the credit risk posed by 
unsecured demand deposit accounts at commercial banks in issuing the 
2018 Order permitting DCOs to invest futures customer funds and 
Cleared Swaps Customer Collateral in French and German sovereign 
debt. See 2018 Order at 35245-35246.
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    Furthermore, the Commission believes that the proposed amendments 
would provide FCMs and DCOs with an investment option to manage the 
potential foreign exchange risk that may arise in their administration 
and investment of Customer Funds. Specifically, the Commission notes 
that absent the ability to invest Customer Funds in identically-
denominated sovereign debt securities, an FCM or a DCO seeking to 
invest customer foreign currency deposits would need to convert the 
currencies to a U.S. dollar-denominated asset, which would introduce 
potential foreign currency fluctuation risk to the FCMs and DCOs.\114\
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    \114\ To reach this conclusion, the Commission considered, among 
other factors, the daily volatility of exchange rates of the 
relevant currency pairs. Specifically, based on data from the 
Federal Reserve Bank of St. Louis' FRED database, the Commission 
notes that for the period from September 2018 to September 2023, the 
standard deviation of the daily percentage change of exchange rate 
between the relevant currency pairs was 0.45 percent for the CAD/USD 
pair, 0.46 percent for the EUR/USD pair, 0.61 percent for the GBP/
USD pair, and 0.55 percent for the JPY/USD pair, indicating a 
currency fluctuation that is an additional risk factor with respect 
to the return on investment of customer foreign currency deposits in 
U.S. dollar-denominated assets. The Commission also recognized 
foreign currency fluctuation risk in the 2000 Permitted Investments 
Amendment, which added foreign sovereign debt to the list of 
Permitted Investments for the first time. See 2000 Permitted 
Investments Amendment at 78003.
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    Based on these considerations, the Commission proposes to expand 
the list of Permitted Investments to include Specified Foreign 
Sovereign Debt. To ensure that investments in Specified Foreign 
Sovereign Debt remain consistent with Regulation 1.25's general 
objectives of preserving principal and maintaining liquidity, and with 
the criteria specified in the 2011 Permitted Investments Amendment for 
adding foreign sovereign debt as a Permitted Investment, the Commission 
is proposing to permit the investment of Customer Funds in such debt 
subject to specified conditions, which are discussed below.
    First, under the Proposal, an FCM or a DCO would be permitted to 
invest in the foreign sovereign debt of only Canada, France, Germany, 
Japan, and the United Kingdom.\115\ The five jurisdictions are among 
the seven largest economies in the International Monetary Fund's 
classification of advanced economies.\116\ Each country is also a 
member of the Group of 7 (``G7''), which represents the world's largest 
industrial democracies, and qualifies as a ``money center country'' as 
the term is defined in Regulation 1.49(a)(1).\117\ Additionally, the 
currencies of the five jurisdictions represent a material portion of 
the total amount of non-U.S. dollar-denominated obligations that FCMs 
owe to customers, and amount to approximately 10 percent of the total 
Customer Funds held by FCMs and DCOs.\118\
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    \115\ Proposed Regulation 1.25(a)(1)(vii).
    \116\ See Statistical Appendix to the World Economic Outlook, 
April 2023, International Monetary Fund, available here: https://www.imf.org/en/Publications/WEO/Issues/2023/04/11/world-economic-outlook-april-2023.
    \117\ 17 CFR 1.49(a). In the absence of customer instructions to 
the contrary, Regulation 1.49(c) limits permissible locations of 
depositories of Customer Funds to the U.S., the country of origin of 
the currency, and a ``money center country.'' The concept of ``money 
center country'' is defined to mean Canada, France, Italy, Germany, 
Japan, and the United Kingdom, and is intended to correspond, 
together with the U.S., to the list of G7 countries. See 
Denomination of Customer Funds and Location of Depositories, 68 FR 
5551 (Feb. 4, 2003) at 5546.
    \118\ Based on data contained in the Segregation Investment 
Detail Reports filed by FCMs with the Commission as of August 15, 
2023. The reports contain detailed listings of the Permitted 
Investments held by each FCM. See 17 CFR 1.32(f), 17 CFR 22.2(g)(5), 
and 17 CFR 30.7(l)(5).
---------------------------------------------------------------------------

    Second, an FCM or a DCO would be permitted to invest in the 
Specified Foreign Sovereign Debt of a country only to the extent that 
the FCM or a DCO has balances in accounts owed to customers denominated 
in the country's currency.\119\ Prior to the 2011 Permitted Investments 
Amendment, when Regulation 1.25 permitted the investment of Customer 
Funds in foreign sovereign debt, the regulation

[[Page 81245]]

included a similar restriction.\120\ As noted above, the Commission 
explained that an FCM or a DCO seeking to invest deposits of foreign 
currencies, absent the ability to invest in identically-denominated 
sovereign debt securities, would need to convert the foreign currencies 
to a U.S. dollar-denominated asset, which would increase the FCM's or 
DCO's exposure to foreign currency fluctuation risk.\121\ The 
Commission believes the restriction is appropriate as it balances the 
need to ensure the safety of Customer Funds with the Commission's 
desire to provide a degree of investment flexibility to FCMs and 
DCOs.\122\
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    \119\ Proposed Regulation 1.25(a)(1)(vii)(A) and (B).
    \120\ See 2000 Permitted Investments Amendment at 65 FR 78010, 
which provided in paragraph (a)(1)(vii) of Regulation 1.25 that an 
FCM or a DCO could invest in debt of a foreign sovereign subject to 
certain conditions, including that the FCM or DCO had balances owed 
to customers denominated in that country's currency.
    \121\ Id. at 78003.
    \122\ As discussed supra, prior to 2011, the Commission 
permitted an FCM or a DCO to invest Customer Funds in foreign 
sovereign debt subject to the condition that the FCM or DCO held 
balances owed to customers denominated in the currency of the 
foreign country. In the wake of the 2008 financial crisis, the 
Commission eliminated foreign sovereign debt from the list of 
permitted investments noting at the time that ``in many cases, the 
potential volatility of foreign sovereign debt in the current 
economic environment and the varying degrees of financial stability 
of different issuers make foreign sovereign debt inappropriate for 
hedging foreign currency risk.'' 2011 Permitted Investments 
Amendment at 78781. Yet it recognized that ``the safety of sovereign 
debt issuances of one country may vary greatly from those of 
another, and that investment in certain sovereign debt might be 
consistent with the objectives of preserving principal and 
maintaining liquidity, as required by Regulation 1.25.'' Id. at 
78782. For the reasons discussed above, the Commission is proposing 
to reinstate certain foreign sovereign debt consistent with the 
Commission's expressed statement in the 2011 Permitted Investments 
Amendment that it would consider permitting such investments 
provided that the investments: (i) are limited to balances owed to 
customers denominated in the currency of the applicable foreign 
sovereign, and (ii) serve to preserve the principal and maintain the 
liquidity of Customer Funds. See id. at 78782. The Proposal is also 
consistent with the Commission's approach in the 2018 Order of 
permitting DCOs to invest in the sovereign debt of France and 
Germany to the extent such foreign sovereign debt satisfies specific 
criteria demonstrating consistency with the credit, liquidity, and 
volatility of short-term U.S. Treasury securities.
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    Third, the Commission is proposing to permit FCMs and DCOs to 
invest in Specified Foreign Sovereign Debt provided that the two-year 
credit default spread of the issuing sovereign is 45 BPS or less.\123\ 
This condition is consistent with the 45 BPS two-year credit default 
spread limit specified by the Commission in the 2018 Order permitting 
DCOs to invest futures customer funds and Cleared Swaps Customer 
Collateral in French and German sovereign debt.\124\ The Commission set 
the cap of 45 BPS in the 2018 Order based on a historical analysis of 
the two-year credit default spread of the U.S. (``U.S. Spread'').\125\ 
Forty-five BPS was, at the time, approximately two standard deviations 
above the mean U.S. Spread over the preceding eight years.\126\
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    \123\ Proposed Regulation 1.25(f)(3).
    \124\ Condition 3(b) of the 2018 Order at 35245.
    \125\ See 2018 Order at 35243.
    \126\ In 2018, the Commission reviewed the daily U.S. Spread 
from July 3, 2009 to July 3, 2017. Over that time period, the U.S. 
Spread had a mean of approximately 26.5 BPS and a standard deviation 
of approximately 9.72 BPS. Forty-five BPS were approximately two 
standard deviations above the 26.5 mean.
---------------------------------------------------------------------------

    The Commission observed that over that eight-year period of July 3, 
2009 to July 3, 2017, the U.S. Spread was 45 BPS or less approximately 
95 percent of the time and exceeded 45 BPS approximately 5 percent of 
the time. During the same period, the two-year German spread exceeded 
45 BPS approximately 6 percent of the time and the two-year French 
spread exceeded 45 BPS approximately 25 percent of the time, with all 
exceedances occurring between July 2009 and September 2012, in the 
aftermath of the 2008 financial crisis and the European sovereign debt 
crisis.\127\
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    \127\ See 2018 Order at 35243.
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    During the more recent period of September 21, 2018 to September 
20, 2023, the U.S. Spread had a mean of approximately 16.4 BPS,\128\ 
which was lower than the mean spread of 26.5 BPS for the July 3, 2009 
to July 3, 2017 period. In that same time period, the two-year credit 
default swap spread of the sovereigns issuing the Specified Foreign 
Sovereign Debt did not exceed 45 BPS. Based on these more recent U.S. 
Spread and Foreign Sovereign Debt data, the Commission preliminarily 
believes that the cap of 45 BPS established in the 2018 Order continues 
to be set at an appropriate level.\129\
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    \128\ Based on an assessment conducted by CFTC staff on 
September 20, 2023.
    \129\ Using the daily U.S. Spread data from July 3, 2009 to July 
3, 2017 and assuming the two-year credit default spread follows a 
normal distribution, the Commission estimated that there was less 
than 2.5 percent likelihood that the U.S. credit default spread 
would exceed 45 BPS over a two-year period. In addition, the 
Commission's estimate, based on the daily U.S. Spread data from 
September 21, 2018 to September 20, 2023, indicates that there is 
less than 1 percent likelihood, under both normal and empirical 
distributions, that the two-year credit default swap spread of the 
sovereigns issuing Specified Foreign Sovereign Debt would exceed 45 
BPS. Therefore, the Commission preliminarily believes that 45 BPS 
represents an appropriate threshold for countries whose debt may 
qualify as a Permitted Investment under Regulation 1.25.
---------------------------------------------------------------------------

    Under the Proposal, if the credit default spread of a subject 
country were to exceed the 45 BPS cap, FCMs and DCOs would not be 
permitted to make new investments in the country's Specified Foreign 
Sovereign Debt.\130\ In addition, if the credit default spread exceeded 
the 45 BPS cap, FCMs and DCOs would be required to discontinue 
investing Customer Funds in that sovereign's debt through Repurchase 
Transactions as soon as practicable under the circumstances.\131\ The 
FCMs or DCOs would not, however, be required to immediately divest 
their current investments in Specified Foreign Sovereign Debt, given 
the risks associated with selling assets into a potentially volatile 
market or having to immediately locate depositories for funds that had 
been invested in a Repurchase Transaction with limited notice. The 
prohibition on new investments would reduce the exposure to Customer 
Funds by avoiding the risk of default on the Specified Foreign 
Sovereign Debt. In situations where the 45 BPS cap is exceeded, the 
Commission preliminarily believes that it would be more appropriate for 
FCMs and DCOs to hold Customer Funds denominated in foreign currency in 
cash or invest the foreign currency in U.S. dollar-denominated 
Permitted Investments instead of Specified Foreign Sovereign Debt. In 
addition, the length to maturity condition discussed immediately below 
would mitigate price risks to the Customer Funds that might arise from 
a country's two-year credit default spread exceeding the 45 BPS limit.
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    \130\ Proposed Regulation 1.25(f)(3)(i).
    \131\ Proposed Regulation 1.25(f)(3)(ii).
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    Fourth, the Commission is proposing to limit the time-to-maturity 
of investments in Specified Foreign Sovereign Debt. Specifically, under 
the Proposal, an FCM or a DCO would be required to ensure that the 
dollar-weighted average time-to-maturity of its portfolio of 
investments in the Specified Foreign Sovereign Debt, as the average is 
computed under Rule 2a-7 under the Investment Company Act of 1940 
(``SEC Rule 2a-7'') \132\ on a country-by-country basis, does not 
exceed 60 calendar days.\133\ Consistent with the position taken in the 
2018 Order,\134\ if the portfolio includes Specified Foreign Sovereign 
Debt instruments that have been acquired under a reverse repurchase 
agreement, the FCM or DCO would be permitted to use the maturity

[[Page 81246]]

of the reverse repurchase agreement to compute the dollar-weighted 
average time-to-maturity of the portfolio.\135\ This approach takes 
into account the expected resale of the instruments, which would be 
scheduled to occur within one business day or on demand as required by 
Regulation 1.25(d)(6).\136\ Conversely, if the FCM or DCO sells 
Specified Foreign Sovereign Debt instruments under a repurchase 
agreement, the FCM or DCO would be required to include the instruments 
in the calculation of the dollar-weighted average based on the 
remaining time-to-maturity of each instrument sold, to account for the 
expected repurchase of such instruments.\137\ In addition, an FCM or a 
DCO would not be permitted to make direct investments in any Specified 
Foreign Sovereign Debt instrument that had a remaining maturity greater 
than 180 calendar days.\138\
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    \132\ 17 CFR 270.2a-7.
    \133\ Proposed Regulation 1.25(f)(1). Under the Proposal, the 
dollar-weighted average of the time-to-maturity would be computed 
pursuant to SEC Rule 2a-7 (17 CFR 270.2a-7), consistent with the 
general time-to-maturity provision in Regulation 1.25(b)(4)(i).
    \134\ 2018 Order at 35244.
    \135\ Consistent with SEC Rule 2a-7(i)(6), the reverse 
repurchase agreement would be deemed to have a maturity equal to the 
period remaining until the date on which the resale of the 
underlying instruments is scheduled to occur, or, where the 
agreement is subject to demand, the notice period applicable to a 
demand for the resale of the instruments. See proposed Regulation 
1.25(f)(1).
    \136\ 17 CFR 1.25(d)(6).
    \137\ Proposed Regulation 1.25(f)(1).
    \138\ Proposed Regulation 1.25(f)(2).
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    Arguing that these restrictions, which are analogous to the 
restrictions in the 2018 Order, would be too limiting, the Petitioners 
requested that the Commission revise the regulations to provide a six-
month dollar-weighted average time-to-maturity for the portfolio of 
foreign sovereign debt, and a maximum two-year remaining time-to-
maturity for each foreign sovereign debt instrument.\139\ The 
Commission, however, notes that the proposed restrictions are intended 
to ensure that an FCM's or DCO's portfolio of Specified Foreign 
Sovereign Debt is comprised of sovereign debt instruments that mature 
within a relatively short period of time. The short time-to-maturity 
requirement is expected to assist FCMs and DCOs in managing and 
mitigating potential market and/or credit risk by providing FCMs and 
DCOs with the option of holding the debt instruments to maturity during 
periods of market stress and price volatility rather than selling the 
debt instruments at potentially significant discounts. This option may 
be particularly valuable in periods of significant interest rate 
movements, which could exacerbate market risk in sovereign debt 
markets. In that regard, the Commission preliminarily views the 
relatively short time-to-maturity as an essential risk-managing feature 
in the context of investments in Specified Foreign Sovereign Debt and 
preliminarily believes that the 60-day dollar-weighted average time-to-
maturity restriction and the 180-day remaining maturity restriction are 
more appropriate than the six months and two years respective limits 
requested in the Joint Petition.
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    \139\ Joint Petition at pp. 5-6 (asserting that the new issuance 
supply of the Specified Foreign Sovereign Debt meeting the 
restrictions is limited and would be thinly traded/quoted).
---------------------------------------------------------------------------

    The Commission also believes that the proposed time-to-maturity 
requirements would not be as limiting as asserted in the Joint Petition 
given that the new issuance supply of the Specified Foreign Sovereign 
Debt meeting the proposed restrictions appears adequate to satisfy the 
demand for the investment of Customer Funds in the relevant 
instruments.\140\ In addition, the use of the maturity of reverse 
repurchase agreements in the calculation of the dollar-weighted average 
of the portfolio of investments in Specified Foreign Sovereign Debt 
would reduce the average time-to-maturity of the portfolio as a whole. 
As noted in the request for comment below, the Commission is explicitly 
seeking comment on its preliminary analysis.
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    \140\ Data made available by the Bank of Canada, l'Agence France 
Tr[eacute]sor (the French Finance Agency), the Bundesrepublik 
Deutschland Finanzagentur (the German Finance Agency), the Japan 
Ministry of Finance, and the United Kingdom Debt Management Office 
indicate that the five jurisdictions issue a sizable amount of debt 
securities with time-to-maturity of less than 180 days on a frequent 
basis. Specifically, in July 2023, Canada auctioned approximately 
USD 22 billion, France auctioned approximately USD 18 billion, 
Germany auctioned approximately USD 10 billion, Japan auctioned 
approximately USD 15 billion, and the United Kingdom auctioned 
approximately USD 34 billion in debt instruments with time-to-
maturity of six months or less (see Canadian Treasury bills auction 
results at https://www.bankofcanada.ca/markets/government-securities-auctions/calls-for-tenders-and-results/regular-treasury-bills/; French BTF auction history at https://www.aft.gouv.fr/en/dernieres-adjudications); German Bubills issuance results at https://www.deutsche-finanzagentur.de/en/federal-securities/issuances/issuance-results (refer to reopening of 12-month Bubills with 
residual maturities between three and six months); Japanese T-bills 
auction results at https://www.mof.go.jp/english/policy/jgbs/auction/past_auction_results/index.html; and United Kingdom Treasury 
Bill tender results at https://www.dmo.gov.uk/data/treasury-bills/tender-results/).
---------------------------------------------------------------------------

    The Commission is also proposing to amend Regulation 1.25(b)(4)(i), 
which provides that except for investments in MMFs, the dollar-weighted 
average time-to-maturity of an FCM's or a DCO's portfolio of Permitted 
Investments, as computed under SEC Rule 2a-7, may not exceed 24 months. 
The proposed amendment would revise Regulation 1.25(b)(4)(i) to exclude 
Specified Foreign Sovereign Debt from the calculation of the dollar-
weighted average time-to-maturity of the portfolio.\141\ The Commission 
is proposing this amendment as Specified Foreign Sovereign Debt would 
be subject to its own dollar-weighted average time-to-maturity limit of 
60 calendar days, which is substantially shorter than the two-year 
dollar-weighted average time-to-maturity requirement for the overall 
portfolio required by Regulation 1.25(b)(4)(i).
---------------------------------------------------------------------------

    \141\ Proposed revised Regulation 1.25(b)(4)(i).
---------------------------------------------------------------------------

    To allow Regulation 1.25(a)(2) to effectively incorporate Specified 
Foreign Sovereign Debt as a Permitted Investment that FCMs and DCOs 
would be able to buy or sell pursuant to Repurchase Transactions, the 
Commission also proposes to expand the permissible counterparties and 
depositories under Regulation 1.25(d)(2) and (7) to include certain 
foreign entities. Regulation 1.25(d)(2) limits counterparties with 
which an FCM or a DCO may enter into a Repurchase Transaction to a 
Section 3(a)(6) \142\ bank, a domestic branch of a foreign bank insured 
by the FDIC, a securities broker or dealer, or a government securities 
dealer registered with the SEC or which has filed a notice pursuant to 
Section 15C(a) of the Government Securities Act of 1986.\143\ 
Regulation 1.25(d)(7) further requires an FCM and a DCO to hold the 
securities transferred to the FCM or DCO under a reverse repurchase 
agreement, in a safekeeping account held with a bank as referred to in 
Regulation 1.25(d)(2), a Federal Reserve Bank, a DCO, or the Depository 
Trust Company.
---------------------------------------------------------------------------

    \142\ For a definition of Section 3(a)(6) bank, see supra note 
51.
    \143\ Public Law 99-571, 100 Stat. 3208 (Oct. 28, 1986).
---------------------------------------------------------------------------

    As a practical matter, absent amendment to these counterparty and 
depository provisions, an FCMs' and DCOs' ability to buy and sell 
Specified Foreign Sovereign Debt pursuant to Repurchase Transactions 
would be restricted given that participants in the foreign sovereign 
debt Repurchase Transactions market are predominantly non-U.S. 
entities. The Commission therefore proposes to add foreign banks and 
foreign brokers or dealers meeting certain requirements, as well as the 
European Central Bank and the central banks of Canada, France, Germany, 
Japan, and the United Kingdom, to the list of permitted 
counterparties.\144\ To be deemed a permitted counterparty, a foreign 
bank would have to qualify as a depository under Regulation 1.49(d)(3)

[[Page 81247]]

by holding regulatory capital in excess of $1 billion, and would also 
have to be located in a money center country as defined in Regulation 
1.49(a)(1) (i.e., Canada, France, Italy, Germany, Japan, and the United 
Kingdom) or in another jurisdiction that has adopted the currency of 
the permitted foreign sovereign debt. Similarly, a foreign broker or 
dealer would have to be located in a money center country and be 
regulated by a foreign financial regulator. The proposed provisions are 
designed to ensure that the counterparties would be regulated entities 
comparable to those counterparties already permitted under Regulation 
1.25(d)(2), and are consistent with the counterparty conditions set 
forth in the 2018 Order.\145\
---------------------------------------------------------------------------

    \144\ Proposed Regulation 1.25(d)(2).
    \145\ See 2018 Order, Condition (e) at 35245.
---------------------------------------------------------------------------

    With respect to permitted depositories, the Commission proposes to 
permit Specified Foreign Sovereign Debt instruments transferred to an 
FCM or a DCO under a reverse repurchase agreement to be held with a 
foreign bank that qualifies as a permitted depository under Regulation 
1.49.\146\ The proposed provision is designed to ensure that any 
additional depositories would be comparable to those already permitted 
under Regulation 1.25(d)(7), and subject to the conditions for 
depositories in the 2018 Order.\147\ The Commission notes that 
mandating the safekeeping of foreign securities purchased through 
reverse repurchase agreements with a U.S. custodian as required under 
the current regulation may be inefficient or impractical.
---------------------------------------------------------------------------

    \146\ Proposed Regulation 1.25(d)(7).
    \147\ See 2018 Order, Condition (f) at 35245.
---------------------------------------------------------------------------

    Request for Comment. The Commission seeks comment on all aspects of 
the Proposal relating to the expansion of the list of Permitted 
Investments to include Specified Foreign Sovereign Debt, including:
    3. Under the Proposal, the list of Permitted Investments set forth 
in Regulation 1.25(a) would be expanded to include sovereign debt 
issued by Canada, France, Germany, Japan, and the United Kingdom, 
subject to specified conditions. Although these Specified Foreign 
Sovereign Debt instruments present credit and liquidity characteristics 
that are similar to those of currently Permitted Investments, such debt 
may also be less liquid than U.S. government securities. Do investments 
in Specified Foreign Sovereign Debt raise any liquidity issues or 
concerns? If so, please explain your responses and provide data if 
possible.
    4. The Proposal would prohibit investments of Customer Funds in 
Specified Foreign Sovereign Debt if the two-year credit default swap 
spread of the issuing sovereign exceeds 45 BPS. Should the Commission 
consider a higher or lower credit default spread limit? If so, please 
specify the appropriate credit default spread and explain why it is 
necessary and appropriate. Should the investment prohibition be 
contingent on the breach of the 45 BPS threshold occurring a certain 
number of times within a specified time period or for a particular 
duration within a specified time period? Should there be a ``cooling-
off'' period before the Specified Foreign Sovereign Debt may be used 
again as a Permitted Investment under Regulation 1.25? For instance, 
should the Specified Foreign Sovereign Debt be subject to a requirement 
that the CDS spread be below 45 BPS for a minimum period of time (e.g., 
3 months) before it could be reinstated as an eligible Permitted 
Investment?
    5. The Proposal would limit the time-to-maturity of investments in 
Specified Foreign Sovereign Debt to a 60-day maximum dollar-weighted 
average time-to-maturity of the portfolio of investments and a 180-day 
maximum remaining time-to-maturity of individual direct investments. 
The Petitioners requested that the limits be set at six months and two 
years, respectively. Should the Commission consider extending the time-
to-maturity limits as requested? If yes, please provide analysis and 
appropriate market data supporting the extension.
3. Interests in U.S. Treasury Exchange-Traded Funds
    ETFs are collective investment vehicles that issue redeemable 
securities that are also traded at the market price on national 
securities exchanges.\148\ The Commission proposes to add interests in 
ETFs to the list of Permitted Investments under Regulation 1.25, 
subject to specified proposed conditions discussed below.
---------------------------------------------------------------------------

    \148\ Invesco Petition at p. 5. See also, Exchange-Traded Funds, 
84 FR 57162 (Oct. 24, 2019) (``SEC ETFs Release'') at 57164.
---------------------------------------------------------------------------

    The SEC adopted Rule 6c-11 \149\ under the Investment Company Act 
of 1940 in 2019, creating a regulatory framework that allows ETFs 
meeting certain requirements to operate as investment companies under 
the Investment Company Act of 1940 without having to obtain an 
exemptive order from the SEC as previously required.\150\ Like other 
investment companies, an ETF pools the assets of multiple investors and 
invests those assets according to a set investment objective and 
principal investment strategies.\151\ Each share of an ETF represents 
an undivided fractional interest in the underlying assets of the 
ETF.\152\ Similar to indexed mutual funds, many ETFs are designed to 
passively track a particular market index, investing in all or a 
representative sample of the instruments included in the index and 
aiming to achieve the same return as the tracked index.\153\ Other ETFs 
are actively managed, with portfolio managers buying and selling stocks 
in accordance with an investment strategy rather than passively 
tracking an index.\154\
---------------------------------------------------------------------------

    \149\ 17 CFR 270.6c-11 (``SEC Rule 6c-11'').
    \150\ See generally SEC ETFs Release.
    \151\ Invesco Petition at p. 5. See also, SEC ETFs Release at 
57164.
    \152\ Id.
    \153\ See ``Exchange-Traded Funds,'' publication by FINRA, 
available at: https://www.finra.org/investors/learn-to-invest/types-investments/investment-funds/exchange-traded-fund.
    \154\ Id.
---------------------------------------------------------------------------

    As an open-end management company,\155\ similar to a mutual 
fund,\156\ an ETF continuously offers its shares for sale. Unlike 
mutual funds, however, ETFs do not sell shares to, or redeem shares 
from, investors directly. Instead, ETFs issue (and redeem) shares to 
(and from) ``authorized participants''--market intermediaries that have 
a contractual arrangement with the ETF (or its distributor) and are 
members or participants of a clearing agency registered with the SEC--
in blocks called ``creation units.'' \157\ Authorized participants play 
a key role for ETF shares as they are the only investors that are 
allowed to transact directly with the ETF.\158\ Authorized participants 
must: (i) be an SEC-registered broker or dealer or other securities 
market participant (such as a bank or other financial institution that 
is not required to register as a broker or dealer to engage in 
securities transactions); (ii) be a full participating member of the 
National Securities Clearing Corporation and the Depository Trust 
Company; and (iii) have entered

[[Page 81248]]

into an authorized participant agreement with the ETF (and potentially 
other parties, such as the ETF's sponsor, distributor or transfer 
agent).\159\
---------------------------------------------------------------------------

    \155\ Some ETFs may also be structured as unit-investment 
trusts. See e.g., SPDR[supreg] S&P 500[supreg] ETF Trust and 
SPDR[supreg] Dow Jones Industrial Average ETF Trust. The regulatory 
framework set forth by SEC Rule 6c-11, however, applies only to ETFs 
that are organized as open-end management investment companies. See 
17 CFR 270.6c-11.
    \156\ A ``mutual fund'' is a type of open-end management 
company, meaning that investors can purchase and redeem shares in 
the fund on a daily basis based on the NAV of their shares. Mutual 
funds pool the money of many investors to purchase a range of 
securities to meet specified investment objectives.
    \157\ See 17 CFR 270.6c-11 (defining ``exchange-traded fund'').
    \158\ Invesco Petition at p. 5.
    \159\ Id.
---------------------------------------------------------------------------

    An authorized participant may act as a principal for its own 
account or as an agent for others when purchasing or redeeming creation 
units.\160\ Purchases and redemptions of ETF shares by an authorized 
participant are referred to as ``primary market transactions'' and 
occur at the next-calculated NAV. As noted above, ETF shares can also 
be purchased and sold in the secondary market at market prices that may 
reflect a discount or premium to the ETF's NAV.
---------------------------------------------------------------------------

    \160\ See SEC ETFs Release at 57164; see also David Abner, The 
ETF Handbook: How to Value and Trade Exchange-Traded Funds, 2nd ed. 
(2016).
---------------------------------------------------------------------------

    As part of its periodic reassessment of the list of Permitted 
Investments of Customer Funds and in consideration of industry input 
provided by the Joint Petition and the Invesco Petition, the Commission 
is proposing to include shares in U.S. Treasury ETFs to the list of 
Permitted Investments under Regulation 1.25. More specifically, in 
assessing the potential expansion of the list of Permitted Investments, 
the Commission has considered statements emphasizing the liquidity of 
U.S. Treasury ETF shares and the diversification opportunity that such 
ETFs provide for Customer Funds. In particular, as discussed in other 
parts of the Proposal, the Petitioners note that U.S. Treasury ETFs 
have characteristics that may be consistent with those of Permitted 
Investments and may provide FCMs and DCOs with an opportunity to 
further diversify their investments of Customer Funds.\161\ Similarly, 
the Invesco Petition focused on the fact that U.S. Treasury ETFs invest 
in a sub-set of the same high-quality liquid instruments that are 
Permitted Investments under Regulation 1.25 (i.e., U.S. government 
securities).\162\ The Invesco Petition also notes that ETFs, as 
registered investment companies whose shares are registered under the 
Securities Act and Exchange Act, must comply with a number of SEC 
financial reporting requirements and liquidity risk management program 
requirements.\163\ Finally, the Invesco Petition asserts that the 
design and characteristics such as price and investment transparency, 
and intra-day trading and liquidity, are additional features that help 
make interests in U.S. Treasury ETFs a safe and efficient vehicle for 
investment of Customer Funds.\164\
---------------------------------------------------------------------------

    \161\ See Joint Petition at pp. 8-9.
    \162\ Invesco Petition at p. 2.
    \163\ Id. at pp. 6-7. Financial requirements include: (i) annual 
shareholder report, including audited financial statements (17 CFR 
270.30e-1); (ii) semi-annual shareholder report, including unaudited 
financial statements (17 CFR 270.30e-1); (iii) monthly portfolio 
statistics and holdings filed quarterly (17 CFR 270.30b1-9); (iv) 
annual census report containing financial-related information (17 
CFR 270.30a-1); and (v) periodic reports with respect to portfolio 
liquidity and derivatives use (17 CFR 270.30b1-10). With respect to 
liquidity risk management, SEC regulations require open-ended 
management investment companies, including ETFs, to adopt and 
implement a liquidity risk management program that is reasonably 
designed to assess and manage liquidity risk, which is defined to 
mean the risk that the fund could not meet redemption requests to 
redeem shares issued by the fund without significant dilution of 
remaining investors' interests in the fund (17 CFR 270.22e-4).
    \164\ Invesco Petition at p. 2.
---------------------------------------------------------------------------

    Further, the Commission has taken into consideration the limited 
range of investments that meet the requirements of Regulation 1.25. In 
that regard, the Commission notes that as a result of various 
regulatory reforms, discussed in this Federal Register release, several 
asset classes included in Regulation 1.25 no longer qualify as 
Permitted Investments. In particular, as discussed in Section III.A.2. 
above, the range of MMFs whose securities qualify as Permitted 
Investments has contracted, as only interests in Permitted Government 
MMFs currently meet the eligibility criteria of Regulation 1.25. In 
addition, as discussed in Section III.A.4. below, commercial paper and 
corporate notes and bonds no longer qualify as Permitted Investments 
with the expiration of the TLGP.
    Also, due to certain regulatory reforms, there has been an 
increased demand for high quality collateral, including for assets that 
currently qualify as Permitted Investments under Regulation 1.25. For 
example, in the aftermath of the 2008 financial crisis, Congress 
enacted the Dodd-Frank Wall Street Reform and Consumer Protection 
Act,\165\ which set forth a regulatory framework for swaps, requiring, 
among other things, the clearing of certain swaps or the margining of 
certain uncleared swaps. As a result, market participants dealing in 
swaps may be required to post to clearinghouses, or post and collect 
with swap counterparties, specified forms of liquid collateral, driving 
increased demand for assets that currently qualify as Permitted 
Investments.
---------------------------------------------------------------------------

    \165\ The Dodd-Frank Wall Street Reform and Consumer Protection 
Act of 2010 (Pub. L. 111-203, H.R. 4173).
---------------------------------------------------------------------------

    The Commission believes expanding the range of available Permitted 
Investments to include interests in ETFs that meet specified 
conditions, as discussed below, would provide FCMs and DCOs with 
greater flexibility and opportunities for capital efficiency in the 
investment of Customer Funds, without unacceptably increasing risk to 
customers. Consistent with the existing regulations limiting customer 
risk associated with the investment of Customer Funds by FCMs and DCOs, 
under the terms of the Proposal, FCMs and DCOs would be financially 
responsible for bearing any loss on an investment of Customer Funds in 
an ETF in the same manner as FCMs and DCOs are financially responsible 
for losses incurred from the investment of Customer Funds in Permitted 
Investments.\166\
---------------------------------------------------------------------------

    \166\ See Regulation 1.29(b) (providing that an FCM or a DCO, as 
applicable, shall bear sole responsibility for any losses resulting 
from the investment of futures customer funds in Permitted 
Investments) and Regulations 22.2(e)(1) and 30.7(i) (providing that 
an FCM shall bear sole responsibility for any losses resulting from 
the investment of Cleared Swaps Customer Collateral and 30.7 funds, 
respectively, in Permitted Investments). As further discussed in 
Section III.C. below, the Commission is also proposing an amendment 
to Regulation 22.3(d) to clarify that DCOs are financially 
responsible for investments of Cleared Swaps Customer Collateral in 
Permitted Investments.
---------------------------------------------------------------------------

    The Commission also believes that the proposed addition of 
interests in ETFs as Permitted Investments under Regulation 1.25(a) 
would foster innovation and promote competition in the ETF market and 
the financial services industry more generally, as the Proposal would 
permit the flow of Customer Funds into a new type of financial 
instrument that previously had been prohibited and, as discussed below, 
would offer the possibility for market participants to purchase a type 
of collateral that is already a Permitted Investment without having to 
purchase the securities directly or through a MMF.
    As noted above, industry representatives and other market 
participants have also expressed interest in U.S. Treasury ETFs as 
Permitted Investments.\167\ Both the Petitioners and Invesco highlight 
the similarity in characteristics between U.S. Treasury ETF securities 
and other instruments that qualify as Permitted Investments under 
Regulation 1.25.\168\ Invesco further notes that ETFs investing in U.S. 
Treasury securities offer an indirect, yet simpler and more cost-
efficient way, for FCMs to invest Customer Funds in such instruments, 
eliminating the need to identify, invest in, and administer

[[Page 81249]]

investments in individual U.S. Treasury securities.\169\
---------------------------------------------------------------------------

    \167\ They generally refer to short-term U.S. Treasury ETFs that 
invest at least 80 percent of their assets in U.S. Treasury 
securities with a remaining term to final maturity of 12 months or 
less.
    \168\ See Joint Petition at pp. 8-9 and Invesco Petition at pp. 
9-10.
    \169\ Invesco Petition at p. 11. Invesco states that an ETF 
would allow FCMs and DCOs to gain exposure to short-term U.S. 
Treasury securities without buying and selling Treasury securities 
on a periodic basis, such as each quarter, eliminating the costs 
associated with trading Treasury securities.
---------------------------------------------------------------------------

    The Commission also notes that CME accepts shares of short-term 
U.S. Treasury ETFs as performance bond from clearing members to margin 
customer and house trades.\170\ The Commission believes that this 
represents an important consideration in determining whether to add 
interests of U.S. Treasury ETFs to the list of Permitted Investments 
given that interests in U.S. Treasury ETFs that qualify as a Permitted 
Investment under the Proposal could ultimately be accepted by DCOs, 
such as CME, as performance bond, and pledged by FCMs as margin 
collateral.
---------------------------------------------------------------------------

    \170\ CME Advisory Notice, Modifications to Schedule of 
Acceptable Performance Bond--Addition of Short-Term U.S. Treasury 
ETFs (Aug. 2, 2022) (``2022 CME Advisory Notice''), available at 
https://www.cmegroup.com/notices/clearing/2022/08/Chadv22-293.pdf 
(providing that acceptable ETFs must track a U.S. Treasury index and 
must have a minimum 80 percent investment in U.S. Treasury 
securities with a time to maturity of 1 year or less).
---------------------------------------------------------------------------

    To ensure consistency with the requirements applicable to other 
Permitted Investments and the general objectives of Regulation 1.25 of 
preserving principal and maintaining liquidity of Permitted 
Investments, the Commission is proposing to impose the conditions 
discussed below on ETFs for their interests to qualify as a Permitted 
Investment. The Commission preliminarily believes that to the extent 
ETFs meet the proposed conditions, the ETFs would be comparable to 
Permitted Government MMFs whose interests currently qualify as 
Permitted Investments under Regulation 1.25(a).\171\ The Commission 
also notes that by allowing FCMs and DCOs to invest Customer Funds in 
ETFs that meet the specified proposed conditions, it would provide FCMs 
and DCOs with a means for investing indirectly in Permitted 
Investments--U.S. Treasury securities, while allowing FCMs and DCOs to 
dispense with the expense and resources required to manage individual 
investments in such instruments.
---------------------------------------------------------------------------

    \171\ The Commission notes that SEC Rule 2a-7, which applies to 
MMFs, restricts the types of investments in which MMFs can invest 
their assets, limits the terms of the investments, and imposes 
liquidity requirements with respect to the investments, among other 
things. See 17 CFR 270.2a-7(d)(2) (providing that MMFs must limit 
their portfolio investments to U.S. dollar-dominated securities that 
at the time of acquisition are eligible securities), 17 CFR 270.2a-
7(d)(1) (limiting the terms of maturity of MMFs' investments), and 
17 CFR 270.2a-7(d)(4) (providing that MMFs must hold securities that 
are sufficiently liquid to meet reasonably foreseeable shareholder 
redemptions and setting forth other liquidity requirements). 
Although SEC Rule 2a-7 does not apply to ETFs, as described below, 
this Proposal would admit as a Permitted Investment only ETFs 
providing investors with substantial protections that are 
comparable, though not identical, to those afforded to MMF 
investors.
---------------------------------------------------------------------------

    One rationale for adding ETFs investing primarily in short-term 
U.S. Treasury securities to the list of Permitted Investments is the 
similarity of the ETFs to MMFs whose interests qualify as Permitted 
Investments under Regulation 1.25(a). As such, the Commission 
preliminarily believes that it is appropriate to propose to impose all 
pertinent requirements applicable to MMFs under Regulation 1.25 to such 
ETFs, subject to certain modification to address the unique 
characteristics of the ETFs. Therefore, under the terms of the 
Proposal, an ETF would be required to satisfy specified requirements, 
as discussed below, to be a qualified ETF (``Qualified ETF'') whose 
interests qualify as a Permitted Investment.
    Consistent with Regulation 1.25(c), which sets forth provisions for 
MMFs whose interests qualify as Permitted Investments, a Qualified ETF 
would be required to be an investment company that is registered under 
the Investment Company Act of 1940 with the SEC and that holds itself 
out to investors as an ETF under SEC Rule 6c-11.\172\ The ETF would 
also be required to be sponsored by a federally regulated financial 
institution, a Section 3(a)(6) bank,\173\ an investment adviser 
registered under the Investment Advisers Act of 1940, or a domestic 
branch of a foreign bank insured by the FDIC.\174\
---------------------------------------------------------------------------

    \172\ Proposed Regulation 1.25(c)(1).
    \173\ For a definition of Section 3(a)(6) bank, see supra note 
51.
    \174\ Proposed Regulation 1.25(c)(2), as applying to Qualified 
ETFs per proposed revised introductory text of paragraph (c) of 
Regulation 1.25.
---------------------------------------------------------------------------

    In addition, the Commission is proposing to limit Qualified ETFs to 
funds that are passively managed and seek to replicate the performance 
of a published short-term U.S. Treasury security index.\175\ For 
purposes of the Proposal, short-term U.S. Treasury securities are 
bonds, notes, and bills with a remaining maturity of 12 months or less, 
issued by, or unconditionally guaranteed as to the timely payment of 
principal and interest by, the U.S. Department of the Treasury.\176\ 
Consistent with this condition, the Commission is further proposing to 
require that the eligible U.S. Treasury securities represent at least 
95 percent of the ETF's investment portfolio. In that regard, the 
Commission notes that pursuant to SEC requirements,\177\ certain 
registered investment companies, including ETFs, must adopt a policy to 
invest at least 80 percent of the value of their assets in accordance 
with the investment focus suggested by the fund's name.\178\
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    \175\ Proposed revised Regulation 1.25(a)(1)(vi).
    \176\ Id.
    \177\ SEC Rule 35d-1 under the Investment Company Act of 1940 
(indicating that a fund name suggesting that the fund focuses its 
investments in a particular type of investments or in investments in 
a particular industry would be a materially deceptive and misleading 
name unless the fund has adopted a policy to invest, under normal 
circumstances, at least 80 percent of the value of its assets in the 
particular type of investments or in investments in the particular 
industry suggested by the fund's name). 17 CFR 270.35d-1.
    \178\ Proposed Regulation 1.25(c)(8)(ii).
---------------------------------------------------------------------------

    The Commission, however, preliminarily believes that a stricter 
standard is necessary to help ensure that FCMs and DCOs invest Customer 
Funds in accordance with Regulation 1.25's general objectives of 
preserving principal and maintaining liquidity. The Commission's 
preliminary analysis indicates that short-term U.S. Treasury ETFs 
generally invest at least 95 percent of their assets in securities 
comprising the U.S. Treasury securities index whose performance the 
funds seek to replicate. As such, the Commission preliminarily believes 
that mandating that a Qualified ETF invest a minimum of 95 percent of 
its assets in eligible U.S. Treasury securities would not be overly 
restrictive. \179\ To ensure compliance with the proposed condition, 
FCMs and DCOs would be required to monitor the Qualified ETF's 
portfolio. If the portion of the ETF's assets invested in eligible U.S. 
Treasury securities falls below 95 percent of the fund's total assets, 
the FCM or DCO would not be permitted to make additional investments of 
Customer Funds in the ETF. The FCM or DCO would also be expected to 
take reasonable actions to divest interests in the fund, while managing 
Customer Funds in a manner consistent with Regulation 1.25's general 
objectives of preserving principal and maintaining liquidity. Depending 
on the market conditions, such actions may include taking steps to 
progressively reduce the

[[Page 81250]]

amount of Customer Funds invested in ETFs instead of immediately 
divesting the investments in a potentially volatile market.
---------------------------------------------------------------------------

    \179\ The Commission considered proposing to require that 
Qualified ETFs invest at least 99.5 percent of their assets in 
eligible U.S. Treasury securities to reflect an analogous condition 
in SEC Rule 2a-7 requiring that government MMFs invest at least 99.5 
percent of their assets in government securities. The Commission, 
however, preliminarily believes that such threshold would be more 
restrictive in the context of Qualified ETFs, given that an eligible 
U.S. Treasury security would be defined as a bond, note, or bill 
with a remaining maturity of 12 months or less, issued or 
unconditionally guaranteed by the U.S. Department of the Treasury, 
whereas a government security is broadly defined in SEC Rule 2a-7 
(by reference to 15 U.S.C. 80a-2(a)(16)) to include U.S. government 
securities and U.S. agency obligations.
---------------------------------------------------------------------------

    The Commission preliminarily believes that limiting the investments 
of Qualified ETFs as proposed would increase the safety and resilience 
of the ETFs \180\ and allow the funds to more closely match the risk 
profile of Permitted Investments, including Permitted Government MMFs. 
Also, Qualified ETFs that maintain portfolios primarily comprised of 
high-quality and liquid investments are better able to redeem interests 
without placing excessive downward pressure on the NAVs.
---------------------------------------------------------------------------

    \180\ The Commission notes that a preliminary analysis of ETFs 
investing primarily in short-term U.S. Treasury securities indicates 
that the funds have a risk profile and volatility characteristics 
that are comparable to that of the underlying U.S. Treasury security 
investments. Specifically, using data available on Bloomberg, the 
Commission notes that for the period June 2020-September 2023, the 
Invesco Collateral Treasury ETF, as well as four other short-term 
U.S. Treasury ETFs that CME accepts as performance bond--
SPDR[supreg] Bloomberg 1-3 Month T-Bill ETF, Goldman Sachs Access 
Treasury 0-1 Year ETF, iShares 0-3 Month Treasury Bond ETF, and 
iShares Short Treasury Bond ETF--had a standard deviation for a two-
day period of risk of approximately 6 BPS, whereas the one-year U.S. 
Treasury securities had a standard deviation of 8 BPS for the same 
period.
---------------------------------------------------------------------------

    In addition, the agreement pursuant to which an FCM or a DCO 
acquires and holds its interest in the Qualified ETF would be 
prohibited from containing provisions that would prevent the pledging 
of the Qualified ETF's shares.\181\ FCMs and DCOs would be required to 
maintain confirmations relating to their purchase of interests in a 
Qualified ETF in their records in accordance with Regulation 1.31 and 
note the ownership of the interests (by book-entry or otherwise) in the 
FCMs' and DCOs' custody account in accordance with Regulation 
1.26.\182\ FCMs and DCOs would be required to obtain the acknowledgment 
letter required by Regulation 1.26 from an entity that has substantial 
control over the ETF interests purchased with Customer Funds and that 
has the knowledge and authority to facilitate redemption and payment or 
transfer of the Customer Funds. Such entity may be the sponsor of the 
Qualified ETF or a depository acting as custodian for the ETF 
interests.
---------------------------------------------------------------------------

    \181\ Paragraph (c)(6) of Regulation 1.25 as applying to 
Qualified ETFs per proposed revised introductory text of paragraph 
(c) of Regulation 1.25.
    \182\ Paragraph (c)(3) of Regulation 1.25 as applying to 
Qualified ETFs per proposed revised introductory text of paragraph 
(c) of Regulation 1.25.
---------------------------------------------------------------------------

    Also, the NAV for the Qualified ETF would be required to be 
computed by 9 a.m. of the business day following each business day and 
made available to FCMs or DCOs, as applicable, by that time.\183\ The 
Commission notes that this proposed requirement is intended to allow 
for the valuation of the Qualified ETF's investment portfolio to be 
available by 9 a.m. the business day following an investment in the 
ETF, so that the valuation is available in time for FCMs to perform 
their daily segregation calculations, which are required to be 
completed by noon each business day, reflecting balances as of the 
close of business on the previous business day.\184\
---------------------------------------------------------------------------

    \183\ Paragraph (c)(4) of Regulation 1.25 as applying to 
Qualified ETFs per proposed revised introductory text of paragraph 
(c) of Regulation 1.25.
    \184\ 2000 Permitted Investments Amendment at 78003.
---------------------------------------------------------------------------

    Further, the Qualified ETF would be required to be legally 
obligated to redeem its interests and make payment in satisfaction of 
the interests by the business day following a redemption request.\185\ 
FCMs or DCOs, as applicable, would be required to retain documentation 
demonstrating compliance with this requirement.\186\ Regulation 
1.25(c)(5)(ii) currently provides an exception to the next-day 
redemption obligation for MMFs for defined extraordinary circumstances, 
such as the non-routine closures of the Fedwire or applicable Federal 
Reserve Banks, and any period during which the SEC by order restricts 
redemptions for the protection of security holders in the fund. 
Regulation 1.25(c)(5)(ii) was adopted by the Commission to be 
consistent with Section 22(e) of the Investment Company Act of 1940 
\187\ and SEC Rule 22e-3,\188\ which provides exceptions to MMFs for 
next-day redemptions.\189\ The Commission is not proposing to adopt 
next-day redemption exceptions for Qualified ETFs as no comparable 
provisions are provided under the rules of the SEC, and in recognition 
that the redemption process for ETFs involves the exchange of ETF share 
for cash by authorized participants. As noted below, the Commission is 
seeking comment on the potential existence of extraordinary 
circumstances that may warrant an exception to the proposed next-day 
redemption requirement.
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    \185\ Paragraph (c)(5)(i) of Regulation 1.25 as applying to 
Qualified ETFs per proposed revised introductory text of paragraph 
(c) of Regulation 1.25.
    \186\ Id.
    \187\ 15 U.S.C. 80a-22(e).
    \188\ 17 CFR 270.22e-3.
    \189\ Regulation 1.25(c)(5)(ii) was originally adopted in 2005. 
See 2005 Permitted Investments Amendment at 28196. It codified a 
2001 letter issued by the Commission's Division of Trading and 
Markets in response to an industry inquiry, stating that the 
division would raise no issue in connection with MMFs that provide 
for certain exceptions to the next-day redemption requirement. Id. 
As specified in the 2001 letter, the circumstances in which the 
next-day redemption could be excused overlapped to a certain extent 
with those contained in Section 22(e) of the Investment Company Act 
of 1940. See CFTC Staff Letter No. 01-31, [2000-2002 Transfer 
Binder] Comm. Fut. L. Rep. (CCH)] 28,521 (Apr. 2, 2001). In 2011, 
the Commission revised Regulation 1.25(c)(5)(ii) to more closely 
align the language of that regulation with Section 22(e) and to 
expressly incorporate SEC Rule 22e-3. See 2011 Permitted Investments 
Amendment at 78789.
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    The Commission preliminarily believes that limiting, as discussed 
above, Qualified ETFs to funds that track the performance of a 
published short-term U.S. Treasury security index would contribute to 
facilitating redemptions of Qualified ETFs' shares to be completed 
within one business day consistent with Regulations 1.25(c)(5)(i) and 
1.25(b)(1).\190\
---------------------------------------------------------------------------

    \190\ See 17 CFR 1.25(c)(5) (providing that MMFs must be legally 
obligated to redeem their interests and to make payment in 
satisfaction of the interests by the business day following a 
redemption request) and 17 CFR 1.25(b)(1) (providing that Permitted 
Investments must be ``highly liquid'' such that the investments have 
the ability to be converted into cash within one business day 
without material discount in value).
---------------------------------------------------------------------------

    As previously discussed, ETFs issue and redeem their shares with 
authorized participants in primary market transactions in blocks of 
shares or ``creation units'' at the NAV per share. Redemptions may be 
in cash or in kind. Authorized participants and the general public can 
also purchase and sell ETF shares in the secondary market at the market 
price per share. The Commission preliminarily believes that FCMs and 
DCOs are likely to purchase and redeem the shares of a Qualified ETF 
through primary market transactions intermediated by authorized 
participants rather than purchasing and selling the ETF shares in the 
secondary market, because the price of the shares in the secondary 
market may differ from the NAV, and the sale of the shares in the 
secondary market may delay the liquidation of the instruments.
    The Commission notes that an FCM's or a DCO's purchase or 
redemption of Qualified ETF shares through intermediated transactions 
with authorized participants raises two concerns. First, if an FCM or a 
DCO invests Customer Funds in shares of a Qualified ETF by purchasing 
the shares through an authorized participant, the FCM or DCO would need 
to take Customer Funds out of the segregated account maintained in 
compliance with Section 4d of the Act and/or Part 30 of the 
Commission's regulations to

[[Page 81251]]

purchase the ETF shares.\191\ As a result, customer segregated accounts 
may not be fully funded, thus potentially violating Commission 
regulations that require FCMs to maintain, at all times, in the 
segregated account, money, securities and property in an amount that is 
at least sufficient in the aggregate to cover their total obligations 
to all customers.\192\ Also, the transfer of Customer Funds to the 
authorized participant may be in contravention of Commission 
regulations that provide that Customer Funds may only be deposited with 
a bank or trust company, a DCO, or another FCM.\193\ Second, if an FCM 
or a DCO uses an unaffiliated authorized participant to redeem its 
Qualified ETF shares, the redemption of the ETF shares may be 
protracted, preventing the redemption and liquidation of the shares to 
occur within one business day, as required by Regulation 1.25.
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    \191\ See 7 U.S.C. 6d (setting forth segregation requirements 
for FCMs' futures customer funds); see also 17 CFR 1.20(a) 
(providing that FCMs must separately account for futures customer 
funds and segregate such funds as belonging to their futures 
customers) and 17 CFR 1.20(g) (providing that DCOs must separately 
account for and segregate futures customer funds as belonging to 
futures customers); 17 CFR 22.2 (providing that FCMs must segregate 
Cleared Customer Collateral) and 17 CFR 22.3 (requiring that DCOs 
segregate Cleared Customer Collateral); and 17 CFR 30.7(b) 
(providing that FCMs must deposit 30.7 funds under an account name 
that clearly identifies the funds as belonging to 30.7 customers).
    \192\ 17 CFR 1.20(a), 17 CFR 22.2(f), and 17 CFR 30.7(a).
    \193\ 17 CFR 1.20(b), 17 CFR 22.2(b) and 17 CFR 30.7(b). With 
respect to 30.7 customer funds, Regulation 30.7(b) also permits 
funds to be deposited with the clearing organization of any foreign 
board of trade, a member of any foreign board of trade, or such 
member's or clearing organization's designated depositories. 17 CFR 
30.7(b).
---------------------------------------------------------------------------

    To address these two concerns, the Commission proposes to require 
an FCM or a DCO that invests Customer Funds in the shares of a 
Qualified ETF to be an authorized participant of the ETF.\194\ The 
Commission believes that this approach would permit Customer Funds to 
be maintained in a segregated account in accordance with Section 4d or 
Part 30, as applicable, with a permitted depository (i.e., a bank, 
trust company, DCO, or another FCM), given that the Customer Funds 
would not need to be transferred to an authorized participant 
unaffiliated with the FCM or DCO. In addition, because an FCM or a DCO 
acting as an authorized participant would be able to redeem the shares 
without relying on a separate authorized participant, the Commission 
believes that the FCM or DCO would be able to better manage completing 
the redemption and liquidation of the Qualified ETFs shares within one 
business day, as required by Regulation 1.25.
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    \194\ Proposed paragraph (c)(8) of Regulation 1.25.
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    The Commission, however, understands that FCMs and DCOs may have 
access to other means of purchasing or liquidating interest in ETFs. 
For instance, an FCM or a DCO may be able to acquire interests in an 
ETF on a delivery-versus-payment basis through a securities broker or 
dealer at price equal to the next calculated NAV amount per share or 
another agreed-upon price that approximates the last calculated NAV. 
Similarly, an FCM or a DCO may be able to sell Qualified ETF shares to 
a broker or dealer willing to buy them at a price corresponding to the 
NAV amount per share and later redeem them from the fund. To be able to 
assess the feasibility of such arrangements and the potential 
associated risks, the Commission requests additional information on the 
availability and functioning of alternative mechanisms of purchasing 
and liquidating Qualified ETF interests in a manner compliant with 
Regulation 1.25 and compliant with the segregation requirements for 
Customer Funds.
    The Commission is also proposing that Qualified ETFs be required to 
redeem their shares in cash.\195\ The Commission understands that ETFs 
typically redeem interests in kind, although they may also redeem in 
cash or both in kind and in cash. The Commission also notes that CME, 
in announcing its acceptance of short-term U.S. Treasury ETFs as 
performance bond, stated that it would accept short-term U.S. Treasury 
ETFs that redeem their shares in cash or in kind.\196\ As discussed 
above, the Commission is requiring that Qualified ETFs redeem their 
shares within one business day following the submission of the 
redemption request, consistent with the time limit for redemptions 
applicable to MMFs under Regulation 1.25(c)(5). In addition, under 
Regulation 1.25(c)(1), the shares of Qualified ETFs, as a Permitted 
Investment, would be required to be convertible into cash within one 
business day without material discount in value. As such, given these 
time limits for the redemption and liquidation of Qualified ETF shares, 
the Commission is proposing to require Qualified ETFs to redeem their 
shares in cash because in-cash redemptions may allow for a more 
expeditious liquidation of the shares than in-kind redemptions.
---------------------------------------------------------------------------

    \195\ Proposed Regulation 1.25(c)(8)(i).
    \196\ 2022 CME Advisory Notice at 1.
---------------------------------------------------------------------------

    In this regard, the Commission notes that in-kind redemptions may 
introduce a time lag between the redemption of the ETF shares and the 
ultimate liquidation of the shares, as the assets received in in-kind 
redemptions would need to be sold or otherwise converted into cash to 
complete the liquidation of the ETF shares, hindering the ability to 
liquidate the ETF shares within one business day, as required by 
Regulation 1.25(b)(1). As such, the Commission is proposing to require 
that Qualified ETFs redeem their shares only in cash. The Commission, 
however, is requesting information on the availability and functioning 
of potential mechanisms or arrangements that may allow FCMs and DCOs to 
liquidate a Qualified ETF's shares in a manner compliant with 
Regulation 1.25 and the segregation requirements if the fund's 
interests were redeemed in kind.
    The Commission is also proposing to require, as a condition for 
qualification as a Permitted Investment, that Qualified ETFs be 
acceptable by a DCO as performance bond from clearing members to margin 
customer trades.\197\ Although qualification as acceptable collateral 
by a DCO is not determinative of qualification as a Permitted 
Investment, the Commission preliminarily believes that limiting 
Qualified ETFs to funds that have met a DCO's criteria of eligibility 
as performance bond represents an additional safeguard. In addition, as 
noted above, the possibility that ETF shares could be pledged by an FCM 
as margin collateral is an important consideration for the Commission 
in determining whether to add the interests of ETFs to the list of 
Permitted Investments.
---------------------------------------------------------------------------

    \197\ Proposed Regulation 1.25(c)(8)(iii).
---------------------------------------------------------------------------

    In order to add the interests of Qualified ETFs to the list of 
Permitted Investments under Regulation 1.25, the Commission is 
proposing to add paragraph (vi) to Regulation 1.25(a)(1), as 
redesignated to accommodate other amendments to the list of Permitted 
Investments pursuant to this Proposal. Paragraph (vi) would identify 
interests in U.S. Treasury exchange-traded funds as a Permitted 
Investment. The Commission also proposes further conforming changes 
throughout Regulation 1.25. Section III.A.2. above provides for the 
replacement of ``money market mutual fund'' or ``money market mutual 
funds'' with ``government money market fund'' or ``government money 
market funds'' throughout Regulation 1.25. The Commission proposes, 
unless otherwise discussed below, to insert next to the term

[[Page 81252]]

``government money market fund'' or ``government money market funds,'' 
the term ``U.S. Treasury exchange-traded fund'' or ``U.S. Treasury 
exchange-traded funds,'' as appropriate, preceded by an appropriate 
conjunction (i.e., ``or'' or ``and''), as necessary.
    To incorporate the condition that a Qualified ETF must be an 
investment company that is registered under the Investment Company Act 
of 1940 with the SEC and holds itself out to investors as an ETF under 
SEC Rule 6c-11, the Commission proposes to revise Regulation 1.25(c)(1) 
to provide that, ``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 
government money market fund, in accordance with 270.2a-7 of this 
title, or an exchange-traded fund, in accordance with 270.6c-11 of this 
title.''
    Moreover, to incorporate the requirement that an FCM or a DCO 
investing in a Qualified ETF must be an authorized participant, the 
Commission proposes to revise Regulation 1.25(c) to add paragraph (8), 
which would provide, ``Interests in U.S. Treasury exchange-traded funds 
will qualify as a Permitted Investment under Regulation 1.25(a) if the 
interests are redeemable in cash by a futures commission merchant or 
derivatives clearing organization in its capacity as an authorized 
participant pursuant to an authorized participant agreement, as defined 
in Sec.  270.6c-11, at a price based on the net asset value in 
accordance with the Investment Company Act of 1940 and regulations 
thereunder, and on a delivery versus payment basis.''
    To account for the possibility that, as part of their investment 
strategy and within the limits of applicable SEC rules, Qualified ETFs 
may engage in derivatives transactions, the Commission is also 
proposing to amend Regulation 1.25(b)(2)(i) to indicate that the 
prohibition of investments containing embedded derivatives would not 
apply to Qualified ETFs.
    Finally, the Commission is proposing to amend Regulation 
1.25(b)(4)(i), which provides that except for investments in MMFs, the 
dollar-weighted average time-to-maturity of an FCM's or a DCO's 
portfolio of Permitted Investments, as computed under SEC Rule 2a-7, 
may not exceed 24 months. The proposed amendment would revise 
Regulation 1.25(b)(4)(i) to exclude Qualified ETFs from the calculation 
of the dollar-weighted average time-to-maturity of the portfolio of 
Permitted Investments.\198\ The Commission is proposing this amendment 
as interests in Qualified ETFs do not have maturity dates, as the 
Qualified ETF manages the rolling of maturing U.S. Treasury securities 
into new investments.
---------------------------------------------------------------------------

    \198\ Proposed revised Regulation 1.25(b)(4)(i).
---------------------------------------------------------------------------

    Request for Comment: The Commission seeks comment on all aspects of 
the Proposal relating to the expansion of the list of Permitted 
Investments to include interests in ETFs subject to the specified 
conditions discussed above, including:
    6. For the interests of ETFs to be deemed a Permitted Investment, 
the ETFs would have to satisfy requirements similar to the requirements 
that apply to Government MMFs whose interests qualify as Permitted 
Investments. Is it appropriate to apply the regulatory framework that 
applies to Government MMFs to ETFs for determining whether an ETF would 
be deemed a Qualified ETF and interests in the ETF be deemed a 
Permitted Investment? To the extent some aspects of the regulatory 
framework applicable to MMFs is not appropriate for ETFs, please 
specify and explain why.
    7. The Proposal to add interests in Qualified ETFs to the list of 
Permitted Investments provides that only the interests of ETFs that are 
passively managed and seek to replicate the performance of a published 
short-term U.S. Treasury security index by investing in a limited set 
of instruments would qualify as Permitted Investments. The Commission 
notes that the types of investments in which Qualified ETFs and 
Permitted Government MMFs would be permitted to invest under the 
Proposal would differ in that Qualified ETFs' investments would be 
determined by its investment strategy seeking to replicate the 
performance of a public short-term U.S. Treasury index and a 
requirement that the Qualified ETFs invest 95 percent or more of their 
assets in U.S. Treasury securities that are components of the index, 
whereas government MMFs would be required to invest 99.5 percent or 
more of their assets in cash, government securities (defined in 15 
U.S.C. 80a-2(a)(16) to broadly include U.S. Treasury securities and 
U.S. agency securities), and/or Repurchase Transactions that must be 
collateralized fully, consistent with the definition of government 
money market funds under SEC Rule 2a-7. Should the Commission further 
limit the types of underlying instruments in which a Qualified ETF 
would be permitted to invest? If so, what criteria should be applied to 
determine the appropriate limitations? Should the Commission permit 
Qualified ETFs to invest a lower or higher percentage of their assets 
in short-term U.S. Treasury securities that are components of the index 
than the proposed 95 percent? If so, what percentage should the 
Commission consider and why? Also, should the Commission reconcile the 
types of investments in which Qualified ETFs and Permitted Government 
MMFs would be permitted to invest by allowing Qualified ETFs to invest 
in the same investments as Permitted Government MMFs?
    8. Under the Proposal, Qualified ETFs would not be precluded from 
undertaking Repurchase Transactions. Does an ETF engaging in Repurchase 
Transactions with fund assets have the potential to adversely impact an 
authorized participant's ability to redeem interest in the fund in 
exchange for cash? Does an ETF engaging in Repurchase Transactions 
present other issues that would delay the ability of an authorized 
participant to redeem interest in the fund in cash? Could the potential 
delay prevent completing redemptions and liquidation of the ETF shares 
within one business day, as required by Regulation 1.25? Should 
Qualified ETFs be prohibited from undertaking Repurchase Transactions 
given the possible risk of delay in redemptions?
    9. The Proposal would require that FCMs or DCOs that invest 
Customer Funds in interests of Qualified ETFs be authorized 
participants in order to address concerns that during purchase or 
redemption of ETF shares, Customer Funds might be moved to an account 
not held by an appropriate depository of customer segregated funds 
(i.e., a bank, trust company, DCO or FCM) without a contemporaneous 
deposit of ETF shares or cash in customer segregated accounts, 
resulting in the FCM or DCO being undersegregated. Are there 
alternative approaches other than requiring FCMs or DCOs to be 
authorized participants that could address or mitigate the Commission's 
concerns? Can DCOs be authorized participants of Qualified ETFs? If 
not, are there alternatives that would permit DCOs to invest Customer 
Funds in Qualified ETFs consistent with the requirements of Regulation 
1.25 and the Commission's segregation requirements?
    10. The Commission understands that interests in short-term U.S. 
Treasury ETFs may be redeemed in cash or in kind. The Commission is 
proposing to require that the shares of a Qualified ETF be redeemable 
only in cash given the concern that in-kind redemptions may not permit 
the liquidation of the

[[Page 81253]]

ETF shares within one business day, as required by Regulation 
1.25(b)(1). If the Commission were to allow shares of Qualified ETFs to 
be redeemable in kind, would the Qualified ETF's interests have the 
ability to be liquidated within one business day as required by 
Regulation 1.25(b)(1)? What mechanisms or arrangements exist that may 
allow FCMs and DCOs to convert Qualified ETF shares into cash within 
one business day without material discount in value if redemptions 
occur in kind? Are there any potential risks associated with such 
mechanisms and arrangements that the Commission should consider? Is 
there an alternative approach to address the Commission's concerns that 
would permit the use of in-kind redemptions and also provide FCMs and 
DCOs with access to cash for the redemptions within one business day? 
Does the proposed requirement that the Qualified ETF invest 95 percent 
or more of its total assets in short-term U.S. Treasury securities help 
ensure that FCMs and DCOs will be able to liquidate securities received 
from an in-kind redemption within one business day? Does the proposed 
requirement that an FCM or a DCO must be an authorized participant help 
ensure that the FCM or DCO has the internal operational capability and 
resources to liquidate in-kind redemptions in a manner and time-frame 
compliant with Regulation 1.25 requirements?
    11. As noted, the Commission is proposing to require that interests 
in Qualified ETFs be redeemable in cash within one business day. Are 
there any extraordinary circumstances, similar to the events listed in 
Regulation 1.25(c)(5)(ii) with respect to MMFs, that may justify an 
exception to the proposed next-day redemption requirement? If so, 
please specify what redemption exceptions are necessary, and explain 
why the exceptions are necessary. Also address potential impacts to 
customers if Qualified ETFs do not redeem within one business if 
exceptions were provided.
    12. Does the Proposal to add Qualified ETFs to the list of 
Permitted Investments under Regulation 1.25, along with the continued 
inclusion of MMFs, have the potential to reduce the availability of 
funds from the banking system in a manner that would raise any 
financial stability concerns? Could the use of Repurchase Transactions 
by MMFs and ETFs exacerbate any financial stability issues that may 
exist?
    13. The Proposal would require that a Qualified ETF must be a 
passively managed fund that seeks to replicate the performance of a 
published short-term U.S. Treasury security index composed of bonds, 
notes, and bills with a remaining maturity of 12 months or less, issued 
by, or unconditionally guaranteed as to the timely payment of principal 
and interest by, the U.S. Department of the Treasury. Should the 
Commission impose conditions or requirements that a publisher of an ETF 
index must meet or satisfy in order for the ETF to be a Qualified ETF? 
If so, what conditions or requirements should the Commission impose, 
and why?
    14. Regulation 1.25(b)(5)(ii) currently provides that an FCM or a 
DCO may invest Customer Funds in a fund affiliated with that FCM or 
DCO. Should the Commission revise Regulation 1.25(b)(5)(ii) to prohibit 
an FCM or a DCO from investing Customer Funds in affiliated funds? Are 
there other Commission or SEC rules that mitigate any potential 
conflicts of interest that may arise from an FCM or a DCO investing 
Customer Funds in affiliated funds?
4. Investments in Commercial Paper and Corporate Notes or Bonds
    The Commission originally approved commercial paper and corporate 
notes as Permitted Investments for FCMs and DCOs in 2000.\199\ The 
Commission subsequently revised the list of Permitted Investments in 
2005 to include corporate bonds.\200\
---------------------------------------------------------------------------

    \199\ See 2000 Permitted Investments Amendment at 78010.
    \200\ See 2005 Permitted Investments Amendment at 28200.
---------------------------------------------------------------------------

    In 2007, the Commission's Division of Clearing and Intermediary 
Oversight conducted a review of the use of Permitted Investments by 
FCMs and DCOs.\201\ The review indicated that commercial paper and 
corporate notes and bonds were not widely used by FCMs and DCOs. In 
2011, in an effort to simplify Regulation 1.25 by eliminating rarely-
used instruments and in consideration of the Commission's concerns that 
corporate debt securities posed credit, liquidity and market risks, the 
Commission revised Regulation 1.25 to provide that an FCM or a DCO may 
invest Customer Funds in commercial paper and corporate notes and 
corporate bonds only if the debt instruments were guaranteed by the 
TLGP.\202\
---------------------------------------------------------------------------

    \201\ 2011 Permitted Investments Amendment at 78776.
    \202\ Id. at 78779.
---------------------------------------------------------------------------

    The TLGP expired in 2012, and, therefore, commercial paper, 
corporate notes, and corporate bonds are no longer Permitted 
Investments under the terms of Regulation 1.25.\203\ Accordingly, the 
Commission is proposing to remove commercial paper, corporate notes, 
and corporate bonds from the list of Permitted Investments.
---------------------------------------------------------------------------

    \203\ Temporary Liquidity Guarantee Program, available at 
https://www.fdic.gov/Regulations/resources/tlgp/index.html (``Under 
the [Debt Guarantee Program], the FDIC guaranteed in full, through 
maturity or June 30, 2012, whichever came first, the senior 
unsecured debt issued by a participating entity between October 14, 
2008, and June 30, 2009. In 2009, the issuance period was extended 
through October 31, 2009. The FDIC's guarantee on each debt 
instrument was also extended in 2009 to the earlier of the stated 
maturity date of the debt or December 31, 2012.'').
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5. Investments in Permitted Investments With Adjustable Rates of 
Interest
    Regulation 1.25(b)(2)(iv)(A) provides that Permitted Investments 
may contain variable or floating rates of interest provided, among 
other things, that: (i) the interest payments on variable rate 
securities correlate closely, and on an unleveraged basis, to a 
benchmark of either the Federal Funds target or effective rate, the 
prime rate, the three-month Treasury Bill rate, the one-month or three-
month LIBOR, or the interest rate of any fixed rate instrument that is 
a listed Permitted Investment under Regulation 1.25(a); \204\ and (ii) 
the interest rate, in any period, on floating rate securities is 
determined solely by reference, on an unleveraged basis, to a benchmark 
of either the Federal Funds target or effective rate, the prime rate, 
the three-month Treasury Bill rate, the one-month or three-month 
LIBOR,\205\ or the interest rate of any fixed rate instrument that is a 
listed Permitted Investment under Regulation 1.25(a).\206\
---------------------------------------------------------------------------

    \204\ 17 CFR 1.25(b)(2)(iv)(A)(1).
    \205\ For simplicity, subsequent references to ``one-month or 
three-month LIBOR rate'' will be referred to as LIBOR unless 
otherwise required by the context of the discussion.
    \206\ 17 CFR 1.25(b)(2)(iv)(A)(2).
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    LIBOR has been used extensively as a reference rate in various 
commercial and financial contracts, including corporate and municipal 
bonds, commercial loans, floating rate mortgages, asset-backed 
securities, consumer loans, and interest rate swaps and other 
derivatives.\207\ The U.K. Financial Conduct Authority, however, 
announced on March 5, 2021 that LIBOR would cease to be published and 
would effectively be discontinued.\208\

[[Page 81254]]

This announcement had been anticipated given the loss of confidence in 
LIBOR as a reliable benchmark following a number of enforcement actions 
concerning attempts to manipulate the benchmark.\209\
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    \207\ Staff Statement on LIBOR Transition, SEC Division of 
Corporation Finance, Division of Investment Management, Division of 
Trading and Markets, and Office of the Chief Accountant (July 12, 
2019), available at https://www.sec.gov/news/public-statement/libor-transition.
    \208\ See CFTC Staff Letter No. 21-26, Revised No-Action 
Positions to Facilitate an Orderly Transition of Swaps from Inter-
Bank Offered Rates to Alternative Benchmarks (Dec. 20, 2021) 
(``Staff Letter 21-26''), (More specifically, the U.K. Financial 
Conduct Authority, which regulates ICE Benchmark Administration 
Limited, the administrator of ICE LIBOR, confirmed that LIBOR would 
either cease to be provided by any administrator or would no longer 
be representative for the 1-week and 2-month USD LIBOR settings, 
immediately after December 31, 2021, and for all other USD LIBOR 
settings immediately after June 30, 2023). As noted supra, CFTC 
Staff Letters are available at the Commission's website, 
www.cftc.gov.
    \209\ See e.g., In re Barclays PLC, CFTC Docket No. 12-25 (June 
27 2012); In re UBS AG, CFTC Docket No. 13-09 (Dec. 19, 2012).
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    The Federal Reserve Bank of New York convened the Alternative 
Reference Rate Committee (``ARRC'') in 2014 to identify best practices 
for U.S. alternative reference rates and best practices for contract 
robustness, to develop an adoption plan, and to create an 
implementation plan with metrics of success and a timeline.\210\ In 
June 2017, the ARRC identified SOFR, a broad Treasury repurchase 
agreements financing rate, as the preferred alternative benchmark to 
USD LIBOR for certain new USD derivatives and financial contracts.\211\ 
SOFR is a broad measure of the cost of borrowing cash overnight 
collateralized by U.S. Treasury securities in the Repurchase 
Transaction market used by financial institutions, governments, and 
corporations.\212\ SOFR is calculated as a volume-weighted median of 
transaction-level triparty repo data collected from the Bank of New 
York Mellon as well as data on bilateral U.S. Treasury Repurchase 
Transactions cleared through the Fixed Income Clearing 
Corporation.\213\ The Federal Reserve Bank of New York, in cooperation 
with the U.S. Office of Financial Research, publishes SOFR by 8:00 a.m. 
each business day.\214\
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    \210\ Staff Letter 21-26 at p. 3.
    \211\ ARRC, ``The ARRC Selects a Broad Repo Rate as its 
Preferred Alternative Reference Rate,'' June 22, 2017, available at 
https://www.newyorkfed.org/medialibrary/microsites/arrc/files/2017/ARRC-press-release-Jun-22-2017.pdf.
    \212\ See Secured Overnight Financing Rate Data, published by 
the Federal Reserve Bank of New York (``FRBNY'') and available at 
https://apps.newyorkfed.org/markets/autorates/sof.
    \213\ Id.
    \214\ See Additional Information about the Treasury Repo 
Reference Rates, published by the FRBNY and available at https://www.newyorkfed.org/markets/treasury-repo-reference-rates-information.
---------------------------------------------------------------------------

    In response to the anticipated termination of the publication of 
LIBOR and the increasing acceptance and use of SOFR as a benchmark 
interest rate, MPD issued Staff Letter 21-02 on January 4, 2021.\215\ 
Staff Letter 21-02 provides that MPD would not recommend enforcement 
action to the Commission if an FCM invested Customer Funds in Permitted 
Investments that contain adjustable rates of interest benchmarked to 
SOFR. Staff Letter 21-02 was a time-limited no-action position that was 
to expire on December 31, 2022. MPD and DCR, however, subsequently 
issued a joint letter, Staff Letter 22-21, extending the effective date 
of the no-action position to December 31, 2024, and expanding the scope 
of the no-action position to include Permitted Investments made by 
DCOs.\216\
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    \215\ See supra note 60.
    \216\ See id.
---------------------------------------------------------------------------

    Given the discontinuation of the publishing of LIBOR and the 
increasing use of SOFR, the Commission is proposing to amend Regulation 
1.25(b)(2)(iv)(A) by replacing LIBOR with SOFR as a permitted benchmark 
for Permitted Investments that contain an adjustable rate of interest. 
To give effect to this revision, paragraphs (b)(2)(iv)(A)(1) and (2) of 
Regulation 1.25 would be amended to replace the phrase ``one-month or 
three-month LIBOR rate'' with the phrase ``SOFR rate.'' These proposed 
amendments would be consistent with the Commission's intent of 
providing FCMs and DCOs with a certain degree of flexibility in 
selecting Permitted Investments with adjustable rates of interest, 
while also recognizing changes in the market.\217\ The Commission 
preliminarily believes that the replacement of LIBOR with SOFR advances 
the objective of Regulation 1.25 of preserving principal and 
maintaining liquidity by requiring the use of reliable benchmarks in 
the qualification as Permitted Investments.
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    \217\ See 2005 Permitted Investments Amendment at 28192, where 
the Commission stated that it is appropriate to afford latitude in 
establishing benchmarks for Permitted Investments to enable FCMs and 
DCOs to more readily respond to changes in the market.
---------------------------------------------------------------------------

    Request for Comment: The Commission seeks comment on all aspects of 
the Proposal to eliminate LIBOR as a permitted benchmark, including:
    15. The ARRC has identified SOFR as a preferred alternative 
reference interest rate to LIBOR. Should the Commission consider other 
additional interest rates beyond SOFR as permitted benchmarks for 
adjustable rate securities under Regulation 1.25? If so, please explain 
why such interest rates would be appropriate benchmarks.
    16. The Commission is proposing to amend Regulation 1.25(b)(2)(iv) 
to permit SOFR as a benchmark for interest payments on variable rate 
securities or floating rate securities that are otherwise Permitted 
Investments under Regulation 1.25. Should the Commission reference a 
particular SOFR rate to provide greater certainty and clarity as to the 
acceptable benchmark? For instance, should the reference be to the 
overnight SOFR rate published by the Federal Reserve Bank of New York, 
to a CME Term SOFR Rate, or to another published SOFR rate? Please 
explain your answer.
6. Investments in Certificates of Deposit Issued by Banks
    Regulation 1.25(a)(1)(iv) permits FCMs and DCOs to invest Customer 
Funds in certificates of deposit (``CDs'') issued by a Section 3(a)(6) 
bank or a domestic branch of a foreign bank that carries deposits 
insured by the FDIC (``bank CDs''). To qualify as a Permitted 
Investment under Regulation 1.25, a bank CD must be redeemable at the 
issuing bank within one business day, with any penalty for early 
withdrawal limited to accrued interest earned according to the written 
terms of the CD agreement.\218\
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    \218\ Regulation 1.25(b)(2)(v); 17 CFR 1.25(b)(2)(v).
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    The Commission's experience has been, however, that FCMs and DCOs 
do not select bank CDs as an investment option. In addition to the 
Commission's general experience in overseeing DCOs and FCMs, Commission 
staff also reviewed Segregation Investment Detail Reports (``SIDR 
Reports'') filed by FCMs for the period September 15, 2022 through 
February 15, 2023 and noted no FCMs reporting investment of Customer 
Funds in bank CDs.\219\
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    \219\ Regulations 1.32(f), 22.2(g)(5), and 30.7(l)(5) require 
each FCM to submit a SIDR Report to the Commission and the FCM's 
designated self-regulatory organization (``DSRO'') listing the names 
of all banks, trust companies, FCMs, DCOs, and any other 
depositories or custodians holding futures customer funds, Cleared 
Swaps Customer Collateral, or 30.7 customer funds, respectively. 
FCMs are required to submit the SIDR Report as of the 15th day of 
each month (or the next business day if the 15th day of the month is 
not a business day) and the last business day of the month. 17 CFR 
1.32(f), 17 CFR 22.2(g)(5), and 17 CFR 30.7(l)(5). Proposed 
amendments to the SIDR Report to reflect the proposed revisions to 
the list of Permitted Investments discussed in this Proposal are 
discussed in Section III.D. below.
    With respect to an FCM, a DSRO is the self-regulatory 
organization that has been delegated the responsibility under a 
formal plan approved by the Commission pursuant to Regulation 1.52 
to monitor and examine the FCM for compliance with Commission and 
self-regulatory organization minimum financial and related financial 
reporting requirements. 17 CFR 1.52.
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    The Commission believes that bank CDs are consistent with the 
overall objective of Regulation 1.25 that all Permitted Investments 
must preserve principal and maintain liquidity of the Customer Funds. 
In this regard, and as noted above, Regulation 1.25(b)(2)(v) provides 
that in order to qualify as a

[[Page 81255]]

Permitted Investment, a CD 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.\220\
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    \220\ 17 CFR 1.25(b)(2)(v).
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    Request for Comment: Notwithstanding that bank CDs currently 
qualify as Permitted Investments, the Commission is seeking comment on 
whether Regulation 1.25 should be amended to remove bank CDs from the 
list of Permitted Investments. As noted above, the Commission's 
experience and the staff's review of the SIDR reports indicate that 
FCMs and DCOs generally have not invested Customer Funds in bank CDs. 
Specifically, the Commission seeks comment on the following issues:
    17. Notwithstanding the Commission's experience and staff's review 
of the SIDR Reports discussed above, do FCMs and/or DCOs invest 
Customer Funds in bank CDs? If so, would the elimination of bank CDs as 
a Permitted Investment have a material adverse impact on FCMs' and 
DCOs' ability to invest Customer Funds pursuant to the proposed 
revisions to Regulation 1.25?
    18. Are there provisions contained in current Regulation 1.25 or 
other regulations of the Commission that hinder or prevent FCMs or DCOs 
from investing Customer Funds in bank CDs? If so, please identify which 
provisions of Regulation 1.25 are at issue and explain why.
    19. Are there legal or operational issues associated with bank CDs 
that hinder or prevent FCMs or DCOs from investing Customer Funds in 
such instruments? If so, please identify the legal or operational 
issues, and explain how such issues hinder or prevent the investment in 
bank CDs.
    20. Would FCMs or DCOs elect to invest Customer Funds in bank CDs 
with the current rising interest rate environment? Are there other 
factors that may lead FCMs or DCOs to increase their use of bank CDs as 
Permitted Investments?
    21. What factors should the Commission consider before removing 
bank CDs from the list of Permitted Investments?
    Based on comments received and the Commission's further 
consideration of this issue, the Commission may determine to revise the 
Permitted Investments by removing bank CDs in the final rulemaking. If 
the Commission were to remove bank CDs from the list of Permitted 
Investments, the Commission would delete paragraph (a)(1)(iv) of 
Regulation 1.25 and redesignate the paragraphs of Regulation 1.25(a)(1) 
as appropriate to reflect the revised list of Permitted Investments. In 
addition, the Commission would delete paragraph (b)(2)(v) of Regulation 
1.25, which sets forth restrictions on the features of permitted bank 
CDs, and revise and/or delete, as appropriate in light of other 
amendments, paragraphs (b)(3)(i)(C) and (b)(3)(ii)(B) of Regulation 
1.25, which set forth asset-based and issuer-based concentration limits 
for certain instruments currently included in the list of Permitted 
Investments, to reflect the elimination of bank CDs from that list. The 
Commission would also make conforming amendments to Regulations 
1.32(f), 22.2(g)(5), and 30.7(l)(5), which define the content of the 
SIDR Reports described in Section III.D. below, to reflect the removal 
of bank CDs from the list of Permitted Investments in Regulation 1.25. 
Specifically, the Commission would delete the requirement for an FCM to 
report the balances invested in bank CDs in the SIDR Report.

B. Asset-Based and Issuer-Based Concentration Limits for Permitted 
Investments

    Regulation 1.25 establishes asset-based and issuer-based 
concentration limits for an FCM's and a DCO's investment of Customer 
Funds in Permitted Investments.\221\ The asset-based and issuer-based 
concentration limits are set at the same levels for investments of 
futures customer funds, Cleared Swaps Customer Collateral, and 30.7 
customer funds.\222\ An FCM or a DCO is also required to calculate the 
asset-based and issuer-based concentration limits separately for 
futures customer funds, Cleared Swaps Customer Collateral, and 30.7 
customer funds based on the total amount of funds held by the FCM or 
DCO in each respective segregation classification.\223\
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    \221\ 17 CFR 1.25(b)(3).
    \222\ The asset-based and issuer-based concentration limits for 
futures customer funds are set forth in Regulation 1.25(b)(3). 17 
CFR 1.25(b)(3). With respect to 30.7 customer funds, Regulation 
30.7(h)(1) provides that an FCM may invest 30.7 customer funds 
subject to, and in compliance with the terms and conditions of 
Regulation 1.25, which includes the asset-based and issuer-based 
concentration limits. 17 CFR 30.7(h)(1). With respect to Cleared 
Swaps Customer Collateral, Regulations 22.2(e)(1) and 22.3(d) 
provide that an FCM or a DCO, respectively, may invest Cleared Swaps 
Customer Collateral in accordance with Regulation 1.25, which 
includes the asset-based and issuer-based concentration limits. 17 
CFR 22.2(e)(1) and 17 CFR 22.3(d).
    \223\ See 2011 Permitted Investments Amendment at 78787, where 
the Commission stated that concentration limits are to be calculated 
on a fund-by-fund basis (i.e., based on separate segregation 
classifications).
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    An FCM or a DCO is currently permitted to directly invest futures 
customer funds, Cleared Swaps Customer Collateral, and 30.7 customer 
funds in each of the Permitted Investments up to the following asset-
based limits: (i) U.S. government securities--100 percent; (ii) U.S. 
agency obligations--50 percent; (iii) for each investment asset class 
of bank CDs, commercial paper, and corporate notes and bonds--25 
percent; and (iv) municipal securities--10 percent.\224\
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    \224\ Regulation 1.25(b)(3)(i)(A)-(D); 17 CFR 1.25(b)(3)(i)(A)-
(D). U.S. government securities refers to general obligations of the 
U.S. and obligations fully guaranteed as to principal and interest 
by the U.S. See 17 CFR 1.25(a)(1)(i).
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    With respect to MMFs, an FCM or a DCO may invest up to 100 percent 
of the total futures customer funds, Cleared Swaps Customer Collateral, 
and 30.7 customer funds that it holds in MMFs that invest only in U.S. 
government securities, provided that the size of the funds' portfolio 
is at least $1 billion and the funds' management company has at least 
$25 billion of assets under management.\225\ If a fund has less than $1 
billion of assets under management, or if the manager of the fund has 
less than $25 billion of assets under management, the FCM or DCO may 
invest up to 10 percent of its total futures customer funds, Cleared 
Swaps Customer Collateral, and 30.7 customer funds in the fund.\226\ 
For Prime MMFs, an FCM or a DCO may invest up to 50 percent of the 
total futures customer funds, Cleared Swaps Customer Collateral, and 
30.7 customer funds in such MMFs; however, the asset-based 
concentration is limited to 10 percent if a fund has less than $1 
billion in assets under management or if the fund's manager has less 
than $25 billion of assets under management.\227\
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    \225\ 17 CFR 1.25(b)(3)(i)(E).
    \226\ 17 CFR 1.25(b)(3)(i)(G).
    \227\ 17 CFR 1.25(b)(3)(i)(F) and (G).
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    With respect to issuer-based concentration limits, an FCM or a DCO 
is permitted to invest up to 100 percent of the total futures customer 
funds, Cleared Swaps Customer Collateral, and 30.7 customer funds that 
it holds in U.S. government securities.\228\ An FCM or a DCO also may 
invest futures customer funds, Cleared Swaps Customer Collateral, and 
30.7 customer funds directly in qualifying Permitted Investments, other 
than U.S. government securities, subject to the following issuer-based 
concentration limits: (i) obligations of any single issuer of U.S. 
agency obligations--25 percent;

[[Page 81256]]

(ii) obligations of any single issuer of municipal securities, bank 
CDs, commercial paper, or corporate notes or bonds--5 percent.\229\
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    \228\ See 17 CFR 1.25(b)(3)(ii), which excludes U.S. government 
securities from the issuer-based concentration limits. See also, 
2011 Permitted Investments Amendment at 78788.
    \229\ 17 CFR 1.25(b)(3)(ii)(A) and (B).
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    With respect to MMFs, an FCM or a DCO may invest up to 100 percent 
of the total futures customer funds, Cleared Swaps Customer Collateral, 
and 30.7 customer funds in a single MMF that invests only in U.S. 
government securities.\230\ With respect to MMFs that maintain 
investment portfolios that hold instruments other than U.S. government 
securities, an FCM or a DCO is subject to the following issuer-based 
concentration limits: (i) interest in any single MMF family may not 
exceed 25 percent of customer funds held; and (ii) interest in any 
individual MMF may not exceed 10 percent of customer funds held.\231\
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    \230\ See 17 CFR 1.25(b)(3)(ii) which excludes MMFs that invest 
only in U.S. government securities from the issuer-based 
concentration limits.
    \231\ 17 CFR 1.25(b)(3)(ii)(C) and (D).
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    The Commission is proposing to amend the asset-based and issuer-
based concentration limits in Regulation 1.25(b)(3) to reflect the 
proposed revisions to the list of Permitted Investments discussed in 
this Proposal and to adjust the limits based on the Commission's 
experience administering Regulation 1.25. In that regard, as discussed 
in Section III.A.2. above, the Commission is proposing to limit the 
scope of MMFs whose interests qualify as Permitted Investments to 
Permitted Government MMFs. A Permitted Government MMF would be defined 
by reference to SEC Rule 2a-7 as an MMF that invests at least 99.5 
percent or more of its total assets in cash, government securities, 
and/or Repurchase Transactions that are collateralized fully.\232\ The 
Commission notes that the scope of underlying instruments in which a 
Permitted Government MMF would be allowed to invest is broader than 
that of the MMFs currently excluded from the concentration limits of 
Regulation 1.25(c) (i.e., MMFs investing solely in U.S. government 
securities). To account for the potential increase in risk associated 
with such broader scope and in the interest of imposing a simple and 
consistent approach to concentration limits, the Commission is 
proposing to establish a single concentration limit of 50 percent for 
all Permitted Government MMFs of a certain size, without distinguishing 
between funds investing solely in U.S. government securities and those 
whose portfolio may also include U.S. agencies securities and/or other 
instruments within the limits of SEC Rule 2a-7.
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    \232\ See supra notes 120 and 121.
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    More precisely, under the Proposal, an FCM's or a DCO's investment 
of Customer Funds in interests in Permitted Government MMFs with at 
least $1 billion in assets and whose management company manages at 
least $25 billion in assets would be limited to no more than 50 percent 
of the total Customer Funds computed separately for each of the 
segregated funds classifications of futures customer funds, Cleared 
Swaps Customer Collateral, and 30.7 customer funds.\233\ The proposed 
asset-based concentration limits are consistent with the concentration 
limits applicable to U.S. agency obligations, which along with U.S. 
Treasury securities, are a permitted underlying instrument for 
Permitted Government MMFs.\234\
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    \233\ Proposed revised Regulation 1.25(c)(3)(i)(E).
    \234\ 17 CFR 1.25(b)(3)(i)(B).
---------------------------------------------------------------------------

    More generally, the Commission is proposing these asset-based 
concentration limits for Permitted Government MMFs to ensure that 
Customer Funds are invested in a manner that limits risks arising from 
a high concentration in any particular Permitted Investment asset 
class. In particular, based on its experience administering the CFTC's 
customer protection rules, the Commission preliminarily believes that 
it is not prudent to allow FCMs and DCOs to invest up to 100 percent of 
segregated Customer Funds in any category of MMFs. For the reasons 
discussed below in connection with the proposed issuer-based 
concentration limits, the Commission is of the view that holding U.S. 
government securities through an MMF gives rise to risks that are 
different from those associated with holding U.S. government securities 
directly, including operational and cybersecurity risks. As such, the 
Commission preliminarily believes that even large MMFs that invest 
solely in U.S. government securities should be subject to a 
concentration limit. The Commission is also proposing to maintain the 
current 10 percent asset-based concentration limit on investments in 
MMFs that hold less than $1 billion in assets or have a management 
company with less than $25 billion in assets under management.\235\ For 
purposes of clarity, the Commission is proposing to delete the 
conjunction ``and'' in that provision to indicate that the fund size 
threshold and the management company size threshold are to be construed 
as alternative prongs triggering the 10 percent limit.
---------------------------------------------------------------------------

    \235\ Proposed Regulation 1.25(c)(3)(i)(F).
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    In addition, to mitigate the potential risks arising from 
concentration in any particular fund or family of funds, the Commission 
is proposing issuer-based concentration limits for investments in 
Permitted Government MMFs. Specifically, the Commission is proposing to 
limit investments of Customer Funds in any single family of Permitted 
Government MMFs to 25 percent and investments of Customer Funds in any 
single issuer of Permitted Government MMFs to 5 percent of the total 
assets held in each of the segregated classifications of futures 
customer funds, Cleared Swaps Customer Collateral, and 30.7 customer 
funds.\236\
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    \236\ Proposed Regulations 1.25(c)(3)(ii)(C) and (D), 
respectively.
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    In adopting the 2011 Permitted Investment Amendment, the Commission 
decided not to introduce concentration limits for MMFs of a certain 
size investing solely in U.S. government securities. This determination 
was made in consideration of comments received from the public, 
including in particular a comment asserting that if FCMs and DCOs are 
permitted to invest all customer segregated funds in U.S. government 
securities directly, an FCM or a DCO should be able to make the same 
investment indirectly via an MMF.\237\ Based on its experience 
administrating CFTC's customer protection rules and in consideration of 
certain recent marketplace events, however, the Commission 
preliminarily believes that introducing concentration limits for 
Permitted Government MMFs is warranted. In particular, the Commission 
is concerned that MMFs, like any institution relying on electronic 
communications, are susceptible to cyber-attacks and operational 
incidents that may adversely impact their normal operating 
capabilities, including delaying or otherwise preventing them from 
processing redemption requests of FCMs and DCOs in a timely 
manner.\238\ FCMs and DCOs may need to redeem

[[Page 81257]]

their interest in Permitted Government MMFs to provide customers with 
cash that is needed to meet, for example, margin calls at other FCMs or 
DCOs, or variation or initial margin requirements for uncleared swap 
transactions, or to cover cash market losses or purchases. More 
generally, the concentration of Customer Funds in any single MMF 
creates vulnerabilities that may affect FCMs' and DCOs' ability to meet 
their regulatory obligations, including providing customers with prompt 
access to their funds.\239\
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    \237\ 2011 Permitted Investments Amendment at 78787.
    \238\ The cyber-attack against ION Cleared Derivatives, a third-
party provider of cleared derivatives order management, order 
execution, trading, and trade processing, demonstrated that an 
incident affecting a single entity may disrupt the operations of 
other market participants and have ripple effects across the 
industry. The incident impacted certain FCMs' operations, including 
by preventing such FCMs from submitting timely and accurate 
positions data to the CFTC. See CFTC Statement on ION and the Impact 
on the Derivatives Markets, available here: https://www.cftc.gov/PressRoom/SpeechesTestimony/cftcstatement020223.
    \239\ For instance, as discussed in the 2011 Permitted 
Investments Amendment, the Reserve Primary Fund's ``breaking the 
buck,'' in September 2008, called attention to the risk to principal 
and potential lack of sufficient liquidity of Prime MMF investments. 
See 2011 Permitted Investments Amendment at 78785. In connection 
with the events affecting the Reserve Primary Fund, staff of the 
CFTC's Division of Clearing and Intermediary Oversight, intervened 
and issued guidance indicating that FCMs holding shares of the fund, 
either as a proprietary investment or as an investment of customer 
segregated funds, could include these investments in the 
calculations required for purposes of compliance with capital, 
segregation, and secured amount reporting requirements (with the 
condition that the NAV be reduced appropriately) even though the 
fund had suspended redemptions. See CFTC Staff Letter No. 08-17, 
available here: https://www.cftc.gov/csl/08-17/download.
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    Although cyber-attacks and other operational incidents may impact 
transactions in any Permitted Investment, including U.S. government 
securities, the Commission believes that the potential risk of Customer 
Funds becoming unavailable is elevated when access to such funds 
depends on the operations of a third party such as an MMF. For 
instance, to the extent a fund experiences an operational issue, such 
incident may result in a redemption suspension for all participants in 
the fund. Thus, by imposing issuer-based concentration limits, the 
Commission intends to facilitate the preservation of principal and 
maintenance of liquidity of Customer Funds through sound 
diversification standards and to mitigate the potential risk of access 
to a large portion of Customer Funds becoming unavailable due to 
cybersecurity or operational incidents, among other events. Given the 
large number of SEC-registered Government MMFs available on the market 
and likely to meet the Permitted Investments' eligibility criteria, the 
Commission preliminarily believes that diversifying an FCM's or DCO's 
portfolio of MMF investments would not be burdensome.\240\
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    \240\ As of August 17, 2023, there are 183 government MMFs 
registered with the SEC (of which 49 are ``Treasury-only'' MMFs). 
See U.S. Securities and Exchange Commission, Money Market Funds 
Statistics, available here: https://www.sec.gov/divisions/investment/mmf-statistics. The government MMFs currently registered 
with the SEC generally do not elect to apply liquidity fees and/or 
redemption gates.
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    In addition, as part of the proposed amendments to the 
concentration limits in Regulation 1.25,\241\ the Commission is 
proposing to revise the asset-based and issuer-based concentration 
limits set forth in paragraphs (b)(3)(i)(F) and (b)(3)(ii)(C) and (D), 
respectively, to reflect the removal of Prime MMFs from the list of 
Permitted Investments.
---------------------------------------------------------------------------

    \241\ See discussion in Section III.A.2 above.
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    As discussed in Section III.A.3 above, the Commission is also 
proposing to permit FCMs and DCOs to invest Customer Funds in Qualified 
ETFs.\242\ The Commission is proposing to impose conditions on 
Qualified ETFs that are similar to the conditions that are imposed on 
Permitted Government MMFs whose interests qualify as Permitted 
Investments.\243\ Among other things, similar to Government MMFs, which 
can invest in a limited set of instruments, including government 
securities and cash, Qualified ETFs would be required to limit their 
investments to instruments that are consistent with their investment 
strategy of seeking to replicate the performance of a public short-term 
U.S. Treasury security index.\244\ For purposes of the Proposal, short-
term U.S. Treasury securities are bonds, notes, and bills with a 
remaining maturity of 12 months or less, issued by, or unconditionally 
guaranteed as to the timely payment of principal and interest by, the 
U.S. Department of the Treasury. Consistent with this condition, the 
Commission is also proposing to require that the eligible U.S. Treasury 
securities represent at least 95 percent of the ETF's investment 
portfolio. Given the similarity of the terms that would apply to 
Permitted Government MMFs and Qualified ETFs under the Proposal, and 
the comparable credit, market, and liquidity risk associated with these 
types of funds comprising instruments generally recognized as safe and 
highly liquid, the Commission preliminarily believes that it is 
appropriate for Qualified ETFs to have the same asset-based and issuer-
based concentration limits as those proposed for Permitted Government 
MMFs. Specifically, under the Proposal, an FCM's or a DCO's investment 
of Customer Funds in Qualified ETFs with at least $1 billion in assets 
and whose management company manages at least $25 billion in assets 
would be limited to an asset-based concentration limit of 50 percent of 
total funds held in each of the segregated classifications of futures 
customer funds, Cleared Swaps Customer Collateral, and 30.7 customer 
funds.\245\ The current 10 percent asset-based concentration limit for 
investments in MMFs that hold less than $1 billion in assets or whose 
management company manages less than $25 billion in assets under 
management would also be extended to Qualified ETFs. In addition, for 
the reasons described supra in connection with Permitted Government 
MMFs, the Commission is proposing to limit investments of Customer 
Funds in any single family of Qualified ETFs to 25 percent and 
investments of Customer Funds in any single issuer of Qualified ETFs to 
5 percent of the total assets held in each of the segregated 
classifications of futures customer funds, Cleared Swaps Customer 
Collateral, and 30.7 customer funds.\246\ Given that there may be at 
least five U.S. Treasury ETFs that could potentially qualify as 
Permitted Investments, the Commission preliminarily believes that the 
proposed issuer-based concentration limits would not be overly 
restrictive.\247\
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    \242\ Proposed Regulation 1.25(a)(1)(vi).
    \243\ See Section III.A.3. above.
    \244\ Proposed Regulation 1.25(a)(1)(vi).
    \245\ Proposed Regulation 1.25(b)(3)(i)(E).
    \246\ Proposed Regulations 1.25(b)(3)(ii)(C) and (D).
    \247\ See 2022 CME Advisory Notice, supra note 170 (announcing 
that CME has added five Short-Term U.S. Treasury ETFs to the list of 
accepted margin collateral). The five ETFs would meet the proposed 
condition of being accepted as performance bond by a DCO. For 
purposes of clarity, the Commission notes, however, that should the 
Commission proceed with adding Qualified ETFs to the list of 
Permitted Investments, FCMs and DCOs would need to assess ETFs' 
eligibility in light of all applicable conditions.
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    The Commission is also proposing revisions to the asset-based and 
issuer-based concentration limits to remove commercial paper, and 
corporate notes and bonds from the limits.\248\ As noted in Section 
III.A.4. above, the Commission is proposing to remove commercial paper 
and corporate notes and bonds from the list of Permitted Investments 
due to the termination of the TLGP by the FDIC in 2012, which resulted 
in such investments no longer qualifying as Permitted Investments. In 
addition, as discussed in Section III.A.6. above, the Commission is 
requesting public comment on the elimination of bank CDs as a Permitted 
Investment due to the apparent lack of interest by FCMs and DCOs in 
such instruments. Therefore, if bank CDs are removed from the list of 
Permitted Investments in a final rulemaking after considering

[[Page 81258]]

comments, specifying asset-based and issuer-based concentration limits 
on investments in commercial paper, corporate notes and bonds, and bank 
CDs would no longer be necessary and would be removed from Regulation 
1.25.
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    \248\ See proposed Regulation 1.25(b)(3)(i)(C) removing 
commercial paper and corporate notes and bonds from the 25 percent 
asset-based concentration limit and proposed Regulation 
1.25(b)(3)(ii)(B) removing commercial paper and corporate notes and 
bonds from the 5 percent issuer-based concentration limit.
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    Finally, as noted in Section III.A.1., the Commission is proposing 
to expand the types of investments that would qualify as Permitted 
Investments to include Specified Foreign Sovereign Debt. The 
Commission, however, is not proposing to impose asset-based or issuer-
based concentration limits on FCM or DCO investments in Specified 
Foreign Sovereign Debt.
    Not imposing concentration limits on the Specified Foreign 
Sovereign Debt would be consistent with the current exclusion of U.S. 
government securities from the asset-based and issuer-based 
concentration limits. As discussed in Section III.A.1. above, the 
relative strength of the economies and limited default risk of Canada, 
France, Germany, Japan, and the United Kingdom are demonstrated by such 
countries being ranked among the seven largest economies in the 
International Monetary Fund's classification of advanced 
economies,\249\ and by the countries being members of the G7, which 
represents the world's largest industrial democracies. In addition, as 
discussed in Section III.A.1. above, the Commission has preliminarily 
determined that the two-year debt instruments that would qualify as 
Specified Foreign Sovereign Debt have credit, liquidity, and volatility 
characteristics that are consistent with two-year U.S. Treasury 
securities. Furthermore, the proposed condition in Regulation 
1.25(a)(1)(vii) that permits an FCM or a DCO to invest Customer Funds 
in Specified Foreign Sovereign Debt only to the extent that the DCO or 
FCM has balances owed to customers denominated in the currency of the 
applicable country is expected to effectively limit the amount of 
Customer Funds that an FCM or a DCO may invest in the Specified Foreign 
Sovereign debt.\250\ The proposed condition that an FCM or a DCO must 
stop making direct investments, or engaging in reverse repurchase 
agreements, involving the Specified Foreign Sovereign Debt of a country 
whose credit default spread on two-year debt instruments exceeds 45 BPS 
would be expected to further preserve the principal of customers' 
foreign currency deposits held by FCMs and DCOs.\251\ Lastly, not 
imposing asset-based or issuer-based concentration limits on an FCM's 
or a DCO's investments in Specified Foreign Sovereign Debt is 
consistent with the Commission's 2018 Order, which did not impose 
concentration limits on a DCO's investment of futures customer funds or 
Cleared Swaps Customer Collateral in the sovereign debt of France or 
Germany. Accordingly, based on the above, the Commission preliminarily 
believes that asset-based and issuer-based concentration limits are not 
necessary for investments in Specified Foreign Sovereign Debt.
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    \249\ See Statistical Appendix to the World Economic Outlook, 
April 2023, International Monetary Fund, available here: https://www.imf.org/en/Publications/WEO/Issues/2023/04/11/world-economic-outlook-april-2023.
    \250\ Proposed Regulation 1.25(a)(1)(vii).
    \251\ Proposed Regulation 1.25(f)(3).
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    The Commission also notes that the concentration limits in 
Regulation 1.25 are minimum requirements. Pursuant to Regulation 1.11, 
an FCM is required to monitor and manage market, credit, liquidity, 
foreign currency, legal, operational, settlement, segregation, capital, 
and any other applicable risks associated with its activity, as part of 
the FCM's risk management program.\252\ If, based on its independent 
risk assessment, an FCM determines that stricter concentration limits 
with respect to Permitted Investments of Customer Funds are 
appropriate, the FCM is required to implement such stricter limits, in 
accordance with Regulation 1.11. Similarly, Regulation 39.13(g)(10) 
requires a DCO to limit the assets it accepts as initial margin to 
those that have minimal credit, market, and liquidity risks, while 
Regulation 39.13(g)(13) requires the DCO to apply appropriate 
limitations or charges on the concentration of assets posted as initial 
margin, as necessary, in order to ensure its ability to liquidate such 
assets quickly with minimal adverse price effects.
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    \252\ 17 CFR 1.11.
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    In addition, if as a result of market events or extraneous 
circumstances, such as a change in an MMF's size, the FCM or DCO 
inadvertently breaches the concentration thresholds, the FCM or DCO 
would be expected to undertake prompt actions to restore compliance 
with the concentration limits, while managing the investments of 
Customer Funds in a manner consistent with the general objectives of 
preserving principal and maintaining liquidity. Depending on the market 
conditions, such actions may include taking steps to progressively 
reduce the amount of Customer Funds invested in a particular asset 
class instead of immediately divesting the investments in a potentially 
volatile market.

[[Page 81259]]

    The foregoing discussion of concentration limits can be summarized 
as follows:

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                      Current concentration limits                  Proposed concentration limits
             Instrument                       Size          --------------------------------------------------------------------------------------------
                                                                   Asset-based            Issuer-based           Asset-based            Issuer-based
--------------------------------------------------------------------------------------------------------------------------------------------------------
U.S. government securities.........  N/A...................  No limit..............  No limit.............  No limit.............  No limit.
Municipal Securities...............  N/A...................  10%...................  5%...................  10%..................  5%.
U.S. agency obligations............  N/A...................  50%...................  25%..................  50%..................  25%.
Bank CDs...........................  N/A...................  25%...................  5%...................  25%..................  5%.
Government MMFs investing solely in  >$1B assets and/or      No limit..............  No limit.............  50%..................  25% per family 5% per
 U.S. government securities (i.e.,    management company     ......................  .....................  .....................   fund.
 securities issued or fully           with >25B in assets.   10%...................  10% (de facto limit    10%..................
 guaranteed by the U.S. government). <$1B assets and/or                               based on asset-based
                                      management company                              limit).
                                      with <$25B in assets.
Government MMFs as defined in SEC    >$1B assets and/or      50%...................  25% per family 10%     50%
 Rule 2a-7 (including MMFs whose      management company     ......................   per fund.             .....................
 portfolio includes U.S. agency       with >25B in assets.   10%...................                         10%..................
 obligations and other instruments). <$1B assets and/or
                                      management company
                                      with <$25B in assets.
Qualified ETFs.....................  >$1B assets and/or      N/A...................  N/A..................  50%..................  25% per family 5% per
                                      management company                                                                            fund.
                                      with >25B in assets.
                                     <$1B assets and/or      N/A...................  N/A..................  10%
                                      management company
                                      with <$25B in assets.
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Request for Comment: The Commission requests comment on all aspects 
of its Proposal relating to concentration limits, including the 
proposed asset-based and issuer-based concentration limits for 
Permitted Government MMFs and Qualified ETFs. The Commission requests 
specific comment with respect to the following:
    22. Should the Commission adopt different asset-based and issuer-
based concentration limits for Permitted Government MMFs and/or 
Qualified ETFs than the limits proposed? Are the proposed limits 
sufficiently conservative to ensure that Customer Funds are adequately 
protected and liquid?
    23. Should the Commission revise any of the asset-based 
concentration limits that are not proposed to be revised as part of 
this Proposal? For instance, FCMs and DCOs are permitted to invest up 
to 50 percent of their Customer Funds in U.S. agency obligations and up 
to 10 percent in municipal securities. Should the Commission consider 
revising these or other asset-based concentration limits? If so, how 
should the asset-based concentration limits be revised? Please explain, 
and provide data if possible.
    24. Should the Commission revise any of the issuer-based 
concentration limits that are not proposed to be revised as part of 
this Proposal? For instance, FCMs and DCOs are permitted in invest up 
to 25 percent of their Customer Funds in obligations of a single issuer 
of U.S. agency obligations and up to 5 percent in obligations of any 
single issuer of municipal securities. Should the Commission consider 
revising these or other issuer-based concentration limits? If so, how 
should the issuer-based concentration limits be revised? Please 
explain, and provide data to support your comment, if possible.
    25. Should the Commission impose asset-based and/or issuer-based 
concentration limits on Specified Foreign Sovereign Debt? If so, please 
explain why such concentration limits are necessary. Please provide 
data to support your comment, if possible.
    26. Given the similarities between Permitted Government MMFs and 
Qualified ETFs discussed above, the Commission is proposing to apply 
the same asset-based and issuer-based concentration limits to both 
asset classes. Is there any reason to distinguish between Permitted 
Government MMFs and Qualified ETFs with respect to the application of 
concentration limits? If so, please explain.

C. Futures Commission Merchant Capital Charges on Permitted Investments

    Although FCMs and DCOs may invest Customer Funds in Permitted 
Investments, as discussed supra, Commission regulations provide that 
FCMs and DCOs are also financially responsible for any losses resulting 
from such investments, and are explicitly prohibited from allocating 
investment losses to customers or clearing FCMs, respectively. 
Specifically, Regulation 1.29 provides that FCMs or DCOs, as 
applicable, shall bear sole responsibility for any losses resulting 
from the investment of futures customer funds, and further provides 
that no investment losses shall be borne or otherwise allocated to FCM 
customers or to FCMs clearing customer accounts at DCOs.\253\ In 
addition, Regulation 22.2(e)(1) \254\ provides that an FCM shall bear 
sole responsibility for any losses resulting from the investment of 
Cleared Swaps Customer Collateral and may not allocate investment 
losses to Cleared Swaps Customers of the FCM and Regulation 30.7(i) 
provides that an FCM shall bear sole financial responsibility for any 
losses resulting from the investment of 30.7 customer funds, and 
further provides that no investment losses may be allocated to the 30.7 
customers of the FCM.\255\ Additionally, the Commission is proposing an 
amendment to Regulation 22.3(d) to clarify that DCOs are financially 
responsible for any losses resulting from investments of Cleared Swap 
Customer Collateral in Permitted Investments, consistent with 
Regulation 1.29, which addresses financial responsibility for losses 
resulting from investment of futures customer funds, and the 
Commission's original intent to permit investments of Cleared Swaps 
Customer Collateral within the parameters applicable to investments of 
futures customer funds.\256\
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    \253\ 17 CFR 1.29(b).
    \254\ 17 CFR 22(e)(1).
    \255\ 17 CFR 30.7(i).
    \256\ See supra note 42.
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    To reserve liquidity for potential losses resulting from 
investments of Customer Funds, Regulation 1.17(c)(5)(v) requires an FCM 
to take capital charges in computing the firm's regulatory 
capital.\257\ The capital

[[Page 81260]]

charges are designed to reflect potential market risk associated with 
the FCM's holding of Permitted Investments, and to ensure that the firm 
has sufficient liquid financial resources to cover potential investment 
losses. Regulation 1.17(c)(5)(v) further provides that an FCM must 
apply the capital charges set forth in Rule 15c3-1 under the Securities 
Exchange Act (``SEC Rule 15c3-1'') \258\ and Appendix A to SEC Rule 
15c3-1 \259\ to the Permitted Investments.
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    \257\ 17 CFR 1.17(c)(5). Although capital charges do not apply 
to DCOs, a DCO is required under Regulation 39.11(a)(2) to maintain 
financial resources sufficient to enable it to cover its operating 
costs for a period of at least one year, calculated on a rolling 
basis. Investment losses would be included in the DCO's operating 
costs.
    \258\ 17 CFR 240.15c3-1.
    \259\ 17 CFR 240.15c3-1a.
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    As discussed in Section III.A.1. above, the Commission is proposing 
to revise the Permitted Investments to include Specified Foreign 
Sovereign Debt (i.e., the sovereign debt of Canada, France, Germany, 
Japan, and the United Kingdom). Under the Proposal, each Specified 
Foreign Sovereign Debt instrument must have a remaining time-to-
maturity of 180 calendar days or less. Given the proposed remaining 
time-to-maturity limit of 180 calendar days for each Specified Foreign 
Sovereign Debt instrument, an FCM investing Customer Funds in 
qualifying sovereign debt of Canada would have no capital charge for 
instruments with a remaining time to maturity of less than 3 months and 
a capital charge of 0.5 percent of the market value for instruments 
with a remaining time to maturity of 3 to 6 months under SEC Rule 15c3-
1.\260\ The capital charge for the sovereign debt of France, Germany, 
Japan, and the United Kingdom, is determined under SEC rules by 
reference to nonconvertible debt securities with a fixed interest rate, 
fixed maturity date, and minimal credit risk. Such nonconvertible debt 
securities that have a remaining time to maturity of one year or less 
are subject to a capital charge of 2 percent of the market value of the 
security under SEC Rule 15c3-1(c)(2)(F)(1).\261\
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    \260\ SEC Rule 15c3-1(c)(2)(vi)(C) provides that the capital 
charges on the sovereign debt of Canada is the same as the capital 
charges set forth in SEC Rule 15c3-1(c)(2)(vi)(A) for debt 
obligations of the U.S., debt obligations fully guaranteed as to 
principal and interest by the U.S., or debt obligations of U.S. 
agencies. SEC Rule 15c3-1(c)(2)(vi)(A) provides that a broker or 
dealer must take a 0.5 percent capital charge on U.S. Treasury and 
U.S. agency debt instruments that have a remaining time to maturity 
of between 3 months and 6 months, and no capital charge on U.S. 
Treasury and U.S. agency debt instruments having a remaining time to 
maturity of less than 3 months.
    \261\ SEC Rule 15c3-1(c)(2)(F)(1) specifies the capital charges 
for nonconvertible debt securities with a fixed interest rate, fixed 
maturity date, and minimal credit risk, which includes the sovereign 
debt of France, Germany, Japan, and the United Kingdom. The capital 
charge for the sovereign debt of these countries that have a 
remaining time-to-maturity of no more than one year is 2 percent of 
the market value of debt instrument.
---------------------------------------------------------------------------

    With respect to Qualified ETFs, neither SEC Rule 15c3-1 nor 
Appendix A to SEC Rule 15c3-1 explicitly addresses capital charges for 
ETFs primarily comprised of U.S. Treasury securities. SEC Rule 15c3-
1(c)(2)(vi)(D)(1) does specify a 2 percent capital charge for a broker-
dealer's net position in redeemable securities of a Prime MMF or a 
Permitted Government MMF.
    SEC staff, however, has provided guidance to registered securities 
brokers or dealers stating that staff would not recommend an 
enforcement action to its Commission if a broker or dealer applied a 
capital charge of 2 percent of the market value of ETFs shares held in 
the size of a creation units.\262\ The SEC staff's guidance was 
applicable to a U.S. Treasury ETF that: (i) is an open-ended management 
company registered with the SEC under the Investment Company Act of 
1940 that issues securities redeemable at the net asset value; and (ii) 
invests solely in cash and government securities that are eligible 
securities under paragraph (a)(11) of Rule 2a-7, limited to U.S. 
Treasury floating and fixed rate bills, notes, and bonds with a 
remaining term to final maturity of 12 months or less, government money 
market funds as defined in Rule 2a-7, and/or Repurchase Transactions 
with a remaining term to final maturity of 12 months or less 
collateralized by U.S. Treasury securities or other government 
securities with a remaining term to final maturity of 12 months or 
less. The SEC staff position was subject to the following conditions: 
(i) the broker or dealer is not aware of any substantial operational 
problem that the U.S. Treasury ETF may be experiencing; (ii) the U.S. 
Treasury ETF shares can be redeemed by a broker or dealer through an 
authorized participant, the redemption of the U.S. Treasury ETF's 
shares can be settled in exchange for a basket of the ETF's underlying 
securities and/or cash by T+1, and the U.S. Treasury ETF has committed 
in its registration statement to permit shareholders, except in 
extraordinary circumstances, to settle transactions within that 
timeframe; and (iii) the U.S. Treasury ETF's shares are listed for 
trading on a national securities exchange and trades of such shares are 
settled in accordance with the standard cycle prescribed by SEC Rule 
15c6-1 \263\ under the Securities Exchange Act of 1934.
---------------------------------------------------------------------------

    \262\ See Letter titled Net Capital Treatment of Certain U.S. 
Treasury Exchange-Traded Funds, issued by the Division of Trading 
and Markets to Ms. Kris Dailey, Vice President, Risk Oversight & 
Operational Regulations, Financial Industry Regulatory Authority, 
June 2, 2022 (``SEC ETF Letter''). The SEC ETF Letter is available 
at the SEC's website: https://www.sec.gov/divisions/marketreg/mr-noaction/2022/finra-060222-15c3-1.pdf.
    \263\ 17 CFR 240.15c6-1.
---------------------------------------------------------------------------

    Based on the SEC's guidance regarding the capital charges for U.S. 
Treasury ETFs, the Commission is specifying that FCMs would be required 
to apply a capital charge equal to 2 percent of the fair market value 
of the shares of a Qualified ETF that invests in the instruments 
specified in the SEC ETF Letter.
    Request for Comment:
    27. The Commission requests comment on the proposed capital charges 
for Specified Foreign Sovereign Debt and Qualified ETFs.
    28. The Proposal would apply a 2 percent capital charge on the 
value of Qualified ETF shares that invests solely in cash and 
government securities that are eligible securities under paragraph 
(a)(11) of SEC Rule 2a-7, limited to U.S. Treasury floating and fixed 
rate bills, notes, and bonds with a remaining term to final maturity of 
12 months or less, government money market funds as defined in SEC Rule 
2a-7, and/or Repurchase Transactions with a remaining term to final 
maturity of 12 months or less collateralized by U.S. Treasury 
securities or other government securities with a remaining term to 
final maturity of 12 months or less. Does the limitation on the 
investments that the Qualified ETF may hold in order to apply the 2 
percent capital charge raise any issues for FCMs investing in Qualified 
ETFs? Would Qualified ETFs hold investments not covered by the SEC ETF 
Letter? If so, what different investments could a Qualified ETF hold? 
How would such additional investments impact the capital charge that 
should be applied to Qualified ETFs?

D. Segregation Investment Detail Report

    Regulations 1.32(f), 22.2(g)(5), and 30.7(l)(5) require each FCM to 
submit a SIDR Report to the Commission and the FCM's DSRO listing the 
names of all banks, trust companies, FCMs, DCOs, and other depositories 
or custodians holding futures customer funds, Cleared Swaps Customer 
Collateral, or 30.7 customer funds. The FCM is further required to 
identify in the SIDR Report the amount of futures customer funds, 
Cleared Swaps Customer Collateral, or 30.7 customer funds invested in 
each of the following categories of Permitted Investments: (i) U.S. 
Treasury securities;

[[Page 81261]]

(ii) municipal securities; (iii) government sponsored enterprise 
securities (i.e., U.S. agency obligations); (iv) bank CDs; (v) 
commercial paper; (vi) corporate notes or bonds; and (vii) interests in 
MMFs. The SIDR Report is required to be filed twice each month with the 
Commission and the firm's DSRO, with balances reported as of the 
fifteenth day of each month, or the first business day thereafter if 
the fifteenth day of the month is not a business day, and as of the 
last business day of each month.
    The Commission is proposing to amend Regulations 1.32(f), 
22.2(g)(5), and 30.7(l)(5), which define the content of the SIDR 
Report, by deleting the requirement for an FCM to report the balances 
invested in commercial paper and corporate notes and bonds as such 
investments would no longer be Permitted Investments under the 
Proposal, for the reasons articulated supra.\264\
---------------------------------------------------------------------------

    \264\ As discussed in Section III.A.6. above, the Commission 
notes that no FCMs or DCOs currently invest Customer Funds in bank 
CDs and has requested public comment regarding the elimination of 
bank CDs from the list of Permitted Investments. If the Commission 
were to eliminate bank CDs in the final rulemaking, the Commission 
would also amend Regulations 1.32(f), 22.2(g)(5), and 30.7(l)(5) to 
remove references to bank CDs.
---------------------------------------------------------------------------

    The Commission is also proposing to amend Regulations 1.32(f), 
22.2(g)(5), and 30.7(l)(5) to require each FCM to report the total 
amount of futures customer funds, Cleared Swaps Customer Collateral, 
and 30.7 customer funds invested in Specified Foreign Sovereign Debt of 
each country that is included within the Specified Foreign Sovereign 
Debt (i.e., individual reporting for Canada, France, Germany, Japan, 
and the United Kingdom). The Commission is also proposing to amend 
Regulations 1.32(f), 22.2(g)(5), and 30.7(l)(5) to require an FCM to 
include in the SIDR Report the total amount of futures customer funds, 
Cleared Swaps Customer Collateral, and 30.7 customer funds invested in 
Qualified ETFs as such investments would be Permitted Investments under 
the Proposal. In addition, the Commission is proposing to amend the 
above regulations by revising the requirement to report balances 
invested in interests in MMFs to reflect that such investments are 
limited to interests in Government MMFs consistent with the Proposal.
    Request for Comment:
    29. The Commission requests comment on the proposed amendments to 
Regulations 1.32(f), 22.2(g)(5), and 30.7(l)(5) and the proposed 
revisions to the SIDR Reports, including whether additional revisions 
would be necessary.

E. Read-Only Electronic Access to Customer Funds Accounts Maintained by 
Futures Commission Merchants

    Commission regulations require depositories holding Customer Funds 
for FCMs to provide the Commission with direct, read-only electronic 
access to the Customer Fund accounts (``Read-only Access Provisions''). 
The Read-only Access Provisions are set forth in Regulation 1.20, 
Appendix A to Regulation 1.20, and Appendix A to Regulation 1.26, for 
futures customer funds; Regulation 22.5 for Cleared Swaps Customer 
Collateral; and, Regulation 30.7 and appendices E and F to Part 30 of 
the Commission's regulations for 30.7 customer funds.
    The Commission adopted the Read-only Access Provisions in 2013 as 
part of a regulatory reform seeking to enhance the CFTC's customer 
protection regime.\265\ In particular, the Commission sought to 
strengthen the customer fund protections in response to the failure of 
two FCMs that violated customer fund segregation laws, which resulted 
in shortfalls in Customer Funds balances.\266\ The Commission noted 
that the FCM failures raised questions concerning the adequate 
functioning and capacity of the oversight system to monitor FCM 
activities, verify Customer Funds balances, and detect fraud.\267\
---------------------------------------------------------------------------

    \265\ See generally 2013 Protections of Customer Funds Release.
    \266\ Id. at 68509.
    \267\ Id. at 68510.
---------------------------------------------------------------------------

    By adopting the Read-only Access Provisions, the Commission sought 
to establish, among other measures, a mechanism that would enable 
Commission staff to review and identify discrepancies between an FCM's 
daily segregation reports \268\ and customer fund balances on deposit 
at various depositories.\269\ To that effect, the Commission amended 
Regulations 1.20 and 30.7 to include provisions requiring FCMs to 
deposit Customer Funds only with depositories that agree to provide the 
Commission with direct, read-only electronic access to allow Commission 
staff to review account balance information and transactions.
---------------------------------------------------------------------------

    \268\ Regulations 1.32 (for futures customer funds), 22.2(g) 
(for Cleared Swaps Customer Collateral) and 30.7(l) (for 30.7 
customer funds) require an FCM to prepare, among other records, a 
daily record as of the close of each business detailing the total 
amount of funds on deposit in customer segregated accounts and the 
total amount of funds owed to customers. The purpose of the daily 
record is for the FCM to demonstrate compliance with its obligation 
to hold a sufficient amount of funds in segregated accounts to pay 
the full account balance of each customer.
    \269\ See 2013 Protections of Customer Funds Release at 68537 
and 68580.
---------------------------------------------------------------------------

    The Commission also adopted template acknowledgment letters set 
forth in Appendix A to Regulation 1.20 and Appendix E to Part 30 of the 
Commission's regulations to require, among other things,\270\ that the 
depository acknowledge and agree, pursuant to authorization granted by 
the FCM, to provide the appropriate Commission staff with ``the 
technological connectivity, which may include provision of hardware, 
software, and related technology and protocol support, to facilitate 
direct, read-only electronic access to transaction and account balance 
information.'' \271\ The template acknowledgment letters set forth in 
Appendix A to Regulation 1.26 and Appendix F to Part 30 contain similar 
provisions with respect to MMF accounts in which FCMs hold customer 
segregated funds.\272\
---------------------------------------------------------------------------

    \270\ These appendices are intended to be used by depositories 
that accept Customer Funds from FCMs to acknowledge that the funds 
belong to the FCM customer and cannot be used to offset obligations 
of the FCM.
    \271\ 17 CFR Appendix A to 1.20, 17 CFR Appendix E to Part 30.
    \272\ 17 CFR Appendix A to 1.26, 17 CFR Appendix F to Part 30.
---------------------------------------------------------------------------

    In adopting the Read-only Access Provisions, the Commission noted 
that it did not anticipate that staff would access FCM accounts on a 
regular basis to monitor account activity, but, rather, that staff 
would make use of the Read-only Access Provision only when necessary to 
obtain account balances and other information that staff could not 
obtain via the CME and NFA automated daily segregation confirmation 
system or otherwise directly from the depositories.\273\ Specifically, 
the Commission explained that CME and NFA had adopted rules requiring 
FCMs to instruct each depository holding Customer Funds to report 
balances on a daily basis to CME or NFA, respectively.\274\
---------------------------------------------------------------------------

    \273\ 2013 Protections of Customer Funds Release at 68537 and 
68592 (noting in footnote 662 that the Commission generally expected 
that it would seek to obtain account information from the CME and 
NFA automated daily segregation confirmation system and/or from 
depositories directly prior to requesting a depository to activate 
electronic access).
    \274\ Id., at 68512. CME Rule 971.C. provides that in order for 
an FCM clearing member's account held at a depository to qualify as 
a segregated account for Customer Funds, the FCM clearing member 
must provide CME with access to account information, in a form and 
manner prescribed by CME, and the depository must allow the FCM 
clearing member to provide CME with access to the account 
information, in a form and manner prescribed by CME. NFA Financial 
Requirements Section 4, paragraph (b), provides that each member FCM 
must instruct each depository, as required by NFA, holding 
segregated Customer Funds to report balances in the FCM's customer 
segregated accounts to NFA or a third party designated by NFA in the 
form and manner prescribed by NFA. CME and NFA Rules are available 
at the following websites: https://www.CMEGroup.com, and https://www.NFA.Futures.Org.

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

[[Page 81262]]

    In practice, CME and NFA receive account information from all 
depositories holding Customer Funds on a daily basis pursuant to CME 
Rule 971.C. and NFA Financial Requirements Section 4, respectively. 
Furthermore, CME and NFA have developed programs that compare the daily 
balances reported by each of the depositories with balances reported by 
the FCMs in their daily segregation reports that are filed with CME 
and/or NFA.\275\ Under these programs, an alert is generated for 
discrepancies that exceed defined thresholds. In the event of such 
alerts, CME/NFA staff conduct appropriate analysis and follow-up 
actions, which may involve communications with an FCM to clarify or 
remedy the situation, and document the outcome.
---------------------------------------------------------------------------

    \275\ At the time the Commission issued the 2013 Protections of 
Customer Funds Release, CME and NFA had just recently launched the 
programs. See 2013 Protections of Customer Funds Release at 68512. 
The verification programs have been further developed in the years 
that followed. FCMs report on the daily segregation records total 
funds held in segregation with banks, clearing organizations, and 
net equities with other FCMs in addition to other balances.
---------------------------------------------------------------------------

    The Commission's experience with overseeing the administration of 
the CME and NFA daily segregation confirmation and verification 
processes for several years has afforded sufficient assurances that the 
system provides adequate access to relevant information and is capable 
of detecting discrepancies in account balances in a timely manner. 
Moreover, the establishment of an efficient method for obtaining and 
verifying FCM balances of Customer Funds at each depository supports 
the Commission's initial expectation that the direct, read-only 
electronic access would not be the Commission's principal tool for 
obtaining account information at depositories.\276\ The Commission also 
is retaining the current requirement that FCMs deposit Customer Funds 
only with depositories that agree that accounts may be examined by 
Commission or DRSO staff at any reasonable time, and that further agree 
to reply promptly and directly to any request from Commission or DSRO 
staff for confirmation of account balances or provision of any other 
information regarding or related to an account, in order to ensure that 
staff have timely access information concerning Customer Funds from 
depositories.\277\
---------------------------------------------------------------------------

    \276\ See 2013 Protections of Customer Funds Release at 68537 
(noting that the Commission anticipated that the combination of 
receipt of daily account balances reported by depositories to CME 
and NFA, and the Commission's ability to confirm account balances 
and transactions directly with depositories via direct 
communications would diminish the need to rely upon direct 
electronic access to account information at depositories).
    \277\ See Regulations 1.20(d)(5) and (6), 1.26(b), 22.5(a) and 
(b), and 30.7(d)(5) and (6). 17 CFR 1.20(d), 1.26(b), 22.5, and 
30.7(d). For example, Regulation 1.20(d)(5) provides that an FCM 
must deposit futures customer funds only with a depository that 
agrees that accounts may be examined at any reasonable time by 
specified Commission or DSRO staff. Regulation 1.20(d)(6) provides 
that an FCM must deposit futures customer funds only with a 
depository that agrees to reply promptly and directly to any request 
from specified Commission staff or DSRO staff for confirmation of 
account balances or provision of any other information regarding or 
related to the FCM's account. Regulation 1.20(d)(5) and (6) further 
provide that the written acknowledgment required from the depository 
must contain the FCM's authorization to the depository to reply 
promptly and directly to the Commission or DSRO without further 
notice to or consent from the FCM. Regulation 22.5 provides that an 
FCM must obtain a written acknowledgment letter in accordance with 
Regulation 1.20 and Regulation 1.26 from each depository holding 
Cleared Swaps Customer Collateral, except an acknowledgment letter 
is not required of a DCO that has adopted rules providing for the 
segregation of Cleared Swaps Customer Collateral.
---------------------------------------------------------------------------

    In addition, in implementing the Read-only Access Provisions, the 
Commission has encountered various practical challenges. Specifically, 
given the number of depositories with which FCMs establish 
relationships and the total number of accounts that FCMs maintain with 
various depository institutions, the Commission must obtain and keep a 
current log of credentials to access the depository accounts, and in 
some instances, must obtain and store physical devices required as part 
of a multi-factor authentication process, for thousands of different 
depository accounts.\278\ Frequently, Commission staff must be trained 
to navigate the various account access systems and work regularly with 
depositories' technology staff to ensure that the systems' security 
features do not prevent the Commission's access to the accounts.\279\ 
Furthermore, due to lack of appropriate infrastructure, some foreign 
depository institutions are unable to provide direct electronic access 
to the customer segregated accounts, offering instead to send end-of-
day accounts statements by email. These operational challenges put an 
undue burden on the Commission's resources, particularly considering 
that the Commission contemplated that the use of real-time access would 
be limited, and prevent Commission staff from using the Read-only 
Access Provisions as intended.\280\
---------------------------------------------------------------------------

    \278\ Based on information provided by CME, as of March 7, 2023, 
FCM registrants maintained over 3,600 active accounts with 
approximately 200 banks, other registered FCMs, foreign broker-
dealers, foreign exchanges, and DCOs.
    \279\ In this regard, depositories often require Commission 
staff to revise user-ids and passwords on a regular basis otherwise 
the access is interrupted and must be reset by the depositories. 
Some depositories also require the use of additional security 
devices beyond user-IDs and passwords, including key fobs or other 
forms of multi-factor authentication.
    \280\ Commission staff has not had a regulatory need to attempt 
to use read-only access for any FCM's depository accounts in the 
approximately 10 years since the Regulation was implemented.
---------------------------------------------------------------------------

    Thus, in light of the practical challenges of maintaining direct 
read-only access to depository accounts and the availability of 
efficient alternative methods for verifying customer segregated account 
balances, the Commission is proposing to eliminate the Read-only Access 
Provisions in Regulations 1.20 and 30.7, and Appendix A to Regulation 
1.20, Appendix A to Regulation 1.26, and appendices E and F to Part 30 
of the Commission's regulations.\281\
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    \281\ If adopted, the proposed amendments would extend to 
Regulation 22.5, which requires FCMs to obtain an acknowledgment 
letter from depositories before depositing Cleared Swaps Customer 
Collateral with a depository, in accordance with Regulations 1.20 
and 1.26. 17 CFR 22.5(a). Regulation 22.5(b) further requires FCMs 
to adhere to all requirements specified in Regulation 1.20 and 1.26 
regarding retaining, permitting access to filing, or amending the 
written acknowledgment letters. 17 CFR 22.5.
    Separately, the Commission is proposing to redesignate 
appendices A and B to Regulation 1.20 as appendices C and D to Part 
1, and appendices A and B to Regulation 1.26 as appendices F and G 
to Part 1, to address a change in the rules of the Office of the 
Federal Register regarding the structure of regulatory text to be 
codified in the Code of Federal Regulations.
---------------------------------------------------------------------------

    The Commission notes that under the Proposal, FCMs would not need 
to obtain new acknowledgment letters for existing accounts at 
depositories holding Customer Funds. Should the Commission proceed with 
the proposed amendments after notice and comment, the revised 
acknowledgment letters would have to be obtained for accounts opened 
following the effective date of the revisions or in the event the FCM 
is required to obtain a new acknowledgment letter for reasons unrelated 
to the elimination of the Read-only Access Provisions. For the 
avoidance of doubt, the Commission confirms that even if an FCM had not 
obtained revised acknowledgment letters for accounts existing prior to 
the effective date of the proposed revisions, but keeps instead such 
letters in the currently applicable template form, the depositories 
would not be required to provide direct, read-only access to accounts 
holding Customer Funds.
    Request for Comment: The Commission seeks comment on all

[[Page 81263]]

aspects of the Proposal relating to the elimination of the Read-only 
Access Provisions, including:
    30. The existing Read-only Access Provisions currently afford the 
Commission with direct access to depository accounts holding Customer 
Funds. Given the challenges depositories and Commission staff are 
encountering in implementing and administrating the provisions and the 
availability of alternative means of obtaining transaction and account 
balance information, what practical implications should the Commission 
consider prior to deciding whether to eliminate the requirement for 
depositories to provide Commission's staff with direct, read-only 
electronic access?

F. Proposed Conforming Amendments

    Regulation 1.26 requires each FCM or DCO that invests futures 
customer funds in financial instruments that are Permitted Investments, 
including qualifying MMFs, to separately account for such instruments 
and to segregate the instruments from its own funds. The FCM or DCO 
also must obtain and retain in its files a written acknowledgment from 
the depository holding the instruments stating that the depository was 
informed that the instruments belong to futures customers and are being 
held in accordance with the provisions of the Act and Commission 
regulations. Regulation 1.26 also specifies how direct investments in 
MMFs must be held and sets forth the template acknowledgement letter to 
be used with respect to direct investments in MMFs.\282\
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    \282\ For purposes of clarification, an FCM or a DCO that holds 
shares of an MMF in a custodial account at a depository (not 
directly with the MMF or its affiliate) is required to execute the 
template acknowledgement letter set forth in Appendix A or B of 
Regulation 1.20 (to be redesignated Appendix C and Appendix D to 
Part 1), as applicable. 17 CFR 1.20.
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    To account for the proposed change in the scope of MMFs that 
qualify as Permitted Investments and the proposed addition of Qualified 
ETFs to the list of Permitted Investments, the Commission proposes 
revisions to paragraphs (a) and (b) of Regulation 1.26 to replace the 
term ``money market mutual fund'' with ``government money market fund 
and U.S. Treasury exchange-traded fund'' or ``government money market 
fund or U.S. Treasury exchange-traded fund,'' as appropriate. To 
address the adoption of appendices H and I, as discussed below, 
paragraph (b) of Regulation 1.26 would be further revised to replace 
the reference to ``appendix A or B to this section'' with ``appendix F, 
G, H or I to this part.'' \283\
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    \283\ Regulation 1.26 currently refers to ``appendix A or B to 
this section.'' As noted supra, Appendix A and Appendix B to 
Regulation 1.26 would be redesignated Appendix F and Appendix G to 
Part 1 to address a change in the rules of the Office of the Federal 
Register regarding the structure of regulatory text to be codified 
in the Code of Federal Regulations.
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    The Commission also proposes to amend Appendices A and B to 
Regulation 1.26 (to be redesignated appendices F and G to Part 1) to 
replace the term ``Money Market Mutual Fund'' with ``Government Money 
Market Fund.''
    To account for the proposed addition of Qualified ETFs to the list 
of Permitted investments, the Commission also proposes to adopt new 
appendices H and I to Part 1. The appendices would set forth template 
acknowledgment letters for Qualified ETFs and would be modeled on 
appendices A and B to Regulation 1.26 (to be redesignated appendices F 
and G to Part 1), which currently address money market mutual funds. 
Appendices H and I to Part 1 would mostly replicate appendices A and B 
to Regulation 1.26, except that the term ``money market mutual fund'' 
would be replaced with ``U.S. Treasury exchange-traded fund;'' 
condition (1) will read ``To qualify as a Permitted Investment, 
interests in U.S. Treasury exchange-traded funds must be redeemable in 
cash by a futures commission merchant or derivatives clearing 
organization in its capacity as an authorized participant pursuant to 
an authorized participant agreement, as defined in Sec.  270.6c-11 of 
this title, at a price based on the net asset value in accordance with 
the Investment Company Act of 1940 and regulations thereunder, and on a 
delivery versus payment basis;'' and references relating to money 
market mutual funds would be eliminated.
    In addition, Regulation 30.7(d) requires that FCMs obtain written 
acknowledgment letters from each depository with which they maintain 
30.7 customer funds. Appendices E and F to Part 30 of the Commission's 
regulations set forth the template acknowledgment letters. The 
Commission is proposing conforming changes to Regulation 30.7(d)(2) to 
replace the term ``money market mutual fund'' with ``government money 
market fund and U.S. Treasury exchange-traded fund'' or ``government 
money market fund or U.S. Treasury exchange-traded fund,'' as 
appropriate. The Commission is also proposing changes to Appendix F to 
Part 30, to replace the term ``money market mutual fund'' with 
``government money market fund.'' In addition, the Commission is also 
proposing to revise Regulation 30.7(d)(2) to add ``or Appendix G to 
this part, respectively'' after ``Appendix F to this part'' to address 
the adoption of new Appendix G to Part 30, which would set forth a 
template acknowledgment letter modeled on proposed Appendix C to 
Regulation 1.26 but addressing 30.7 customer funds.
    Request for Comment: The Commission seeks comment on all aspects of 
the Proposal relating to the conforming amendments. The Commission also 
invites comments on any other aspect of the Proposal. The Commission 
also specifically requests comment on the following question:
    31. Are there any risks associated with the Proposal that the 
Commission has not considered? What measures could the Commission take 
to mitigate such risks?

IV. Section 4(c) of the Act

    With respect to investment of futures customer funds, the proposed 
amendments to Regulation 1.25 would be promulgated under Section 
4d(a)(2) of the Act.\284\ Section 4d(a)(2) provides that customer money 
may be invested in U.S. government securities and municipal securities. 
It further provides that such investments must be made in accordance 
with such rules and regulations and subject to such conditions as the 
Commission may prescribe.
---------------------------------------------------------------------------

    \284\ 7 U.S.C. 6(c).
---------------------------------------------------------------------------

    Pursuant to its authority under Section 4(c) of the Act, the 
Commission proposes to expand the range of instruments in which FCMs 
and DCOs may invest futures customer funds beyond those listed in 
Section 4d(a)(2) of the Act to enhance the yield available to FCMs, 
DCOs and their customers, without compromising the safety of futures 
customer funds.
    Section 4(c)(1) of the Act empowers the Commission to ``promote 
responsible economic or financial innovation and fair competition'' by 
exempting any transaction or class of transactions (including any 
person or class of persons offering, entering into, rendering advice or 
rendering other services with respect to, the agreement, contract, or 
transaction), from any of the provisions of the Act, subject to certain 
exceptions.\285\ The Commission's authority under Section 4(c) extends 
to transactions covered by Section 4d(a)(2) and to FCMs and DCOs that 
offer, enter into, render advice, or render other services with respect 
to such

[[Page 81264]]

transactions. In enacting Section 4(c), Congress noted that its goal 
``is to give the Commission a means of providing certainty and 
stability to existing and emerging markets so that financial innovation 
and market development can proceed in an effective and competitive 
manner.'' \286\ The Commission may grant such an exemption by rule, 
regulation, or order, after notice and opportunity for hearing, and may 
do so on application of any person or on its own initiative.
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    \285\ 7 U.S.C. 6(c)(1).
    \286\ House Conf. Report No. 102-978, 1992 U.S.C.C.A.N. 3179, 
3213.
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    Section 4(c)(2) of the Act provides that the Commission may grant 
exemptions under Section 4(c)(1) only when it determines that the 
requirements for which an exemption is being provided should not be 
applied to the agreements, contracts, or transactions at issue; that 
the exemption is consistent with the public interest and the purposes 
of the Act; that the agreements, contracts, or transactions will be 
entered into solely between appropriate persons; and that the exemption 
will not have a material adverse effect on the ability of the 
Commission or any contract market to discharge its regulatory or self-
regulatory responsibilities under the Act. The Proposal would provide 
FCMs and DCOs with a limited exemption from the restrictions in Section 
4d(a) and (b) of the CEA pertaining to the safeguarding and investment 
of Customer Funds. As such, the Commission's preliminary analysis below 
focuses on how the proposed expansion of the list of Permitted 
Investments meets the conditions in Section 4(c)(2)(A) as they apply to 
an exemption with respect to an FCM or a DCO. More specifically, the 
discussion below describes how the proposed expansion is, in the 
Commission's view, consistent with the public interest and the purposes 
of the CEA.\287\ In that regard, the Commission notes that when Section 
4(c) was enacted, the Conference Report accompanying the Futures 
Trading Practices Act of 1992 \288\ stated that the ``public interest'' 
in this context would ``include the national public interests noted in 
the Act, the prevention of fraud and the preservation of the financial 
integrity of the markets, as well as the promotion of responsible 
economic or financial innovation and fair competition.'' \289\
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    \287\ The analysis does not include a discussion of Section 
4(c)(2)(B)'s conditions because the exemption in this instance does 
not implicate or affect a futures agreement, contract, or 
transaction.
    \288\ Public Law 102-546, 106 Stat. 3590 (1992).
    \289\ H.R. Conf. Rep. No. 102-978 (1992). The Conference Report 
also states that the reference in Section 4(c) to the ``purposes of 
the Act'' is intended to ``underscore [the Conferees'] expectation 
that the Commission will assess the impact of a proposed exemption 
on the maintenance of the integrity and soundness of markets and 
market participants.'' Id.
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    To qualify as Permitted Investments, the instruments subject to 
this Proposal would need to meet strict conditions to ensure that 
investments of futures customer funds in these instruments are 
consistent with the objective of preserving principal and maintaining 
liquidity, as provided by Regulation 1.25. The Commission's preliminary 
analysis, presented above, indicates that the instruments proposed 
herein to be included as Permitted Investments meeting the specified 
proposed conditions present credit and volatility characteristics that 
are comparable to instruments that already qualify as Permitted 
Investments. As such, the Commission is of the view that the proposed 
expansion of the list of Permitted Investments would provide FCMs and 
DCOs with an opportunity to diversify their investments of Customer 
Funds, mitigating the risks that can arise from concentrating Customer 
Funds in a smaller set of Permitted Investments, without compromising 
the safety of such investments.
    The expanded selection of Permitted Investments is expected to also 
permit FCMs and DCOs to remain competitive globally and domestically 
and maintain safeguards against systemic risk. A wider range of 
alternatives to invest futures customer funds may provide more 
profitable investment options, allowing FCMs and DCOs to generate more 
income for themselves and their customers. This, in turn, may motivate 
FCMs and DCOs to increase their presence in the futures market and 
other relevant markets, thus increasing competition. Increased revenue 
to FCMs and DCOs from the investment of Customer Funds also may benefit 
customers in the form of lower commission charges or direct interest 
payments on funds on deposit with the FCM or DCO, which may lead to 
greater market participation by customers and increased market 
liquidity. In light of the foregoing, the Commission believes that the 
adoption of the proposed amendments would promote responsible economic 
and financial innovation and fair competition, and would be consistent 
with the objective of Regulation 1.25 and with the ``public interest,'' 
as that term is used in Section 4(c) of the Act. Specifically, 
permitting FCMs and DCOs to invest Customer Funds in Specified Foreign 
Sovereign Debt to the extent they hold balances owed to customers 
denominated in the applicable currency reduces potential currency risk 
to DCOs, FCMs, and customers that would result from investing such 
foreign currencies in U.S.-dollar denominated assets. In addition, 
permitting investments in Qualified ETFs, subject to the proposed 
conditions, including that the ETF is passively managed with the 
investment objective of replicating the performance of a published 
short-term U.S. Treasury security index composed of U.S. Treasury 
bonds, notes, and bills with a remaining maturity of 12 months or less, 
provides an opportunity for greater diversification of the types of 
investment options that FCMs and DCO may use to manage the risk of 
holding Customer Funds. Proposed Qualified ETFs also provide potential 
benefits to FCMs, particularly smaller FCMs, that don't have the 
internal operations and resources to effectively manage direct 
investments in other Permitted Investments, such as U.S. government 
securities, U.S. agency obligations, and municipal securities. Both 
Specified Foreign Sovereign Debt and Qualified ETFs have the potential 
to reduce costs to FCMs, DCOs, and customers while remaining consistent 
with the requirement in Regulation 1.25 for the preservation of 
principal and liquidity of Permitted Investments. The Commission 
solicits public comment on whether the Proposal satisfies the 
requirements for exemption under Section 4(c) of the Act.
    The Commission notes that with respect to investments of Cleared 
Swaps Customer Collateral and 30.7 customer funds, the Commission would 
be acting pursuant to its plenary authority under Sections 4d(f) \290\ 
and 4(b) \291\ of the Act, respectively, and would not need to apply 
Section 4(c) to effectuate the proposed amendments.
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    \290\ 7 U.S.C. 6d(f)(4) (providing that Cleared Swaps Customer 
Collateral may be invested in certain specified investments and ``in 
any other investment that the Commission may by rule or Regulation 
prescribe, and such investments shall be made in accordance with 
such rules and Regulations and subject to such conditions as the 
Commission may prescribe.'')
    \291\ 7 U.S.C. 6(b)(2)(A) (providing that the Commission may 
adopt rules and Regulations requiring, among other things, the 
safeguarding of customer's funds, by any person located in the U.S. 
who engages in foreign futures trading).
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V. Administrative Compliance

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') requires Federal agencies 
to consider whether the rules they propose will have a significant 
economic impact on a substantial number of small entities and, if so, 
provide a regulatory flexibility analysis respecting the

[[Page 81265]]

impact.\292\ Whenever an agency publishes a general notice of proposed 
rulemaking for any rule, pursuant to the notice-and-comment provisions 
of the Administrative Procedure Act,\293\ a regulatory flexibility 
analysis or certification typically is required.\294\ The Commission 
has previously determined that registered FCMs and DCOs are not small 
entities for purposes of the RFA.\295\ Accordingly, the Chairman, on 
behalf of the Commission, hereby certifies pursuant to 5 U.S.C. 605(b) 
that the Proposal will not have a significant economic impact on a 
substantial number of small entities.
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    \292\ 5 U.S.C. 601 et seq.
    \293\ 5 U.S.C. 553. The Administrative Procedure Act is found at 
5 U.S.C. 500 et seq.
    \294\ See 5 U.S.C. 601(2), 603, 604, and 605.
    \295\ See 47 FR 18618, 18619 (Apr. 30, 1982) and 66 FR 45604, 
45609 (Aug. 29, 2001).
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B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \296\ imposes certain 
requirements on Federal agencies in connection with their conducting or 
sponsoring any collection of information as defined by the PRA. Under 
the PRA, an agency may not conduct or sponsor, and a person is not 
required to respond to, a collection of information unless it displays 
a currently valid control number from the Office of Management and 
Budget (``OMB'').\297\ The PRA is intended, in part, to minimize the 
paperwork burden created for individuals, businesses, and other persons 
as a result of the collection of information by federal agencies, and 
to ensure the greatest possible benefit and utility of information 
created, collected, maintained, used, shared, and disseminated by or 
for the Federal Government.\298\ The PRA applies to all information, 
regardless of form or format, whenever the Federal Government is 
obtaining, causing to be obtained, or soliciting information, and 
includes required disclosure to third parties or the public, of facts 
or opinions, when the information collection calls for answers to 
identical questions posed to, or identical reporting or recordkeeping 
requirements imposed on, ten or more persons.\299\
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    \296\ 44 U.S.C. 3501 et seq.
    \297\ See 44 U.S.C. 3507(a)(3); 5 CFR 1320.5(a)(3).
    \298\ See 44 U.S.C. 3501.
    \299\ See 44 U.S.C. 3502(3).
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    The regulation to be amended under this proposal contains a 
collection of information for which the Commission has previously 
received control numbers from OMB. The titles for this collection of 
information are OMB Control No. 3038-0024, Regulations and Forms 
Pertaining to Financial Integrity of the Market Place; Margin 
Requirements for SDs/MSPs and OMB Control No. 3038-0091, Disclosure and 
Retention of Certain Information Relating to Cleared Swaps Customer 
Collateral.\300\
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    \300\ For the previously approved PRA estimates under OMB 
Control No. 3038-0024, see ICR Reference No. 202101-3038-001, at 
https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=202207-3038-001. For previously approved PRA estimated under OMB Control No. 
3038-0091, see ICR Reference No. 202009-3038-007, at https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=202009-3038-007.
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    As discussed in Section III.D. above, among other reporting items, 
FCMs are required to report in the SIDR Reports the amount of futures 
customer funds, Cleared Swaps Customer Collateral, and 30.7 customer 
funds invested in each of the current categories of Permitted 
Investments. The Commission is proposing to amend Regulations 1.32(f), 
22.2(g)(5), and 30.7(l)(5), which define the content of the SIDR 
Report, by deleting the requirement for an FCM to report the balances 
invested in commercial paper and corporate notes and bonds as such 
investments would no longer be Permitted Investments under the 
Proposal; to require each FCM to report the total amount of futures 
customer funds, Cleared Swaps Customer Collateral, and 30.7 customer 
funds invested in Specified Foreign Sovereign Debt of each country that 
is included within the Specified Foreign Sovereign Debt; and to require 
an FCM to include in the SIDR Report the total amount of futures 
customer funds, Cleared Swaps Customer Collateral, and 30.7 customer 
funds invested in Qualified ETFs as such investments would be Permitted 
Investments under the Proposal. As such, the proposed changes to the 
content of the SIDR Reports would reflect the proposed revisions to the 
list of Permitted Investments discussed in Section III.A. of the 
Proposal. The Commission does not expect these proposed changes to 
result in an increase in the number of burden hours required for the 
completion of the reports. Accordingly, the Commission is retaining its 
existing burden estimates associated with this collection of 
information.\301\
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    \301\ The Commission has previously estimated that compliance 
with the requirements under Regulations 1.32(f) and 1.32(g) to file 
SIDR reports requires 59 covered FCMs to expend 2,832 burden hours 
annually. The Commission has estimated that each FCM will file 24 
reports per year requiring approximately 48 burden hours per 
respondent. This yields a total of 2,832 burden hours annually (59 
FCM respondents x 48 burden hours annually = 2,832 hours).
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    In addition, the Commission is proposing to revise Regulation 1.26, 
which requires each FCM or DCO investing futures customer funds in MMFs 
that are Permitted Investments to obtain and retain in its files a 
written acknowledgment from the depository holding the funds stating 
that the depository was informed that the funds belong to customers and 
are being held in accordance with the provisions of the Act and 
Commission regulations. Regulation 1.26 also specifies the form of the 
written acknowledgment letter that each FCM or DCO must obtain from an 
MMF, in the event futures customer funds are held directly with the 
MMF. Regulations 22.5 and 30.7(d) set forth similar requirements with 
respect to Cleared Swaps Customer Collateral and 30.7 customer funds. 
The proposed amendments to Regulation 1.26 would require FCMs and DCOs 
segregating Customer Funds in a Permitted Government MMF or Qualified 
ETF account to obtain and maintain in their files an acknowledgment 
letter from the fund in which Customer Funds are held and to file such 
acknowledgment letter electronically with the Commission. The 
Commission is proposing an analogous amendment to Regulation 30.7(d)(2) 
with respect to investments of 30.7 customer funds by FCMs.\302\ The 
Commission notes that the proposed revisions to Regulations 1.26 and 
30.7(d) would reduce the scope of MMFs from which FCMs and DCOs, as 
applicable, would be required to obtain an acknowledgment letter by 
limiting the requirement to Permitted Government MMFs, a smaller set of 
MMFs. The proposed revisions to Regulations 1.26 and 30.7(d) would also 
impose a new requirement on FCMs and DCOs, as applicable, to obtain an 
acknowledgment letter from Qualified ETFs. The requirement would also 
apply under Regulation 22.5, which cross-references Regulation 1.26. To 
the extent that the new collection requirement would apply only to FCMs 
and DCOs that are APs and invest in Qualified ETFs in such capacity, 
the Commission estimates that the proposed requirement would affect no 
more than 15 registrants (i.e., approximately 10 FCMs and five DCOs). 
Using the Commission's prior estimates of the number of burden hours 
necessary to comply with the requirement to obtain an acknowledgment 
letter pursuant to Regulations 1.26 and 30.7(d) (i.e., 0.75 burden 
hours per response), the Commission estimates that the new requirement 
would result in 0.75 annual burden hours per registrant per category

[[Page 81266]]

of Customer Funds, as applicable, assuming that a registrant would 
obtain one acknowledgement letter per year from a Qualified ETF with 
which it holds Customer Funds.\303\
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    \302\ The Commission notes that an amendment to Regulation 22.5 
would not be necessary as this regulation cross-references 
Regulation 1.26.
    \303\ The Commission has previously estimated that an FCM or a 
DCO, as applicable, spends 0.75 hours per acknowledgement letter 
required under Regulation 1.26 or Regulation 30.7(d). See ICR 
Reference No. 202101-3038-001, at https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=202207-3038-001. The Commission therefore 
estimates that to obtain an acknowledgement letter from Qualified 
ETFs, 15 registrants would have to extend 30 burden hours annually. 
Specifically, the Commission estimates that FCMs would have to spend 
a total of 22.5 hours (10 FCMs x 1 report x 0.75 burden hours x 3 
categories of Customer Funds = 22.5 hours) and DCOs would have to 
spend a total of 7.5 hours (5 DCOs x 1 report x 0.75 burden hours x 
2 categories of Customer Funds = 7.5 hours). The Commission notes 
that investments by DCOs are only relevant with respect to futures 
customer funds and Cleared Swaps Customer Collateral.
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    The Commission also notes that, in connection with the proposed 
revisions related to the elimination of the Read-only Access 
Provisions, an FCM would need to obtain the revised acknowledgment 
letter only for accounts opened following the effective date of the 
proposed revisions or if the FCM is required to obtain a new 
acknowledgment letter for reasons unrelated to the elimination of the 
Read-only Access Provisions. The opening of a new depository account 
triggers a requirement to obtain an acknowledgment letter in all 
circumstances, regardless of the proposed revisions related to the 
elimination of the Read-only Access Provisions. For these reasons, the 
Commission is retaining its existing estimate of the burden that 
covered FCMs and DCOs incur to obtain, maintain, and electronically 
file the acknowledgment letters with the Commission, as currently 
provided in the approved collection of information.\304\
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    \304\ The Commission has estimated that 36 covered FCMs incur an 
estimated 216 burden hours annually to file required acknowledgment 
letters pursuant to Regulation 1.20(d). The Commission has estimated 
that each respondent will file 3 reports per year requiring an 
estimated 2 burden hours per report, for a total of 6 burden hours 
per respondent. This yields a total of 216 burden hours annually (36 
respondents x 6 burden hours annually = 216 burden hours). Under 
Regulation 1.26, the Commission has estimated that 74 covered 
respondents incur an estimated 111 burden hours annually to obtain 
and maintain required acknowledgement forms (74 respondents x 1.5 
hours annually = 111 burden hours). Under Regulation 30.7, the 
Commission has estimated that 42 covered respondents incur an 
estimated 252 burden hours annually (42 respondents x 6 burden hours 
annually = 252 burden hours) and under Regulation 22.5, the 
Commission has estimated that 78 covered respondents incur an 
estimated 390 burden hours annually (78 respondents x 5 burden hours 
annually = 390 burden hours) to obtain and maintain the required 
acknowledgment letters.
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    The Commission welcomes public comment on all aspects of its 
analysis of the PRA requirements. In particular, the Commission invites 
comment on its estimates of additional burden hours in connection with 
the proposed requirement for FCMs and DCOs that invest Customer Funds 
in Qualified ETFs to obtain an acknowledgment letter from such ETFs.

C. Cost-Benefit Considerations

    Section 15(a) of the Act requires the Commission to consider the 
costs and benefits of its actions before promulgating a regulation 
under the Act.\305\ Section 15(a) further specifies that the costs and 
benefits shall be evaluated in light of the following 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 
considers the costs and benefits resulting from its discretionary 
determinations with respect to the Section 15(a) considerations, and 
seeks comments from interested persons regarding the nature and extent 
of such costs and benefits.
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    \305\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------

    As described in more detail above, the Commission is proposing to 
revise the list of Permitted Investments in Regulation 1.25(a) to: (i) 
add the foreign sovereign debt of certain jurisdictions and interests 
in certain ETFs that invest primarily in short-term U.S. Treasury 
securities; (ii) limit the scope of MMFs whose interests qualify as 
Permitted Investments to certain Government MMFs; and (iii) eliminate 
commercial paper, corporate notes or bonds. The Commission is further 
specifying the capital charges that FCMs would be required to take on 
investments of Customer Funds in foreign sovereign debt and ETFs. The 
Commission is also proposing to replace LIBOR with SOFR as a permitted 
benchmark under Regulation 1.25(b)(2)(iv)(A)(1) and (2), as well as to 
adopt certain conforming changes consistent with the proposed 
amendments, and is requesting public comment on the possible removal of 
bank CDs from the list of Permitted Investments. Finally, the 
Commission is proposing to revise relevant provisions in Parts 1 and 30 
of the Commission's regulations to eliminate the requirement for 
depositories to provide read-only electronic access to accounts 
maintained by FCMs that hold Customer Funds.
    The baseline for consideration of the benefits and costs associated 
with the Proposal are the benefits and costs that FCMs, DCOs, and the 
public would realize if the Commission does not proceed with the 
proposed amendments, or in other words, the status quo.
    The Commission notes that the consideration of costs and benefits 
below is based on the understanding that the markets function 
internationally, with many transactions involving U.S. firms taking 
place across international boundaries; with some Commission registrants 
being organized outside of the United States; with leading industry 
members typically conducting operations both within and outside the 
United States; and with industry members commonly following 
substantially similar business practices wherever located. Where the 
Commission does not specifically refer to matters of location, the 
below discussion of costs and benefits refers to the effects of these 
proposed amendments on all activity subject to the proposed amended 
regulations, whether by virtue of the activity's physical location in 
the United States or by virtue of the activity's connection with 
activities in, or effect on, U.S. commerce under Section 2(i) of the 
Act.\306\
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    \306\ 7 U.S.C. 2(i).
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    The Commission recognizes that the Proposal may result in some 
additional, incremental costs for FCMs and DCOs. However, the 
Commission lacks the data necessary to reasonably quantify all of the 
costs and benefits considered below. Additionally, any initial and 
recurring compliance costs for any particular FCM or DCO will depend on 
its size, existing infrastructure, practices, and cost structures. The 
Commission welcomes comments on any such incremental costs, especially 
by DCOs and FCMs, who may be better able to provide quantitative costs 
data or estimates, based on their respective experiences relating to 
Commission's regulations governing the investment of Customer Funds and 
related requirements.
    The Commission is also including a number of questions for the 
purpose of eliciting cost and benefit estimates from public commenters 
wherever possible. Quantifying other costs and benefits, such as the 
effects of potential changes in the behavior of FCMs and DCOs resulting 
from the proposed amendments are inherently harder to measure. Thus, 
the Commission is similarly requesting comment through questions to 
help it better quantify these impacts. Due to these quantification

[[Page 81267]]

difficulties, for this NPRM, the Commission offers the following 
qualitative discussion of its costs and benefits.
a. Foreign Sovereign Debt, Interests in Exchange-Traded Funds, and 
Associated Capital Charges
    The Proposal would expand the list of Permitted Investments to add 
two new categories of instruments. Specifically, the Proposal would 
add: (i) the sovereign debt of Canada, France, Germany, Japan, and the 
United Kingdom, and (ii) interests in certain ETFs that invest in 
primarily short-term U.S. Treasury securities, to the list of Permitted 
Investments in which FCMs and DCOs may invest customer segregated funds 
pursuant to Regulation 1.25. The Proposal would also require an FCM to 
apply capital charges on any investments of Customer Funds in the 
Specified Foreign Sovereign Debt and Qualified ETFs to account for 
potential market risk associated with such investments. The Proposal 
would further expand the universe of permitted counterparties and 
depositories that can be used to buy and sell permitted foreign 
sovereign debt pursuant to Repurchase Transactions to include certain 
non-U.S. entities.
1. Benefits
    The Commission preliminarily believes that expanding the list of 
Permitted Investments to include Specified Foreign Sovereign Debt and 
interests in Qualified ETFs would provide FCMs and DCOs with a wider 
range of alternatives to invest Customer Funds, and as a result, FCMs 
and DCOs might have more investment options, some of which might be 
more profitable than the existing Permitted Investments, such that FCMs 
and DCOs may be able to generate more income for themselves and their 
customers. This may motivate FCMs or DCOs to increase their presence in 
the futures market and other relevant markets, thereby increasing 
competition, which might lead to a reduction in charges to customers 
and an increase trading activity and liquidity.
    Also, the ability to use Specified Foreign Sovereign Debt as a 
Permitted Investment would facilitate FCMs' and DCOs' management of 
foreign currencies that customers deposit to margin their trades and 
enable FCMs and DCOs to avoid certain risks and practical challenges in 
the handling of foreign currencies. For example, providing FCMs and 
DCOs with the opportunity to invest customer foreign currencies in 
identically-denominated assets would help manage the foreign currency 
risk that FCMs and DCOs face if they seek to invest foreign currencies 
in the currently permitted, U.S. dollar-denominated investments. In 
addition, in their Joint Petition, the Petitioners asserted that as a 
matter of risk management policy, or due to regulatory requirements, 
many clearing organizations located outside of the United States impose 
strict cut-off times for cash withdrawal by clearing members, while 
allowing later cut-off times for withdrawal of other types of 
collateral.\307\ Also, for reasons such as capital requirements and 
balance sheet management, banks may not accept foreign currencies at 
all or may place limits on the accepted amount. Banks may also charge 
higher rates for holding foreign currencies. As such, FCM customers 
depositing foreign currencies might potentially absorb those costs. The 
Petitioners also argued that it may be preferable to hold foreign 
currencies in the form of high-quality sovereign debt than keeping the 
funds in unsecured bank demand deposit accounts that might expose the 
funds to the credit risk of commercial banks.
---------------------------------------------------------------------------

    \307\ Joint Petition at p. 3 (citing, as an example of 
regulatory requirements, Article 45 of the regulatory technical 
standards on requirements for central counterparties (Commission 
Delegated Regulation (EU) No. 153/2013) (``CCP RTS''), which 
supplements provisions in the EU Market Infrastructure Regulation 
(Regulation (EU) No 648/2012) (``EMIR'') governing the investment 
policies of EU central counterparties. Per Article 45(2) of the CCP 
RTS, not less than 95 percent of cash deposited other than with a 
central bank and maintained overnight must be deposited through 
arrangements that ensure its collateralization with highly liquid 
financial instruments).
---------------------------------------------------------------------------

    Similarly, for reasons related to balance sheet management, 
custodian institutions may impose higher fees for accepting cash 
deposits denominated in USD or limit the amounts of USD cash that they 
are willing to safeguard.
    Expanding the list of Permitted Investments to instruments that 
meet the overall required standards of preserving principal and 
maintaining liquidity, while also providing the potential for greater 
diversification or higher returns for FCMs, DCOs and customers, would 
give FCMs and DCOs more flexibility in the management of Customer 
Funds. This might be particularly important given the narrower range of 
assets that currently qualify as Permitted Investments under Regulation 
1.25.
    In addition, Qualified ETFs, in particular, may offer an 
opportunity to invest in U.S. Treasury securities, which qualify as a 
Permitted Investment, without devoting the resources required to 
purchase, monitor, and roll over such securities when they mature.
    The Commission also preliminarily believes that requiring an FCM to 
apply capital charges on investments of Customer Funds in Specified 
Foreign Sovereign Debt and Qualified ETFs helps ensure that the FCM 
maintains a sufficient level of readily available liquid funds that 
would be available to transfer into the FCM's futures accounts, Cleared 
Swaps Customer Accounts, and/or 30.7 accounts to cover decreases in 
value of the investments to help ensure continue compliance with 
Customer Funds segregation requirements.\308\ Requiring an FCM to 
maintain regulatory capital to cover potential decreases in the value 
of the Permitted Investments benefits the FCM by helping to ensure that 
such firms have sufficient, liquid financial resources to meet 100 
percent of their obligations to futures customers, Cleared Swaps 
Customers, and 30.7 customers at all times as required by Regulations 
1.20, 22.2, and 30.7. Capital charges on Permitted Investments also 
benefit FCM customers as the charges help ensure an FCM maintains 
capital in an amount sufficient to cover investment losses and to 
prevent such losses from being passed on to customers in violation of 
Regulations 1.29(b), 22.2(e)(1), and 30.7(i).
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    \308\ The terms ``futures account,'' ``Cleared Swap Customer 
Account,'' and ``30.7 account'' are defined in Regulations 1.3, 
22.1, and 30.1, respectively. 17 CFR 1.3, 17 CFR 22.1, and 17 CFR 
30.1.
---------------------------------------------------------------------------

    In addition, the Commission also notes that the proposed amendment 
to Regulation 22.3(d), seeking to clarify that DCOs are responsible for 
losses resulting from their investments of Customer Funds, would 
provide legal certainty with respect to the Commission's customer 
protection regulations.
2. Costs
    Although the Proposal would increase the range of permissible 
investments in which DCOs and FCMs may invest customers funds, 
facilitating their management of investments and capital, the Proposal 
may result in customer segregated funds being invested in instruments 
that may be less liquid and have increased exposure to credit and 
market risks than those currently permitted under Regulation 1.25. Such 
risks could result in an increased exposure for FCMs and DCOs, who 
pursuant to Regulations 1.29(b), 22.2(e)(1), 22.3(d), and 30.7(i), as 
applicable, are responsible for losses resulting from investments of 
Customer Funds. A heightened risk exposure may also indirectly impact 
customers if the

[[Page 81268]]

losses compromise the FCM's or DCO's ability to return Customer Funds.
    To account for these potential risks and ensure that the proposed 
Permitted Investments are consistent with the general objectives of 
Regulation 1.25 of preserving principal and maintaining liquidity, the 
Commission is proposing several conditions for foreign sovereign debt 
and interests in U.S. Treasury ETFs to qualify as Permitted 
Investments. Specifically, for the Specified Foreign Sovereign Debt, 
the proposed conditions include a cap of 45 BPS on the two-year credit 
default spread of the issuing sovereign, a 60-day limit on the dollar-
weighted average of the time to maturity of the FCM's or DCO's 
portfolio of investments in each type of Specified Foreign Sovereign 
Debt, and a 180-day limit on the time-to-maturity of any individual 
Specified Foreign Sovereign Debt instrument. For interests in Qualified 
ETFs to be deemed Permitted Investments, the Commission proposes to 
require, among other conditions, that the ETF is passively managed and 
seeks to replicate the performance of a published short-term U.S. 
Treasury security index. For purposes of the Proposal, short-term U.S. 
Treasury securities are bonds, notes, and bills with a remaining 
maturity of 12 months or less, issued by, or unconditionally guaranteed 
as to the timely payment of principal and interest by, the U.S. 
Department of the Treasury. Under the Proposal, the eligible U.S. 
Treasury securities must represent at least 95 percent of the Qualified 
ETF's investment portfolio. In addition, to be able invest in a 
Qualified ETF, an FCM or a DCO would have to qualify as an authorized 
participant such that it would be able to redeem interests in the ETF 
directly from the fund. Moreover, as discussed above, the Proposal 
would require FCMs to take capital charges based on the current market 
value of the Specified Foreign Sovereign Debt and Qualified ETFs to 
address potential market risk of such investments. The capital charges 
are intended to ensure that an FCM has sufficient financial resources 
in the form of cash and other readily marketable collateral to 
adequately cover potential market risk of the investments, consistent 
with the FCM's obligation to bear any losses resulting from such 
investments.
    Requiring an FCM to apply capital charges in connection with the 
proposed new categories of Permitted Investments would result in costs 
associated with reserving capital. The FCM may not be able to use the 
amounts reserved as capital to maximize the profit of its business 
operations, thus potentially reducing its income. The Commission notes, 
however, that capital requirements are an essential risk-management 
feature of the FCM's regulatory regime and the amounts reserved as 
capital would be necessary and expected costs associated with operating 
a business as an FCM.
    In addition, the Commission preliminarily believes that the 
proposed clarifying amendment to Regulation 22.3(d) would not result in 
increased costs for DCOs. The proposed amendment seeks to expressly 
state a regulatory obligation that is consistent with the Commission's 
original intent to permit DCOs to invest Cleared Swaps Customer 
Collateral within the parameters applicable to investments of futures 
customer funds.\309\ As such, the Commission preliminarily believes 
that DCOs already reserve financial resources to account for their 
responsibility for such investments.
---------------------------------------------------------------------------

    \309\ See supra note 42.
---------------------------------------------------------------------------

    Finally, as discussed above, the Commission has slightly adjusted 
its existing burden estimates associated with the approved collection 
of information. As such, the Commission preliminarily believes that 
FCMs and DCOs would not incur material costs relating to the collection 
of information as a result of this Proposal.
3. Section 15(a) Considerations
    In light of the foregoing, the Commission has evaluated the costs 
and benefits of the Proposal pursuant to the five considerations 
identified in Section 15(a) of the Act as follows:
(a) Protection of Market Participants and the Public
    The Proposal would expand the list of permitted instruments set 
forth in Regulation 1.25(a) to include instruments that may be less 
liquid and may be more exposed to credit and market risks than some of 
the currently Permitted Investments under Regulation 1.25, resulting in 
Customer Funds being invested in potentially illiquid and risky 
instruments. To address these potential risks with respect to Specified 
Foreign Sovereign Debt and Qualified ETFs, the Proposal would include 
strict conditions for the relevant instruments to qualify as Permitted 
Investments, and would require FCMs to reserve regulatory capital to 
cover potential decreases in the market value of the Specified Foreign 
Sovereign Debt and Qualified ETFs and not pass such losses on to 
customers. The Commission's preliminary analysis indicates that 
instruments meeting the specified conditions present credit and 
volatility characteristics that are comparable to those of instruments 
that already qualify as Permitted Investments.\310\ As such, the 
Commission believes that the current level of protection provided to 
Customer Funds would be maintained under the terms of the proposal.
---------------------------------------------------------------------------

    \310\ See supra note 77 (using one-year sovereign debt 
instruments yield data to demonstrate that the price risk of the 
Specified Foreign Sovereign Debt instruments is comparable to that 
of U.S. government securities), Section III.A.1 and note 94 (using 
credit default swap data to demonstrate that the Specified Foreign 
Sovereign Debt instruments have a risk profile comparable to that of 
U.S. government securities) and note 180 (using yield data to 
demonstrate that five ETFs currently available on the market, which 
invest in short-term U.S. Treasury securities, are at least as 
stable as one-year U.S. Treasury securities).
---------------------------------------------------------------------------

(b) Efficiency, Competitiveness, and Financial Integrity of Markets
    Having a greater selection of Permitted Investments may provide 
FCMs or DCOs with the ability to generate more income from their 
investment of Customer Funds. This may motivate FCMs or DCOs to 
increase their presence in the futures and other relevant markets 
increasing competition, which might lead to lower charges for 
customers. The increase in revenue may also increase earnings to 
customers as DCOs and FCMs often pay a return on customer deposited 
funds, and FCMs may otherwise share some or all of the income to 
customers.
    The increased range of Permitted Investments is expected to provide 
investment flexibility to FCMs and DCOs and an opportunity to realize 
cost savings. More specifically, by being able to invest in Specified 
Foreign Sovereign Debt, FCMs and DCOs may be able to avoid practical 
challenges, such as having to meet clearing organizations' strict cut-
off times for cash withdrawal, or the additional fees for holding 
foreign currencies, imposed by some institutions. In addition, 
investing in Specified Foreign Sovereign Debt could be a safer 
alternative than holding cash at a commercial bank. It may also help 
avoid the foreign currency risk to which FCMs and DCOs may be exposed 
absent the ability to invest customer foreign currencies in 
identically-denominated assets.
    In addition, Qualified ETFs may provide a simpler and cost-
efficient way of investing in U.S. Treasury securities, saving the 
resources that would otherwise be required to roll over such securities 
at their maturity.
(c) Price Discovery
    The Proposal would increase the selection of Permitted Investments 
and may lead FCMs and DCO to generate more income from their 
investments of

[[Page 81269]]

Customer Funds. This might lead to a reduction in charges for 
customers, or provide customers with additional revenue, and 
potentially motivate customers to increase their trading in the futures 
market and other relevant markets, which might increase liquidity in 
those markets and enhance price discovery.
(d) Sound Risk Management
    Increasing the range of Permitted Investments would provide FCMs 
and DCOs with a broader selection of investment options to invest 
Customer Funds, enabling FCMs and DCOs to have more diversified 
portfolios and reduce the potential concentration in a few instruments. 
Providing safe alternative investment options may be particularly 
beneficial for FCMs and DCOs in light of the limited range of 
instruments that meet the eligibility criteria of Regulation 1.25 and 
the competing demand for high quality forms of collateral driven by the 
regulatory reforms implementing the Dodd-Frank Wall Street Reform and 
Consumer Protection Act of 2010.
    By making available Specified Foreign Sovereign Debt as a Permitted 
Investment, the Commission would provide FCMs and DCOs with an 
opportunity to better manage risks associated with holding foreign 
currencies deposited by customers. As noted above, the Commission 
recognizes that investing customer segregated funds in Specified 
Foreign Sovereign Debt provides an alternative to taking on the 
exposure of holding cash at a commercial bank. The Commission notes 
also that absent the ability to invest Customer Funds in identically-
denominated sovereign debt securities, an FCM or a DCO seeking to 
invest customer foreign currency deposits would need to convert the 
currencies to a U.S. dollar-denominated asset, which would increase the 
potential foreign currency risk. In addition, by limiting the 
investment of foreign currency to foreign sovereign debt that meets 
certain requirements, the Proposal is expected to further promote sound 
risk management. Lastly, requiring an FCM to reserve capital to cover 
potential decreases in the value of the Specified Foreign Sovereign 
Debt and Qualified ETFs would help ensure that an FCM has the financial 
resources to meet its regulatory obligations of bearing 100 percent of 
the losses on the investment of Customer Funds.
(e) Other Public Interest Considerations
    Although the four factors mentioned above are considered to be the 
primary cost-benefit considerations, other public interest 
considerations may also be relevant. For instance, in addition to the 
potential benefits that may accrue to FCMs, DCOs, and customers, 
benefits associated with the addition of Qualified ETFs to the list of 
Permitted Investments may also accrue to the general public, as 
allowing FCMs and DCOs to invest Customer Funds in such instruments may 
contribute to a more vibrant and robust market for ETFs. In addition, 
the expansion of Permitted Investments to include Specified Foreign 
Sovereign Debt may ease access to futures and cleared swaps markets for 
entities domiciled in non-U.S. jurisdictions that can now more easily 
transaction in foreign currency with potentially lower costs and risk. 
This may provide additional hedging opportunities for entities and 
enhance market liquidity.
b. Government Money Market Funds, Commercial Paper and Corporate Notes 
or Bonds, and Certificates of Deposit Issued by Banks
    The Proposal would limit the scope of MMFs whose interests qualify 
as Permitted Investments to certain Government MMFs as defined by SEC 
Rule 2a-7, revise the asset-based concentration limits applicable to 
such funds, and add issuer-based concentration limits. The Proposal 
would also remove from the list of Permitted Investments commercial 
paper and corporate notes or bonds guaranteed as to principal and 
interest by the United States under the TLGP. The Proposal would also 
request public comment as to whether bank CDs should be removed from 
the list of Permitted Investments due to a lack of use by FCMs and 
DCOs.
1. Benefits
    The Proposal would remove interests in certain MMFs, including 
Prime MMFs and Electing Government MMFs, from the list of Permitted 
Investments set forth in Regulation 1.25, limiting the scope of MMFs 
whose interests qualify as Permitted Investments to Permitted 
Government MMFs, as further discussed above. The Commission believes 
that interests in Prime MMFs and Electing Government MMFs are 
unsuitable as Permitted Investments under Regulation 1.25 because such 
MMFs are subject to the SEC MMF Reforms pursuant to which liquidity 
fees to stem redemptions may be imposed, which could hinder the 
liquidity of the MMFs and adversely impact customers' access to their 
funds, which may be needed to meet margin calls on open positions or 
cash market transaction. The Proposal would therefore prevent 
investments of Customer Funds in MMFs that might pose unacceptable 
levels of liquidity risk.
    The Proposal would impose asset-based concentration limits 
according to the size of the Permitted Government MMFs and their 
management companies. A 50 percent concentration limits would apply to 
Government MMFs with at least $1 billion in assets and with management 
companies with more than $25 billion in assets under management. The 
current 10 percent concentration limit for MMFs with less than $1 
billion in assets and/or which have a management company managing less 
than $25 billion in assets would be maintained. These concentration 
limits recognize that larger Government MMFs may be a safer investment 
alternative given that they may be better positioned to withstand times 
of significant financial stress and to manage high levels of 
redemptions. As such, the concentration limits, as proposed, ensure 
that FCMs' and DCOs' investments in Permitted Government MMFs account 
for the level of liquidity, market, and credit risk posed by a fund in 
light of its capital base, portfolio of holdings, and capacity to 
handle market stress.
    The proposed concentration limits would promote investments of 
Customer Funds in Permitted Government MMFs of different sizes subject 
to different concentration limits, leading to diversification in FCMs' 
and DCO's portfolios, while encouraging investments in safer larger 
Government MMFs. The proposed concentration limits might also reduce 
the potential concentration in certain Permitted Government MMFs, 
fostering competition across the funds, which might lead to better 
terms and reduced costs for FCMs and DCOs. In addition, the Commission 
is proposing issuer-based limits with the goal of mitigating potential 
risks associated with concentrating investments of Customer Funds in 
any single fund or family of Government MMFs such as the risk that 
access to Customer Funds may become restricted due to a cybersecurity 
or an operational incident affecting the fund. Specifically, the 
Commission is proposing to limit investments of Customer Funds in any 
single family of Government MMFs to 25 percent and investments of 
Customer Funds in any single issuer of Government MMFs to 5 percent of 
the total assets held in each of the segregated classifications of 
futures customer funds, Cleared Swaps Customer Collateral, and 30.7 
customer funds. In establishing these concentration limits, the 
Commission acknowledges that there are no precise

[[Page 81270]]

limits that can guarantee absolute protection against market 
volatility. The Commission's preliminary assessment indicates, however, 
that these proposed limits represent a practical approach that 
effectively balances the need to support the viability of FCMs' and 
DCOs' business model while safeguarding the principal and liquidity of 
the Customer Funds.
    The Proposal would also eliminate commercial paper and corporate 
notes or bonds guaranteed under the TLGP as Permitted Investments given 
that the TLGP expired in 2012. This proposed rule amendment will 
streamline the CFTC rules, facilitating their implementation and 
administration, and is consistent with the Commission's earlier 
determination that commercial paper and corporate notes or bonds are 
rarely used and pose unacceptable levels of credit, liquidity, and 
market risk.\311\ The Proposal is also requesting public comment on 
whether to remove bank CDs from the list of Permitted Investments, in 
light of the Commission's experience that FCMs and DCOs do not invest 
Customer Funds in these instruments.\312\
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    \311\ Investment of Customer Funds and Funds Held in an Account 
for Foreign Futures and Foreign Options Transactions, 75 FR 67642, 
67644 (Nov. 3, 2010).
    \312\ In addition to the Commission's general experience in 
overseeing DCOs and FCMs, Commission staff also reviewed how FCMs 
invested customer funds as reported in the SIDR Report for the 
period September 15, 2022 to February 15, 2023 and noted that no 
FCMs reported investing customer funds in bank CDs.
---------------------------------------------------------------------------

2. Costs
    As the Proposal would limit the scope of MMFs whose interests 
qualify as Permitted Investments to Permitted Government MMFs, the 
Proposal may lead to less diversification in the investment of Customer 
Funds by FCMs and DCOs. FCMs' and DCOs' portfolios may be concentrated 
in the Permitted Government MMFs, increasing exposure to risks 
associated with the funds, which might heighten the risk of loss of 
Customer Funds. Also, given that fewer MMFs would be available as 
Permitted Investments, FCMs and DCOs would have less flexibility in 
investing Customer Funds. FCMs and DCOs might thus generate less income 
and may pass on additional operational costs to customers by increasing 
their fees.
    The Commission notes, however, that the potential risk of 
concentration of investments in Permitted Government MMFs would be 
mitigated by the proposed asset-based and issuer-based concentration 
limits, which are designed to promote diversification among different 
categories of Permitted Investments and among different individual 
Permitted Government MMFs.
    To meet the proposed concentration limits, FCMs and DCOs may be 
required to liquidate Government MMFs held in their portfolios and 
might incur losses. The Commission notes that the risk of loss is 
likely to be mitigated given that the Government MMFs in which FCMs and 
DCOs have been permitted to invest Customer Funds since the issuance of 
Staff Letter 16-68 and Staff Letter 16-69 are presumably highly 
liquid.\313\
---------------------------------------------------------------------------

    \313\ See 17 CFR 1.25(b)(1).
---------------------------------------------------------------------------

    In the Commission's view, the elimination of commercial paper and 
corporate notes or bonds guaranteed under the TLGP would not result in 
any costs as the instruments have not been available as Permitted 
Investments since the 2012 when the TLGP expired. Similarly, the 
Commission believes that were it to remove banks CDs at a later time, 
there would be no immediate potential cost because in the Commission's 
experience FCMs and DCOs do not currently invest Customer Funds in this 
type of instrument. Eliminating this investment option, however, may 
lead to potential long-term costs if this option becomes valuable.
3. Section 15(a) Considerations
    In light of the foregoing, the Commission has evaluated the costs 
and benefits of the Proposal pursuant to the five considerations 
identified in Section 15(a) of the Act as follows:
(a) Protection of Market Participants and the Public
    The Proposal would remove from the list of Permitted Investments 
interests in MMFs whose redemptions may be subject to liquidity fees, 
including Prime MMFs and Electing Government MMFs. In the Commission's 
view, the imposition of a liquidity fee is in conflict with provisions 
in Regulation 1.25 that are designed to reduce Customer Funds' exposure 
to liquidity risk and to preserve the principal of investments 
purchased with Customer Funds. As a result, by preventing investments 
in instruments that pose unacceptable levels of liquidity risk, the 
Proposal would provide greater protection to customer segregated funds 
and promote the efficient and safe investment of Customer Funds by FCMs 
and DCOs.
    The Proposal would limit the scope of MMFs whose interests qualify 
as Permitted Investments to Government MMFs as defined by SEC Rule 2a-
7. The Commission notes that these types of funds are less susceptible 
to runs and have seen inflows during periods of market 
instability.\314\ As such, the Proposal, by limiting the scope of 
eligible MMFs to Government MMFs, would reduce the potential that funds 
in which Customer Funds are invested may be impacted by run risk and 
other associated risks. However, given that there would be fewer MMFs 
available as Permitted Investments, FCMs' and DCOs' investments may be 
concentrated in fewer MMFs and the investments may be more susceptible 
to risk associated with the fewer available funds.
---------------------------------------------------------------------------

    \314\ See SEC MMF Reforms at 51417 (noting that investors 
typically view government MMFs, in contrast to Prime MMFs, as a 
relatively safe investment during times of market turmoil). See also 
Money Market Fund Reforms, 87 FR 7248 (Feb. 8, 2022) (``SEC MMF 
Reforms Proposing Release'') at 7250 (recounting that during the 
2008 financial crisis there was a run primarily on institutional 
Prime MMFs after an MMF ``broke the buck'' and suspended 
redemptions, which motivated many fund sponsors to step in and 
provide financial support to their funds. The events led to general 
turbulence in the financial markets and contributed to severe 
dislocations in short-term credit markets.
---------------------------------------------------------------------------

    The proposed asset-based concentration limits for Government MMFs 
would ascribe limits according to the size of the funds, with larger 
funds being subject to a 50 percent limit and smaller funds to a 10 
percent limit. These limits recognize that larger funds have capital 
bases better capable of handling a high volume of redemptions in times 
of stress. Accordingly, the concentration limits would promote 
investments in larger funds, which represent a safer investment 
alternative, while providing for diversification by permitting 
investments in smaller Government MMFs subject to concentration limits 
to ensure the safety of Customer Funds. In addition, the proposed 
issuer-based concentration limits would promote diversification among 
different individual Government MMFs, thus mitigating the potential 
risks associated with concentrating investments of Customer Funds with 
a single fund or family of funds.
    The implementation of the proposed concentration limits may require 
FCMs and DCOs to liquidate their fund holdings, which could lead to 
losses. The Commission believe that the potential for losses would be 
mitigated because since the issuance in 2016 of Staff Letter 16-68 and 
Staff Letter 16-69, FCMs and DCOs have been allowed to invest only in 
Government MMFs meeting the liquidity standards of Regulation 1.25.
    By removing commercial paper and corporate notes or bonds 
guaranteed under the TLGP from the list of

[[Page 81271]]

Permitted Investments under Regulation 1.25, the Proposal would 
eliminate instruments that are no longer available given the expiration 
of the TLGP in 2012. This would streamline the CFTC rules and 
facilitate their implementation, removing a potential source of 
confusion and allowing FCMs and DCOs to focus their efforts on more 
immediate regulatory concerns. If the Commission were to proceed with 
the removal of bank CDs, a type of instruments that is not used by FCMs 
and DCOs as an investment of Customer Funds, the elimination would 
similarly contribute to the effort of streamlining Commission's 
regulations.
(b) Efficiency, Competitiveness, and Financial Integrity of Markets
    By eliminating interests in Prime MMFs and Electing Government MMFs 
from the list of Permitted Investments, the Proposal would prevent 
investments of Customer Funds in instruments that might be less liquid 
in light of the SEC MMF Reforms, thus advancing the objectives of 
Regulation 1.25 of preserving principal and maintaining liquidity.
    As discussed earlier, the elimination of commercial paper and 
corporate notes or bonds guaranteed under the TLGP would remove 
instruments that are either no longer available given the expiration of 
the program or not used as an investment of Customer Funds, allowing 
FCMs and DCOs to more efficiently allocate their resources and address 
more immediate regulatory concerns.
(c) Price Discovery
    The Proposal, by reducing the selection of Permitted Investments, 
would lead to fewer investment options available to FCMs and DCOs. As 
such, FCMs and DCOs might generate less income from their investment of 
Customer Funds and might pass onto customers the costs of operations by 
increasing fees. Facing increased costs, customers might cut back on 
their trading, reducing liquidity, which might hinder price discovery.
(d) Sound Risk Management
    By eliminating from the list of Permitted Investments interests in 
Prime MMFs and Electing Government MMFs, the Proposal would prevent 
investments of customers funds in certain MMFs, which might be 
susceptible to increased liquidity risk in light the SEC MMF Reforms, 
thus promoting sound risk management. Also, the concentration limits 
that would apply to the Permitted Government MMFs would foster adequate 
diversification in FCMs' and DCOs' portfolios by encouraging 
investments of Customer Funds in larger funds expected to have the 
capacity to withstand significant market stress and increasing 
redemptions, while making available smaller funds subject to specified 
concentration limits.
(e) Other Public Interest Considerations
    The Commission believes that the relevant cost-benefit 
considerations are captured in the four factors above.
c. SOFR as a Permitted Benchmark
    In March 2021, the U.K. Financial Conduct Authority announced that 
LIBOR would be effectively discontinued.\315\ The Commission is 
therefore proposing to replace LIBOR with SOFR as a permitted benchmark 
for variable and floating rate securities that qualify as Permitted 
Investments under Regulation 1.25.
---------------------------------------------------------------------------

    \315\ Staff Letter 21-26 at p. 1.
---------------------------------------------------------------------------

1. Benefits
    Under Regulation 1.25(b)(2)(iv)(A), variable and floating 
securities qualify as Permitted Investments if, among other things, the 
interest payments on the securities correlate to specified benchmarks, 
including LIBOR.\316\ As discussed in more detail above, a number of 
enforcement actions concerning attempts to manipulate the LIBOR 
benchmark led to a loss of confidence in the reliability and robustness 
of LIBOR and to the benchmark's discontinuation. The Commission 
therefore proposes to remove LIBOR as a permitted benchmark and replace 
it with SOFR. The Commission believes that the unreliability of LIBOR 
could undermine the value of variable and floating rate securities that 
reference the benchmark. Accordingly, the replacement of LIBOR with 
SOFR, which has been identified as a preferred benchmark alternative by 
the ARRC,\317\ would ensure that Customer Funds are invested in 
securities that reference a reliable and robust benchmark providing 
greater protection to Customer Funds.
---------------------------------------------------------------------------

    \316\ 17 CFR 1.25(b)(2)(iv)(A).
    \317\ See Staff Letter 21-26 at p. 3.
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2. Costs
    The Commission notes that given the widespread use of LIBOR as a 
benchmark, FCMs and DCOs that invest Customer Funds in variable and 
fixed rate securities might incur costs as a result of the transition 
to SOFR. To the extent that FCMs and DCOs already invest in variable 
and fixed rate securities benchmarked to LIBOR, they would need to 
amend the terms of their agreements to incorporate the new benchmark. 
FCMs and DCOs may also need to adjust their systems and processes to 
implement and recognize SOFR as a benchmark. However, the Commission 
believes that transitioning to a more reliable benchmark offsets these 
associated costs by enhancing security for Customer Funds and removing 
a potential source of risk to the financial system overall.
3. Section 15(a) Considerations
    In light of the foregoing, the Commission has evaluated the costs 
and benefits of the Proposal pursuant to the five considerations 
identified in Section 15(a) of the Act as follows:
(a) Protection of Market Participants and the Public
    As previously discussed, LIBOR is no longer deemed a reliable and 
robust benchmark. As such, it could negatively impact the value of 
variable and floating rate securities that reference the benchmark. By 
eliminating LIBOR as a permitted benchmark, the Proposal would prevent 
investments of Customer Funds in securities referencing an unreliable 
benchmark and would promote the use of a safer benchmark alternative.
(b) Efficiency, Competitiveness, and Financial Integrity of Markets
    By formalizing the use of SOFR as a permitted benchmark for 
Permitted Investments in which Customer Funds may be invested, the 
Proposal would promote the transition to SOFR and facilitate the 
phasing out of LIBOR, a widely used benchmark that is now deemed to be 
unreliable, removing a potential source of risk to the financial 
system.\318\
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    \318\ The replacement of LIBOR as a benchmark for Permitted 
Investments represents another step in the Commission's efforts to 
facilitate the transition away from LIBOR, as illustrated by a 
recent amendment to the clearing requirements. See Clearing 
Requirement Determination Under Section 2(h) of the Commodity 
Exchange Act for Interest Rate Swaps to Account for the Transition 
from LIBOR and Other IBORs to Alternative Reference Rates, 87 FR 
52182 (Aug. 24, 2022) (replacing the requirement to clear interest 
rate swaps referencing LIBOR and certain other interbank offered 
rates with the requirement to clear interest rate swaps referencing 
overnight, nearly risk-free reference rates).
---------------------------------------------------------------------------

    In addition, SOFR is an essential benchmark that helps ensure the 
stability and integrity of financial markets. As such, formalizing the 
use of SOFR as a permitted benchmark for permitted investments may 
enhance the financial integrity of markets.

[[Page 81272]]

(c) Price Discovery
    The proposed amendment to replace LIBOR with SOFR as a permitted 
benchmark would have no negative impact on price discovery. Permitting 
SOFR as a benchmark for Customer Funds investments would benefit FCMs 
and DCOs and their customers. This might increase liquidity in the 
futures markets and enhance the process of price discovery.
(d) Sound Risk Management
    By eliminating LIBOR as a permitted benchmark and replacing it with 
SOFR, the Proposal would ensure that to the extent FCMs and DCOs select 
variable and floating rate securities as Permitted Investments to 
invest Customer Funds, these instruments would reference benchmarks 
that are, in the Commission's view, sound and reliable, thus fostering 
sound risk management.
(e) Other Public Interest Considerations
    The Commission believes that the relevant cost-benefit 
considerations are captured in the four factors above.
d. Revision of the Read-Only Access Provisions
    The Proposal would eliminate the Read-only Access Provisions in 
parts 1 and 30 of the Commission's regulations,\319\ which require 
depositories to provide the Commission with direct, read-only 
electronic access to accounts maintained by FCMs that hold Customer 
Funds.
---------------------------------------------------------------------------

    \319\ More specifically, the relevant provisions appear in 
Regulation 1.20, Appendix A to Regulation 1.20, Appendix A to 
Regulation 1.26, Regulation 30.7 and appendices E and F to Part 30 
of CFTC's Regulations. If adopted, the proposed amendments would 
extend to Regulation 22.5, which requires FCMs and DCOs, before 
depositing Cleared Swaps Customer Collateral with a depository, to 
obtain an acknowledgment letter from each depository in accordance 
with Regulations 1.20 and 1.26. 17 CFR 22.5(a). Regulation 22.5 
further requires FCMs and DCOs to adhere to all requirements 
specified in Regulation 1.20 and 1.26 regarding retaining, 
permitting access to filing, or amending the written acknowledgment 
letters. 17 CFR 22.5(a).
---------------------------------------------------------------------------

1. Benefits
    Eliminating the Read-only Access Provisions would streamline the 
CFTC rules, facilitating their implementation and administration, and 
is consistent with the Commission's anticipation that the existence of 
alternative methods for obtaining and verifying account balance 
information would diminish the need to rely on the direct read-only 
access to accounts. More specifically, by relying on the CME's and 
NFA's daily segregation confirmation and verification process, the 
Commission would be able to allocate resources to focus on more 
immediate regulatory concerns within its jurisdictional purview. In 
that regard, the Commission notes, as discussed above, that it has 
encountered numerous practical challenges in the administration of 
direct access to depository accounts, which unduly burden the 
Commission's resources, particularly considering that the Commission 
contemplated that the use of real-time access would be limited, and 
prevent Commission staff from using the Read-only Access Provisions as 
intended.
    In addition, eliminating the requirement to provide the Commission 
with direct, read-only access to accounts maintained by FCMs, would 
reduce costs for depositories, which may motivate these institutions to 
more readily take FCM Customer Funds on deposit. The Proposal may thus 
foster competition in the futures market and ultimately reduce costs 
for FCMs and their customers.
    Furthermore, the deletion of the Read-only Access Provisions would 
eliminate the need for the Commission to keep a log of access 
credentials and physical authentication devices, thereby reducing the 
potential cybersecurity risk associated with the maintenance of such 
credentials and devices.
2. Costs
    Withdrawing the requirement that depositories provide the 
Commission with direct, read-only electronic access to depository 
accounts holding Customer Funds would deprive the Commission from 
ongoing, instantaneous access to the accounts for purposes of 
identifying potential discrepancies between the account balance 
information reported by the FCMs and the account balance information 
available directly from the depositories.
    The Commission believes, however, that more efficient means for 
identifying discrepancies in the account balance information exist, 
namely by obtaining account balance and transaction information through 
the CME's and NFA's automated daily segregation confirmation system or 
by requesting the information directly from the depositories.
3. Section 15(a) Considerations
    In light of the foregoing, the Commission has evaluated the costs 
and benefits of the Proposal pursuant to the five considerations 
identified in Section 15(a) of the Act as follows:
(a) Protection of Market Participants and the Public
    As previously noted, if the Commission is no longer required to 
administer the direct, read-only access to depository accounts, the 
Commission would eliminate the potential cybersecurity risk associated 
with the maintenance of access credentials and authentication devices, 
thus limiting risk for market participants and the public.
    The Commission further notes that the CME's and NFA's automated 
daily segregation confirmation system provides an efficient and 
effective method for verifying customer accounts balances, which, in 
conjunction with the Commission's right to request information from the 
depositories, would ensure an adequate degree of protection for market 
participants and the public.
(b) Efficiency, Competitiveness, and Financial Integrity of Markets
    By eliminating the Read-only Access Provisions, the Commission 
would dispense with a method for verifying account balance information 
that imposes technological challenges in its implementation and 
administration, allowing for Commission staff to direct its efforts to 
more effective alternative means for verifying the information.
    In addition, as noted, the elimination of the requirement to 
provide the Commission with direct, read-only access to accounts 
maintained by FCMs would reduce costs for depositories, which may 
motivate them to more readily take FCM Customer Funds on deposit, 
potentially fostering competition in the futures market and ultimately 
reducing costs for FCMs.
(c) Price Discovery
    The Proposal, by eliminating the requirement for depositories to 
provide the Commission with read-only access to accounts maintained by 
FCMs, may reduce operational costs for depositories, which may 
ultimately lead to cost reductions that benefit both depositories and 
FCMs. The FCMs may, in turn, pass those benefits to customers via 
reduced charges.
(d) Sound Risk Management
    As previously noted, CME and NFA have developed a sophisticated 
system--the automated daily segregation confirmation system--which 
provides DSROs and the Commission with an efficient tool for detection 
of potential discrepancies between FCMs' reports and the balances on 
deposit at various depositories. If the Commission proceeds with the 
proposed amendment to delete the Read-only Access Provisions, the 
Commission would continue to rely on CME's and NFA's automated system 
for

[[Page 81273]]

oversight purposes. As such, the Commission believes that the proposed 
amendment would not be detrimental to sound risk management practices.
    Furthermore, as noted above, the deletion of the Read-only Access 
Provisions would eliminate a potential cybersecurity risk associated 
with the maintenance by the Commission of periodically updated access 
credentials and physical authentication devices, thus promoting sound 
risk management.
(e) Other Public Interest Considerations
    The Commission believes that the relevant cost-benefit 
considerations are captured in the four factors above.
Request for Comments on Cost-Benefit Considerations
    The Commission invites public comment on its cost-benefit 
considerations, including the Section 15(a) factors described above. 
Commenters are also invited to submit any data or other information 
they may have quantifying or qualifying the costs and benefits of the 
proposed amendments. In particular, the Commission seeks specific 
comment on the following:
    1. Has the Commission accurately identified all the benefits of 
this Proposal? Are there other benefits to the Commission, market 
participants, and/or the public that may result from the adoption of 
this Proposal that the Commission should consider? Please provide 
specific examples and explanations of any such benefits.
    2. Has the Commission accurately identified all the costs of this 
Proposal? Are there additional costs to the Commission, market 
participants and/or the public that may result from the adoption of 
this Proposal that the Commission should consider? Please provide 
specific examples and explanations of any such costs.
    3. Are the regulatory safeguards that are included in the Proposal 
adequate to address the potential risks that may arise from the 
Proposal? Are there other regulatory safeguards that the Commission 
should consider?
    4. Does this Proposal impact the Section 15(a) factors in any way 
that is not described above? Please provide specific examples and 
explanations of any such impact.

D. Antitrust Laws

    Section 15(b) of the Act requires the Commission to ``take into 
consideration the public interest to be protected by the antitrust laws 
and endeavor to take the least anticompetitive means of achieving the 
purposes of this Act, in issuing any order or adopting any Commission 
rule or regulation (including any exemption under Section 4(c) or 
4c(b)), or in requiring or approving any bylaw, rule or regulation of a 
contract market or registered futures association established pursuant 
to Section 17 of this Act.'' \320\
---------------------------------------------------------------------------

    \320\ 7 U.S.C. 19(b).
---------------------------------------------------------------------------

    The Commission believes that the public interest to be protected by 
the antitrust laws is generally to protect competition. The Commission 
requests comment on whether the Proposal implicates any other specific 
public interest to be protected by the antitrust laws.
    The Commission has considered the Proposal to determine whether it 
is anticompetitive, and has preliminarily identified no anticompetitive 
effects. The Commission requests comment on whether the Proposal is 
anticompetitive and, if it is, what the anticompetitive effects are.
    Because the Commission has preliminarily determined that the 
Proposal is not anticompetitive and has no anticompetitive 
effects,\321\ the Commission has not identified any less competitive 
means of achieving the purposes of the Act. The Commission requests 
comment on whether there are less anticompetitive means of achieving 
the relevant purposes of the Act that would otherwise be served by 
adopting the proposed amendments.
---------------------------------------------------------------------------

    \321\ In this regard, the Commission has considered whether the 
proposed concentration limits might have an anti-competitive effect. 
The Commission is preliminarily of the view that, on balance, 
issuer-based concentration limits enhance competition by preventing 
any one MMF or ETF from having too great market power, and thereby 
fostering competition. Although the asset-based concentration limits 
might theoretically have an anti-competitive impact, the limits are 
set at a relatively high level and therefore the Commission 
preliminarily believes that they are unlikely to have a significant 
market impact. The Commission invites comments on this analysis.
---------------------------------------------------------------------------

List of Subjects

17 CFR Part 1

    Brokers, Commodity futures, Consumer protection, Reporting and 
recordkeeping requirements.

17 CFR Part 22

    Brokers, Clearing, Consumer protection, Reporting and 
recordkeeping, Swaps.

17 CFR Part 30

    Consumer protection.

    For the reasons stated in the preamble, the Commodity Futures 
Trading Commission proposes to amend 17 CFR chapter I as follows:

PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

0
1. The authority citation for Part 1 continues to read as follows:

    Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h, 
6i, 6k, 6l, 6m, 6n, 6o, 6p, 6r, 6s, 7, 7a-1, 7a-2, 7b, 7b-3, 8, 9, 
10a, 12, 12a, 12c, 13a, 13a-1, 16, 16a, 19, 21, 23 and 24 (2012).


Sec.  1.20  [Amended]

0
2. Amend Sec.  1.20 by:
0
a. Revising in paragraph (d)(2), the cross-reference to ``appendix A to 
this part'' to read ``Appendix C to this part'';
0
b. Removing and reserving paragraph (d)(3);
0
c. Revising in paragraph (g)(4)(ii), the cross-reference to ``appendix 
B to this part'' to read ``Appendix D to this part'';
0
d. Redesignating Appendix A to Sec.  1.20 as Appendix C to Part 1; and
0
e. Redesignating Appendix B to Sec.  1.20 as Appendix D to Part 1.
0
3. Amend Sec.  1.25 by:
0
a. Republishing paragraph (a) heading and the introductory text of 
paragraph (a)(1);
0
b. Removing paragraphs (a)(1)(v) and (vi);
0
c. Redesignating paragraph (a)(1)(vii) as paragraph (a)(1)(v);
0
d. Revising newly redesignated paragraph (a)(1)(v);
0
e. Adding new paragraphs (a)(1)(vi) and (a)(1)(vii);
0
f. Republishing the introductory text of paragraph (b) and the 
paragraph (b)(2) heading;
0
g. Revising paragraph (b)(2)(i) introductory text;
0
h. Republishing paragraph (b)(2)(iv)(A);
0
i. Revising paragraphs (b)(2)(iv)(A)(1) and (2);
0
j. Removing paragraph (b)(2)(vi);
0
k. Republishing paragraph (b)(3) heading;
0
l. Revising paragraphs (b)(3)(i)(C) and (E);
0
m. Removing paragraph (b)(3)(i)(F);
0
n. Redesignating paragraph (b)(3)(i)(G) as (b)(3)(i)(F);
0
o. Revising newly redesignated paragraph (b)(3)(i)(F), paragraphs 
(b)(3)(ii)(B) through (E) and (b)(4)(i), paragraph (c) introductory 
text, paragraph (c)(1), and paragraph (c)(5)(ii) introductory text;
0
p. Revising in paragraph (c)(7), the cross-reference to ``The appendix 
to this section'' to read ``Appendix E to this part'';
0
q. Adding paragraph (c)(8);
0
r. Republishing the introductory text of paragraph (d);
0
s. Revising paragraphs (d)(2) and (d)(7);

[[Page 81274]]

0
t. Adding paragraph (f); and
0
u. Redesignating the Appendix to Sec.  1.25 as Appendix E to Part 1.
    The republications, revisions, and additions read as follows:


Sec.  1.25  Investment of customer funds.

    (a) Permitted investments. (1) Subject to the terms and conditions 
set forth in this section, a futures commission merchant or a 
derivatives clearing organization may invest customer money in the 
following instruments (permitted investments):
* * * * *
    (v) Interests in government money market funds as defined in Sec.  
270.2a-7 of this title, provided that the government money market funds 
do not choose to rely on the ability to impose discretionary liquidity 
fees consistent with the requirements of Sec.  270.2a-7(c)(2)(i) of 
this title (government money market fund);
    (vi) Interests in exchange-traded funds, as defined in Sec.  
270.6c-11 of this title, which seek to replicate the performance of a 
published short-term U.S. Treasury security index composed of bonds, 
notes, and bills with a remaining maturity of 12 months or less, issued 
by, or unconditionally guaranteed as to the timely payment of principal 
and interest by, the U.S. Department of the Treasury (U.S. Treasury 
exchange-traded fund); and
    (vii) General obligations of Canada, France, Germany, Japan, and 
the United Kingdom (permitted foreign sovereign debt), subject to the 
following:
    (A) A futures commission merchant may invest in the permitted 
foreign sovereign debt of a country to the extent it has balances in 
segregated accounts owed to its customers denominated in that country's 
currency; and
    (B) A derivatives clearing organization may invest in the permitted 
foreign sovereign debt of a country to the extent it has balances in 
segregated accounts owed to its clearing members that are futures 
commission merchants denominated in that country's currency.
* * * * *
    (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:
* * * * *
    (2) Restrictions on instrument features. (i) With the exception of 
government money market funds and U.S. Treasury exchange-traded funds, 
no permitted investment may contain an embedded derivative of any kind, 
except as follows:
* * * * *
    (iv)(A) Adjustable rate securities are permitted, subject to the 
following requirements:
    (1) The interest payments on variable rate securities must 
correlate closely and on an unleveraged basis to a benchmark of either 
the Federal Funds target or effective rate, the prime rate, the three-
month Treasury Bill rate, the Secured Overnight Financing Rate, or the 
interest rate of any fixed rate instrument that is a permitted 
investment listed in paragraph (a)(1) of this section;
    (2) The interest payment, in any period, on floating rate 
securities must be determined solely by reference, on an unleveraged 
basis, to a benchmark of either the Federal Funds target or effective 
rate, the prime rate, the three-month Treasury Bill rate, the Secured 
Overnight Financing Rate, or the interest rate of any fixed rate 
instrument that is a permitted investment listed in paragraph (a)(1) of 
this section;
* * * * *
    (3) Concentration--
    (i) * * *
    (C) Investments in certificates of deposit may not exceed 25 
percent of the total assets held in segregation by the futures 
commission merchant or derivatives clearing organization.
* * * * *
    (E) Investments in government money market funds or U.S. Treasury 
exchange-traded funds with $1 billion or more in assets and whose 
management company manages $25 billion or more in assets may not exceed 
50 percent of the total assets held in segregation by the futures 
commission merchant or derivatives clearing organization.
    (F) Investments in government money market funds or U.S. Treasury 
exchange-traded funds with less than $1 billion in assets or which have 
a management company managing less than $25 billion in assets, may not 
exceed 10 percent of the total assets held in segregation by the 
futures commission merchant or derivatives clearing organization.
    (ii) * * *
    (B) Securities of any single issuer of municipal securities or 
certificates of deposit held by a futures commission merchant or 
derivatives clearing organization may not exceed 5 percent of the total 
assets held in segregation by the futures commission merchant or 
derivatives clearing organization.
    (C) Interests in any single family of government money market funds 
or U.S. Treasury exchange-traded funds may not exceed 25 percent of the 
total assets held in segregation by the futures commission merchant or 
derivatives clearing organization.
    (D) Interests in any individual government money market fund or 
U.S. Treasury exchange-traded fund may not exceed 5 percent of the 
total assets held in segregation by the futures commission merchant or 
derivatives clearing organization.
    (E) 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 government money market fund or U.S. 
Treasury exchange-traded fund is not deemed to be a security issued by 
its sponsoring entity.
* * * * *
    (4) Time-to-maturity. (i) Except for investments in government 
money market funds, U.S. Treasury exchange-traded funds, and permitted 
foreign sovereign debt subject to the requirements of paragraph (f) of 
this section, the dollar-weighted average of the time-to-maturity of 
the portfolio, as that average is computed pursuant to Sec.  270.2a-7 
of this title, may not exceed 24 months.
* * * * *
    (c) Government money market funds and U.S. Treasury exchange-traded 
funds. The following provisions will apply to the investment of 
customer funds in government money market funds or U.S. Treasury 
exchange-traded 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 government money 
market fund, in accordance with Sec.  270.2a-7 of this title, or an 
exchange-traded fund, in accordance with Sec.  270.6c-11 of this title.
* * * * *
    (5) * * *
    (ii) Exception. A government money market fund may provide for the 
postponement of redemption and payment due to any of the following 
circumstances:
* * * * *
    (8) Interests in U.S. Treasury exchange-traded funds will qualify 
as permitted investments under paragraph (a) of this section if:
    (i) The interests are redeemable in cash by a futures commission 
merchant

[[Page 81275]]

or a derivatives clearing organization in its capacity of an authorized 
participant pursuant to an authorized participant agreement, as defined 
in Sec.  270.6c-11 of this title, at a price based on the net asset 
value in accordance with the Investment Company Act of 1940 and 
regulations thereunder, and on a delivery versus payment basis;
    (ii) The U.S. Treasury exchange-traded fund invests at least 95 
percent of its assets in securities comprising the short-term U.S. 
Treasury index whose performance the fund seeks to replicate; and
    (iii) The interests are acceptable as performance bond by a 
derivatives clearing organization.
    (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 for repurchase or resell), provided the 
agreements to repurchase or resell conform to the following 
requirements:
* * * * *
    (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, a 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. In addition, with respect to agreements to 
repurchase or resell permitted foreign sovereign debt, the following 
entities are also permitted counterparties: a foreign bank that 
qualifies as a depository under Sec.  1.49(d)(3) and that is located in 
a money center country as the term is defined in Sec.  1.49(a)(1) or in 
another jurisdiction that has adopted the currency in which the 
permitted foreign sovereign debt is denominated as its currency; a 
securities broker or dealer located in a money center country as the 
term is defined in Sec.  1.49(a)(1) and that is regulated by a national 
financial regulator; and the Bank of Canada, the Bank of England, the 
Banque de France, the Central Bank of Japan, the Deutsche Bundesbank, 
or the European Central Bank.
* * * * *
    (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 Federal Reserve Bank, a derivatives clearing 
organization, or the Depository Trust Company in an account that 
complies with the requirements of Sec.  1.26. Securities transferred to 
the futures commission merchant or derivatives clearing organization 
under an agreement related to permitted foreign sovereign debt may also 
be held in a safekeeping account that complies with the requirements of 
Sec.  1.26 at a foreign bank that meets the location and qualification 
requirements in Sec.  1.49(c) and (d).
* * * * *
    (f) Permitted foreign sovereign debt. The following provisions will 
apply to investments of customer funds in permitted foreign sovereign 
debt.
    (1) The dollar-weighted average of the remaining time-to-maturity 
of the portfolio of investments in permitted foreign sovereign debt, as 
that average is computed pursuant to Sec.  270.2a-7 of this title on a 
country-by-country basis, may not exceed 60 calendar days. Permitted 
foreign sovereign debt instruments acquired under an agreement to 
resell shall be deemed to have a maturity equal to the period remaining 
until the date on which the resale of the underlying instruments is 
scheduled to occur, or, where the agreement is subject to demand, the 
notice period applicable to a demand for the resale of the securities. 
Permitted foreign sovereign debt instruments sold under an agreement to 
repurchase shall be included in the calculation of the dollar-weighted 
average based on the remaining time-to-maturity of each instrument 
sold.
    (2) A futures commission merchant or a derivatives clearing 
organization may not invest customer funds in any permitted foreign 
sovereign debt that has a remaining maturity greater than 180 calendar 
days.
    (3) If the two-year credit default spread of an issuing sovereign 
of permitted foreign sovereign debt is greater than 45 basis points:
    (i) The futures commission merchant or derivatives clearing 
organization shall not make any new investments in that sovereign's 
debt using customer funds.
    (ii) The futures commission merchant or derivatives clearing 
organization must discontinue investing customer funds in that 
sovereign's debt through agreements to resell as soon as practicable 
under the circumstances.


Sec.  1.26  [Amended]

0
4. Amend Sec.  1.26 by:
0
a. Redesignating Appendix A to Sec.  1.26 as Appendix F to Part 1 and 
Appendix B to Sec.  1.26 as Appendix G to Part 1; and
0
b. In the table below, for each paragraph indicated in the left column, 
removing the words indicated in the middle column from wherever they 
appear in the paragraph, and adding the words indicated in the right 
column:

----------------------------------------------------------------------------------------------------------------
             Paragraph                          Remove                                  Add
----------------------------------------------------------------------------------------------------------------
(a)................................  ``money market mutual        ``government money market funds and U.S.
                                      funds''.                     Treasury exchange-traded funds.''
(b)................................  ``the money market mutual    ``the government money market fund or U.S.
                                      fund''.                      Treasury exchange-traded fund.''
(b)................................  ``appendix A or B to this    ``Appendix F, G, H or I to this part.''
                                      section''.
(b)................................  ``appendix A or B to Sec.    ``appendix C or D to this part.''
                                      1.20''.
----------------------------------------------------------------------------------------------------------------

0
5. Revise newly redesignated Appendix C to part 1 to read as follows:

Appendix C to Part 1--Futures Commission Merchant Acknowledgment Letter 
for CFTC Regulation 1.20 Customer Segregated Account

[Date]
[Name and Address of Bank, Trust Company, Derivatives Clearing 
Organization or Futures Commission Merchant]

    We refer to the Segregated Account(s) which [Name of Futures 
Commission Merchant] (``we'' or ``our'') have opened or will open 
with [Name of Bank, Trust Company, Derivatives Clearing Organization 
or Futures Commission Merchant] (``you'' or ``your'') entitled:
    [Name of Futures Commission Merchant] [if applicable, add ``FCM 
Customer Omnibus Account''] CFTC Regulation Sec.  1.20 Customer 
Segregated Account under Sections 4d(a) and 4d(b) of the Commodity 
Exchange Act [and, if applicable, ``, Abbreviated as [short title 
reflected in the depository's electronic system]'']

Account Number(s): [ ]
(collectively, the ``Account(s)'').

    You acknowledge that we have opened or will open the above-
referenced Account(s) for the purpose of depositing, as applicable, 
money, securities and other property

[[Page 81276]]

(collectively the ``Funds'') of customers who trade commodities, 
options, swaps, and other products, as required by Commodity Futures 
Trading Commission (``CFTC'') Regulations, including Regulation 
Sec.  1.20, as amended; that the Funds held by you, hereafter 
deposited in the Account(s) or accruing to the credit of the 
Account(s), will be separately accounted for and segregated on your 
books from our own funds and from any other funds or accounts held 
by us in accordance with the provisions of the Commodity Exchange 
Act, as amended (the ``Act''), and part 1 of the CFTC's regulations, 
as amended; and that the Funds must otherwise be treated in 
accordance with the provisions of Section 4d of the Act and CFTC 
regulations thereunder.
    Furthermore, you acknowledge and agree that such Funds may not 
be used by you or by us to secure or guarantee any obligations that 
we might owe to you, and they may not be used by us to secure or 
obtain credit from you. You further acknowledge and agree that the 
Funds in the Account(s) shall not be subject to any right of offset 
or lien for or on account of any indebtedness, obligations or 
liabilities we may now or in the future have owing to you. This 
prohibition does not affect your right to recover funds advanced in 
the form of cash transfers, lines of credit, repurchase agreements 
or other similar liquidity arrangements you make in lieu of 
liquidating non-cash assets held in the Account(s) or in lieu of 
converting cash held in the Account(s) to cash in a different 
currency.
    In addition, you agree that the Account(s) may be examined at 
any reasonable time by the director of the Division of Swap Dealer 
and Intermediary Oversight of the CFTC or the director of the 
Division of Clearing and Risk of the CFTC, or any successor 
divisions, or such directors' designees, or an appropriate officer, 
agent or employee of our designated self-regulatory organization 
(``DSRO''), [Name of DSRO], and this letter constitutes the 
authorization and direction of the undersigned on our behalf to 
permit any such examination to take place without further notice to 
or consent from us.
    You agree to reply promptly and directly to any request for 
confirmation of account balances or provision of any other 
information regarding or related to the Account(s) from the director 
of the Division of Swap Dealer and Intermediary Oversight of the 
CFTC or the director of the Division of Clearing and Risk of the 
CFTC, or any successor divisions, or such directors' designees, or 
an appropriate officer, agent, or employee of [Name of DSRO], acting 
in its capacity as our DSRO, and this letter constitutes the 
authorization and direction of the undersigned on our behalf to 
release the requested information without further notice to or 
consent from us.
    The parties agree that all actions on your part to respond to 
the above information request will be made in accordance with, and 
subject to, such usual and customary authorization verification and 
authentication policies and procedures as may be employed by you to 
verify the authority of, and authenticate the identity of, the 
individual making any such information request, in order to provide 
for the secure transmission and delivery of the requested 
information to the appropriate recipient(s). We will not hold you 
responsible for acting pursuant to any information request from the 
director of the Division of Swap Dealer and Intermediary Oversight 
of the CFTC or the director of the Division of Clearing and Risk of 
the CFTC, or any successor divisions, or such directors' designees, 
or an appropriate officer, agent, or employee of [Name of DSRO], 
acting in its capacity as our DSRO, upon which you have relied after 
having taken measures in accordance with your applicable policies 
and procedures to assure that such request was provided to you by an 
individual authorized to make such a request.
    In the event that we become subject to either a voluntary or 
involuntary petition for relief under the U.S. Bankruptcy Code, we 
acknowledge that you will have no obligation to release the Funds 
held in the Account(s), except upon instruction of the Trustee in 
Bankruptcy or pursuant to the Order of the respective U.S. 
Bankruptcy Court.
    Notwithstanding anything in the foregoing to the contrary, 
nothing contained herein shall be construed as limiting your right 
to assert any right of offset or lien on assets that are not Funds 
maintained in the Account(s), or to impose such charges against us 
or any proprietary account maintained by us with you. Further, it is 
understood that amounts represented by checks, drafts or other items 
shall not be considered to be part of the Account(s) until finally 
collected. Accordingly, checks, drafts and other items credited to 
the Account(s) and subsequently dishonored or otherwise returned to 
you or reversed, for any reason, and any claims relating thereto, 
including but not limited to claims of alteration or forgery, may be 
charged back to the Account(s), and we shall be responsible to you 
as a general endorser of all such items whether or not actually so 
endorsed.
    You may conclusively presume that any withdrawal from the 
Account(s) and the balances maintained therein are in conformity 
with the Act and CFTC regulations without any further inquiry, 
provided that, in the ordinary course of your business as a 
depository, you have no notice of or actual knowledge of a potential 
violation by us of any provision of the Act or the CFTC regulations 
that relates to the segregation of customer funds; and you shall not 
in any manner not expressly agreed to herein be responsible to us 
for ensuring compliance by us with such provisions of the Act and 
CFTC regulations; however, the aforementioned presumption does not 
affect any obligation you may otherwise have under the Act or CFTC 
regulations.
    You may, and are hereby authorized to, obey the order, judgment, 
decree or levy of any court of competent jurisdiction or any 
governmental agency with jurisdiction, which order, judgment, decree 
or levy relates in whole or in part to the Account(s). In any event, 
you shall not be liable by reason of any action or omission to act 
pursuant to any such order, judgment, decree or levy, to us or to 
any other person, firm, association or corporation even if 
thereafter any such order, decree, judgment or levy shall be 
reversed, modified, set aside or vacated.
    The terms of this letter agreement shall remain binding upon the 
parties, their successors and assigns and, for the avoidance of 
doubt, regardless of a change in the name of either party. This 
letter agreement supersedes and replaces any prior agreement between 
the parties in connection with the Account(s), including but not 
limited to any prior acknowledgment letter agreement, to the extent 
that such prior agreement is inconsistent with the terms hereof. In 
the event of any conflict between this letter agreement and any 
other agreement between the parties in connection with the 
Account(s), this letter agreement shall govern with respect to 
matters specific to Section 4d of the Act and the CFTC's regulations 
thereunder, as amended.
    This letter agreement shall be governed by and construed in 
accordance with the laws of [Insert governing law] without regard to 
the principles of choice of law.
    Please acknowledge that you agree to abide by the requirements 
and conditions set forth above by signing and returning to us the 
enclosed copy of this letter agreement, and that you further agree 
to provide a copy of this fully executed letter agreement directly 
to the CFTC (via electronic means in a format and manner determined 
by the CFTC) and to [Name of DSRO], acting in its capacity as our 
DSRO. We hereby authorize and direct you to provide such copies 
without further notice to or consent from us, no later than three 
business days after opening the Account(s) or revising this letter 
agreement, as applicable.

[Name of Futures Commission Merchant]
By:
Print Name:
Title:
ACKNOWLEDGED AND AGREED:
[Name of Bank, Trust Company, Derivatives Clearing Organization or 
Futures Commission Merchant]
By:
Print Name:
Title:
Contact Information: [Insert phone number and email address]
DATE:

0
6. Revise the heading of newly redesignated Appendix E to part 1 to 
read as follows:

Appendix E to Part 1--Government Money Market Fund Prospectus 
Provisions Acceptable for Compliance With Sec.  1.25(c)(5)

* * * * *
0
7. Revise newly redesignated Appendix F to part 1 to read as follows:

Appendix F to Part 1--Futures Commission Merchant Acknowledgment Letter 
for CFTC Regulation Sec.  1.26 Customer Segregated Government Money 
Market Fund Account

[Date]
[Name and Address of Government Money Market Fund]

    We propose to invest funds held by [Name of Futures Commission 
Merchant] (``we'' or

[[Page 81277]]

``our'') on behalf of our customers in shares of [Name of Government 
Money Market Fund] (``you'' or ``your'') under account(s) entitled 
(or shares issued to):
    [Name of Futures Commission Merchant] [if applicable, add ``FCM 
Customer Omnibus Account''] CFTC Regulation Sec.  1.26 Customer 
Segregated Government Money Market Fund Account under Sections 4d(a) 
and 4d(b) of the Commodity Exchange Act [and, if applicable, ``, 
Abbreviated as [short title reflected in the depository's electronic 
system]'']

Account Number(s): [ ]
(collectively, the ``Account(s)'').

    You acknowledge that we are holding these funds, including any 
shares issued and amounts accruing in connection therewith 
(collectively, the ``Shares''), for the benefit of customers who 
trade commodities, options, swaps and other products (``Commodity 
Customers''), as required by Commodity Futures Trading Commission 
(``CFTC'') Regulation Sec.  1.26, as amended; that the Shares held 
by you, hereafter deposited in the Account(s) or accruing to the 
credit of the Account(s), will be separately accounted for and 
segregated on your books from our own funds and from any other funds 
or accounts held by us in accordance with the provisions of the 
Commodity Exchange Act, as amended (the ``Act''), and part 1 of the 
CFTC's regulations, as amended; and that the Shares must otherwise 
be treated in accordance with the provisions of Section 4d of the 
Act and CFTC regulations thereunder.
    Furthermore, you acknowledge and agree that such Shares may not 
be used by you or by us to secure or guarantee any obligations that 
we might owe to you, and they may not be used by us to secure or 
obtain credit from you. You further acknowledge and agree that the 
Shares in the Account(s) shall not be subject to any right of offset 
or lien for or on account of any indebtedness, obligations or 
liabilities we may now or in the future have owing to you.
    In addition, you agree that the Account(s) may be examined at 
any reasonable time by the director of the Division of Swap Dealer 
and Intermediary Oversight of the CFTC or the director of the 
Division of Clearing and Risk of the CFTC, or any successor 
divisions, or such directors' designees, or an appropriate officer, 
agent or employee of our designated self-regulatory organization 
(``DSRO''), [Name of DSRO], and this letter constitutes the 
authorization and direction of the undersigned on our behalf to 
permit any such examination to take place without further notice to 
or consent from us.
    You agree to reply promptly and directly to any request for 
confirmation of account balances or provision of any other account 
information regarding or related to the Account(s) from the director 
of the Division of Swap Dealer and Intermediary Oversight of the 
CFTC or the director of the Division of Clearing and Risk of the 
CFTC, or any successor divisions, or such directors' designees, or 
an appropriate officer, agent, or employee of [Name of DSRO], acting 
in its capacity as our DSRO, and this letter constitutes the 
authorization and direction of the undersigned on our behalf to 
release the requested information without further notice to or 
consent from us.
    The parties agree that all actions on your part to respond to 
the above information request will be made in accordance with, and 
subject to, such usual and customary authorization verification and 
authentication policies and procedures as may be employed by you to 
verify the authority of, and authenticate the identity of, the 
individual making any such information request, in order to provide 
for the secure transmission and delivery of the requested 
information to the appropriate recipient(s).
    We will not hold you responsible for acting pursuant to any 
information request from the director of the Division of Swap Dealer 
and Intermediary Oversight of the CFTC or the director of the 
Division of Clearing and Risk of the CFTC, or any successor 
divisions, or such directors' designees, or an appropriate officer, 
agent, or employee of [Name of DSRO], acting in its capacity as our 
DSRO, upon which you have relied after having taken measures in 
accordance with your applicable policies and procedures to assure 
that such request was provided to you by an individual authorized to 
make such a request.
    In the event we become subject to either a voluntary or 
involuntary petition for relief under the U.S. Bankruptcy Code, we 
acknowledge that you will have no obligation to release the Shares 
held in the Account(s), except upon instruction of the Trustee in 
Bankruptcy or pursuant to the Order of the respective U.S. 
Bankruptcy Court.
    Notwithstanding anything in the foregoing to the contrary, 
nothing contained herein shall be construed as limiting your right 
to assert any right of offset or lien on assets that are not Shares 
maintained in the Account(s), or to impose such charges against us 
or any proprietary account maintained by us with you. Further, it is 
understood that amounts represented by checks, drafts or other items 
shall not be considered to be part of the Account(s) until finally 
collected. Accordingly, checks, drafts and other items credited to 
the Account(s) and subsequently dishonored or otherwise returned to 
you or reversed, for any reason and any claims relating thereto, 
including but not limited to claims of alteration or forgery, may be 
charged back to the Account(s), and we shall be responsible to you 
as a general endorser of all such items whether or not actually so 
endorsed.
    You may conclusively presume that any withdrawal from the 
Account(s) and the balances maintained therein are in conformity 
with the Act and CFTC regulations without any further inquiry, 
provided that, in the ordinary course of your business as a 
depository, you have no notice of or actual knowledge of a potential 
violation by us of any provision of the Act or the CFTC regulations 
that relates to the segregation of customer funds; and you shall not 
in any manner not expressly agreed to herein be responsible to us 
for ensuring compliance by us with such provisions of the Act and 
CFTC regulations; however, the aforementioned presumption does not 
affect any obligation you may otherwise have under the Act or CFTC 
regulations.
    You may, and are hereby authorized to, obey the order, judgment, 
decree or levy of any court of competent jurisdiction or any 
governmental agency with jurisdiction, which order, judgment, decree 
or levy relates in whole or in part to the Account(s). In any event, 
you shall not be liable by reason of any action or omission to act 
pursuant to such order, judgment, decree or levy, to us or to any 
other person, firm, association or corporation even if thereafter 
any such order, decree, judgment or levy shall be reversed, 
modified, set aside or vacated.
    We are permitted to invest customers' funds in government money 
market funds pursuant to CFTC Regulation Sec.  1.25. That rule sets 
forth the following conditions, among others, with respect to any 
investment in a government money market fund:
    (1) The net asset value of the fund must be computed by 9:00 
a.m. of the business day following each business day and be made 
available to us by that time;
    (2) The fund must be legally obligated to redeem an interest in 
the fund and make payment in satisfaction thereof by the close of 
the business day following the day on which we make a redemption 
request except as otherwise specified in CFTC Regulation Sec.  
1.25(c)(5)(ii); and,
    (3) The agreement under which we invest customers' funds must 
not contain any provision that would prevent us from pledging or 
transferring fund shares.
    The terms of this letter agreement shall remain binding upon the 
parties, their successors and assigns, and for the avoidance of 
doubt, regardless of a change in the name of either party. This 
letter agreement supersedes and replaces any prior agreement between 
the parties in connection with the Account(s), including but not 
limited to any prior acknowledgment letter agreement, to the extent 
that such prior agreement is inconsistent with the terms hereof. In 
the event of any conflict between this letter agreement and any 
other agreement between the parties in connection with the 
Account(s), this letter agreement shall govern with respect to 
matters specific to Section 4d of the Act and the CFTC's regulations 
thereunder, as amended.
    This letter agreement shall be governed by and construed in 
accordance with the laws of [Insert governing law] without regard to 
the principles of choice of law.
    Please acknowledge that you agree to abide by the requirements 
and conditions set forth above by signing and returning to us the 
enclosed copy of this letter agreement, and that you further agree 
to provide a copy of this fully executed letter agreement directly 
to the CFTC (via electronic means in a format and manner determined 
by the CFTC) and to [Name of DSRO], acting in its capacity as our 
DSRO, in accordance with CFTC Regulation Sec.  1.20. We hereby 
authorize and direct you to provide such copies without further 
notice to or consent from us, no later than three business days 
after opening the Account(s) or revising this letter agreement, as 
applicable.

[Name of Futures Commission Merchant]
By:
Print Name:
Title:
ACKNOWLEDGED AND AGREED:
[Name of Government Money Market Fund]
By:

[[Page 81278]]

Print Name:
Title:
Contact Information: [Insert phone number and email address]
Date:

0
8. Revise newly redesignated Appendix G to part 1 to read as follows:

Appendix G to Part 1--Derivatives Clearing Organization Acknowledgment 
Letter for CFTC Regulation Sec.  1.26 Customer Segregated Government 
Money Market Fund Account

[Date]
[Name and Address of Government Money Market Fund]

    We propose to invest funds held by [Name of Derivatives Clearing 
Organization] (``we'' or ``our'') on behalf of customers in shares 
of [Name of Government Money Market Fund] (``you'' or ``your'') 
under account(s) entitled (or shares issued to):
    [Name of Derivatives Clearing Organization] Futures Customer 
Omnibus Account, CFTC Regulation Sec.  1.26 Customer Segregated 
Government Money Market Fund Account under Sections 4d(a) and 4d(b) 
of the Commodity Exchange Act [and, if applicable, ``, Abbreviated 
as [short title reflected in the depository's electronic system]'']
Account Number(s): [ ]
(collectively, the ``Account(s)'').
    You acknowledge that we are holding these funds, including any 
shares issued and amounts accruing in connection therewith 
(collectively, the ``Shares''), for the benefit of customers who 
trade commodities, options, swaps and other products, as required by 
Commodity Futures Trading Commission (``CFTC'') Regulation Sec.  
1.26, as amended; that the Shares held by you, hereafter deposited 
in the Account(s) or accruing to the credit of the Account(s), will 
be separately accounted for and segregated on your books from our 
own funds and from any other funds or accounts held by us in 
accordance with the provisions of the Commodity Exchange Act, as 
amended (the ``Act''), and part 1 of the CFTC's regulations, as 
amended; and that the Shares must otherwise be treated in accordance 
with the provisions of Section 4d of the Act and CFTC regulations 
thereunder.
    Furthermore, you acknowledge and agree that such Shares may not 
be used by you or by us to secure or guarantee any obligations that 
we might owe to you, and they may not be used by us to secure or 
obtain credit from you. You further acknowledge and agree that the 
Shares in the Account(s) shall not be subject to any right of offset 
or lien for or on account of any indebtedness, obligations or 
liabilities we may now or in the future have owing to you.
    You agree to reply promptly and directly to any request for 
confirmation of account balances or provision of any other 
information regarding or related to the Account(s) from the director 
of the Division of Clearing and Risk of the CFTC or the director of 
the Division of Swap Dealer and Intermediary Oversight of the CFTC, 
or any successor divisions, or such directors' designees, and this 
letter constitutes the authorization and direction of the 
undersigned on our behalf to release the requested information 
without further notice to or consent from us.
    The parties agree that all actions on your part to respond to 
the above information requests will be made in accordance with, and 
subject to, such usual and customary authorization verification and 
authentication policies and procedures as may be employed by you to 
verify the authority of, and authenticate the identity of, the 
individual making any such information request, in order to provide 
for the secure transmission and delivery of the requested 
information to the appropriate recipient(s).
    We will not hold you responsible for acting pursuant to any 
information request from the director of the Division of Clearing 
and Risk of the CFTC or the director of the Division of Swap Dealer 
and Intermediary Oversight of the CFTC, or any successor divisions, 
or such directors' designees, upon which you have relied after 
having taken measures in accordance with your applicable policies 
and procedures to assure that such request was provided to you by an 
individual authorized to make such a request.
    In the event that we become subject to either a voluntary or 
involuntary petition for relief under the U.S. Bankruptcy Code, we 
acknowledge that you will have no obligation to release the Shares 
held in the Account(s), except upon instruction of the Trustee in 
Bankruptcy or pursuant to the Order of the respective U.S. 
Bankruptcy Court.
    Notwithstanding anything in the foregoing to the contrary, 
nothing contained herein shall be construed as limiting your right 
to assert any right of offset or lien on assets that are not Shares 
maintained in the Account(s), or to impose such charges against us 
or any proprietary account maintained by us with you. Further, it is 
understood that amounts represented by checks, drafts or other items 
shall not be considered to be part of the Account(s) until finally 
collected. Accordingly, checks, drafts and other items credited to 
the Account(s) and subsequently dishonored or otherwise returned to 
you or reversed, for any reason, and any claims relating thereto, 
including but not limited to claims of alteration or forgery, may be 
charged back to the Account(s), and we shall be responsible to you 
as a general endorser of all such items whether or not actually so 
endorsed.
    You may conclusively presume that any withdrawal from the 
Account(s) and the balances maintained therein are in conformity 
with the Act and CFTC regulations without any further inquiry, 
provided that, in the ordinary course of your business as a 
depository, you have no notice of or actual knowledge of a potential 
violation by us of any provision of the Act or the CFTC regulations 
that relates to the segregation of customer funds; and you shall not 
in any manner not expressly agreed to herein be responsible to us 
for ensuring compliance by us with such provisions of the Act and 
CFTC regulations; however, the aforementioned presumption does not 
affect any obligation you may otherwise have under the Act or CFTC 
regulations.
    You may, and are hereby authorized to, obey the order, judgment, 
decree or levy of any court of competent jurisdiction or any 
governmental agency with jurisdiction, which order, judgment, decree 
or levy relates in whole or in part to the Account(s). In any event, 
you shall not be liable by reason of any action or omission to act 
pursuant to any such order, judgment, decree or levy, to us or to 
any other person, firm, association or corporation even if 
thereafter any such order, decree, judgment or levy shall be 
reversed, modified, set aside or vacated.
    We are permitted to invest customers' funds in government money 
market funds pursuant to CFTC Regulation Sec.  1.25. That rule sets 
forth the following conditions, among others, with respect to any 
investment in a government money market fund:
    (1) The net asset value of the fund must be computed by 9:00 
a.m. of the business day following each business day and be made 
available to us by that time;
    (2) The fund must be legally obligated to redeem an interest in 
the fund and make payment in satisfaction thereof by the close of 
the business day following the day on which we make a redemption 
request except as otherwise specified in CFTC Regulation Sec.  
1.25(c)(5)(ii); and,
    (3) The agreement under which we invest customers' funds must 
not contain any provision that would prevent us from pledging or 
transferring fund shares.
    The terms of this letter agreement shall remain binding upon the 
parties, their successors and assigns and, for the avoidance of 
doubt, regardless of a change in the name of either party. This 
letter agreement supersedes and replaces any prior agreement between 
the parties in connection with the Account(s), including but not 
limited to any prior acknowledgment letter agreement, to the extent 
that such prior agreement is inconsistent with the terms hereof. In 
the event of any conflict between this letter agreement and any 
other agreement between the parties in connection with the 
Account(s), this letter agreement shall govern with respect to 
matters specific to Section 4d of the Act and the CFTC's regulations 
thereunder, as amended.
    This letter agreement shall be governed by and construed in 
accordance with the laws of [Insert governing law] without regard to 
the principles of choice of law.
    Please acknowledge that you agree to abide by the requirements 
and conditions set forth above by signing and returning to us the 
enclosed copy of this letter agreement, and that you further agree 
to provide a copy of this fully executed letter agreement directly 
to the CFTC (via electronic means in a format and manner determined 
by the CFTC) in accordance with CFTC Regulation Sec.  1.20. We 
hereby authorize and direct you to provide such copy without further 
notice to or consent from us, no later than three business days 
after opening the Account(s) or revising this letter agreement, as 
applicable.

[Name of Derivatives Clearing Organization]
By:
Print Name:
Title:
ACKNOWLEDGED AND AGREED:
[Name of Government Money Market Fund]
By:
Print Name:

[[Page 81279]]

Title:
Contact Information: [Insert phone number and email address]
DATE:

0
9. Add Appendix H to part 1 to read as follows:

Appendix H to Part 1--Futures Commission Merchant Acknowledgment Letter 
for CFTC Regulation Sec.  1.26 Customer Segregated U.S. Treasury 
Exchange-Traded Fund Account

[Date]
[Name and Address of U.S. Treasury Exchange-Traded Fund]

    We propose to invest funds held by [Name of Futures Commission 
Merchant] (``we'' or ``our'') on behalf of our customers in shares 
of [Name of U.S. Treasury Exchange-Traded Fund] (``you'' or 
``your'') under account(s) entitled (or shares issued to):
    [Name of Futures Commission Merchant] [if applicable, add ``FCM 
Customer Omnibus Account''] CFTC Regulation Sec.  1.26 Customer 
Segregated U.S. Treasury Exchange-Traded Fund Account under Sections 
4d(a) and 4d(b) of the Commodity Exchange Act [and, if applicable, 
``, Abbreviated as [short title reflected in the depository's 
electronic system]'']

Account Number(s): [ ]
(collectively, the ``Account(s)'').

    You acknowledge that we are holding these funds, including any 
shares issued and amounts accruing in connection therewith 
(collectively, the ``Shares''), for the benefit of customers who 
trade commodities, options, swaps and other products (``Commodity 
Customers''), as required by Commodity Futures Trading Commission 
(``CFTC'') Regulation Sec.  1.26, as amended; that the Shares held 
by you, hereafter deposited in the Account(s) or accruing to the 
credit of the Account(s), will be separately accounted for and 
segregated on your books from our own funds and from any other funds 
or accounts held by us in accordance with the provisions of the 
Commodity Exchange Act, as amended (the ``Act''), and part 1 of the 
CFTC's regulations, as amended; and that the Shares must otherwise 
be treated in accordance with the provisions of Section 4d of the 
Act and CFTC regulations thereunder.
    Furthermore, you acknowledge and agree that such Shares may not 
be used by you or by us to secure or guarantee any obligations that 
we might owe to you, and they may not be used by us to secure or 
obtain credit from you. You further acknowledge and agree that the 
Shares in the Account(s) shall not be subject to any right of offset 
or lien for or on account of any indebtedness, obligations or 
liabilities we may now or in the future have owing to you.
    In addition, you agree that the Account(s) may be examined at 
any reasonable time by the Director of the Market Participants 
Division of the CFTC or the Director of the Division of Clearing and 
Risk of the CFTC, or any successor divisions, or such Directors' 
designees, or an appropriate officer, agent or employee of our 
designated self-regulatory organization (``DSRO''), [Name of DSRO], 
and this letter constitutes the authorization and direction of the 
undersigned on our behalf to permit any such examination to take 
place without further notice to or consent from us.
    You agree to reply promptly and directly to any request for 
confirmation of account balances or provision of any other account 
information regarding or related to the Account(s) from the Director 
of the Market Participants Division of the CFTC or the Director of 
the Division of Clearing and Risk of the CFTC, or any successor 
divisions, or such Directors' designees, or an appropriate officer, 
agent, or employee of [Name of DSRO], acting in its capacity as our 
DSRO, and this letter constitutes the authorization and direction of 
the undersigned on our behalf to release the requested information 
without further notice to or consent from us.
    The parties agree that all actions on your part to respond to 
the above information request will be made in accordance with, and 
subject to, such usual and customary authorization verification and 
authentication policies and procedures as may be employed by you to 
verify the authority of, and authenticate the identity of, the 
individual making any such information request, in order to provide 
for the secure transmission and delivery of the requested 
information to the appropriate recipient(s).
    We will not hold you responsible for acting pursuant to any 
information request from the Director of the Market Participants 
Division of the CFTC or the Director of the Division of Clearing and 
Risk of the CFTC, or any successor divisions, or such Directors' 
designees, or an appropriate officer, agent, or employee of [Name of 
DSRO], acting in its capacity as our DSRO, upon which you have 
relied after having taken measures in accordance with your 
applicable policies and procedures to assure that such request was 
provided to you by an individual authorized to make such a request.
    In the event we become subject to either a voluntary or 
involuntary petition for relief under the U.S. Bankruptcy Code, we 
acknowledge that you will have no obligation to release the Shares 
held in the Account(s), except upon instruction of the Trustee in 
Bankruptcy or pursuant to the Order of the respective U.S. 
Bankruptcy Court.
    Notwithstanding anything in the foregoing to the contrary, 
nothing contained herein shall be construed as limiting your right 
to assert any right of offset or lien on assets that are not Shares 
maintained in the Account(s), or to impose such charges against us 
or any proprietary account maintained by us with you. Further, it is 
understood that amounts represented by checks, drafts or other items 
shall not be considered to be part of the Account(s) until finally 
collected. Accordingly, checks, drafts and other items credited to 
the Account(s) and subsequently dishonored or otherwise returned to 
you or reversed, for any reason and any claims relating thereto, 
including but not limited to claims of alteration or forgery, may be 
charged back to the Account(s), and we shall be responsible to you 
as a general endorser of all such items whether or not actually so 
endorsed.
    You may conclusively presume that any withdrawal from the 
Account(s) and the balances maintained therein are in conformity 
with the Act and CFTC regulations without any further inquiry, 
provided that, in the ordinary course of your business as a 
depository, you have no notice of or actual knowledge of a potential 
violation by us of any provision of the Act or the CFTC regulations 
that relates to the segregation of customer funds; and you shall not 
in any manner not expressly agreed to herein be responsible to us 
for ensuring compliance by us with such provisions of the Act and 
CFTC regulations; however, the aforementioned presumption does not 
affect any obligation you may otherwise have under the Act or CFTC 
regulations.
    You may, and are hereby authorized to, obey the order, judgment, 
decree or levy of any court of competent jurisdiction or any 
governmental agency with jurisdiction, which order, judgment, decree 
or levy relates in whole or in part to the Account(s). In any event, 
you shall not be liable by reason of any action or omission to act 
pursuant to such order, judgment, decree or levy, to us or to any 
other person, firm, association or corporation even if thereafter 
any such order, decree, judgment or levy shall be reversed, 
modified, set aside or vacated.
    We are permitted to invest customers' funds in U.S. Treasury 
exchange-traded funds pursuant to CFTC Regulation Sec.  1.25. That 
rule sets forth the following conditions, among others, with respect 
to any investment in a U.S. Treasury exchange-traded fund:
    (1) To qualify as a permitted investment, interests in U.S. 
Treasury exchange-traded must be redeemable in cash by a futures 
commission merchant or derivatives clearing organization in its 
capacity as an authorized participant pursuant to an authorized 
participant agreement, as defined in Sec.  270.6c-11 of Title 17 of 
the Code of Federal Regulations, at a price based on the net asset 
value in accordance with the Investment Company Act of 1940 and 
regulations thereunder, and on a delivery versus payment basis;
    (2) The fund must be legally obligated to redeem an interest in 
the fund and make payment in satisfaction thereof by the close of 
the business day following the day on which we make a redemption 
request; and,
    (3) The agreement under which we invest customers' funds must 
not contain any provision that would prevent us from pledging or 
transferring fund shares.
    The terms of this letter agreement shall remain binding upon the 
parties, their successors and assigns, and for the avoidance of 
doubt, regardless of a change in the name of either party. This 
letter agreement supersedes and replaces any prior agreement between 
the parties in connection with the Account(s), including but not 
limited to any prior acknowledgment letter agreement, to the extent 
that such prior agreement is inconsistent with the terms hereof. In 
the event of any conflict between this letter agreement and any 
other agreement between the parties in connection with the 
Account(s), this letter agreement shall govern with respect to 
matters specific to Section 4d of the Act and the CFTC's regulations 
thereunder, as amended.
    This letter agreement shall be governed by and construed in 
accordance with the laws

[[Page 81280]]

of [Insert governing law] without regard to the principles of choice 
of law.
    Please acknowledge that you agree to abide by the requirements 
and conditions set forth above by signing and returning to us the 
enclosed copy of this letter agreement, and that you further agree 
to provide a copy of this fully executed letter agreement directly 
to the CFTC (via electronic means in a format and manner determined 
by the CFTC) and to [Name of DSRO], acting in its capacity as our 
DSRO, in accordance with CFTC Regulation Sec.  1.20. We hereby 
authorize and direct you to provide such copies without further 
notice to or consent from us, no later than three business days 
after opening the Account(s) or revising this letter agreement, as 
applicable.

[Name of Futures Commission Merchant]
By:
Print Name:
Title:
ACKNOWLEDGED AND AGREED:
[Name of U.S. Treasury Exchange-Traded Fund]
By:
Print Name:
Title:
Contact Information: [Insert phone number and email address]
Date:

0
10. Add Appendix I to part 1 to read as follows:

Appendix I to Part 1--Derivatives Clearing Organization Acknowledgment 
Letter for CFTC Regulation Sec.  1.26 Customer Segregated U.S. Treasury 
Exchange-Traded Fund Account

[Date]
[Name and Address of U.S. Treasury Exchange-Traded Fund]

    We propose to invest funds held by [Name of Derivatives Clearing 
Organization] (``we'' or ``our'') on behalf of customers in shares 
of [Name of U.S. Treasury Exchange-Traded Fund] (``you'' or 
``your'') under account(s) entitled (or shares issued to):
    [Name of Derivatives Clearing Organization] Futures Customer 
Omnibus Account, CFTC Regulation Sec.  1.26 Customer Segregated U.S. 
Treasury Exchange-Traded Fund Account under Sections 4d(a) and 4d(b) 
of the Commodity Exchange Act [and, if applicable, ``, Abbreviated 
as [short title reflected in the depository's electronic system]'']

Account Number(s): [ ]
(collectively, the ``Account(s)'').

    You acknowledge that we are holding these funds, including any 
shares issued and amounts accruing in connection therewith 
(collectively, the ``Shares''), for the benefit of customers who 
trade commodities, options, swaps and other products, as required by 
Commodity Futures Trading Commission (``CFTC'') Regulation Sec.  
1.26, as amended; that the Shares held by you, hereafter deposited 
in the Account(s) or accruing to the credit of the Account(s), will 
be separately accounted for and segregated on your books from our 
own funds and from any other funds or accounts held by us in 
accordance with the provisions of the Commodity Exchange Act, as 
amended (the ``Act''), and part 1 of the CFTC's regulations, as 
amended; and that the Shares must otherwise be treated in accordance 
with the provisions of Section 4d of the Act and CFTC regulations 
thereunder.
    Furthermore, you acknowledge and agree that such Shares may not 
be used by you or by us to secure or guarantee any obligations that 
we might owe to you, and they may not be used by us to secure or 
obtain credit from you. You further acknowledge and agree that the 
Shares in the Account(s) shall not be subject to any right of offset 
or lien for or on account of any indebtedness, obligations or 
liabilities we may now or in the future have owing to you.
    You agree to reply promptly and directly to any request for 
confirmation of account balances or provision of any other 
information regarding or related to the Account(s) from the Director 
of the Division of Clearing and Risk of the CFTC or the Director of 
the Market Participants Division of the CFTC, or any successor 
divisions, or such Directors' designees, and this letter constitutes 
the authorization and direction of the undersigned on our behalf to 
release the requested information without further notice to or 
consent from us.
    The parties agree that all actions on your part to respond to 
the above information requests will be made in accordance with, and 
subject to, such usual and customary authorization verification and 
authentication policies and procedures as may be employed by you to 
verify the authority of, and authenticate the identity of, the 
individual making any such information request, in order to provide 
for the secure transmission and delivery of the requested 
information to the appropriate recipient(s).
    We will not hold you responsible for acting pursuant to any 
information request from the Director of the Division of Clearing 
and Risk of the CFTC or the Director of the Market Participants 
Division of the CFTC, or any successor divisions, or such Directors' 
designees, upon which you have relied after having taken measures in 
accordance with your applicable policies and procedures to assure 
that such request was provided to you by an individual authorized to 
make such a request.
    In the event that we become subject to either a voluntary or 
involuntary petition for relief under the U.S. Bankruptcy Code, we 
acknowledge that you will have no obligation to release the Shares 
held in the Account(s), except upon instruction of the Trustee in 
Bankruptcy or pursuant to the Order of the respective U.S. 
Bankruptcy Court.
    Notwithstanding anything in the foregoing to the contrary, 
nothing contained herein shall be construed as limiting your right 
to assert any right of offset or lien on assets that are not Shares 
maintained in the Account(s), or to impose such charges against us 
or any proprietary account maintained by us with you. Further, it is 
understood that amounts represented by checks, drafts or other items 
shall not be considered to be part of the Account(s) until finally 
collected. Accordingly, checks, drafts and other items credited to 
the Account(s) and subsequently dishonored or otherwise returned to 
you or reversed, for any reason, and any claims relating thereto, 
including but not limited to claims of alteration or forgery, may be 
charged back to the Account(s), and we shall be responsible to you 
as a general endorser of all such items whether or not actually so 
endorsed.
    You may conclusively presume that any withdrawal from the 
Account(s) and the balances maintained therein are in conformity 
with the Act and CFTC regulations without any further inquiry, 
provided that, in the ordinary course of your business as a 
depository, you have no notice of or actual knowledge of a potential 
violation by us of any provision of the Act or the CFTC regulations 
that relates to the segregation of customer funds; and you shall not 
in any manner not expressly agreed to herein be responsible to us 
for ensuring compliance by us with such provisions of the Act and 
CFTC regulations; however, the aforementioned presumption does not 
affect any obligation you may otherwise have under the Act or CFTC 
regulations.
    You may, and are hereby authorized to, obey the order, judgment, 
decree or levy of any court of competent jurisdiction or any 
governmental agency with jurisdiction, which order, judgment, decree 
or levy relates in whole or in part to the Account(s). In any event, 
you shall not be liable by reason of any action or omission to act 
pursuant to any such order, judgment, decree or levy, to us or to 
any other person, firm, association or corporation even if 
thereafter any such order, decree, judgment or levy shall be 
reversed, modified, set aside or vacated.
    We are permitted to invest customers' funds in U.S. Treasury 
exchange-traded funds pursuant to CFTC Regulation Sec.  1.25. That 
rule sets forth the following conditions, among others, with respect 
to any investment in a U.S. Treasury exchange-traded fund:
    (1) To qualify as a permitted investment, interests in U.S. 
Treasury exchange-traded must be redeemable in cash by a futures 
commission merchant or derivatives clearing organization in its 
capacity as an authorized participant pursuant to an authorized 
participant agreement, as defined in Sec.  270.6c-11 of Title 17 of 
the Code of Federal Regulations, at a price based on the net asset 
value in accordance with the Investment Company Act of 1940 and 
regulations thereunder, and on a delivery versus payment basis;
    (2) The fund must be legally obligated to redeem an interest in 
the fund and make payment in satisfaction thereof by the close of 
the business day following the day on which we make a redemption 
request; and,
    (3) The agreement under which we invest customers' funds must 
not contain any provision that would prevent us from pledging or 
transferring fund shares.
    The terms of this letter agreement shall remain binding upon the 
parties, their successors and assigns and, for the avoidance of 
doubt, regardless of a change in the name of either party. This 
letter agreement supersedes and replaces any prior agreement between 
the parties in connection with the Account(s), including but not 
limited to any prior acknowledgment letter agreement, to the extent 
that such prior agreement is inconsistent with the terms hereof. In 
the

[[Page 81281]]

event of any conflict between this letter agreement and any other 
agreement between the parties in connection with the Account(s), 
this letter agreement shall govern with respect to matters specific 
to Section 4d of the Act and the CFTC's regulations thereunder, as 
amended.
    This letter agreement shall be governed by and construed in 
accordance with the laws of [Insert governing law] without regard to 
the principles of choice of law.
    Please acknowledge that you agree to abide by the requirements 
and conditions set forth above by signing and returning to us the 
enclosed copy of this letter agreement, and that you further agree 
to provide a copy of this fully executed letter agreement directly 
to the CFTC (via electronic means in a format and manner determined 
by the CFTC) in accordance with CFTC Regulation Sec.  1.20. We 
hereby authorize and direct you to provide such copy without further 
notice to or consent from us, no later than three business days 
after opening the Account(s) or revising this letter agreement, as 
applicable.

[Name of Derivatives Clearing Organization]
By:
Print Name:
Title:
ACKNOWLEDGED AND AGREED:
[Name of U.S. Treasury Exchange-Traded Fund]
By:
Print Name:
Title:
Contact Information: [Insert phone number and email address]
DATE:

0
11. In Sec.  1.32, revise paragraphs (f)(3)(v), (vi), and (vii) to read 
as follows:


Sec.  1.32  Reporting of segregated account computation and details 
regarding the holding of futures customer funds.

* * * * *
    (f) * * *
    (3) * * *
    (v) Permitted foreign sovereign debt by country:
    (A) Canada;
    (B) France;
    (C) Germany;
    (D) Japan;
    (E) United Kingdom;
    (vi) Interests in U.S. Treasury exchange-traded funds; and
    (vii) Interests in government money market funds.
* * * * *

PART 22--CLEARED SWAPS

0
12. The authority citation for part 22 continues to read as follows:

    Authority:  7 U.S.C. 1a, 6d, 7a-1 as amended by Pub. L. 111-203, 
124 Stat. 1376.

0
13. In Sec.  22.2, revise paragraphs (g)(5)(iii)(E), (F), and (G) to 
read as follows:


Sec.  22.2  Futures Commission Merchants: Treatment of Cleared Swaps 
and Associated Cleared Swaps Customer Collateral.

* * * * *
    (g) * * *
    (5) * * *
    (iii) * * *
    (E) Permitted foreign sovereign debt by country:
    (1) Canada;
    (2) France;
    (3) Germany;
    (4) Japan;
    (5) United Kingdom;
    (F) Interests in U.S. Treasury exchange-traded funds; and
    (G) Interests in government money market funds.
* * * * *
0
14. In Sec.  22.3, revise paragraph (d) to read as follows:


Sec.  22.3  Derivatives clearing organizations: Treatment of cleared 
swaps customer collateral.

* * * * *
    (d) Exceptions; Permitted investments. Notwithstanding the 
foregoing and Sec.  22.15, a derivatives clearing organization may 
invest the money, securities, or other property constituting Cleared 
Swaps Customer Collateral in accordance with Sec.  1.25 of this 
chapter. A derivative clearing organization shall bear sole 
responsibility for any losses resulting from the investment of Cleared 
Swaps Customer Collateral in instruments described in Sec.  1.25 of 
this chapter. No investment losses shall be borne or otherwise 
allocated to a futures commission merchant.

PART 30--FOREIGN FUTURES AND FOREIGN OPTIONS TRANSACTIONS

0
15. 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.

0
16. In Sec.  30.7, revise paragraphs (d)(2) and (3) and (l)(5)(iii)(E) 
through (G) to read as follows:


Sec.  30.7  Treatment of foreign futures or foreign options secured 
amount.

* * * * *
    (d) * * *
    (2) The written acknowledgment must be in the form as set out in 
Appendix E to this part; Provided, however, that if the futures 
commission merchant invests funds set aside as the foreign futures or 
foreign options secured amount in government money market funds or U.S. 
Treasury exchange-traded funds as a permitted investment under 
paragraph (h) of this section and in accordance with the terms and 
conditions of Sec.  1.25(c) of this chapter, the written acknowledgment 
with respect to such investment must be in the form as set out in 
Appendix F to this part or in Appendix G to this part, respectively.
    (3)(i) A futures commission merchant shall deposit 30.7 customer 
funds only with a depository that agrees to provide the director of the 
Division of Swap Dealer and Intermediary Oversight, or any successor 
division, or such director's designees, with account balance 
information for 30.7 customer accounts.
    (ii) The written acknowledgment must contain the futures commission 
merchant's authorization to the depository to provide account balance 
information to the director of the Division of Swap Dealer and 
Intermediary Oversight, or any successor division, or such director's 
designees, without further notice to or consent from the futures 
commission merchant.
* * * * *
    (l) * * *
    (5) * * *
    (iii) * * *
    (E) Permitted foreign sovereign debt by country:
    (1) Canada;
    (2) France;
    (3) Germany;
    (4) Japan;
    (5) United Kingdom;
    (F) Interests in U.S. Treasury exchange-traded funds; and
    (G) Interests in government money market funds.
* * * * *
0
17. Revise Appendix E to part 30 to read as follows:

Appendix E to Part 30--Acknowledgment Letter for CFTC Regulation Sec.  
30.7 Customer Secured Account

[Date]
[Name and Address of Depository]

    We refer to the Secured Amount Account(s) which [Name of Futures 
Commission Merchant] (``we'' or ``our'') have opened or will open 
with [Name of Depository] (``you'' or ``your'') entitled:
    [Name of Futures Commission Merchant] [if applicable, add ``FCM 
Customer Omnibus Account''] CFTC Regulation Sec.  30.7 Customer 
Secured Account under Section 4(b) of the Commodity Exchange Act 
[and, if applicable, ``, Abbreviated as [short title reflected in 
the depository's electronic system]'']

Account Number(s): [ ]
(collectively, the ``Account(s)'').
    You acknowledge that we have opened or will open the above-
referenced Account(s) for the purpose of depositing, as applicable, 
money, securities and other property (collectively ``Funds'') of 
customers who

[[Page 81282]]

trade foreign futures and/or foreign options (as such terms are 
defined in U.S. Commodity Futures Trading Commission (``CFTC'') 
Regulation Sec.  30.1, as amended); that the Funds held by you, 
hereafter deposited in the Account(s) or accruing to the credit of 
the Account(s), will be kept separate and apart and separately 
accounted for on your books from our own funds and from any other 
funds or accounts held by us, in accordance with the provisions of 
the Commodity Exchange Act, as amended (the ``Act''), and part 30 of 
the CFTC's regulations, as amended; that the Funds may not be 
commingled with our own funds in any proprietary account we maintain 
with you; and that the Funds must otherwise be treated in accordance 
with the provisions of Section 4(b) of the Act and CFTC Regulation 
Sec.  30.7.
    Furthermore, you acknowledge and agree that such Funds may not 
be used by you or by us to secure or guarantee any obligations that 
we might owe to you, and they may not be used by us to secure or 
obtain credit from you. You further acknowledge and agree that the 
Funds in the Account(s) shall not be subject to any right of offset 
or lien for or on account of any indebtedness, obligations or 
liabilities we may now or in the future have owing to you. This 
prohibition does not affect your right to recover funds advanced in 
the form of cash transfers, lines of credit, repurchase agreements 
or other similar liquidity arrangements you make in lieu of 
liquidating non-cash assets held in the Account(s) or in lieu of 
converting cash held in the Account(s) to cash in a different 
currency.
    In addition, you agree that the Account(s) may be examined at 
any reasonable time by the director of the Division of Swap Dealer 
and Intermediary Oversight of the CFTC or the director of the 
Division of Clearing and Risk of the CFTC, or any successor 
divisions, or such directors' designees, or an appropriate officer, 
agent or employee of our designated self-regulatory organization 
(``DSRO''), [Name of DSRO], and this letter constitutes the 
authorization and direction of the undersigned on our behalf to 
permit any such examination to take place without further notice or 
consent from us.
    You agree to reply promptly and directly to any request for 
confirmation of account balances or provision of any other 
information regarding or related to the Account(s) from the director 
of the Division of Swap Dealer and Intermediary Oversight of the 
CFTC or the director of the Division of Clearing and Risk of the 
CFTC, or any successor divisions, or such directors' designees, or 
an appropriate officer, agent, or employee of [Name of DSRO], acting 
in its capacity as our DSRO, and this letter constitutes the 
authorization and direction of the undersigned on our behalf to 
release the requested information without further notice to or 
consent from us.
    The parties agree that all actions on your part to respond to 
the above information request will be made in accordance with, and 
subject to, such usual and customary authorization verification and 
authentication policies and procedures as may be employed by you to 
verify the authority of, and authenticate the identity of, the 
individual making any such information request, in order to provide 
for the secure transmission and delivery of the requested 
information to the appropriate recipient(s).
    We will not hold you responsible for acting pursuant to any 
information request from the director of the Division of Swap Dealer 
and Intermediary Oversight of the CFTC or the director of the 
Division of Clearing and Risk of the CFTC, or any successor 
divisions, or such directors' designees, or an appropriate officer, 
agent, or employee of [Name of DSRO], acting in its capacity as our 
DSRO, upon which you have relied after having taken measures in 
accordance with your applicable policies and procedures to assure 
that such request was provided to you by an individual authorized to 
make such a request.
    In the event we become subject to either a voluntary or 
involuntary petition for relief under the U.S. Bankruptcy Code, we 
acknowledge that you will have no obligation to release the Funds 
held in the Account(s), except upon instruction of the Trustee in 
Bankruptcy or pursuant to the Order of the respective U.S. 
Bankruptcy Court.
    Notwithstanding anything in the foregoing to the contrary, 
nothing contained herein shall be construed as limiting your right 
to assert any right of offset or lien on assets that are not Sec.  
30.7 customer funds maintained in the Account(s), or to impose such 
charges against us or any proprietary account maintained by us with 
you. Further, it is understood that amounts represented by checks, 
drafts or other items shall not be considered to be part of the 
Account(s) until finally collected. Accordingly, checks, drafts and 
other items credited to the Account(s) and subsequently dishonored 
or otherwise returned to you or reversed, for any reason, and any 
claims relating thereto, including but not limited to claims of 
alteration or forgery, may be charged back to the Account(s), and we 
shall be responsible to you as a general endorser of all such items 
whether or not actually so endorsed.
    You may conclusively presume that any withdrawal from the 
Account(s) and the balances maintained therein are in conformity 
with the Act and CFTC regulations without any further inquiry, 
provided that, in the ordinary course of your business as a 
depository, you have no notice of or actual knowledge of a potential 
violation by us of any provision of the Act or part 30 of the CFTC 
regulations that relates to the holding of customer funds; and you 
shall not in any manner not expressly agreed to herein be 
responsible to us for ensuring compliance by us with such provisions 
of the Act and CFTC regulations; however, the aforementioned 
presumption does not affect any obligation you may otherwise have 
under the Act or CFTC regulations.
    You may, and are hereby authorized to, obey the order, judgment, 
decree or levy of any court of competent jurisdiction or any 
governmental agency with jurisdiction, which order, judgment, decree 
or levy relates in whole or in part to the Account(s). In any event, 
you shall not be liable by reason of any action or omission to act 
pursuant to any such order, judgment, decree or levy, to us or to 
any other person, firm, association or corporation even if 
thereafter any such order, decree, judgment or levy shall be 
reversed, modified, set aside or vacated.
    The terms of this letter agreement shall remain binding upon the 
parties, their successors and assigns and, for the avoidance of 
doubt, regardless of a change in the name of either party. This 
letter agreement supersedes and replaces any prior agreement between 
the parties in connection with the Account(s), including but not 
limited to any prior acknowledgment letter agreement, to the extent 
that such prior agreement is inconsistent with the terms hereof. In 
the event of any conflict between this letter agreement and any 
other agreement between the parties in connection with the 
Account(s), this letter agreement shall govern with respect to 
matters specific to Section 4(b) of the Act and the CFTC's 
regulations thereunder, as amended.
    This letter agreement shall be governed by and construed in 
accordance with the laws of [Insert governing law] without regard to 
the principles of choice of law.
    Please acknowledge that you agree to abide by the requirements 
and conditions set forth above by signing and returning to us the 
enclosed copy of this letter agreement, and that you further agree 
to provide a copy of this fully executed letter agreement directly 
to the CFTC (via electronic means in a format and manner determined 
by the CFTC) and to [Name of DSRO], acting in its capacity as our 
DSRO. We hereby authorize and direct you to provide such copies 
without further notice to or consent from us, no later than three 
business days after opening the Account(s) or revising this letter 
agreement, as applicable.

[Name of Futures Commission Merchant]
By:
Print Name:
Title:
ACKNOWLEDGED AND AGREED:
[Name of Depository]
By:
Print Name:
Title:
Contact Information: [Insert phone number and email address]
DATE:

0
18. Revise Appendix F to part 30 to read as follows:

Appendix F to Part 30--Acknowledgment Letter for CFTC Regulation Sec.  
30.7 Customer Secured Government Money Market Fund Account

[Date]
[Name and Address of Government Money Market Fund]

    We propose to invest funds held by [Name of Futures Commission 
Merchant] (``we'' or ``our'') on behalf of our customers in shares 
of [Name of Government Money Market Fund] (``you'' or ``your'') 
under account(s) entitled (or shares issued to):
    [Name of Futures Commission Merchant] [if applicable, add ``FCM 
Customer Omnibus Account''] CFTC Regulation Sec.  30.7 Customer 
Secured Government Money Market Fund Account under Section 4(b) of 
the Commodity Exchange Act [and, if applicable,

[[Page 81283]]

``, Abbreviated as [short title reflected in the depository's 
electronic system]'']

Account Number(s): [ ]
(collectively, the ``Account(s)'').
    You acknowledge that we are holding these funds, including any 
shares issued and amounts accruing in connection therewith 
(collectively, the ``Shares''), for the benefit of customers who 
trade foreign futures and/or foreign options (as such terms are 
defined in U.S. Commodity Futures Trading Commission (``CFTC'') 
Regulation Sec.  30.1, as amended); that the Shares held by you, 
hereafter deposited in the Account(s) or accruing to the credit of 
the Account(s), will be kept separate and apart and separately 
accounted for on your books from our own funds and from any other 
funds or accounts held by us in accordance with the provisions of 
the Commodity Exchange Act, as amended (the ``Act''), and part 30 of 
the CFTC's regulations, as amended; and that the Shares must 
otherwise be treated in accordance with the provisions of Section 
4(b) of the Act and CFTC Regulations Sec. Sec.  1.25 and 30.7.
    Furthermore, you acknowledge and agree that such Shares may not 
be used by you or by us to secure or guarantee any obligations that 
we might owe to you, and they may not be used by us to secure or 
obtain credit from you. You further acknowledge and agree that the 
Shares in the Account(s) shall not be subject to any right of offset 
or lien for or on account of any indebtedness, obligations or 
liabilities we may now or in the future have owing to you.
    In addition, you agree that the Account(s) may be examined at 
any reasonable time by the director of the Division of Swap Dealer 
and Intermediary Oversight of the CFTC or the director of the 
Division of Clearing and Risk of the CFTC, or any successor 
divisions, or such directors' designees, or an appropriate officer, 
agent or employee of our designated self-regulatory organization 
(``DSRO''), [Name of DSRO], and this letter constitutes the 
authorization and direction of the undersigned on our behalf to 
permit any such examination to take place without further notice to 
or consent from us.
    You agree to reply promptly and directly to any request for 
confirmation of account balances or provision of any other 
information regarding or related to the Account(s) from the director 
of the Division of Swap Dealer and Intermediary Oversight of the 
CFTC or the director of the Division of Clearing and Risk of the 
CFTC, or any successor divisions, or such directors' designees, or 
an appropriate officer, agent, or employee of [Name of DSRO], acting 
in its capacity as our DSRO, and this letter constitutes the 
authorization and direction of the undersigned on our behalf to 
release the requested information, without further notice to or 
consent from us.
    The parties agree that all actions on your part to respond to 
the above information request will be made in accordance with, and 
subject to, such reasonable and customary authorization verification 
and authentication policies and procedures as may be employed by you 
to verify the authority of, and authenticate the identity of, the 
individual making any such information request, in order to provide 
for the secure transmission and delivery of the requested 
information to the appropriate recipient(s).
    We will not hold you responsible for acting pursuant to any 
information request from the director of the Division of Swap Dealer 
and Intermediary Oversight of the CFTC or the director of the 
Division of Clearing and Risk of the CFTC, or any successor 
divisions, or such directors' designees, or an appropriate officer, 
agent, or employee of [Name of DSRO], acting in its capacity as our 
DSRO, upon which you have relied after having taken measures in 
accordance with your applicable policies and procedures to assure 
that such request was provided to you by an individual authorized to 
make such a request.
    In the event we become subject to either a voluntary or 
involuntary petition for relief under the U.S. Bankruptcy Code, we 
acknowledge that you will have no obligation to release the Shares 
held in the Account(s), except upon instruction of the Trustee in 
Bankruptcy or pursuant to the Order of the respective U.S. 
Bankruptcy Court.
    Notwithstanding anything in the foregoing to the contrary, 
nothing contained herein shall be construed as limiting your right 
to assert any right of offset or lien on assets that are not Shares 
maintained in the Account(s), or to impose such charges against us 
or any proprietary account maintained by us with you. Further, it is 
understood that amounts represented by checks, drafts or other items 
shall not be considered to be part of the Account(s) until finally 
collected. Accordingly, checks, drafts and other items credited to 
the Account(s) and subsequently dishonored or otherwise returned to 
you or reversed, for any reason and any claims relating thereto, 
including but not limited to claims of alteration or forgery, may be 
charged back to the Account(s), and we shall be responsible to you 
as a general endorser of all such items whether or not actually so 
endorsed.
    You may conclusively presume that any withdrawal from the 
Account(s) and the balances maintained therein are in conformity 
with the Act and CFTC regulations without any further inquiry, 
provided that, in the ordinary course of your business as a 
depository, you have no notice of or actual knowledge of a potential 
violation by us of any provision of the Act or part 30 of the CFTC 
regulations that relates to the holding of customer funds; and you 
shall not in any manner not expressly agreed to herein be 
responsible to us for ensuring compliance by us with such provisions 
of the Act and CFTC regulations; however, the aforementioned 
presumption does not affect any obligation you may otherwise have 
under the Act or CFTC regulations.
    You may, and are hereby authorized to, obey the order, judgment, 
decree or levy of any court of competent jurisdiction or any 
governmental agency with jurisdiction, which order, judgment, decree 
or levy relates in whole or in part to the Account(s). In any event, 
you shall not be liable by reason of any action or omission to act 
pursuant to any such order, judgment, decree or levy, to us or to 
any other person, firm, association or corporation even if 
thereafter any such order, decree, judgment or levy shall be 
reversed, modified, set aside or vacated.
    We are permitted to invest customers' funds in government money 
market funds pursuant to CFTC Regulation Sec.  1.25. That rule sets 
forth the following conditions, among others, with respect to any 
investment in a government money market fund:
    (1) The net asset value of the fund must be computed by 9:00 
a.m. of the business day following each business day and be made 
available to us by that time;
    (2) The fund must be legally obligated to redeem an interest in 
the fund and make payment in satisfaction thereof by the close of 
the business day following the day on which we make a redemption 
request except as otherwise specified in CFTC Regulation Sec.  
1.25(c)(5)(ii); and,
    (3) The agreement under which we invest customers' funds must 
not contain any provision that would prevent us from pledging or 
transferring fund shares.
    The terms of this letter agreement shall remain binding upon the 
parties, their successors and assigns and, for the avoidance of 
doubt, regardless of a change in the name of either party. This 
letter agreement supersedes and replaces any prior agreement between 
the parties in connection with the Account(s), including but not 
limited to any prior acknowledgment letter agreement, to the extent 
that such prior agreement is inconsistent with the terms hereof. In 
the event of any conflict between this letter agreement and any 
other agreement between the parties in connection with the 
Account(s), this letter agreement shall govern with respect to 
matters specific to Section 4(b) of the Act and the CFTC's 
regulations thereunder, as amended.
    This letter agreement shall be governed by and construed in 
accordance with the laws of [Insert governing law] without regard to 
the principles of choice of law.
    Please acknowledge that you agree to abide by the requirements 
and conditions set forth above by signing and returning to us the 
enclosed copy of this letter agreement, and that you further agree 
to provide a copy of this fully executed letter agreement directly 
to the CFTC (via electronic means in a format and manner determined 
by the CFTC) and to [Name of DSRO], acting in its capacity as our 
DSRO. We hereby authorize and direct you to provide such copies 
without further notice to or consent from us, no later than three 
business days after opening the Account(s) or revising this letter 
agreement, as applicable.

[Name of Futures Commission Merchant]
By:
Print Name:
Title:
ACKNOWLEDGED AND AGREED:
[Name of Government Money Market Fund]
By:
Print Name:
Title:
Contact Information: [Insert phone number and email address]
DATE:

0
19. Add Appendix G to part 30 to read as follows:

[[Page 81284]]

Appendix G to Part 30--Acknowledgment Letter for CFTC Regulation Sec.  
30.7 Customer Secured U.S. Treasury Exchange-Traded Fund Account

[Date]
[Name and Address of U.S. Treasury Exchange-Traded Fund]
    We propose to invest funds held by [Name of Futures Commission 
Merchant] (``we'' or ``our'') on behalf of our customers in shares 
of [Name of U.S. Treasury Exchange-Traded Fund] (``you'' or 
``your'') under account(s) entitled (or shares issued to):
    [Name of Futures Commission Merchant] [if applicable, add ``FCM 
Customer Omnibus Account''] CFTC Regulation Sec.  30.7 Customer 
Secured U.S. Treasury Exchange-Traded Fund Account under Section 
4(b) of the Commodity Exchange Act [and, if applicable, ``, 
Abbreviated as [short title reflected in the depository's electronic 
system]'']

Account Number(s): [ ]
(collectively, the ``Account(s)'').

    You acknowledge that we are holding these funds, including any 
shares issued and amounts accruing in connection therewith 
(collectively, the ``Shares''), for the benefit of customers who 
trade foreign futures and/or foreign options (as such terms are 
defined in U.S. Commodity Futures Trading Commission (``CFTC'') 
Regulation Sec.  30.1, as amended); that the Shares held by you, 
hereafter deposited in the Account(s) or accruing to the credit of 
the Account(s), will be separately accounted for and segregated on 
your books from our own funds and from any other funds or accounts 
held by us in accordance with the provisions of the Commodity 
Exchange Act, as amended (the ``Act''), and part 30 of the CFTC's 
regulations, as amended; and that the Shares must otherwise be 
treated in accordance with the provisions of Section 4(b) of the Act 
and CFTC Regulations Sec. Sec.  1.25 and 30.7.
    Furthermore, you acknowledge and agree that such Shares may not 
be used by you or by us to secure or guarantee any obligations that 
we might owe to you, and they may not be used by us to secure or 
obtain credit from you. You further acknowledge and agree that the 
Shares in the Account(s) shall not be subject to any right of offset 
or lien for or on account of any indebtedness, obligations or 
liabilities we may now or in the future have owing to you.
    In addition, you agree that the Account(s) may be examined at 
any reasonable time by the Director of the Market Participants 
Division of the CFTC or the Director of the Division of Clearing and 
Risk of the CFTC, or any successor divisions, or such Directors' 
designees, or an appropriate officer, agent or employee of our 
designated self-regulatory organization (``DSRO''), [Name of DSRO], 
and this letter constitutes the authorization and direction of the 
undersigned on our behalf to permit any such examination to take 
place without further notice to or consent from us.
    You agree to reply promptly and directly to any request for 
confirmation of account balances or provision of any other account 
information regarding or related to the Account(s) from the Director 
of the Market Participants Division of the CFTC or the Director of 
the Division of Clearing and Risk of the CFTC, or any successor 
divisions, or such Directors' designees, or an appropriate officer, 
agent, or employee of [Name of DSRO], acting in its capacity as our 
DSRO, and this letter constitutes the authorization and direction of 
the undersigned on our behalf to release the requested information 
without further notice to or consent from us.
    The parties agree that all actions on your part to respond to 
the above information requests will be made in accordance with, and 
subject to, such usual and customary authorization verification and 
authentication policies and procedures as may be employed by you to 
verify the authority of, and authenticate the identity of, the 
individual making any such information request, in order to provide 
for the secure transmission and delivery of the requested 
information to the appropriate recipient(s).
    We will not hold you responsible for acting pursuant to any 
information request from the Director of the Market Participants 
Division of the CFTC or the Director of the Division of Clearing and 
Risk of the CFTC, or any successor divisions, or such Directors' 
designees, or an appropriate officer, agent, or employee of [Name of 
DSRO], acting in its capacity as our DSRO, upon which you have 
relied after having taken measures in accordance with your 
applicable policies and procedures to assure that such request was 
provided to you by an individual authorized to make such a request.
    In the event we become subject to either a voluntary or 
involuntary petition for relief under the U.S. Bankruptcy Code, we 
acknowledge that you will have no obligation to release the Shares 
held in the Account(s), except upon instruction of the Trustee in 
Bankruptcy or pursuant to the Order of the respective U.S. 
Bankruptcy Court.
    Notwithstanding anything in the foregoing to the contrary, 
nothing contained herein shall be construed as limiting your right 
to assert any right of offset or lien on assets that are not Shares 
maintained in the Account(s), or to impose such charges against us 
or any proprietary account maintained by us with you. Further, it is 
understood that amounts represented by checks, drafts or other items 
shall not be considered to be part of the Account(s) until finally 
collected. Accordingly, checks, drafts and other items credited to 
the Account(s) and subsequently dishonored or otherwise returned to 
you or reversed, for any reason and any claims relating thereto, 
including but not limited to claims of alteration or forgery, may be 
charged back to the Account(s), and we shall be responsible to you 
as a general endorser of all such items whether or not actually so 
endorsed.
    You may conclusively presume that any withdrawal from the 
Account(s) and the balances maintained therein are in conformity 
with the Act and CFTC regulations without any further inquiry, 
provided that, in the ordinary course of your business as a 
depository, you have no notice of or actual knowledge of a potential 
violation by us of any provision of the Act or the CFTC regulations 
that relates to the segregation of customer funds; and you shall not 
in any manner not expressly agreed to herein be responsible to us 
for ensuring compliance by us with such provisions of the Act and 
CFTC regulations; however, the aforementioned presumption does not 
affect any obligation you may otherwise have under the Act or CFTC 
regulations.
    You may, and are hereby authorized to, obey the order, judgment, 
decree or levy of any court of competent jurisdiction or any 
governmental agency with jurisdiction, which order, judgment, decree 
or levy relates in whole or in part to the Account(s). In any event, 
you shall not be liable by reason of any action or omission to act 
pursuant to such order, judgment, decree or levy, to us or to any 
other person, firm, association or corporation even if thereafter 
any such order, decree, judgment or levy shall be reversed, 
modified, set aside or vacated.
    We are permitted to invest customers' funds in U.S. Treasury 
exchange-traded funds pursuant to CFTC Regulation Sec.  1.25. That 
rule sets forth the following conditions, among others, with respect 
to any investment in a U.S. Treasury exchange-traded fund:
    (1) To qualify as a permitted investment, interests in U.S. 
Treasury exchange-traded must be redeemable in cash by a futures 
commission merchant or derivatives clearing organization in its 
capacity as an authorized participant pursuant to an authorized 
participant agreement, as defined in Sec.  270.6c-11 of Title 17 of 
the Code of Federal Regulations, at a price based on the net asset 
value in accordance with the Investment Company Act of 1940 and 
regulations thereunder, and on a delivery versus payment basis;
    (2) The fund must be legally obligated to redeem an interest in 
the fund and make payment in satisfaction thereof by the close of 
the business day following the day on which we make a redemption 
request; and,
    (3) The agreement under which we invest customers' funds must 
not contain any provision that would prevent us from pledging or 
transferring fund shares.
    The terms of this letter agreement shall remain binding upon the 
parties, their successors and assigns, and for the avoidance of 
doubt, regardless of a change in the name of either party. This 
letter agreement supersedes and replaces any prior agreement between 
the parties in connection with the Account(s), including but not 
limited to any prior acknowledgment letter agreement, to the extent 
that such prior agreement is inconsistent with the terms hereof. In 
the event of any conflict between this letter agreement and any 
other agreement between the parties in connection with the 
Account(s), this letter agreement shall govern with respect to 
matters specific to Section 4(b) of the Act and the CFTC's 
regulations thereunder, as amended.
    This letter agreement shall be governed by and construed in 
accordance with the laws of [Insert governing law] without regard to 
the principles of choice of law.
    Please acknowledge that you agree to abide by the requirements 
and conditions set forth above by signing and returning to us the 
enclosed copy of this letter agreement, and that you further agree 
to provide a copy of this fully executed letter agreement directly 
to the CFTC (via electronic means in a format

[[Page 81285]]

and manner determined by the CFTC) and to [Name of DSRO], acting in 
its capacity as our DSRO. We hereby authorize and direct you to 
provide such copies without further notice to or consent from us, no 
later than three business days after opening the Account(s) or 
revising this letter agreement, as applicable.

[Name of Futures Commission Merchant]
By:
Print Name:
Title:
ACKNOWLEDGED AND AGREED:
[Name of U.S. Treasury Exchange-Traded Fund]
By:
Print Name:
Title:
Contact Information: [Insert phone number and email address]
Date:

    Issued in Washington, DC, on November 3, 2023, by the 
Commission.
Christopher Kirkpatrick,
Secretary of the Commission.

    Note: The following appendices will not appear in the Code of 
Federal Regulations.

Appendices to Investment of Customer Funds by Futures Commission 
Merchants and Derivatives Clearing Organizations--Commission Voting 
Summary, Chairman's Statement, and Commissioners' Statements

Appendix 1--Commission Voting Summary

    On this matter, Chairman Behnam and Commissioners Johnson, 
Goldsmith Romero, Mersinger, and Pham voted in the affirmative. No 
Commissioner voted in the negative.

Appendix 2--Statement of Support of Chairman Rostin Behnam

    A fundamental tenet of the Commission's customer protection 
framework is the safeguarding and investment of customer funds 
deposited by customers with futures commission merchants (``FCMs'') 
and derivatives clearing organizations (``DCOs'') to margin futures, 
foreign futures, and cleared swaps transactions. This proposal to 
revise the Commission's regulations for the safeguarding and 
investment of customer funds by FCMs and DCOs in Commission 
regulations Sec. Sec.  1.20, 1.25, 1.26, 1.32, 22.2, 22.3, and 30.7 
along with the relevant appendices does not change this foundational 
principle. This proposal embodies a prudent, periodic reassessment 
of these requirements to ensure that this framework remains 
appropriately calibrated to preserve principal and maintain 
liquidity. Therefore, I support the Commission issuing this proposal 
for public comment.

Modernizing the List of Permitted Investments of Customer Funds

    Regulation Sec.  1.25 currently permits FCMs and DCOs to invest 
customer funds in, among other things, U.S. government securities, 
municipal securities, and U.S. agency obligations. The Commission's 
proposal would expand the list of permitted investments to add the 
foreign sovereign debt of Canada, France, Germany, Japan, and the 
United Kingdom, and add interests in certain short-term U.S. 
Treasury exchange-traded funds. These investments would be subject 
to various restrictions based on credit default spreads, time-to-
maturity, concentration limits, and liquidity conditions that limit 
FCMs and DCOs to investing customer funds in safe investments. The 
Commission's proposal to add these instruments follows a detailed 
staff analysis of these instruments' liquidity, volatility, and 
credit characteristics. To the extent the proposal refines 
regulations in response to a decade of market developments 
including, but not limited to, the LIBOR transition to SOFR, changes 
to the broader U.S regulatory framework, and lessons learned from 
the implementation of the electronic access requirement, the 
amendments exemplify good government.

FCM and DCO Permitted Investments Parity

    FCMs and DCOs operate in tandem as the backbone of our cleared 
markets. Given that the number of FCMs that offer customer clearing 
has significantly decreased in the past decade, alignment of the 
types of investments permitted for FCMs and DCOs is an essential 
component to maintaining market continuity and resiliency for 
customer clearing. The proposal would permit FCMs and DCOs to invest 
customer funds in the same narrowly-tailored set of foreign 
sovereign debt to the extent that FCMs and DCOs hold balances owed 
to customers in the currency of the issuing sovereign and subject to 
certain eligibility, credit, and time-to-maturity conditions. This 
addition to the list of permitted investments would not only 
minimize FCMs' exposure to foreign currency risk fluctuations, but 
also incorporate the exact same conditions currently in place for 
CFTC registered DCOs to uneventfully invest customer funds in French 
and German sovereign debt--conditions that have been in place for 
the past five years. Simply put, a level playing field across agency 
registrants.

Stay Strong

    The proposal would not undermine or weaken any of the safeguards 
that the Commission has had in place since 2011. In fact, the 
Commission recognized in the 2011 final rule release ``that the 
safety of sovereign debt issuances of one country may vary greatly 
from those of another, and that investment in certain sovereign debt 
may be consistent with the objectives of preserving principal and 
maintaining liquidity, as required by Regulation 1.25.'' \1\ The 
Commission not only anticipated, but ``invite[d] FCMs and DCOs that 
seek to invest customer funds in foreign sovereign debt to petition 
the Commission pursuant to Section 4(c).'' \2\ This proposal 
incorporates the section 4(c) order and its conditions that the 
Commission provided to DCOs in 2018.
---------------------------------------------------------------------------

    \1\ Investment of Customer Funds and Funds Held in an Account 
for Foreign Futures and Foreign Options Transactions Final Rule, 76 
FR 78776, 78782 (Dec. 19, 2011).
    \2\ Id.
---------------------------------------------------------------------------

Welcome Public Comment

    I look forward to hearing the public's comments for further 
guidance on how to strengthen Regulation Sec.  1.25 and the related 
regulations, while also making the derivatives markets more 
resilient and less concentrated.
    I want to thank Abigail Knauff, and staff in the Market 
Participants Division, Division of Clearing and Risk, Office of the 
General Counsel, and the Office of the Chief Economist for all of 
their work on the proposal.

Appendix 3--Statement of Commissioner Kristin N. Johnson

Preserving Trust and Preventing the Erosion of Customer Protection 
Regulation

Introduction

    The Commodity Exchange Act (CEA) tasks the Commodity Futures 
Trading Commission (CFTC or Commission) with developing, adopting, 
and implementing rules that effectively protect customer funds or 
property held by market participants that serve as custodians. 
Preserving the value of customer funds and property held by a third-
party is a central, critical, and foundational role of the CFTC.
    Retail participation in our markets is growing. The regulation 
advanced today is only part of our broader framework to preserve 
customer assets.
    As we examine the matter before us today, I strongly advocate 
for the Commission to carefully consider (among other issues 
outlined below) and implement:
    <bullet> appropriate parallel rules to protect retail customer 
assets, funds, and property across our markets;
    <bullet> a regulatory metric that acknowledges the challenges of 
relying on credit default swap (CDS) spreads calculated by an 
increasingly concentrated market to inform our understanding of the 
likelihood of foreign sovereign debt default risk; and
    <bullet> forthcoming rules governing the clearing of U.S. 
treasuries.

Preserving Customer Assets Is Our Mission

    Successful preservation of customer assets directly impacts 
transaction costs and, in periods marked by significant losses of 
customer funds, may impact market integrity.
    For decades, the CFTC and other market and prudential regulators 
have introduced and enforced important rules governing the 
preservation of customer funds and property. Notwithstanding 
prudential and market regulators' best efforts, markets and 
customers have experienced remarkable losses. We have witnessed 
customer losses in heavily regulated markets as well as markets 
where there are regulatory gaps and regulators may have limited 
visibility.

FTX and Billions in Missing Customer Funds

    Last year, we witnessed a series of bankruptcies in the $1 
trillion cryptocurrency markets. Several of the failed firms were 
among the largest global retail customer trading platforms in the 
digital asset marketplace.
    A year ago today, media accounts began reporting that FTX 
Trading or FTX.com

[[Page 81286]]

(FTX) could not account for more than $10 billion in customer 
funds.\1\ Yesterday, in a federal courtroom in the Southern District 
of New York, jurors found Sam Bankman-Fried, former chief executive 
officer (CEO) of FTX, guilty of misappropriating and embezzling 
billions of dollars in customer funds deposited with and held in the 
custody by FTX in connection with crypto-trading transactions at 
FTX.
---------------------------------------------------------------------------

    \1\ FTX Demonstrates Need for More Oversight: CFTC's Johnson 
(Bloomberg TV Nov. 9, 2022), https://www.bloomberg.com/news/videos/2022-11-09/ftx-demonstrates-need-for-more-oversight-cftc-s-johnson.
---------------------------------------------------------------------------

    An ounce of prevention is worth a pound of cure. When customers 
entrust their resources and assets to registered participants in our 
markets, regulation offers the first-best method of preserving 
customers funds or property. Consequently, creating and enforcing 
effective, well-tailored rules governing the custody, investment, 
and preservation of customer funds must be among the Commission's 
highest priorities. Without these rules and rigorous enforcement, 
our markets would lack the foundation of trust upon which every 
transaction is built.

Commission Regulation Sec.  1.25

    A recent report indicates that futures commission merchants 
(FCMs) may hold approximately $500 billion of customer funds in 
segregated accounts--a number that is the equivalent of the gross 
domestic product of certain medium-sized countries.
    Today, the Commission seeks to refine a foundational rule 
governing the investment of funds by FCMs and derivatives clearing 
organizations (DCOs) in our markets. FCMs and DCOs, alongside 
several other registered futures and swaps market participants, are 
entrusted with customer funds.
    I commend the Market Participants Division (Division) for its 
willingness to incorporate comments from my office in the Proposed 
Rule.\2\ I applaud the effort of the proposed amendments to 
Regulation Sec.  1.25 and related matters (Proposed Rule) advanced 
today, which seeks to introduce greater protections for customer 
funds, yet, regrettably I find that the Commission has missed an 
important opportunity.
---------------------------------------------------------------------------

    \2\ I thank the Division for carefully considering and agreeing 
to include a question in the Proposed Rule evaluating Regulation 
Sec.  1.25(b)(5)(ii), which currently provides that an FCM or a DCO 
may invest customer funds in a fund affiliated with that FCM or DCO, 
and they have introduced several questions in the Proposed Rule. 
Additionally, at my request, the Commission is exploring whether we 
should provide greater certainty and clarity as to the acceptable 
benchmark in light of the various types of Secured Overnight 
Financing Rates (SOFR) that are available, the permissible 
investments that are likely to have a floating interest rate 
calculated on SOFR, and the recommendations of the Alternative 
Reference Rates Committee.
---------------------------------------------------------------------------

    Over the term of my service as a Commissioner, I have 
continuously advocated for enhanced protection of customer funds. 
While I support the adoption of the Proposed Rule, I find that the 
Commission has missed an opportunity to effectively address gaps in 
a parallel market that has had exponential growth in recent years 
due, in part, to the introduction of cryptocurrency or digital 
assets.

Understanding and Applying Our Regulatory Authority

    Before reaching the impact of the Proposed Rule, it is important 
to consider the scope of the Commission's authority to act to refine 
existing rules governing the investment of customer funds as well as 
a broader intervention that addresses evolving market structures.
    The Commission is proposing to amend Regulation Sec.  1.25 
pursuant to its public interest exemptive authority under section 
4(c) of the CEA. The Commission may exercise this power to provide 
certain exemptions from the requirements of the CEA and regulations 
promulgated thereunder, if the Commission determines that such an 
exemption would be consistent with the public interest.\3\
---------------------------------------------------------------------------

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

    The Commission may grant a public interest exemption by engaging 
in the rulemaking process for the Proposed Rule. In a formal 
rulemaking process, we benefit from careful review and development 
of the proposed rule text and the heightened discourse and public 
exchanges that are characteristic of the notice and comment period. 
As a financial market regulator, the Commission must continuously 
engage in careful and deliberative analyses to ensure the adoption 
and implementation of robust regulatory processes. Our efforts to 
achieve these goals ensure the continued stability and integrity of 
our derivatives markets.
    However, as noted in the legislative history of section 4(c) of 
the CEA, the Commission must be vigilant to ensure that the exercise 
of its exemptive power does not ``prompt a wide-scale deregulation 
of markets falling within the ambit of the [CEA].'' \4\
---------------------------------------------------------------------------

    \4\ H.R. Rep. No. 102-978, at 3213 (1992) (Conf. Rep.).
---------------------------------------------------------------------------

Origins of the Commission's 4(c) Authority

    Section 4(c) of the CEA was adopted in the context of the 
evolution of the derivatives market from traditional agricultural 
derivatives to financial derivatives. In the 1980s, market 
participants developed a new OTC derivatives or swaps market 
featuring instruments that shared characteristics with existing 
futures contracts and had similar economic purposes. While some 
questioned the CFTC's jurisdiction over the novel swap agreements, 
the Commission's jurisdiction over futures contracts was clearly 
established. Congress has long concluded that the CFTC has 
jurisdiction over contracts that are ``in the character of'' futures 
contracts.\5\
---------------------------------------------------------------------------

    \5\ 7 U.S.C. 2(a).
---------------------------------------------------------------------------

    In 1992, in response to regulatory uncertainty, Congress adopted 
section 4(c) of the CEA--codified in the Futures Trading Practices 
Act (1992 Act). Rather than resolving the appropriate classification 
for OTC swap agreements, Congress deferred to the Commission to 
exempt exchange-traded and OTC derivatives instruments from the CEA 
where such exemptions are consistent with the public interest. 
Congress granted the CFTC this exemptive authority to ensure 
``certainty and stability'' for ``existing and emerging markets'' 
and to enable ``financial innovation and market development'' and 
competition.\6\
---------------------------------------------------------------------------

    \6\ H.R. Conf. Rep. No. 102-978, at 3213.
---------------------------------------------------------------------------

    Roughly a year later, consistent with the authority granted by 
Congress in the 1992 Act, the CFTC adopted an exemptive regulation 
(1993 Exemptive Regulation).\7\ Relying on section 4(c)(3)(K) of the 
CEA, the Commission limited the market participants permitted to 
trade in these products to ``eligible swap participants,'' a group 
that includes sophisticated individuals with assets over $10 
million.\8\ To further enhance customer protection, the CFTC 
mandated that an eligible swap participant could only trade 
unregulated swaps on its own behalf or on behalf of another eligible 
swap participant.\9\
---------------------------------------------------------------------------

    \7\ Exemption for Certain Swap Agreements, 58 FR 5587 (Jan. 22, 
1993). The 1993 Exemptive Regulation for swaps was a revision to the 
exemption the CFTC had previously issued in 1989 in a Statement of 
Policy.
    \8\ Id. at 5589-5590.
    \9\ Id.
---------------------------------------------------------------------------

    Seven years later as the swaps market grew exponentially, 
Congress enacted the Commodity Futures Modernization Act and 
addressed the product classification issue head-on. By law, Congress 
exempted financial OTC derivatives from the scope of the CEA, 
subject to certain conditions that generally excluded small 
businesses and individual investors from participating in the 
unregulated swaps market.
    The deregulation of the swaps market directly and markedly 
contributed to the global financial crisis, which caused significant 
stress and contagion in global financial markets. Certain of the 
proposed amendments will weaken many of the regulations adopted 
pursuant to the Dodd-Frank Act, and it is imperative that we not 
make the same mistake as the Commission amends its customer 
protection regime.

Explanation of the Customer Protection Framework

    Pursuant to its authority under section 4(c) of the CEA, the 
Commission proposes to expand the range of instruments in which FCMs 
and DCOs may invest customer funds beyond those specifically 
enumerated in the CEA under section 4d. The stated benefit is to 
enhance the yield available to FCMs, DCOs and their customers, 
without compromising the safety of customer funds.
    The Commission has established a comprehensive customer 
protection regime, designed to ensure that customer funds are 
segregated from the proprietary funds of FCMs and DCOs, used only to 
support customer positions, and available for return to customers in 
the event of the insolvency of the FCM or DCO. Customer funds are 
classified into one of three account classes based on the specific 
type of customer position. The categories are futures customer 
funds, cleared swaps collateral, or 30.7 customer funds in respect 
of domestic futures, cleared swaps, and foreign futures, 
respectively--all of which are referred to as customer funds.

[[Page 81287]]

    The CEA and Commission Regulation Sec.  1.25 are foundational 
provisions that set the framework and scope for FCMs' and DCOs' 
investment of customer funds and are fundamentally interconnected 
with the requirements to segregate customer funds.\10\ Section 4d of 
the CEA permits FCMs to invest futures customer funds in a 
prescribed list of instruments--obligations of U.S. government, 
obligations fully guaranteed as to principal and interest by the 
U.S., and general obligations of any State or any political 
subdivision.\11\ The regulation permits FCMs and DCOs to invest 
customer funds in each account class in a limited set of permitted 
investments consistent with the prudential objectives of preserving 
customer funds and mitigating credit risk, market risk, and 
liquidity risk. The CEA and Regulation Sec.  1.25 reinforce the 
long-held view of the Commission that customer funds, entrusted to 
an FCM or a DCO, must be invested in a manner that preserves the 
availability to customers of FCMs and DCOs.
---------------------------------------------------------------------------

    \10\ Kristin N. Johnson, Commissioner, CFTC, Statement on 
Extension of Staff No-Action Letter Regarding Investments in 
Securities with Adjustable Rate of Interest Benchmarked to SOFR 
(Dec. 23, 2022), https://www.cftc.gov/PressRoom/SpeechesTestimony/johnsonstatement122322.
    \11\ Section 4(b)(2)(A) of the CEA grants the Commission the 
plenary authority to adopt rules and regulations regarding an FCM's 
safeguarding of 30.7 customer funds. In 2011, the Commission 
extended the requirements of Regulation Sec.  1.25 to an FCM's 
investment of 30.7 customer funds for trading foreign futures 
positions. Section 4d(f)(4) of the CEA prescribes a list of 
instruments that cleared swaps customer collateral may be invested 
in and further provides that the investments must be made in 
accordance with the rules and regulations, and subject to any 
conditions, as the Commission prescribes. In 2012, the Commission 
extended the requirements of Regulation Sec.  1.25 to an FCM's 
investment of cleared swaps customer collateral.
---------------------------------------------------------------------------

    However, the investment of customer funds may threaten the 
preservation of such funds, and I have diligently and consistently 
called for Commission regulation to protect the funds of retail 
clients that might not fall within the definition of ``customer 
funds.'' Some DCOs do not have an intermediated market structure. As 
a result, the protections that exist for customers of FCMs in the 
context of an intermediated DCO are not extended to direct clients 
of a DCO in the context of a non-intermediated market structure.

Overview of the Proposed Amendments

    Since the Commission first authorized FCMs and DCOs to invest 
futures customer funds in these limited permitted instruments in 
1968, the Commission has engaged in a series of critical expansions 
and subsequent restrictions of the provisions of Commission 
Regulation Sec.  1.25.\12\ This evolution is largely in response to 
failures of large FCMs and major financial crises and economic 
stresses.
---------------------------------------------------------------------------

    \12\ Title 17--Commodity and Securities Exchanges, 33 FR 14454 
(Sept. 26, 1968).
---------------------------------------------------------------------------

    In its current form, Commission Regulation Sec.  1.25 applies to 
all three account classes and lists seven categories of investments 
that qualify as permitted investments--obligations of the U.S. and 
obligations fully guaranteed as to principal and interest by the 
U.S.; general obligations of any State or political subdivision of a 
State; obligations of any U.S. government corporation or enterprise 
sponsored by the U.S.; certificates of deposit issued by a bank; 
commercial paper fully guaranteed by the U.S. under the Temporary 
Liquidity Guarantee Program (TLGP) as administered by the Federal 
Deposit Insurance Corporation; corporate notes and bonds fully 
guaranteed as to principal and interest by the U.S. under the TLGP; 
and interests in money market mutual funds (MMFs).\13\
---------------------------------------------------------------------------

    \13\ 17 CFR 1.25(a)(1).
---------------------------------------------------------------------------

    The Commission's authority to introduce and enforce regulations 
that ensure the preservation of customers' assets, particularly in 
instances where FCMs and DCOs may experience liquidity crises, is 
foundational to protecting market participants from fraudulent and 
other abusive conduct and the misuse of customer assets. Effectively 
exercising this authority is equally central to the Commission's 
role in supporting sound risk management practices and ensuring the 
stability of the broader financial system.
    In the Proposed Rule, the Commission proposes to take several 
significant actions: add specified foreign sovereign debt to the 
list of permitted investments; add short-term U.S. treasury 
exchange-traded funds (ETF) to the list of permitted investments; 
limit the scope of MMF whose interest qualify as permitted 
investments; eliminate commercial paper and corporate notes and 
bonds as permitted investments; request comment on the potential 
elimination of certificates of deposit issued by banks; replace the 
London Interbank Offered Rate (LIBOR) with SOFR as a permitted 
benchmark for adjustable rate securities; revise concentration 
limits for certain permitted investments; establish capital charges 
for specified foreign sovereign debt and qualified ETFs; propose to 
eliminate the read-only, access provisions; and clarify that DCOs 
are financially responsible for any losses resulting from 
investments of cleared swap customer collateral in permitted 
investments.
    I appreciate the importance of the Commission's engagement in 
the continual reassessment of Regulation Sec.  1.25 and related 
matters and revising regulatory requirements as and when 
appropriate. In this case, the proposed amendments are in response 
to specific petitions by market participants; but the Commission 
must ensure that its regulations are robust and responsive to our 
evolving market structure.

Regulatory Gap for Non-Intermediated DCOs

    The Proposed Rule does not consider the prudential principles of 
Regulation Sec.  1.25 in the context of a non-intermediated clearing 
model where the DCO offers direct client access to its clearing 
services, without the FCM as an intermediary. The derivatives market 
structure is significantly evolving, and it is imperative that the 
Commission's regulations evolve in parallel.

Formal Rules Governing Custody for Retail Investors Across Our 
Markets

    In 2022, the Commission received a request from LedgerX, which 
was withdrawn last year when LedgerX's parent company, FTX, filed 
for bankruptcy protection. The request aimed to amend its order of 
registration as a non-intermediated DCO to clear margined products 
for retail participants.
    Five years earlier, LedgerX solicited and the Commission granted 
an order permitting the firm to offer fully-collateralized 
derivatives contracts as a DCO. The Commission's order, amended in 
September 2020, imposed a number of important conditions, including 
requiring LedgerX to ``at all times maintain funds of its clearing 
members separate and distinct from its own funds.'' \14\ The 
conditions were necessary and important for the preservation of 
customer property.
---------------------------------------------------------------------------

    \14\ See Press Release No. 8230-20, CFTC Approves LedgerX, LLC 
to Clear Fully-Collateralized Futures and Options on Futures (Sept. 
2, 2020), https://www.cftc.gov/PressRoom/PressReleases/8230-20.
---------------------------------------------------------------------------

    Our current regulations do not reach the issues addressed by the 
conditions in the LedgerX order. The Commission should consider 
regulation that closes this gap and ensures parallel retail customer 
protection for trading through intermediaries and non-intermediated 
DCOs.
    LedgerX's obligation to comply with the Commission's conditions 
contributed to the preservation of customer property after FTX 
acquired LedgerX. When FTX, filed for bankruptcy, LedgerX remained 
solvent, a non-debtor. The LedgerX order serves as an important 
precedent for the framework the Commission should consider when 
adopting parallel protections for direct clients, particularly 
retail clients, in the non-intermediated context.
    It is imperative that the Commission consider an equivalent 
application of Regulation Sec.  1.25 in the context of a non-
intermediated DCO's investment of the property of retail 
customers.\15\
---------------------------------------------------------------------------

    \15\ Kristin N. Johnson, Commissioner, CFTC, Keynote Speech at 
the Salzburg Global Finance Forum (June 29, 2023), https://www.cftc.gov/PressRoom/SpeechesTestimony/opajohnson4; Kristin N. 
Johnson, Commissioner, CFTC, Keynote Address at the World Federation 
of Exchanges Annual Meeting (Sept. 21, 2023), https://www.cftc.gov/PressRoom/SpeechesTestimony/opajohnson5.
---------------------------------------------------------------------------

Earlier Evidence of the Need To Enhance Customer Protections Rules

    Long before crypto markets, however, we witnessed significant 
FCM bankruptcies under then-existing rules that failed to prevent 
losses to customers. Refco collapsed in 2005; Sentinel Management 
Group shuttered its doors in 2007; MF Global failed in 2012; and 
Peregrine Financial Group filed for bankruptcy protection in 2012. 
The substantial amount of customer funds entrusted to FCMs and the 
long history of FCM failures underscore the critical relationships 
between FCMs and customers as well as the FCM's role, 
responsibility, and accountability in serving as a custodian of 
customer funds.

Elimination of Read-Only, Electronic Access to Customer Accounts

    As historic and current events demonstrate, the Commission's 
customer protection framework, though exceptionally

[[Page 81288]]

consequential and significant, does not guarantee against losses of 
customer funds. Following several infamous bankruptcies, the 
Commission tightened existing regulations including to improve 
oversight of FCM activities and verify customer funds. The 
Commission is reevaluating certain aspects of those regulations, 
which is important. But we should be careful not to forget the 
unprecedented events that led to the implementation of more 
stringent oversight of FCMs and necessitate the extension of strict 
oversight to non-intermediated DCOs.

The Failure of MF Global and Peregrine

    MF Global, a prominent FCM and broker-dealer, is an example of a 
firm that unraveled during the financial crisis. Jon Corzine, a 
former investment banking executive and former Governor and Senator 
of New Jersey, adopted a proprietary trading strategy involving the 
investment in the sovereign debt (bonds) of certain European nations 
through repurchase-to-maturity transactions. MF Global structured a 
portfolio of ``repurchase to maturity'' bonds, bonds that paid large 
coupon rates. Later the bonds were posted as ``collateral for short-
term borrowing'' and purportedly delayed any risk to the firm's 
balance sheet until maturity.
    A steep decline in sovereign debt markets triggered demands for 
increased margin, and MF Global had insufficient liquidity to 
maintain positions. In an attempt to stave off a ``run on the bank'' 
by customer withdrawals, creditors' demands, efforts to unwind repo 
counterparty positions, and attempts to liquidate proprietary 
positions at fire sale prices, MF Global made the unacceptable and 
catastrophic decision to misappropriate customer funds in violation 
of the Commission's customer segregation requirements.\16\
---------------------------------------------------------------------------

    \16\ Investing customer funds in foreign sovereign debt is 
distinguishable from the investments of MF Global made for its own 
account, and the issue with MF Global is that funds were transferred 
out of the segregated account and used for other purposes. But MF 
Global highlights the need for strong enforcement of segregation 
requirements in times of unusual market conditions, such as a run. 
See Rena S. Miller, Cong. Rsch. Serv., R42091, The MF Global 
Bankruptcy, Missing Customer Funds, and Proposals for Reform (2013), 
https://sgp.fas.org/crs/misc/R42091.pdf.
---------------------------------------------------------------------------

    The failure of futures trading firm Peregrine also created a 
need for stronger customer protection tools. Russell Wasendorf Sr. 
was the founder and former CEO of Peregrine, and he was sentenced to 
50 years in prison because he siphoned off more than $215 million 
from customers of Peregrine. The National Futures Association (NFA), 
the self-regulatory organization (SRO) and Peregrine's auditor, was 
heavily criticized for failing to catch the shortfall in customer 
funds.
    After the collapse of MF Global and Peregrine Financial Group, 
the Commission supplemented the protections embedded in Commission 
regulations to enhance customer protections and transparency at the 
FCM level.\17\
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    \17\ Kristin N. Johnson, Commissioner, CFTC, Keynote Address at 
Digital Assets @Duke Conference, Duke's Pratt School of Engineering 
and Duke Financial Economics Center (Jan. 26, 2023), https://www.cftc.gov/PressRoom/SpeechesTestimony/opajohnson2.
---------------------------------------------------------------------------

Dated Efforts To Enhance Customer Protection

    In November 2013, the Commission adopted a rule that afforded 
greater assurances to market participants that customer funds are 
protected.\18\ The Commission required depositories holding customer 
funds for FCMs to provide the Commission with direct, read-only 
electronic access to customer fund accounts while acknowledging that 
the Commission did not intend to access FCM accounts on a regular 
basis but would use that information when necessary to obtain 
account balance and other information that staff could not obtain 
via the designated auditors, either CME Group Inc. (CME) or NFA.
---------------------------------------------------------------------------

    \18\ Enhancing Protections Afforded Customers and Customer Funds 
Held by Futures Commission Merchants and Derivatives Clearing 
Organizations, 78 FR 68506 (Nov. 14, 2013).
---------------------------------------------------------------------------

    The Division notes that the Commission and depositories are 
experiencing significant operational and resource-intensive 
challenges in implementing and administering the provision and the 
CME and NFA have provided alternative means of obtaining transaction 
and account balance information.
    Although the Commission is proposing to remove the ``direct 
access'' requirement, the Commission should be confident that the 
private sector auditing features that exist at the relevant 
designated self-regulatory organization (DSRO) are considered in the 
context of non-intermediated DCOs where there is an absence of an 
FCM.
    Whether it is a traditional market structure or new market 
structure, the Commission needs to be comfortable that liabilities 
to customers will be satisfied. I also expect that the Commission 
and relevant DSRO would impose on non-intermediated market 
infrastructures the same segregation investment reporting 
obligations imposed on traditional infrastructures. There is a 
continuous need to revisit whether measures to protect customer 
funds are adequate.

Consideration of Other Important Factors

    Although I support the Proposed Rule, a few discrete aspects of 
the Proposed Rule merit additional discussion.
    <bullet> Inclusion of Foreign Sovereign Debt as Permitted 
Investments
    The Commission plans to use the CDS spread to determine whether 
certain permitted foreign sovereign debt should qualify as 
``permitted investments.'' The Commission needs to carefully 
consider the conditions that apply to each permitted foreign 
sovereign debt by establishing strong guardrails so that history 
does not repeat itself.
    On August 15, 2023, FCMs held the U.S. dollar equivalent of $51 
billion of customer funds denominated in Canadian, European, 
Japanese, and UK currencies. Given the significant non-U.S. dollar 
customer transactions intermediated by FCMs, the Commission's 
proposal expands the list of permissible investments to add the debt 
of countries that represent the largest economies, are members of 
the Group of 7, and a money center country--Canada, France, Germany, 
Japan, and the UK.

De-Regulatory Decisions and the Recent Financial Crisis

    The recent global financial crisis is a cautionary tale. A 
series of deregulatory decisions created significant vulnerabilities 
in financial markets. More specifically, an exemption from 
regulation for bespoke OTC swaps trading in bilateral markets 
obscured excessive risk-taking and undermined the integrity of 
global markets. According to the U.S. Government Accountability 
Office, the 2007-2009 financial crisis, which threatened the 
stability of the U.S. financial system and the health of the U.S. 
economy, may have led to $10 trillion in losses, including large 
declines in employment and household wealth, reduced tax revenues 
from lower economic activity, and lost output (value of goods and 
services).\19\
---------------------------------------------------------------------------

    \19\ U.S. Gov't Accountability Off., GAO-13-180, Financial 
Regulatory Reform: Financial Crisis Losses and Potential Impacts of 
the Dodd-Frank Act (2013), https://www.gao.gov/assets/files.gao.gov/assets/gao-13-180.pdf.
---------------------------------------------------------------------------

    Traditionally, customer funds have been invested in U.S. 
treasury securities. The Commission amended Regulation Sec.  1.25 in 
2000 to expand the list of investments to include all foreign 
sovereign debt, subject to a ratings requirement.\20\ Following the 
2007-2009 global financial crisis, in December 2011, the Commission 
unanimously approved a final rule amending Regulation Sec.  1.25 to 
eliminate all foreign sovereign debt as permitted investments in 
light of the economic crisis but remained open to the possibility of 
reintroducing specific foreign debt.\21\ The Commission tightened 
the definition of permissible investments.
---------------------------------------------------------------------------

    \20\ See Rules Relating to Intermediaries of Commodity Interest 
Transactions, 65 FR 77993 (Dec. 13, 2000); Investment of Customer 
Funds, 65 FR 82270 (Dec. 28, 2000) (making technical corrections and 
accelerating the effective date of the final rules from February 12, 
2001 to December 28, 2000).
    \21\ Investment of Customer Funds and Funds Held in an Account 
for Foreign Futures and Foreign Options Transactions, 76 FR 78776 
(Dec. 19, 2011).
---------------------------------------------------------------------------

    History has demonstrated that certain sovereign debt instruments 
may be risky. The financial crisis was closely intertwined with the 
sovereign debt crisis, which is characterized by the economic 
collapse in--and a deterioration in the credit quality of--Iceland, 
Portugal, Italy, Ireland, Greece, and Spain. It is helpful that 
sovereign debt from those countries are not proposed to be permitted 
investments.
    The Commission should reintroduce foreign sovereign debt as a 
permitted investment with caution and sufficient guardrails. The 
Commission is using the CDS spread of the sovereign issuer as a 
proxy for default risk, such that the relevant sovereign is 
disqualified if the issuer's two-year credit default spread exceeds 
45 basis points. The CDS spread is the spread on protection pursuant 
to a CDS against the default of the issuer of a debt instrument, and 
an increase in the spread reflects a market perception that the 
creditworthiness of the issuer has

[[Page 81289]]

deteriorated, implying an increased risk of non-payment on the debt 
investment.
    We must not forget that the CDS market came under heavy scrutiny 
during the financial crisis. Warren Buffett infamously called CDS 
``financial weapons of mass destruction.'' Since the adoption of the 
Dodd-Frank Act, there has been significant contraction in a number 
of important segments of the CDS market.
    Given the nature of this specific market-based metric, I 
encourage market participants, in responding to the request for 
comment, to consider whether the use of the CDS spread, which is 
dependent on a functioning CDS market, is (and the circumstances 
under which it would be) an appropriate indicator of whether a 
foreign sovereign debt is ``consistent with the objectives of 
preserving principal and maintaining liquidity and according to the 
following specific requirements.'' \22\
---------------------------------------------------------------------------

    \22\ 17 CFR 1.25(b).
---------------------------------------------------------------------------

<bullet> Interaction With Proposed U.S. Treasury Clearing Requirement

    Financial markets are closely interconnected and correlated. 
Consequently, we need a comprehensive and holistic approach to U.S. 
treasury obligations. The Securities and Exchange Commission (SEC) 
has announced a proposed rule that seeks to address the clearing of 
certain repurchase or reverse repurchase agreements involving U.S. 
treasury securities.
    Our registrants, FCMs and DCOs, may buy and sell permitted 
investments, including U.S. treasury obligations, pursuant to 
repurchase and reverse repurchase transactions with permitted 
counterparties, subject to certain conditions.
    Upon the finalization of the SEC proposed rule, the Commission 
may need to revisit Regulation Sec.  1.25 accordingly.

Conclusion

    For the reasons above, I support the adoption of the Proposed 
Rule. I look forward to the thoughtful contributions of market 
participants.

Appendix 4--Statement of Commissioner Christy Goldsmith Romero

The CFTC's Sacrosanct Responsibility To Safeguard Customer Funds To 
Protect Customers and Avoid Systemic Risk

Proposed Changes to Regulations Governing the Investment of Customer 
Funds

    The CFTC has a sacrosanct responsibility to safeguard customer 
funds held by brokers and clearinghouses. For our markets to work 
well, customers must have confidence that their funds will be safe. 
Safe from a broker or clearinghouse who misuses customer money for 
their own purposes or decides on their own to use customer funds to 
make risky bets chasing their own profits.

The Importance of Customer Confidence and Public Confidence for Markets 
to Work Well

    History has shown that a loss of customer confidence in the 
safety of their funds often has immediate negative consequences on 
markets. Vulnerability to runs, increased customer redemption 
requests, significant market volatility, and rapid and steep drop in 
prices, can signal a loss of confidence. And given how 
interconnected our markets are, this can happen very fast, and can 
cause contagion. We saw an example earlier this year with Silicon 
Valley Bank.
    Promoting public and customer confidence in our markets is one 
of the CFTC's most important regulatory responsibilities. There is a 
disconnect between regular people and what goes on on Wall Street 
and in Washington. That's a message from the late CFTC Commissioner 
Bart Chilton at the open meeting the last time the CFTC took up this 
same regulation in 2011.\1\ He was speaking with the backdrop of MF 
Global's bankruptcy weeks before, where there were concerns of 
misuse of customer funds. Commissioner Chilton said that we cannot 
get disconnected, and sometimes it's just a matter of explaining 
what we're doing. He said that we have to do the best we can to 
explain to people what our job is, what our responsibilities are, 
and that the first responsibility is to protect customer funds.
---------------------------------------------------------------------------

    \1\ See CFTC, Transcript of December 5, 2011 Open Commission 
Meeting, https://www.cftc.gov/sites/default/files/idc/groups/public/@swaps/documents/dfsubmission/dfsubmission12_120511-trans.pdf.
---------------------------------------------------------------------------

    Well put, and I agree. Today we meet with the backdrop of the 
conviction on all counts of the founder of FTX, counts that included 
misuse of customer funds.\2\ It's not the same as MF Global. Regular 
people may not realize that those missing FTX customer funds were in 
an entity not regulated by the CFTC. But we have to stay connected 
to regular people who might be concerned about the safety of their 
funds in our markets. We have to explain how we are part of the 
solution to safeguard customer funds. This is particularly important 
because we have seen a rise of retail customers in our markets 
associated with trading in cryptocurrency and event contracts--
retail customers who may not have the same ability as an 
institutional customer to withstand losses or delays if a broker or 
clearinghouse goes bankrupt.
---------------------------------------------------------------------------

    \2\ See United States Attorney Southern District of New York, 
Statement Of U.S. Attorney Damian Williams On The Conviction Of 
Samuel Bankman-Fried, https://www.justice.gov/usao-sdny/pr/statement-us-attorney-damian-williams-conviction-samuel-bankman-fried (Nov. 2, 2023).
---------------------------------------------------------------------------

    We have to send a message and show through our actions that the 
CFTC is doing all that we can to protect customer funds.

Protecting Customer Funds by Limiting What They Can Be Invested In

    One way the CFTC protects customer funds is by limiting what 
they can be invested in. In section 4(d) of the Commodity Exchange 
Act, Congress limited investments of customer funds to U.S. 
government and other municipal securities, and obligations fully 
guaranteed by the U.S.
    The CFTC can make an exemption to section 4(d) to allow other 
investment types if they meet certain carefully designed factors 
established by Congress in section 4(c). From 2000 to 2005, the CFTC 
used this exemptive authority to considerably loosen Regulation 
Sec.  1.25 to allow brokers (FCMs) and clearinghouses (DCOs) to 
invest customer funds in all kinds of investments.
    Then there was the financial crisis, the Dodd Frank Act, and the 
MF Global scandal. In 2011, the CFTC under Chairman Gary Gensler, 
eliminated exemptions for certain investments that could pose an 
unacceptable level of risk to customer funds.\3\ One investment type 
eliminated in a 5-0 vote in 2011 was foreign sovereign debt. That 
investment type is before us again today at the request of the same 
groups (CME and FIA) who opposed the CFTC's elimination of foreign 
sovereign debt as a permitted investment in 2011. While the 
Commission subsequently made a limited exception for clearinghouses 
in the debt of France and Germany in 2018, at that time, it declined 
to apply that exception to brokers as requested by FIA.
---------------------------------------------------------------------------

    \3\ See 76 FR 78776 (Dec. 19, 2011) (``In issuing these final 
rules, the Commission is narrowing the scope of investment choices 
in order to eliminate the potential use of portfolios of instruments 
that pose an unacceptable level of risk to customer funds.'').
---------------------------------------------------------------------------

    We need to be very cautious about revisiting post-crisis CFTC 
reforms, particularly reforms that only came after substantial 
public engagement and careful CFTC deliberation. In good economic 
times like we are in today, we have to keep the lessons learned from 
the past in mind, while we look to the future. One of those lessons 
learned is that things can change quickly when it comes to risk.
    We have to always keep sacrosanct our responsibility to protect 
customer funds and avoid systemic risk. Holding customer funds is 
not intended to be a way for brokers and clearinghouses to maximize 
profits through investments that could prove risky. Customer funds 
must only be invested in a way that minimizes exposure to credit, 
liquidity, and market risk, not just now, but in the future. This 
would preserve customer funds, and enable investments to be quickly 
converted to cash at a predictable value, which is necessary to 
avoid systemic risk. This has to be one of our top priorities.
    That's why I support prohibiting investments of customer funds 
in: (1) commercial paper; (2) corporate notes and bonds; (3) bank 
certificates of deposit; (4) adjustable rate securities that 
reference LIBOR; and (5) money market funds that are not government 
money market funds or that charge a liquidity fee for customer 
redemptions. I also support the concentration limits on money market 
funds to protect customer funds from potential risk of loss from a 
cyber-attack.

Proposed Expansion of How Brokers and Clearinghouses Can Invest 
Customer Funds

    The proposal before us would also make two exemptions under 
section 4(d),\4\ allowing investments of customer funds in: (1) ETFs 
that invest in primarily short-term U.S. Treasury securities; and 
(2) sovereign debt of

[[Page 81290]]

five G7 countries (Canada, France, Germany, Japan, and the United 
Kingdom) and expanding the list of counterparties to foreign banks, 
brokers and dealers, and central banks.
---------------------------------------------------------------------------

    \4\ In addition to Regulation Sec.  1.25, the proposal also 
applies to Regulation Sec.  30.7 that governs a broker's treatment 
of customer funds associated with positions in foreign futures and 
options. Additionally, the proposal applies to customer swaps funds 
(cleared swaps customer collateral) held by brokers and 
clearinghouses. See generally 17 CFR part 22 (implementing section 
4d(f) of the Commodity Exchange Act).
---------------------------------------------------------------------------

    Section 4(c)(2) sets a high bar for exemptions. The CFTC is 
required to show:
    1. It is in the public interest;
    2. It is consistent with the purposes of the Act;
    3. The agreements, contracts or transactions have to be between 
appropriate persons; and
    4. The exemption cannot have a material adverse effect on the 
ability of the Commission or any contract market to discharge its 
regulatory responsibilities.
    I would have liked to see more independent CFTC analysis of 
these factors in this proposal.
    Public Interest Factor: I am concerned about the proposal's 
discussion of the public interest factor:

    The expanded selection of Permitted Investments is expected to 
also permit FCMs and DCOs to remain competitive globally and 
domestically and maintain safeguards against systemic risk. A wider 
range of alternatives to invest futures customer funds may provide 
more profitable investment options, allowing FCMs and DCOs to 
generate more income for themselves and their customers. This, in 
turn, may motivate FCMS and DCOs to increase their presence in the 
futures markets and other relevant markets, thus increasing 
competition. Increased revenue to FCMs and DCOs from the investment 
of Customer Funds also may benefit customers in the form of lower 
commission charges of direct interest payments on funds on deposit 
with the FCM or DCO, which may lead to greater market participation 
by customers and increased market liquidity. In light of the 
foregoing, the Commission believes that the adoption of the proposed 
amendments would promote responsible economic and financial 
innovation and fair competition, and would be consistent with the 
objective of Regulation 1.25 and with the ``public interest.''

    We should be very careful about drawing the dangerous conclusion 
that increased profits is a sufficient justification to satisfy the 
public interest factor. This conclusion could justify granting every 
requested exemption, which is surely not what Congress had in mind 
or the message that we should send. It is important to remember that 
broker and clearinghouse profit is not the goal for the CFTC, the 
Commodity Exchange Act or the public. Chasing profits could lead to 
risky investments, potentially putting customer funds at risk.
    We should not draw an unsupported conclusion that if brokers and 
clearinghouses make more profit, that the benefits will flow to 
customers, as opposed to being kept for those companies or their 
shareholders. There was also no independent supportive analysis that 
additional profits would increase competition or innovation. I would 
also have liked to see analysis on the avoidance of systemic risk, 
not just a conclusory, unsupported statement that this change will 
permit brokers and clearinghouses to ``maintain safeguards against 
systemic risk.''
    An independent CFTC analysis of whether a Commission action is 
in the public interest is the important responsibility given to us 
by Congress. The proposal discusses without supporting data or 
analysis that the proposal could reduce foreign currency risk and 
result in diversification of investments. However, those were the 
same considerations that were not persuasive to the Commission in 
2011. I encourage public interest groups and customers of brokers 
and clearinghouses to let the CFTC know if they think these 
exemptions are in the public interest. Should we go forward in the 
future with a final rule, I would expect to see an independent and 
supported CFTC analysis.
    I would encourage the CFTC to engage in more data analysis, as 
well as more roundtables and requests for comment, before proposing 
rules or exemptions that revise post-crisis reforms. We may also be 
able to use public interest analysis conducted by other federal 
agencies. I would also encourage greater engagement with public 
interest groups before proposing changes to rules, just as we engage 
with industry.
    Consistent with the Purposes of the Act: The purposes of the Act 
are to deter and prevent price manipulation or other disruptions to 
market integrity; to ensure the financial integrity of all 
transactions and the avoidance of systemic risk; to protect all 
market participants from fraudulent or other abusive sales practices 
and misuses of customer assets; and to promote responsible 
innovation and fair competition among boards of trade, other markets 
and market participants.\5\
---------------------------------------------------------------------------

    \5\ 7 U.S.C. 5(b).
---------------------------------------------------------------------------

    The proposal contains a thorough and independent CFTC analysis 
of conditions necessary to protect against the misuse of customer 
assets. But the proposal's discussion of fair competition, 
responsible innovation, and systemic risk is conclusory, without 
supporting analysis. I encourage commenters and the public to let us 
know if these exemptions are consistent with the purposes of the 
Act.
    Appropriate Persons Factor: I did not see discussion of this 
important factor. The proposal would expand counterparties for 
foreign sovereign debt, including foreign brokers and dealers, with 
certain conditions. I would have liked to see an analysis of how 
this factor is met. We should not assume that it is met, that no 
analysis is needed or that Commissioners do not have views on 
meeting this test. I look forward to commenters' views on this. 
Should we go forward in the future with a final rule, I would expect 
to see an independent supported CFTC analysis of this factor.
    Discharge of Regulatory Responsibilities Factor: The CFTC's 
regulatory responsibility in Regulation Sec.  1.25 is to preserve 
principal and maintain liquidity. I commend the staff for the depth 
and comprehension of this analysis, and appreciate the thorough 
calibration of conditions to address future risk with sovereign 
debt. I agree that investments in certain sovereign debt might be 
consistent with preserving principal and maintaining liquidity. This 
analysis found that government ETFs and sovereign debt in these 
countries appear to be similar to existing permitted investments. 
Commenters will tell us whether we have conducted the correct 
analysis.
    While I am supporting putting this out for public comment, I 
also believe that we should be very cautious in overturning post-
crisis reforms. In 2011, the CFTC considered all of the same 
concerns raised before us today, but decided unanimously to ban 
investments in sovereign debt. The Commission in 2011 said that 
although it appreciated the risk of foreign currency exposure, not 
all sovereign debt, in all situations, is sufficiently safe. The 
Commission said then that global and regional crises illustrated 
that circumstances may quickly change, leaving a broker or 
clearinghouse unable to timely liquidate the investment, and 
potentially only after a significant mark-down.
    At that time, the CFTC said it would consider exemption 
requests. The staff explained that when considering such a request, 
they would ask the petitioner why they need the exemption and to 
explain why it is in the public interest, and analyze liquidity. The 
record shows only one request in 12 years. In 2018, after notice and 
receiving only supporting comments, the Commission approved a 
limited exemption for clearinghouses to invest customer funds in the 
sovereign debt of France and Germany, finding comparable credit, 
liquidity and volatility characteristics to U.S. Government 
securities.
    In the proposal before us, the staff's analysis reflects that 
the debt of these countries is similar to current permitted 
investments, but may be less liquid than U.S. government securities. 
The proposal asks whether these investments would raise any 
liquidity or other concerns. I am interested in commenters' views on 
this and on whether the expansion of counterparties will expose 
customers to unacceptable levels of risk.
    Given that we know that circumstances can change very quickly, I 
often say that we should expect the unexpected. One alternative 
would be to leave in place the current process of considering any 
exemptive request, rather than change the rule, particularly if 
there are concerns over liquidity or counterparties. This should not 
be unduly burdensome given there was only one request in 12 years. 
The Commission could consider the conditions at that time, the 
reason for the request, the public interest, and liquidity. The 
flexibility to conduct this type of analysis at the specific time of 
the request, and after notice and comment, would be more targeted to 
avoid systemic risk. And should circumstances change quickly, an 
exemptive order could be much easier and faster to revisit than a 
rule. I look forward to commenters' views on this alternative 
compared to rewriting the rule.
    Finally, I would urge CFTC staff to look for other safeguards 
for customer funds in other Commission rules. Additional safeguards 
would allow us to fulfill our sacrosanct responsibility to protect 
customer funds, and promote public confidence.

Appendix 5--Statement of Support of Commissioner Caroline D. Pham

    I support the Notice of Proposed Rulemaking on Investment of 
Customer

[[Page 81291]]

Funds by Futures Commission Merchants and Derivatives Clearing 
Organizations (Proposed Amendments to Regulation Sec.  1.25 or NPRM) 
because, importantly, it provides regulatory clarity by codifying 
outstanding no-action relief, and promotes good government by 
providing a timely response to a petition from market participants. 
I would like to thank Tom Smith, Warren Gorlick, Liliya Bozhanova, 
and Jeff Burns for their work on the NPRM.
    Regulatory clarity has a number of key aspects: transparency, 
simplicity, and significantly, unambiguity. In turn, regulatory 
clarity promotes compliance, market integrity, and confidence. As 
regulators, in everything we do, we must remember that regulatory 
clarity enables businesses to effectively comply with our 
regulations, thereby reducing the likelihood of non-compliance 
issues. It's why I have made regulatory clarity a guiding principle 
of my commissionership.
    Good government has a number of key aspects that overlap with 
those of regulatory clarity: transparency and simplicity, for 
instance. However, responsiveness is an aspect unique to good 
government. In serving the public, we must be mindful that we are 
here to be responsive to the concerns and needs of our 
constituents--in our case, market participants. Good government, in 
turn, promotes economic growth and progress. It's why I have made 
good government something I am always striving to encourage as 
Commissioner.

Background

    Regulation Sec.  1.25 is the primary CFTC rule setting forth 
safeguards for the investment of customer funds held by futures 
commission merchants (FCMs) and derivatives clearing organizations 
(DCOs). As the Commission has said in the past, 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 to avoid systemic 
risk.\1\ These safeguards are vital in maintaining confidence in our 
markets.
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    \1\ Investment of Customer Funds and Funds Held in an Account 
for Foreign Futures and Foreign Options Transactions, 76 FR 78776 
(Dec. 19, 2011).
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    The requirement for a FCM or DCO to treat customer funds as 
belonging to the customers, and for the FCM or DCO to segregate 
customer funds from its own funds, is a critical component of this 
framework. The Commodity Exchange Act (CEA) and CFTC regulations 
provide three regulatory frameworks based on the market in which 
customers are transacting: (i) futures customer funds; (ii) cleared 
swaps customer collateral; or (iii) 30.7 customer funds.\2\
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    \2\ See, 17 CFR 1.20 (segregation framework for futures customer 
funds); 17 CFR 22.2 and 22.3 (segregation framework for cleared 
swaps customer collateral); and 17 CFR 30.7 (segregation framework 
for 30.7 customer funds).
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    CEA section 4d(a)(2) covers futures customer funds, setting 
forth the framework for requiring FCMs to treat futures customer 
funds as belonging to the futures customer.\3\ CEA section 4d(b) 
addresses the duties imposed on DCOs and other depositories 
receiving futures customer funds from FCMs pursuant to section 
4d(a)(2).\4\ Regulations Sec. Sec.  1.20 through 1.30, and 
Regulations Sec. Sec.  1.32 and 1.49 implement sections 4d(a)(2) and 
4d(b).\5\
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    \3\ 7 U.S.C. 6d(a)(2).
    \4\ 7 U.S.C. 6d(b).
    \5\ 17 CFR 1.20 through 17 CFR 1.30, 17 CFR 1.32, and 17 CFR 
1.49.
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    CEA section 4d(f)(2)(A) covers cleared swaps customer 
collateral, setting forth a framework for requiring FCMs to treat 
cleared swaps customer collateral as belonging to the cleared swaps 
customer.\6\ Regulations Sec. Sec.  22.2 through 22.13, and 
Regulations Sec. Sec.  22.15 through 22.17, implement CEA section 
4d(f).\7\ And CEA section 4(b)(2)(A) covers 30.7 customer funds, 
setting forth a framework for requiring FCMs to safeguard 30.7 
customer funds deposited by 30.7 customers for trading on foreign 
boards of trade (FBOTs).\8\ Regulation Sec.  30.7 implements CEA 
section 4(b)(2)(A).\9\
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    \6\ 7 U.S.C. 6d(f)(2)(A).
    \7\ 17 CFR 22.2 through 17 CFR 22.13, 17 CFR 22.15 through 17 
CFR 22.17.
    \8\ 7 U.S.C. 6(b)(2)(A).
    \9\ 17 CFR 30.7.
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    A cornerstone of these frameworks is the ability of FCMs and 
DCOs to invest customer funds. CEA section 4d(a)(2) authorizes FCMs 
to invest futures customer funds in: (i) obligations of the U.S.; 
(ii) obligations fully guaranteed as to principal and interest by 
the U.S.; and (iii) general obligations of any State or of any 
political subdivision of a State.\10\ Regulation Sec.  1.25 was 
initially adopted to implement section 4d(a)(2), and authorized FCMs 
and DCOs to invest futures customer funds in the instruments set 
forth in section 4d(a)(2) of the Act (the Permitted 
Investments).\11\
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    \10\ 7 U.S.C. 6d(a)(2).
    \11\ See Title 17--Commodity and Securities Exchanges, 33 FR 
14454 (Sept. 26, 1968).
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    Over time, the Commission has changed the Permitted Investments: 
in 2000, for instance, expanding the list to include certificates of 
deposit, commercial paper, corporate notes, foreign sovereign debt, 
and interests in money market funds. Currently, Regulation Sec.  
1.25 lists seven categories of investments that qualify as Permitted 
Investments.\12\ In addition, the Commission extended Regulation 
Sec.  1.25 to apply to an FCM's investment of 30.7 customer funds 
for trading foreign futures positions, and to FCMs and DCOs 
investing cleared swaps customer collateral.\13\
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    \12\ 17 CFR 1.25(a)(1).
    \13\ See 17 CFR 22.2(e)(1) and 17 CFR 22.3(d).
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    When looking at Regulation Sec.  1.25, the Commission always has 
to balance the need to safeguard customer funds, against retaining 
an appropriate degree of flexibility for FCMs and DCOs to invest 
funds and attain capital efficiency. I believe the Proposed 
Amendments to Regulation Sec.  1.25 continue to strike the right 
balance, though I encourage commenters to comment on that facet.

How the Commission Does, and Should Continue to, Promote Regulatory 
Clarity and Good Government

    I would like to highlight two aspects of the Proposed Amendments 
to Regulation Sec.  1.25 that provide examples of regulatory clarity 
and good government.
    The NPRM endeavors to promote regulatory clarity by codifying 
outstanding CFTC staff no-action relief, proposing to replace LIBOR 
with SOFR as a permitted benchmark for adjustable rate securities.
    Regulation Sec.  1.25(b)(2)(iv)(A) provides that permitted 
investments may contain variable or floating rates of interest 
provided, among other things, that: (i) the interest payments on 
variable rate securities correlate closely, and on an unleveraged 
basis, to a benchmark of either the Federal Funds target or 
effective rate, the prime rate, the three-month Treasury Bill rate, 
the one-month or three-month LIBOR, or the interest rate of any 
fixed rate instrument that is a listed permitted investment under 
Regulation Sec.  1.25(a); \14\ and (ii) the interest rate, in any 
period, on floating rate securities is determined solely by 
reference, on an unleveraged basis, to a benchmark of either the 
Federal Funds target or effective rate, the prime rate, the three-
month Treasury Bill rate, the one-month or three-month LIBOR, or the 
interest rate of any fixed rate instrument that is a listed 
permitted investment under Regulation Sec.  1.25(a).\15\
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    \14\ 17 CFR 1.25(b)(2)(iv)(A)(1).
    \15\ 17 CFR 1.25(b)(2)(iv)(A)(2).
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    As we all know, it was announced in March 2021 that LIBOR would 
cease to be published and would effectively be discontinued.\16\ In 
response to the Alternative Reference Rate Committee (ARRC) 
identifying SOFR as the preferred alternative benchmark to USD LIBOR 
for certain new USD derivatives and financial contracts,\17\ CFTC 
staff issued Staff Letter 21-02 in January 2021,\18\ permitting FCMs 
to invest customer funds in permitted investments that contain 
adjustable rates of interest benchmarked to SOFR. A later CFTC Staff 
letter 22-21 extended the effective date of the no-action position 
to December 31, 2024, and expanded the scope of the no-action 
position to include permitted investments made by DCOs.\19\
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    \16\ See CFTC Staff Letter No. 21-26, Revised No-Action 
Positions to Facilitate an Orderly Transition of Swaps from Inter-
Bank Offered Rates to Alternative Benchmarks (Dec. 20, 2021).
    \17\ ARRC, ``The ARRC Selects a Broad Repo Rate as its Preferred 
Alternative Reference Rate,'' June 22, 2017, available at https://www.newyorkfed.org/medialibrary/microsites/arrc/files/2017/ARRC-press-release-Jun-22-2017.pdf.
    \18\ See CFTC Staff Letter No. 22-21, CFTC Regulation 1.25--
Investment of Customer Funds in Securities with an Adjustable Rate 
of Interest Benchmarked to [SOFR]--Extension of Time-Limited No-
Action Position Concerning Investments by [FCMs] and No-Action 
Position Concerning Investments by [DCOs], Dec. 23, 2022.
    \19\ See id.
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    Given the discontinuation of LIBOR and the increasing use of 
SOFR, the Commission is proposing to amend Regulation Sec.  
1.25(b)(2)(iv)(A) by replacing LIBOR with SOFR as a permitted 
benchmark for

[[Page 81292]]

permitted investments that contain an adjustable rate of interest. 
To give effect to this revision, paragraphs (b)(2)(iv)(A)(1) and (2) 
of Regulation Sec.  1.25 would be amended to replace the phrase 
``one-month or three-month LIBOR rate'' with the phrase ``SOFR 
rate.''
    This is important to me for three reasons. First, I have been 
vocal that the Commission must not get stuck in a never-loop of 
extending staff no-action relief.\20\ To be sure, no-action relief 
has its place in our regulatory framework.\21\ But the Commission 
should seek to find pragmatic solutions to fixing unworkable rules.
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    \20\ See Statement of Commissioner Caroline D. Pham on 
Conditional Order of SEF Registration (July 20, 2022).
    \21\ See e.g., Statement of Commissioner Caroline D. Pham on 
Staff Letter Regarding ADM Investor Services, Inc. (June 16, 2023).
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    Second, I appreciate the Commission is taking action in advance 
of the relief expiration date of December 2024. Firms expend 
considerable resources to come into compliance with our 
requirements. To the extent our requirements are changing (e.g., 
staff no-action relief is expiring), waiting on the part of the 
Commission only unnecessarily increases the risks and costs to firms 
for implementation.
    And third, I am pleased the NPRM does not propose to impose any 
additional conditions beyond the relief contained in CFTC staff 
letter 22-21. Conditions may have their place, but the Commission 
needs to avoid a ``kitchen sink'' approach when applying them.
    All of this comes together to provide an example of what 
regulatory clarity needs to entail. Extraneous changes, unworkable 
conditions, and waiting too long to act all inhibit regulatory 
clarity by introducing ambiguity, unnecessary burdens, and wasted 
time.
    The NPRM also endeavors to promote good government by providing 
a timely, thorough response to a petition submitted by market 
participants.
    The Futures Industry Association (FIA) and CME Group Inc. (CME) 
submitted a joint petition requesting the Commission to expand 
investments that FCMs and DCOs may enter into with Customer 
Funds.\22\ The Petitioners requested that the Commission permit FCMs 
and DCOs to invest Customer Funds in the foreign sovereign debt of 
Canada, France, Germany, Japan, and the United Kingdom, subject to 
the condition that the investment in the foreign sovereign debt is 
limited to balances owed by FCMs and DCOs to customers and FCM 
clearing firms, respectively, denominated in the applicable currency 
of Canada, France, Germany, Japan, or the United Kingdom.\23\ The 
Petitioners further request that the Commission exempt FCMs and DCOs 
from the provisions of Regulation Sec.  1.25(d)(2) to authorize FCMs 
and DCOs to enter into Repurchase Transactions involving Specified 
Foreign Sovereign Debt with foreign banks and foreign securities 
brokers or dealers and to hold Specified Foreign Sovereign Debt in 
safekeeping accounts at foreign banks.\24\
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    \22\ Petition for Order under Section 4(c) of the Commodity 
Exchange Act, dated May 24, 2023 (the Joint Petition). The Joint 
Petition and a Supplement are available on the Commission's website.
    \23\ Joint Petition at p. 4.
    \24\ Joint Petition at p. 5.
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    The Petitioners further request that FCMs and DCOs be permitted 
to invest Customer Funds in certain ETFs that invest primarily in 
short-term U.S. Treasury securities (U.S. Treasury ETFs),\25\ 
because U.S. Treasury ETFs have characteristics that may be 
consistent with those of other Permitted Investments and may provide 
FCMs and DCOs with an opportunity to diversify further their 
investments of customer funds.\26\
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    \25\ Joint Petition at pp. 8-9.
    \26\ Id.
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    This is important to me for two reasons. First, the Commission 
is providing a timely response to the petition. Not only does every 
market participant deserve a response to a request to the 
Commission, but they deserve a response in a reasonable amount of 
time. Second, the NPRM does not propose additional conditions beyond 
what was requested in the Joint Petition. Instead, and admirably, 
the Commission requests comment where it is unsure about conditions, 
after a careful and thorough analysis of its proposed actions.
    In conclusion, I am pleased to support the NPRM because multiple 
aspects set an example for how the Commission can promote regulatory 
clarity and good government in all areas of its regulation and 
oversight. Thank you again to the staff for their hard work, and I 
look forward to the comments on the Proposed Amendments to 
Regulation Sec.  1.25.

[FR Doc. 2023-24774 Filed 11-20-23; 8:45 am]
BILLING CODE 6351-01-P


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