78776 Federal Register / Vol. 76, No. 243 / Monday, December 19, 2011 / Rules and Regulations 

1 7 U.S.C. 6d. 

2 7 U.S.C. 1 et seq. (2006), as amended by the 

Dodd-Frank Wall Street Reform and Consumer 

Protection Act, Pub. L. 111–203, 124 Stat. 1376 

(2010). 

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

4 17 CFR 1.25. Commission regulations may be 

accessed through the Commission’s Web site, 

http://www.cftc.gov. 

5This category of permitted investment was later 

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

70 FR 28190, 28197 (May 17, 2005). 

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

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

(making technical corrections and accelerating 

effective date of final rules from February 12, 2001 

to December 28, 2000). 

7 Id. 

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

9 70 FR 28190. 

10 17 CFR 1.25(b). 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Parts 1 and 30 

RIN 3038–AC79 

Investment of Customer Funds and 

Funds Held in an Account for Foreign 

Futures and Foreign Options 

Transactions 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Final rule. 

SUMMARY: The Commodity Futures 

Trading Commission (Commission or 

CFTC) is amending its regulations 

regarding the investment of customer 

segregated funds subject to Commission 

Regulation 1.25 (Regulation 1.25) and 

funds held in an account subject to 

Commission Regulation 30.7 

(Regulation 30.7, and funds subject 

thereto, 30.7 funds). Certain 

amendments reflect the implementation 

of new statutory provisions enacted 

under Title IX of the Dodd-Frank Wall 

Street Reform and Consumer Protection 

Act. The amendments address: certain 

changes to the list of permitted 

investments (including the elimination 

of in-house transactions), a clarification 

of the liquidity requirement, the 

removal of rating requirements, and an 

expansion of concentration limits 

including asset-based, issuer-based, and 

counterparty concentration restrictions. 

They also address revisions to the 

acknowledgment letter requirement for 

investment in a money market mutual 

fund (MMMF), revisions to the list of 

exceptions to the next-day redemption 

requirement for MMMFs, the 

elimination of repurchase and reverse 

repurchase agreements with affiliates, 

the application of customer segregated 

funds investment limitations to 30.7 

funds, the removal of ratings 

requirements for depositories of 30.7 

funds, the elimination of the option to 

designate a depository for 30.7 funds, 

and certain technical changes. 

DATES: This rule is effective February 

17, 2012. All persons shall be in 

compliance with this rule not later than 

June 18, 2012. 

FOR FURTHER INFORMATION CONTACT: 

Ananda K. Radhakrishnan, Director, 

(202) 418–5188, 

aradhakrishnan@cftc.gov, or Jon 

DeBord, Special Counsel, (202) 418– 

5478, jdebord@cftc.gov, Division of 

Clearing and Risk, Commodity Futures 

Trading Commission, Three Lafayette 

Centre, 1151 21st Street NW., 

Washington, DC 20581. 

SUPPLEMENTARY INFORMATION: 

Table of Contents 

I. Background 

A. Regulation 1.25 

B. Regulation 30.7 

C. Advance Notice of Proposed 

Rulemaking 

D. The Dodd-Frank Act 

E. The Notice of Proposed Rulemaking 

II. Discussion of the Final Rules 

A. Permitted Investments—Regulation 1.25 

1. Government Sponsored Enterprise 

Securities 

2. Commercial Paper and Corporate Notes 

or Bonds 

3. Foreign Sovereign Debt 

4. In-House Transactions 

B. General Terms and Conditions 

1. Marketability 

2. Ratings 

3. Restrictions on Instrument Features 

4. Concentration Limits 

(a) Asset-Based Concentration Limits 

(b) Issuer-based Concentration Limits 

(c) Counterparty Concentration Limits 

C. Money Market Mutual Funds 

1. Acknowledgment Letters 

2. Next-day Redemption Requirement 

D. Repurchase and Reverse Repurchase 

Agreements 

E. Regulation 30.7 

1. Harmonization 

2. Ratings 

3. Designation as a Depository for 30.7 

Funds 

4. Technical Amendment 

F. Implementation 

III. Cost Benefit Considerations 

IV. Related Matters 

A. Regulatory Flexibility Act 

B. Paperwork Reduction Act 

Text of Rules 

I. Background 

A. Regulation 1.25 

Under Section 4d 1 of the Commodity 

Exchange Act (Act),2 customer 

segregated funds may be invested in 

obligations of the United States and 

obligations fully guaranteed as to 

principal and interest by the United 

States (U.S. government securities) and 

general obligations of any State or of any 

political subdivision thereof (municipal 

securities). Pursuant to authority under 

Section 4(c) of the Act,3 the Commission 

substantially expanded the list of 

permitted investments by amending 

Regulation 1.25 4 in December 2000 to 

permit investments in general 

obligations issued by any enterprise 

sponsored by the United States 

(government sponsored enterprise or 

GSE debt securities), bank certificates of 

deposit (CDs), commercial paper, 

corporate notes,5 general obligations of 

a sovereign nation, and interests in 

MMMFs.6 In connection with that 

expansion, the Commission included 

several provisions intended to control 

exposure to credit, liquidity, and market 

risks associated with the additional 

investments, e.g., requirements that the 

investments satisfy specified rating 

standards and concentration limits, and 

be readily marketable and subject to 

prompt liquidation.7

The Commission further modified 

Regulation 1.25 in 2004 and 2005. In 

February 2004, the Commission adopted 

amendments regarding repurchase 

agreements using customer-deposited 

securities and time-to-maturity 

requirements for securities deposited in 

connection with certain collateral 

management programs of derivatives 

clearing organizations (DCOs).8 In May 

2005, the Commission adopted 

amendments related to standards for 

investing in instruments with embedded 

derivatives, requirements for adjustable 

rate securities, concentration limits on 

reverse repurchase agreements, 

transactions by futures commission 

merchants (FCMs) that are also 

registered as securities brokers or 

dealers (in-house transactions), rating 

standards and registration requirements 

for MMMFs, an auditability standard for 

investment records, and certain 

technical changes.9

The Commission has been, and 

continues to be, mindful that customer 

segregated funds must be invested in a 

manner that minimizes their exposure 

to credit, liquidity, and market risks 

both to preserve their availability to 

customers and DCOs and to enable 

investments to be quickly converted to 

cash at a predictable value in order to 

avoid systemic risk. Toward these ends, 

Regulation 1.25 establishes a general 

prudential standard by requiring that all 

permitted investments be ‘‘consistent 

with the objectives of preserving 

principal and maintaining liquidity.’’ 10

In 2007, the Commission’s Division of 

Clearing and Intermediary Oversight 

(Division) launched a review of the 

nature and extent of investments of 

Regulation 1.25 funds and 30.7 funds 


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11 17 CFR 30.7. 

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

13See Commission Form 1–FR–FCM Instructions 

at 12–9 (Mar. 2010) (‘‘In investing funds required 

to be maintained in separate section 30.7 

account(s), FCMs are bound by their fiduciary 

obligations to customers and the requirement that 

the secured amount required to be set aside be at 

all times liquid and sufficient to cover all 

obligations to such customers. Regulation 1.25 

investments would be appropriate, as would 

investments in any other readily marketable 

securities.’’). 

14 74 FR 23962 (May 22, 2009). 

15The Commission received comment letters 

from CME Group Inc. (CME), Crane Data LLC, The 

Dreyfus Corporation (Dreyfus), FCStone Group Inc. 

(FCStone), Federated Investors, Inc. (Federated), 

Futures Industry Association (FIA), Investment 

Company Institute (ICI), MF Global Inc. (MF 

Global), National Futures Association (NFA), 

Newedge USA, LLC (Newedge), and Treasury 

Strategies, Inc.. Two letters were received from 

Federated: a July 10, 2009 letter and an August 24, 

2009 letter. 

16See Dodd-Frank Wall Street Reform and 

Consumer Protection Act, Pub. L. 111–203, 124 

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

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

LawRegulation/OTCDERIVATIVES/index.htm. 

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

Title IX may be cited as the ‘‘Investor Protection 

and Securities Reform Act of 2010.’’ 

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

19See 76 FR 44262 (July 25, 2011). 

20See 75 76 FR 44776 (July 27, 2011). 

21See 75 FR 67642 (Nov. 3, 2010); see also 76 FR 

25274 (May 4, 2011) (reopening the comment 

period for certain NPRMs until June 3, 2011). 

22Comment letters were received from ADM 

Investor Services, Inc. (ADM), Bank of New York 

Mellon (BNYM), BlackRock, Inc. (BlackRock), 

Brown Brothers Harriman & Co. (BBH), Business 

Continued 

(2007 Review) in order to further its 

understanding of investment strategies 

and practices and to assess whether any 

changes to the Commission’s regulations 

would be appropriate. As part of this 

review, all registered DCOs and FCMs 

carrying customer accounts provided 

responses to a series of questions. As the 

Division was conducting follow-up 

interviews with respondents, the market 

events of September 2008 occurred and 

changed the financial landscape such 

that much of the data previously 

gathered no longer reflected current 

market conditions. However, that data 

remains useful as an indication of how 

Regulation 1.25 was implemented in a 

more stable financial environment. 

Additionally, recent events in the 

economy have underscored the 

importance of conducting periodic 

reassessments and, as necessary, 

revising regulatory policies to 

strengthen safeguards designed to 

minimize risk, while retaining an 

appropriate degree of investment 

flexibility and opportunities for capital 

efficiency for DCOs and FCMs investing 

customer segregated funds. 

B. Regulation 30.7 

Regulation 30.7 11 governs an FCM’s 

treatment of customer money, securities, 

and property associated with positions 

in foreign futures and foreign options. 

Regulation 30.7 was issued pursuant to 

the Commission’s plenary authority 

under Section 4(b) of the Act.12 Because 

Congress did not expressly apply the 

limitations of Section 4d of the Act to 

30.7 funds, the Commission historically 

has not subjected those funds to the 

investment limitations applicable to 

customer segregated funds. 

The investment guidelines for 30.7 

funds are general in nature.13 Although 

Regulation 1.25 investments offer a safe 

harbor, the Commission does not 

currently limit investments of 30.7 

funds to permitted investments under 

Regulation 1.25. Appropriate 

depositories for 30.7 funds currently 

include certain financial institutions in 

the United States, financial institutions 

in a foreign jurisdiction meeting certain 

capital and credit rating requirements, 

and any institution not otherwise 

meeting the foregoing criteria, but 

which is designated as a depository 

upon the request of a customer and the 

approval of the Commission. 

C. Advance Notice of Proposed 

Rulemaking 

In May 2009, the Commission issued 

an advance notice of proposed 

rulemaking (ANPR) 14 to solicit public 

comment prior to proposing 

amendments to Regulations 1.25 and 

30.7. The Commission stated that it was 

considering significantly revising the 

scope and character of permitted 

investments for customer segregated 

funds and 30.7 funds. In this regard, the 

Commission sought comments, 

information, research, and data 

regarding regulatory requirements that 

might better safeguard customer 

segregated funds. It also sought 

comments, information, research, and 

data regarding the impact of applying 

the requirements of Regulation 1.25 to 

investments of 30.7 funds. 

The Commission received twelve 

comment letters in response to the 

ANPR, and it considered those 

comments in formulating its proposal.15

Eleven of the 12 letters supported 

maintaining the current list of permitted 

investments and/or specifically 

ensuring that MMMFs remain a 

permitted investment. Five of the letters 

were dedicated solely to the topic of 

MMMFs, providing detailed discussions 

of their usefulness to FCMs. Several 

letters addressed issues regarding 

ratings, liquidity, concentration, and 

portfolio weighted average time to 

maturity. The alignment of Regulation 

30.7 with Regulation 1.25 was viewed as 

non-controversial. 

The FIA’s comment letter expressed 

its view that ‘‘all of the permitted 

investments described in Rule 1.25(a) 

are compatible with the Commission’s 

objectives of preserving principal and 

maintaining liquidity.’’ This opinion 

was echoed by MF Global, Newedge and 

FC Stone. CME asserted that only ‘‘a 

small subset of the complete list of 

Regulation 1.25 permitted investments 

are actually used by the industry.’’ NFA 

also wrote that investments in 

instruments other than U.S. government 

securities and MMMFs are ‘‘negligible,’’ 

and recommended that the Commission 

eliminate asset classes not ‘‘utilized to 

any material extent.’’ 

D. The Dodd-Frank Act 

On July 21, 2010, President Obama 

signed the Dodd-Frank Wall Street 

Reform and Consumer Protection Act 

(Dodd-Frank Act).16 Title IX of the 

Dodd-Frank Act 17 was enacted in order 

to increase investor protection, promote 

transparency and improve disclosure. 

Section 939A of the Dodd-Frank Act 

obligates federal agencies to review their 

respective regulations and make 

appropriate amendments in order to 

decrease reliance on credit ratings. The 

Dodd-Frank Act requires the 

Commission to conduct this review 

within one year after the date of 

enactment.18 Included in these rule 

amendments are changes to Regulations 

1.25 and 30.7 that remove provisions 

setting forth credit rating requirements. 

Separate rulemakings addressed the 

removal of credit ratings from 

Commission Regulations 1.49 and 

4.24 19 and the removal of Appendix A 

to Part 40 (which contains a reference to 

credit ratings).20

E. The Notice of Proposed Rulemaking 

A Notice of Proposed Rulemaking 

(NPRM) was issued by the Commission 

on October 26, 2010, having been 

considered in conjunction with the 

Dodd-Frank rulemaking regarding credit 

ratings. The NPRM was published in the 

Federal Register on November 3, 2010, 

and the comment period closed on 

December 3, 2010.21

The Commission invited comments 

related to topics covered by Regulations 

1.25 and 30.7, including the scope of 

permitted investments, liquidity, 

marketability, ratings, concentration 

limits, portfolio weighted average 

maturity requirements, and the 

applicability of Regulation 1.25 

standards to foreign futures accounts. 

The Commission received 32 comment 

letters.22


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Law Society of the University of Mississippi (BLS), 

CME, Committee on the Investment of Employee 

Benefit Assets (CIEBA), Dreyfus, Farm Credit 

Administration (FCA), Farm Credit Council (Farm 

Credit Council), Farr Financial Inc. (Farr Financial), 

Federal Farm Credit Banks Funding Corporation 

(FFCB), Federal Housing Finance Authority 

(FHFA), Federated, Futures and Options 

Association (FOA), FIA and International Swaps 

and Derivatives Association, Inc. (FIA/ISDA), 

International Assets Holding Corporation and 

FCStone (INTL/FCStone), ICI, Joint Audit 

Committee (JAC), J.P. Morgan Futures Inc. (J.P. 

Morgan), LCH.Clearnet Group (LCH), MF Global 

and Newedge (MF Global/Newedge), 

MorganStanley & Co. (MorganStanley), NFA, 

Natural Gas Exchange, Inc. (NGX), Office of Finance 

of the Federal Home Loan Banks (FHLB), R.J. 

O’Brien and Associates (RJO), and UBS Global 

Asset Management (Americas) Inc. (UBS). 

Federated sent multiple letters. Federated’s 

November 30, 2010 letter will be referred to as 

‘‘Federated I,’’ its December 2, 2010 letter will be 

referred to as ‘‘Federated II,’’ and Arnold & Porter 

LLP’s post-comment period letter on behalf of 

Federated, dated March 21, 2011, will be referred 

to as ‘‘Federated III.’’ Federated also sent a letter 

dated November 8, 2010 and a post-comment 

period letter dated February 28, 2011. The letters 

from BLS and NGX were received during the 

reopened comment period, on May 12, 2011 and 

May 31, 2011, respectively. 

23See 31 U.S.C. 9101 (defining ‘‘government 

corporation’’). 

24 GSEs are chartered by Congress but are 

privately owned and operated. Securities issued by 

GSEs do not have an explicit federal guarantee, 

although they are considered by some to have an 

‘‘implicit’’ guarantee due to their federal affiliation. 

Obligations of U.S. government corporations, such 

as the Government National Mortgage Association 

(known as GNMA or Ginnie Mae), are explicitly 

backed by the full faith and credit of the United 

States. Although the Commission is not aware of 

any GSE securities that have an explicit federal 

guarantee, in the NPRM the Commission concluded 

that GSE securities should remain on the list of 

permitted investments in the event this status 

changes in the future. 

25MF Global/Newedge letter at 4. 

26 17 CFR 270.2a–7. 

27FFCB letter at 3. 

28BlackRock letter at 6. 

29FIA/ISDA letter at 5, J.P. Morgan letter at 1. 

30RJO letter at 5. 

31MF Global/Newedge letter at 5, BlackRock 

letter at 6, ADM letter at 3. MF Global cited the 

Student Loan Marketing Association, FFCB Federal 

Home Loan Banks and Federal Agricultural 

Mortgage Corporation as examples of GSEs that 

performed well during the financial crisis. 

32NFA letter at 2, ADM letter at 3. 

33FHFA letter at 1. 

34FCA at 2, Farm Credit Council letter at 3, RJO 

letter at 4, FFCB letter at 3. 

35Farm Credit Council letter at 1–2. 

II. Discussion of the Final Rules 

A. Permitted Investments—Regulation 

1.25 

In finalizing amendments to 

Regulation 1.25, the Commission seeks 

to impose requirements on the 

investment of customer segregated 

funds with the goal of enhancing the 

preservation of principal and 

maintenance of liquidity consistent with 

Section 4d of the Act. The Commission 

has endeavored to tailor its amendments 

to achieve these goals, while retaining 

an appropriate degree of investment 

flexibility and opportunities for 

attaining capital efficiency for DCOs and 

FCMs investing customer segregated 

funds. 

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 may pose an 

unacceptable level of risk to customer 

funds. The Commission seeks to 

increase the safety of Regulation 1.25 

investments by promoting 

diversification. 

Below, the Commission details its 

decisions regarding the proposals in the 

NPRM. The Commission has decided to: 

• Retain investments in U.S. agency 

obligations, including implicitly backed 

GSE debt securities, and impose 

limitations on investments in debt 

issued by the Federal National Mortgage 

Association (Fannie Mae) and the 

Federal Home Loan Mortgage 

Corporation (Freddie Mac); 

• Remove corporate debt obligations 

not guaranteed by the United States 

from the list of permitted investments; 

• Eliminate foreign sovereign debt as 

a permitted investment; and 

• Eliminate in-house and affiliate 

transactions. 

1. Government Sponsored Enterprise 

Securities 

In the NPRM, the Commission 

proposed to amend Regulation 

1.25(a)(1)(iii) to expressly add U.S. 

government corporation obligations 23 to 

GSE debt securities 24 (together, U.S. 

agency obligations) and to add the 

requirement that the U.S. agency 

obligations must be fully guaranteed as 

to principal and interest by the United 

States. As proposed, all current GSE 

debt securities, including that of Fannie 

Mae and Freddie Mac, would have been 

impermissible as Regulation 1.25 

investments since no GSE debt 

securities have the explicit guarantee of 

the U.S. government. The Commission 

received 14 comment letters discussing 

GSEs. Thirteen of those 14 comment 

letters opposed the proposal. 

Generally, the arguments focused on 

the safety of GSEs, GSEs’ performance 

during the financial crisis, and the 

detrimental, unintended consequences 

of the proposal. In addition, there were 

several letters from organizations related 

to the Farm Credit System GSE (Farm 

Credit System) and FHLB System GSE 

(FHLB System) supporting, at a 

minimum, the inclusion of their GSE 

debt as a permitted Regulation 1.25 

investment. 

In terms of safety, commenters 

expressed the view that GSE debt 

securities are sufficiently liquid and that 

the U.S. government would not allow a 

GSE to fail.25 FFCB remarked that the 

Securities and Exchange Commission 

(SEC) has retained GSE debt securities 

as investments appropriate under SEC 

Rule 2a–7 26 (which governs MMMFs).27

In addition to GSEs being safe, 

BlackRock noted that ‘‘any changes in 

the viability of such entities should be 

telegraphed well in advance resulting in 

minimal disruption to the credit 

markets.’’ 28

With respect to Fannie Mae and 

Freddie Mac, the FHFA’s support of 

those GSEs effectively amounts to a 

federal guarantee, according to two 

commenters.29 As long as the federal 

government holds exposure of greater 

than 50 percent in Fannie Mae and 

Freddie Mac, RJO wrote that it believes 

that the quality of these issuances is 

better than those of any bank or 

corporation.30

Commenters averred that the safety of 

GSEs is further proven by their stability 

during the financial crisis. MF Global/ 

Newedge, BlackRock and ADM noted 

that non-Fannie Mae/Freddie Mac GSEs 

performed well during the financial 

crisis.31

Limiting investments to only those 

agency obligations backed by the full 

faith and credit of the U.S. government 

would be a mistake because ‘‘none’’ 

satisfy the requirement, according to the 

NFA, or ‘‘only GNMAs’’ satisfy the 

requirement, according to ADM.32 The 

FHFA wrote that specific criteria for 

eligible investments is preferable to 

speculation on the actions of third 

parties (such as whether the federal 

government will or will not bail out a 

GSE).33

Several commenters were concerned 

that the Commission’s proposal would 

have the unintended consequence of 

harming the broader market for GSEs, as 

investors would question the safety of 

such investments.34 The Farm Credit 

Council wrote that ‘‘[u]ntil and unless 

Congress signals its intention to erode 

the federal government’s support of 

GSEs, we respectfully request that the 

CFTC not amend Regulation 1.25 with 

respect to investments in GSEs.’’ 35

Most commenters recommended that 

GSE debt securities, including those not 

explicitly guaranteed by the U.S. 

government, remain permitted 

investments to varying extents. There 

were a range of recommendations 

regarding the debt of Fannie Mae and 

Freddie Mac. MF Global/Newedge 

suggested that GSEs with implicit 

guarantees should have a 50 percent 

asset-based concentration limit along 


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36MF Global/Newedge letter at 5. 

37CME letter at 3. 

38RJO letter at 5. 

39FIA/ISDA letter at 5. 

40BlackRock at 6. 

41The FHLB System, which is regulated by the 

FHFA, comprises an ‘‘Office of Finance’’ and 12 

independently-chartered, regional cooperative 

Federal Home Loan Banks created by Congress to 

provide support for housing finance and 

community development through member financial 

institutions. The 12 Federal Home Loan Banks issue 

debt securities (FHLB debt securities), the proceeds 

from which are used to provide liquidity to the 

7,900 FHLB member banks through collateralized 

loans. See FHLB letter at 1–3. 

42The Farm Credit System comprises five banks 

and 87 associations which provide credit and 

financial services to farmers, ranchers, and similar 

agricultural enterprises by issuing debt (Farm Credit 

debt securities) through the FFCB. 

43FHLB letter at 1–3. 

44Farm Credit Council letter at 1. Farm Credit 

debt securities are regulated by the FCA and 

insured by an independent U.S. governmentcontrolled corporation which maintains an 

insurance fund of roughly 2 percent of the 

outstanding loans. The total outstanding loan 

amount was over $3 billion as of the end of 2009. 

See Farm Credit Council letter at 2. 

45FFCB letter at 1. 

46 Id. 

47RJO letter at 4. 

48CIEBA letter at 3. 

49See 12 U.S.C. 4617(b)(2)(D). The primary goals 

of the conservatorships are to help restore 

confidence in the entities, enhance their capacity to 

fulfill their mission, mitigate the systemic risk that 

contributed directly to instability in financial 

markets, and maintain Fannie Mae and Freddie 

Mac’s secondary mortgage market role until their 

future is determined through legislation. To these 

ends, FHFA’s conservatorship of Fannie Mae and 

Freddie Mac is directed toward minimizing losses, 

limiting risk exposure, and ensuring that Fannie 

Mae and Freddie Mac price their services to 

adequately address their costs and risk. 

50 17 CFR 1.25(a)(1)(v). 

51 17 CFR 1.25(a)(1)(vi). 

52Commercial paper would remain available as a 

direct investment for MMMFs and corporate notes 

or bonds would remain available as indirect 

investments for MMMFs by means of a repurchase 

agreement. 

53The 2007 Review indicated that out of 87 FCM 

respondents, only nine held commercial paper and 

seven held corporate notes/bonds as direct 

investments during the November 30, 2006— 

December 1, 2007 period. 

54 Debra Kokal, Joint Audit Committee, CFTC 

Staff Letter 10–01 [Current Transfer Binder] Comm. 

Fut. L. Rep. (CCH) ¶ 31,514 (Jan. 15. 2010) (TLGP 

Letter). 

with a 10 percent issuer-based limit, or, 

alternatively, that GSEs meeting specific 

outstanding float standards should be 

allowed. MF Global/Newedge stated 

that, at a minimum, the Commission 

should allow FCMs to invest in GSEs 

other than Fannie Mae and Freddie 

Mac.36 CME wrote that highly liquid 

GSEs, including those of Fannie Mae 

and Freddie Mac, should remain as 

permitted investments and should have 

a 25 percent asset-based concentration 

limit.37 RJO recommended that all GSE 

securities be permitted, and that, at the 

very least, the Commission should 

permit investments in Fannie Mae and 

Freddie Mac until December 31, 2012, 

when the government guarantee 

expires.38 FIA/ISDA recommended that 

investments in GSE securities be 

permitted subject to the conditions that 

(i) with the exception of ‘‘agency 

discount notes,’’ the size of the issuance 

is at least $1 billion, (ii) trading in the 

securities of such agency remains highly 

liquid, (iii) the prices at which the 

securities may be traded are publicly 

available (through, for example, 

Bloomberg or Trace), and (iv) 

investments in GSEs are subject to a 

maximum of 50 percent asset-based and 

15 percent issuer-based concentration 

limits.39 BlackRock recommended a 30 

percent issuer limitation on GSEs.40

The Farm Credit Council, FHLB, the 

FCA, the FFCB and RJO all wrote letters 

supporting one or both of the FHLB 

System 41 and Farm Credit System debt 

securities.42 FHLB stated that the 

prohibition on GSEs not explicitly 

backed by the full faith and credit of the 

federal government is overly broad. In 

particular, FHLB noted that FHLB debt 

securities performed well throughout 

the financial crisis. FHLB stated that it 

maintained funding capabilities even 

during the most severe periods of 

market stress, due to investors’ favorable 

views of its debt securities.43 Similarly, 

the Farm Credit Council wrote that 

Farm Credit debt securities remained 

safe during the recent period of market 

volatility, and the Farm Credit System 

was able to supply much-needed 

financial support to farmers, rangers, 

harvesters of aquatic products, 

agricultural cooperatives, and rural 

residents and businesses.44 Farm Credit 

discount notes, among other Farm 

Credit debt securities, ‘‘have been a 

staple in risk-averse investor portfolios 

since the [Farm Credit System’s] 

inception in 1916 and have proven their 

creditworthiness across a range of 

market environments.’’ 45 During the 

recent crisis, the Farm Credit System 

was able to issue and redeem over $400 

billion in discount notes annually, 

while issuing over $100 billion per year 

in longer-maturity debt securities.46 RJO 

concurred regarding both GSEs, noting 

that the FHLB System and Farm Credit 

System experienced minimal, if any, 

problems during the crisis.47

CIEBA, which represents 100 of the 

country’s largest pension funds, was the 

only commenter that backed the 

proposal.48

After reviewing the comments, the 

Commission has concluded that U.S. 

agency obligations should remain 

permitted investments. The Commission 

acknowledges the fact, mentioned by 

several commenters, that most GSE debt 

performed well during the most recent 

financial crisis. 

The Commission believes it 

appropriate to include a limitation for 

debt issued by Fannie Mae and Freddie 

Mac, two GSEs which did not perform 

well during the recent financial crisis. 

Both entities failed and, as a result, have 

been operating under the 

conservatorship of the FHFA since 

September of 2008. As conservator of 

Fannie Mae and Freddie Mac, FHFA has 

assumed all powers formerly held by 

each entity’s officers, directors, and 

shareholders. In addition, FHFA, as 

conservator, is authorized to take such 

actions as may be necessary to restore 

each entity to a sound and solvent 

condition and that are appropriate to 

preserve and conserve the assets and 

property of each entity.49

In consideration of the above 

comments, the Commission is amending 

Regulation 1.25(a)(1)(iii) by permitting 

investments in U.S. agency obligations. 

The Commission is adding new 

paragraph (a)(3) to include the 

limitation that debt issued by Fannie 

Mae and Freddie Mac are permitted as 

long as these entities are operating 

under the conservatorship or 

receivership of FHFA. 

2. Commercial Paper and Corporate 

Notes or Bonds 

In order to simplify Regulation 1.25 

by eliminating rarely-used instruments, 

and in light of the credit, liquidity, and 

market risks posed by corporate debt 

securities, the Commission proposed 

amending Regulation 1.25(a)(1)(v)–(vi) 

to limit investments in ‘‘commercial 

paper’’ 50 and ‘‘corporate notes or 

bonds’’ 51 to commercial paper and 

corporate notes or bonds that are 

federally guaranteed as to principal and 

interest under the Temporary Liquidity 

Guarantee Program (TLGP) and meet 

certain other prudential standards.52

The NPRM supported this proposal by 

noting the credit, liquidity and market 

risks associated with corporate notes or 

bonds and referenced that information 

obtained during the 2007 Review 

indicated that commercial paper and 

corporate notes or bonds were not 

widely used by FCMs or DCOs.53

Second, the NPRM provided 

background on the TLGP and explained 

that TLGP debt would be permissible if: 

(1) The size of the issuance is greater 

than $1 billion; (2) the debt security is 

denominated in U.S. dollars; and (3) the 

debt security is guaranteed for its entire 

term.54

Seven comment letters discussed 

commercial paper and corporate notes 


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55BlackRock letter at 6, RJO letter at 6, ADM 

letter at 3. 

56By contrast, the Commission found that TLGP 

debt that (1) has an issuance size of greater than $1 

billion, (2) is denominated in U.S. dollars and (3) 

is guaranteed for its entire term, is sufficiently safe 

and liquid for use as a Regulation 1.25 investment. 

See TLGP Letter. 

57FIA/ISDA letter at 5. 

58RJO letter at 6. 

59RJO letter at 5. 

60BlackRock letter at 6. 

61MF Global/Newedge at 8. 

62RJO letter at 5. 

63While the Commission does not have similar 

data reflecting Regulation 1.25 investments from 

more recent years, the Commission believes that 

investment in commercial paper and corporate 

notes or bonds remains minimal. This belief is 

supported by a July 21, 2009 letter from NFA, in 

response to the ANPR, which averred that 

segregated funds were primarily invested in 

government securities and MMMFs, while 

investments in other instruments were ‘‘negligible.’’ 

Moreover, the Commission has received no 

evidence to contradict its position. 

64See TLGP Letter; 75 FR 67642, 67645 (Nov. 3, 

2010). 

65 In the NPRM, the Commission proposed 

removing paragraph (b)(3)(iv) (as amended in this 

rulemaking, paragraph (b)(2)(iv)) which permits 

adjustable rate securities as limited under that 

paragraph. As proposed, Regulation 1.25 would 

have only permitted corporate and U.S. agency 

obligations that had explicit U.S. government 

guarantees. However, since the Commission is, for 

the most part, retaining the current treatment of 

U.S. agency obligations, as described in more detail 

in section II.A.1 of this rulemaking, the Commission 

has decided not to adopt the proposed removal of 

paragraph (b)(3)(iv) (now paragraph (b)(2)(iv)). 

66The inclusion of foreign sovereign debt as a 

permitted investment can be traced to an August 7, 

2000 comment letter from the Federal Reserve Bank 

of Chicago requesting that the Commission allow 

FCMs and DCOs to invest non-dollar customer 

funds in the foreign sovereign debt of the currency 

so denominated. The Commission agreed in its final 

rule, explaining that an FCM investing deposits of 

foreign currencies would be required to convert the 

foreign currencies to a U.S. dollar denominated 

asset, and that such conversion would ‘‘increase its 

exposure to foreign currency fluctuation risk, unless 

it incurred the additional expense of hedging.’’ See 

65 FR 78003 (Dec. 13, 2000). 

or bonds in a substantive manner. Six of 

the comment letters weighed in favor of 

retaining commercial paper and 

corporate notes or bonds to some 

degree. Comments included statements 

as to the effects of the proposal, the 

safety of these instruments, and the lack 

of reliability of the 2007 Commission 

review of customer funds investments. 

According to three commenters, 

limiting commercial paper and 

corporate notes or bonds to just those 

backed by the TLGP is essentially 

eliminating the asset class altogether.55

BlackRock, ADM and RJO asserted that 

TLGP debt is not liquid due to the lack 

of available supply and therefore might 

not be a viable option for investment.56

There was general support for 

maintaining corporate notes or bonds as 

Regulation 1.25 permitted investments. 

FIA/ISDA wrote that as long as trading 

in the relevant security remains highly 

liquid, such securities should continue 

to be eligible investments under 

Regulation 1.25.57 RJO noted that 

commercial paper and corporate notes 

and bonds (i) have many high quality 

names, (ii) have a mature and liquid 

secondary market, and (iii) provide 

greater diversification than merely 

‘‘financial sector’’ bank CDs.58 Further, 

RJO averred that high quality corporate 

notes or bonds are no different than 

those used by prime MMMFs.59 MF 

Global/Newedge stated that they were 

unaware of any instances of an FCM 

unable to meet its obligations under 

Regulation 1.25 as a result of investment 

losses it suffered involving corporate 

notes or commercial paper. They believe 

that commercial paper and corporate 

notes or bonds should continue to be 

permitted; however, to the extent that 

there are limitations, they suggest (a) 

permitting FCMs to invest only in 

corporate notes or commercial paper 

issued by entities with a certain 

minimum capital level or which meet a 

certain float size, or (b) limiting FCM 

investments in such instruments to 25 

percent of their portfolio and 5 percent 

with any one issuer. BlackRock supports 

a 25–50 percent asset-based 

concentration limit for TLGP debt, but 

also notes that a lack of creditworthy 

supply may prevent an FCM from 

reaching that limit.60

Commenters rejected the 

Commission’s contention that the lack 

of investment in commercial paper and 

corporate notes or bonds illustrated in 

its 2007 Review was dispositive. MF 

Global/Newedge suggested that the 

investment review is outdated and is 

inadequate to justify removing an 

important source of revenue for FCMs.61

RJO noted that commercial paper and 

corporate notes likely appear to be used 

minimally during the relevant period 

because investments in such 

instruments were not as safe during that 

time frame.62

The Commission does not find the 

arguments in favor of retaining 

corporate notes and bonds to be 

persuasive. While the Commission 

encourages FCMs and DCOs to increase 

or decrease their holdings of certain 

permitted instruments depending on 

market conditions, the Commission is 

following the language of the statute and 

its goal of eliminating instruments that 

may, during tumultuous markets, tie up 

or threaten customer principal. The 

Commission recognizes that certain 

high-quality paper and notes may be 

sufficiently safe. As discussed in 

Section I.B.4.(a) of this rulemaking, an 

FCM or DCO may invest up to 50 

percent of its funds in prime MMMFs, 

which may invest in high-quality paper 

and notes meeting certain standards. To 

the extent that commenters suggested 

that the 2007 Report does not accurately 

reflect the volume of investment of 

customer segregated funds in 

commercial paper and corporate notes 

or bonds, the Commission believes that 

the 2007 Report contains sufficiently 

accurate information reflective of the 

circumstances at that time.63 Further, 

notwithstanding the relative paucity of 

investment in such instruments, the 

Commission believes that the 

investment of customer funds in such 

instruments runs counter to the 

overarching objective of preserving 

principal and maintaining liquidity of 

customer funds. 

Although the TLGP expires in 2012, 

the Commission believes it is useful to 

include commercial paper and corporate 

notes or bonds that are fully guaranteed 

as to principal and interest by the 

United States as permitted investments. 

This would permit continuing 

investment in TLGP debt securities, 

even though the Commission has 

otherwise eliminated commercial paper 

and corporate notes or bonds from the 

list of permitted investments. Therefore, 

the Commission is adopting the 

proposed amendments to Regulation 

1.25(a) and (b) that limit the commercial 

paper and corporate notes or bonds that 

can qualify as permitted investments to 

only those guaranteed as to principal 

and interest under the TLGP and that 

meet the criteria set forth in the 

Division’s interpretation.64 The 

Commission is amending Regulation 

1.25 by (1) amending paragraphs 

(a)(1)(v) and (a)(1)(vi) to specify that 

commercial paper and corporate notes 

or bonds must be federally backed and 

(2) inserting new paragraph (b)(2)(vi) 

that describes the criteria for federally 

backed commercial paper and corporate 

notes or bonds.65

3. Foreign Sovereign Debt 

Currently, an FCM or DCO may invest 

in the sovereign debt of a foreign 

country to the extent it has balances in 

segregated accounts owed to its 

customers (or, in the case of a DCO, to 

its clearing member FCMs) denominated 

in that country’s currency.66 In the 

NPRM, the Commission proposed to 

remove foreign sovereign debt as a 

permitted investment in the interests of 

both simplifying the regulation and 

safeguarding customer funds in light of 


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Federal Register / Vol. 76, No. 243 / Monday, December 19, 2011 / Rules and Regulations 78781 

67FIA/ISDA letter at 6, MF Global/Newedge letter 

at 5, J.P. Morgan letter at 1, LCH letter at 2, NFA 

letter at 3, FOA letter at 4. 

68FOA letter at 2, ADM letter at 2. 

69BlackRock letter at 6. 

70FIA/ISDA letter at 6, FOA letter at 3, BlackRock 

letter at 6. 

71CME letter at 3. 72FOA letter at 3. 73LCH letter at 2, FOA letter at 2–3. 74CME letter at 3, FIA/ISDA letter at 6. 75LCH letter at 2. 

76 Id. 

77RJO letter at 6. 

78NGX letter at 3. 

79ADM letter at 2. 

80CIEBA letter at 3. 

81Additionally, the Commission believes that it is 

appropriate to note that Regulation 1.25 does not 

dictate the collateral that may be accepted by FCMs 

from customers or by DCOs from clearing member 

FCMs. If FCMs and DCOs so allow, customers and 

clearing member FCMs, respectively, may continue 

to post foreign currency or foreign sovereign debt 

as collateral. 

82 75 FR 67642, 67645. 

recent crises experienced by a number 

of foreign sovereigns. The Commission 

requested comment on whether foreign 

sovereign debt should remain, to any 

extent, as a permitted investment and, if 

so, what requirements or limitations 

might be imposed in order to minimize 

sovereign risk. 

Thirteen comment letters discussed 

foreign sovereign debt. Twelve of the 13 

suggested retaining foreign sovereign 

debt to varying degrees. One comment 

letter supported the Commission’s 

proposal. As discussed in more detail 

below, both the importance of hedging 

against foreign currency exposure as 

well as the unintended consequences of 

the proposal were cited frequently by 

commenters as reasons to retain foreign 

sovereign debt as a permitted 

investment. 

Six commenters discussed the need to 

mitigate the risks associated with 

foreign currency exposure. FIA/ISDA, 

MF Global/Newedge, J.P. Morgan, LCH, 

NFA and FOA each noted that when a 

DCO requires margin deposited in a 

foreign currency, an FCM will face a 

foreign currency exposure in order to 

meet that margin requirement. The FCM 

is able to mitigate this exposure by 

investing customer funds in foreign 

sovereign debt securities denominated 

in the relevant currency.67

The benefits of increased 

diversification and liquidity were 

mentioned by three commenters. FOA 

and ADM noted that outside investment 

in sovereign debt played a key role, 

during the recent financial crisis, in 

maintaining liquidity and demand in 

such instruments, which, in turn, had a 

beneficial impact on pricing and 

spreads.68 BlackRock wrote that, 

notwithstanding the current limited 

investment in foreign sovereign debt, 

there are opportunities to add 

diversification and liquidity by allowing 

such investments.69 FIA/ISDA, FOA 

and BlackRock suggested that lack of 

use should not disqualify an investment 

as long as permitting it would still serve 

to preserve principal and maintain 

liquidity.70

Several commenters predicted 

harmful unintended consequences if the 

proposal to remove foreign sovereign 

debt as a permitted investment becomes 

the final rule. CME suggested that the 

implementation of the Dodd-Frank Act 

will result in an increase in the amount 

of customer funds held by FCMs and an 

increase in the number of foreign 

customers and foreign-domiciled 

clearing members.71 Removing foreign 

sovereign debt would limit 

diversification, would undermine the 

role of non-US sovereign debt, and 

would have the unintended 

consequence of increasing market 

volatility, according to FOA.72 LCH and 

FOA predicted that retaliatory action 

from foreign jurisdictions also could 

occur.73

Most commenters supported retaining 

foreign sovereign debt to some degree. 

CME and FIA/ISDA suggested that 

foreign sovereign debt be retained as a 

permitted investment, adding that all 

investments must be highly liquid 

under the terms of Regulation 1.25, so 

risky foreign sovereign debt would not 

be permitted.74 LCH recommended that 

foreign sovereign debt remain permitted 

as an investment, or, at a minimum, that 

investments be limited to only high 

quality sovereign issuers.75 LCH also 

noted that DCOs have conservative 

investment policies in place already.76

RJO suggested limiting foreign sovereign 

debt to only G–7 issuers, with limits 

based upon the margin requirement for 

all client positions.77 NGX suggested 

that DCOs domiciled outside of the U.S., 

in G–7 countries, be permitted to invest 

in their country’s sovereign debt, adding 

that not allowing such investments may 

be a ‘‘hardship’’ on such DCOs.78 ADM 

suggested that G–7 countries serve as a 

‘‘safe harbor’’ for Regulation 1.25 foreign 

sovereign debt investments.79 One 

commenter, CIEBA, backed the 

Commission’s proposal without further 

explanation.80

The Commission has considered the 

comments and has decided to adopt the 

proposed amendment, thereby 

eliminating foreign sovereign debt from 

the list of permitted investments. As 

discussed in more detail below, the 

Commission believes 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. The Commission also is 

not persuaded that foreign sovereign 

debt is used with sufficient frequency to 

justify the commenters’ claims that 

foreign sovereign debt assists with 

diversification of customer fund 

investments, and it is not persuaded 

that the specter of backlash from other 

jurisdictions or increased market 

volatility requires a different outcome. 

First, while it appreciates the risks of 

foreign currency exposure, the 

Commission does not believe that 

foreign sovereign debt is, in all 

situations, a sufficiently safe means for 

hedging such risk. Recent global and 

regional financial crises have illustrated 

that circumstances may quickly change, 

negatively impacting the safety of 

sovereign debt held by an FCM or DCO. 

An FCM or DCO holding troubled 

sovereign debt may then be unable to 

liquidate such instruments in a timely 

manner—and, when it does, it may be 

only after a significant mark-down. 

Given the choice between an FCM 

holding devalued currency, which can 

be exchanged for a portion of the 

customers’ margin and returned to the 

customer immediately, and an FCM 

holding illiquid foreign sovereign debt, 

which might not be able to be 

exchanged for any currency in a timely 

manner, the Commission believes that 

the former is in the customers’ best 

interests. The Commission notes that 

FCMs can avoid foreign currency risk by 

not accepting collateral that is not 

accepted at the DCO or foreign board of 

trade, or by providing in its customer 

agreement that the customer will bear 

any currency exposure.81

Second, the Commission is not 

persuaded by commenters’ assertions 

that investment in foreign sovereign 

debt has increased the diversification of 

customer funds in any meaningful way. 

The Commission has noted that 

investment in foreign sovereign debt 

was minimal in the 2007 Review.82 The 

Commission has received no data or 

evidence from any commenter 

suggesting that investment in foreign 

sovereign debt has materially increased 

since the 2007 Review. 

Third, the Commission does not 

believe that eliminating foreign 

sovereign debt as a permitted 

investment of customer funds will cause 

the market or jurisdictional problems 

claimed by commenters. As discussed 

above, no commenter has demonstrated 

that foreign sovereign debt is widely 

used, so its elimination should not 


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83See 7 U.S.C. 6(c). 

84 70 FR 28190, 28193. 

85 70 FR 28193. See also 70 FR 5577, 5581 

(February 3, 2005). 

86 70 FR 28190, 28193. 

87 74 FR 23963, 23964. 

88 75 FR 67642, 67646. 

89CME letter at 3, FIA/ISDA letter at 12. 

90MorganStanley letter at 2–3. 

91Morgan Stanley letter at 2. 

92MorganStanley letter at 3–4. 

93MF Global/Newedge letter at 7. 

94RJO letter at 3. 

95 Id. 

96MorganStanley letter at 4. 

97RJO letter at 3, CIEBA letter at 3. 

undermine foreign sovereign debt nor 

cause a disruption in the market. 

The foregoing points notwithstanding, 

the Commission is aware that FCMs and 

DCOs have varying collateral 

management needs and investment 

policies. The Commission also 

recognizes 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. 

Therefore, the Commission is 

amenable to considering applications 

for exemptions with respect to 

investment in foreign sovereign debt by 

FCMs or DCOs upon a demonstration 

that the investment in the sovereign 

debt of one or more countries is 

appropriate in light of the objectives of 

Regulation 1.25 and that the issuance of 

an exemption satisfies the criteria set 

forth in Section 4(c) of the Act.83

Accordingly, the Commission invites 

FCMs and DCOs that seek to invest 

customer funds in foreign sovereign 

debt to petition the Commission 

pursuant to Section 4(c). The 

Commission will consider permitting 

investments (1) to the extent that the 

FCM or DCO has balances in segregated 

accounts owed to its customers (or 

clearing member FCMs, as the case may 

be) in that country’s currency and (2) to 

the extent that such 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. 

Finally, in response to NGX, the 

Commission does not agree that foreign 

domiciled FCMs and DCOs should be 

able to invest in the sovereign debt of 

their domicile nation. A compelling 

argument has not been presented as to 

why this constitutes a ‘‘hardship’’ to 

DCOs domiciled outside of the United 

States. 

4. In-house Transactions 

The Commission allowed in-house 

transactions as a permitted investment 

for the first time in 2005.84 At that time, 

the Commission stated that in-house 

transactions ‘‘provide the economic 

equivalent of repos and reverse repos,’’ 

and, like repurchase agreements with 

third parties, preserve the ‘‘integrity of 

the customer segregated account.’’ 85

The Commission further wrote that inhouse transactions should not disrupt 

FCMs and DCOs from maintaining 

‘‘sufficient value in the account at all 

times.’’ 86 In the May 2009 ANPR, the 

Commission noted that the recent 

events in the economy underscored the 

importance of conducting periodic 

reassessments and refocused its review 

of permitted investments, including inhouse transactions.87

In the NPRM, the Commission 

proposed to eliminate in-house 

transactions permitted under paragraph 

(a)(3) and subject to the requirements of 

paragraph (e) of Regulation 1.25. The 

Commission noted that ‘‘[r]ecent market 

events have * * * increased concerns 

about the concentration of credit risk 

within the FCM/broker-dealer corporate 

entity in connection with in-house 

transactions.’’ 88 The Commission 

requested comment on the impact of 

this proposal on the business practices 

of FCMs and DCOs. Specifically, the 

Commission requested that commenters 

present scenarios in which a repurchase 

or reverse repurchase agreement with a 

third party could not be satisfactorily 

substituted for an in-house transaction. 

Six commenters discussed in-house 

transactions. Four requested that inhouse transactions be retained to some 

extent, while two supported the 

Commission’s proposal to eliminate inhouse transactions. 

FIA/ISDA, CME, MF Global/Newedge 

and MorganStanley recommended that 

the Commission allow FCMs to engage 

in in-house transactions. FIA/ISDA and 

CME suggested that the current terms of 

Regulation 1.25(e) should be more than 

sufficient to assure that the customer 

segregated account and the foreign 

futures and foreign options secured 

amount are protected in the event of an 

FCM bankruptcy.89 MorganStanley 

wrote that FCM efficiency relies heavily 

on in-house transactions, particularly 

when customer margin is not 

appropriate for DCO margin. It further 

stated that relying entirely on third 

party repurchase agreements will 

materially increase operational risk in 

an area where it is negligible today.90

According to MorganStanley, 

Because the in-house transaction can be 

effected and recorded through book entries 

on the FCM/broker-dealer’s general ledger, it 

can be accomplished through automated 

internal processes that are subject to a high 

level of control. The same is not routinely 

true of third-party repurchase arrangements, 

which often involve greater time lags than do 

in-house transactions between execution and 

settlement and also typically require more 

manual processing than their in-house 

counterparts.91

MorganStanley further noted that, as 

with the FCM of Lehman Brothers 

Holdings Inc. (Lehman Brothers) in 

2008, a third party custodial 

arrangement is not without risk.92 MF 

Global/Newedge wrote that removing 

in-house transactions would not reduce 

FCM risk, ‘‘since FCMs would be unable 

to enter into and execute such 

transactions with and through entities 

and personnel with whom they have 

created an effective, efficient and liquid 

settlement framework.’’ 93

However, RJO stated that in-house 

transactions currently do not provide 

‘‘protection to the capital base of the 

FCM arm of a dually registered 

entity.’’ 94 Without ‘‘ring fencing the 

capital associated with the separately 

regulated business lines,’’ RJO does not 

consider in-house transactions to be 

satisfactory substitutes for separately 

capitalized affiliates or third parties.95

CME and FIA/ISDA support retaining 

in-house transactions as they currently 

are permitted under Regulation 1.25. 

MorganStanley suggested retaining inhouse transactions subject to a 

concentration limit of 25 percent of total 

assets held in segregation or secured 

amount; or if the Commission is 

determined to eliminate in-house 

transactions, raising the proposed 

concentration limit for reverse 

repurchase agreements to 25 percent of 

total assets held in segregation or 

secured amount.96 RJO, for the reasons 

noted above, and CIEBA, without 

explanation, both support the proposal 

to remove in-house transactions from 

the list of permitted investments.97

Many commenters to the NPRM 

similarly suggest that the benefits of 

repurchase and reverse repurchase 

agreements can also be realized by inhouse transactions, without any 

decrease in safety to customer funds. 

The Commission rejects this position. 

The Commission believes that in-house 

transactions are fundamentally different 

than repurchase or reverse repurchase 

agreements with third parties. In the 

case of a reverse repurchase agreement, 

the transaction is similar to a 

collateralized loan whereby customer 

cash is exchanged for unencumbered 

collateral, both of which are housed in 

legally separate entities. The agreement 

is transacted at arms-length (often by 


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98 70 FR 28193; see also 70 FR 5581. 

99 17 CFR 1.20. 

100Conversely, transactions that at one point in 

time are considered to be unacceptably risky may 

later prove to be sufficiently safe. Should any 

person, in the future, believe that circumstances 

warrant reconsideration of the deletion of paragraph 

(a)(3) regarding in-house transactions, such person 

may petition the Commission for an amendment in 

accordance with the procedures set forth in 

Regulation 13.2, 17 CFR 13.2. Such a petition may 

include proposed conditions to the listing of inhouse transactions as permitted investments in 

order to address the concerns (e.g., concentration of 

credit risk within the FCM/broker-dealer corporate 

entity, potential for conflicts of interest in handling 

customer funds, etc.) that are the basis for the 

Commission’s determination to eliminate in-house 

transactions as permitted investments at this time. 

101FCMs, whether or not dually registered as 

broker-dealers, may also engage in collateral 

exchanges for the benefit of customers with 

affiliates or third parties. 

102 17 CFR 1.25(b). 

103See 17 CFR 240.15c3–1(c)(11)(i) (SEC 

regulation defining ‘‘ready market’’). 

104CME letter at 7, JAC letter at 1–2, FIA/ISDA 

letter at 3, Farr Financial letter at 3, RJO letter at 

7, BlackRock letter at 6. 

means of a tri-party repo mechanism), 

on a delivery versus payment basis, and 

is memorialized by a legally binding 

contract. By contrast, in an in-house 

transaction, cash and securities are 

under common control of the same legal 

entity, which presents the potential for 

conflicts of interest in the handling of 

customer funds that may be tested in 

times of crisis. Unlike a repurchase or 

reverse repurchase agreement, there is 

no mechanism to ensure that an inhouse transaction is done on a delivery 

versus payment basis. Furthermore, an 

in-house transaction, by its nature, is 

transacted within a single entity and 

therefore cannot be legally documented, 

since an entity cannot contract with 

itself (the most one could do to 

document such a transaction would be 

to make an entry on a ledger or subledger). 

Other advocates of in-house 

transactions explained that in-house 

transactions help them better manage 

their balance sheets. For example, if a 

firm entered into a repurchase or reverse 

repurchase transaction with an 

unaffiliated third party, the accounting 

of that transaction may cause the 

consolidated balance sheet of the firm to 

appear larger than if the transaction 

occurred in-house. In 2005, the 

Commission wrote that in-house 

transactions could ‘‘assist an FCM both 

in achieving greater capital efficiency 

and in accomplishing important risk 

management goals, including internal 

diversification targets.’’ 98 However, the 

purpose of Regulation 1.25 is not to 

assist FCMs and DCOs with their 

balance sheet maintenance. The purpose 

of Regulation 1.25 is to permit FCMs 

and DCOs to invest customer funds in 

a manner that preserves principal and 

maintains liquidity. 

The Commission reiterates that 

customer segregation is the foundation 

of customer protection in the 

commodity, futures and swaps markets. 

Segregation must be maintained at all 

times, pursuant to Section 4d of the Act 

and Commission Regulation 1.20,99 and 

customer segregated funds must be 

invested in a manner which preserves 

principal and maintains liquidity in 

accordance with Regulation 1.25. As 

such, the Commission must be vigilant 

in narrowing the scope of Regulation 

1.25 if transactions that were once 

considered sufficiently safe later prove 

to be unacceptably risky. Based on the 

concerns outlined above, the 

Commission now believes that in-house 

transactions present an unacceptable 

risk to customer segregated funds under 

Regulation 1.25. The final regulation 

deletes paragraph (a)(3), as proposed.100

For the removal of doubt, the 

Commission wishes to distinguish inhouse transactions from in-house sales 

of permitted investments. An in-house 

transaction is an exchange of cash or 

permitted instruments, held by a dually 

registered FCM/broker dealer, for 

customer funds. An in-house sale is the 

legal purchase of a permitted 

investment, which may be owned by a 

dually registered FCM/broker-dealer, 

with customer funds. Such in-house 

sales of permitted investments at fair 

market prices are acceptable and are 

unaffected by the elimination of inhouse transactions. 

In addition, the Commission wishes 

to distinguish in-house transactions 

from collateral exchanges for the benefit 

of the customer. As described above, a 

dually registered FCM/broker-dealer 

may not engage in in-house 

transactions, which are exchanges made 

at the discretion of the dually registered 

entity. However, a dually registered 

FCM/broker-dealer receiving customer 

collateral not acceptable at the DCO or 

foreign board of trade may exchange 

that collateral for acceptable collateral 

held by its dually registered brokerdealer to the extent necessary to meet 

margin requirements.101

B. General Terms and Conditions 

FCMs and DCOs may invest customer 

funds only in enumerated permitted 

investments ‘‘consistent with the 

objectives of preserving principal and 

maintaining liquidity.’’102 In 

furtherance of this general standard, 

paragraph (b) of Regulation 1.25 

establishes various specific 

requirements designed to minimize 

credit, market, and liquidity risk. 

Among them are requirements that the 

investment be ‘‘readily marketable’’ (a 

concept borrowed from SEC 

regulations), that it meet specified rating 

requirements, and that it not exceed 

specified issuer concentration limits. 

The Commission proposed and has 

decided to amend these standards to 

facilitate the preservation of principal 

and maintenance of liquidity by 

establishing clear, prudential standards 

that further investment quality and 

portfolio diversification and to remove 

references to credit ratings. The 

Commission notes that an investment 

that meets the technical requirements of 

Regulation 1.25, but does not meet the 

overarching prudential standard, cannot 

qualify as a permitted investment. 

1. Marketability 

Regulation 1.25(b)(1) states that 

‘‘[e]xcept for interests in money market 

mutual funds, investments must be 

‘readily marketable’ as defined in 

§ 240.15c3–1 of this title.’’ 103 In the 

NPRM, the Commission proposed to 

remove the ‘‘readily marketable’’ 

requirement from paragraph (b)(1) of 

Regulation 1.25 and substitute in its 

place a ‘‘highly liquid’’ standard. The 

Commission proposed to define ‘‘highly 

liquid’’ as having the ability to be 

converted into cash within one business 

day, without a material discount in 

value. As an alternative, the 

Commission offered a calculable 

standard, in which an instrument would 

be considered highly liquid if there was 

a reasonable basis to conclude that, 

under stable financial conditions, the 

instrument has the ability to be 

converted into cash within one business 

day, without greater than a one percent 

haircut off of its book value. 

The Commission requested comment 

on whether the proposed definition of 

‘‘highly liquid’’ accurately reflected the 

industry’s understanding of that term, 

and whether the term ‘‘material’’ might 

be replaced with a more precise or, 

perhaps, even calculable standard. The 

Commission welcomed comment on the 

ease or difficulty in applying the 

proposed or alternative ‘‘highly liquid’’ 

standards. 

Six commenters mentioned the 

‘‘highly liquid’’ definition. All six 

supported the proposed, but not the 

alternative, standard.104 Several noted 

that under the alternative standard, even 

some Treasuries would likely fall 

outside of the scope of permitted 

investments. No commenters provided 

more precise language than ‘‘material’’ 

or any calculable option. 

Certain commenters requested 

additional clarification. FIA/ISDA wrote 


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105FIA/ISDA letter at 3. 

106 Id. 

107 JAC letter at 2. 

108Section 939A(a) directs each Federal agency to 

review their regulations for references to or 

requirements of credit ratings and assessments of 

credit-worthiness. Section 939A(b) states, in part, 

that ‘‘each such agency shall modify such 

regulation * * * to remove any reference to or 

requirement of reliance on credit ratings and to 

substitute in such regulation such standard of 

credit-worthiness as each respective agency shall 

determine as appropriate for such regulations.’’ See 

75 FR 67254 (Nov. 2, 2010). 

109BlackRock letter at 2. 

110MF Global/Newedge letter at 7–8. 

111ADM letter at 2. According to ADM, the 

inactivity of the secondary market for CDs is due 

to the fact that most buyers hold CDs to maturity. 

Id. 

112RJO letter at 6. However it should be noted 

that this proposal does not alter Regulation 1.25 

with regard to penalties; therefore the Commission 

views this concern as unwarranted. 

113MF Global/Newedge letter at 8. 

114 Id. 

115ADM letter at 2. 

116Farr Financial letter at 3. 

117CIEBA letter at 3. 

that some liquid securities do not trade 

every day and requested that the 

Commission confirm that, in 

determining whether a security is highly 

liquid, an FCM may use, as a reference, 

securities that are directly comparable, 

particularly for those issuers with many 

classes of securities outstanding.105 FIA/ 

ISDA also asked the Commission to 

confirm that FCMs may rely on publicly 

available prices as well as third party 

pricing vendors such as Bloomberg, 

TradeWeb, TRACE, IDCG and MSRB.106

Additionally, JAC requested assurance 

that the highly liquid standard will not 

be substituted for ‘‘ready market’’ in 

other places in Commission regulations, 

in the Form 1–FR–FCM instructions, or 

for offsets to debit/deficits on 30.7 

statements.107

The Commission has considered the 

comments received and concludes that 

the ‘‘readily marketable’’ standard is no 

longer appropriate and should be 

removed as it creates an overlapping 

and confusing standard when applied in 

the context of the express objective of 

‘‘maintaining liquidity.’’ While 

‘‘liquidity’’ and ‘‘ready market’’ appear 

to be interchangeable concepts, they 

have distinctly different origins and 

uses. The objective of ‘‘maintaining 

liquidity’’ is to ensure that investments 

can be promptly liquidated in order to 

meet a margin call, pay variation 

settlement, or return funds to the 

customer upon demand. Meanwhile, the 

SEC’s ‘‘ready market’’ standard is 

intended for a different purpose (which 

is to set appropriate haircuts in order to 

calculate capital) and is easier to apply 

to exchange-traded equity securities 

than debt securities. The Commission is 

therefore adopting the proposal and 

amending the text of Regulation 

1.25(b)(1) to delete ‘‘readily marketable’’ 

and replace it with ‘‘highly liquid,’’ 

defined as having the ability to be 

converted into cash within one business 

day, without a material discount in 

value. 

In response to FIA/ISDA’s request for 

clarification, when determining whether 

a security which does not trade every 

day is sufficiently liquid, the 

Commission believes that an FCM may 

use any data that reasonably provides 

evidence of liquidity. However, it is the 

Commission’s position that theoretical 

pricing data is not enough, on its own, 

to establish that a security is highly 

liquid. FCMs seeking pricing 

information should be able to use 

publicly-available as well as third party 

pricing vendors. Finally, in response to 

JAC, the Commission confirms that the 

‘‘highly liquid’’ standard is for 

Regulation 1.25 purposes only. This 

standard will not be substituted for 

‘‘ready market’’ elsewhere in 

Commission regulations at the present 

time. 

2. Ratings 

Consistent with Section 939A of the 

Dodd-Frank Act, the Commission is 

amending Regulation 1.25, as proposed, 

by removing all references to ratings 

requirements.108 Only one commenter 

discussed ratings. BlackRock cautioned 

that complete removal of ratings criteria 

as a risk filter may place undue 

responsibility on an FCM or DCO to 

complete a thorough risk assessment of 

an issuer’s financial strength.109

The Commission notes that the 

removal of references to ratings does not 

prohibit a DCO or FCM from taking into 

account credit ratings as one of many 

factors to be considered in making an 

investment decision. Rather, the 

presence of high ratings is not required 

and would not provide a safe harbor for 

investments that do not satisfy the 

objectives of preserving principal and 

maintaining liquidity. 

3. Restrictions on Instrument Features 

In the NPRM, the Commission 

proposed to amend Regulation 

1.25(b)(3)(v) (as amended, Regulation 

1.25(b)(2)(v)) by restricting CDs to only 

those instruments which can be 

redeemed at the issuing bank within one 

business day, with any penalty for early 

withdrawal limited to accrued interest 

earned according to its written terms. 

Five commenters discussed restrictions 

on the instrument features of CDs. Four 

suggested that CDs be retained to 

varying degrees. One suggested that CDs 

be removed from the list of permitted 

investments entirely. 

On the subject of safety, MF Global/ 

Newedge asserted that brokered CDs are 

preferable to non-brokered CDs. In 

support of this conclusion, MF Global/ 

Newedge pointed out that brokered CDs 

receive price quotes, are marked-tomarket every day and have numerous 

buyers, while non-brokered CDs have 

only one buyer, ‘‘which creates 

significant counterparty risk for FCMs 

purchasing such products.’’110

ADM and RJO discussed the liquidity 

of the market for CDs. ADM suggested 

that brokered CDs are liquid despite an 

inactive secondary market.111 RJO 

averred that non-negotiable CDs were 

not intended for institutional size 

transactions. RJO also predicted that 

this proposal could severely limit the 

quantity and quality of banks willing to 

accept the proposed stringent limitation 

on breakage fees.112

MF Global/Newedge recommended 

that brokered CDs remain permitted; 

however, if limits are to be imposed, 

they recommended (a) that issuers of 

brokered CDs meet certain capital 

criteria or the CDs meet certain float size 

thresholds, or (b) that FCMs be allowed 

to invest in brokered CDs up to 50 

percent of their portfolio and/or 10 

percent with any one issuer.113 MF 

Global/Newedge also suggested that the 

Commission consider allowing brokered 

CDs with puts. Such an instrument may 

be traded in the secondary market, but 

also may be put back to the issuer.114

Rather than restricting negotiable CDs, 

ADM suggested that the Commission 

restrict the allowable issuers of CDs 

using guidelines that the Commission 

sees fit.115 Farr Financial recommended 

that brokered CDs be allowed as long as 

they generally meet the criteria of 

‘‘highly liquid.’’116 Farr Financial also 

suggested that the portion of the 

proposed rule limiting penalties for 

early withdrawal to ‘‘any accrued 

interest earned’’ be modified to account 

for the standard practices of CD 

penalties. For example, Farr Financial 

stated that CDs with a term of one year 

or less have an early withdrawal penalty 

of up to 90 days of simple interest 

earned. For CDs with a term of more 

than one year, typically the early 

withdrawal penalty is up to 180 days of 

simple interest. CIEBA recommended 

eliminating investments in both 

brokered and non-brokered CDs, 

without further explanation.117

The Commission is adopting the 

proposed amendment to Regulation 

1.25(b)(3)(v) (as amended, Regulation 

1.25(b)(2)(v)) by restricting CDs to only 


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118 17 CFR 1.25(b)(2)(v). 

119Comment request appears in section II.A of the 

NPRM. See 75 FR at 67646. 

120 Id. 

121Comment request appears in section II.C of the 

NPRM. See 75 FR at 67649. 

122 ICI letter at 2. 123Federated I letter at 6. The Commission notes 

that the Reserve Primary Fund (Reserve Primary) 

was an MMMF that satisfied the enumerated 

requirements of Regulation 1.25 and at one point 

was a $63 billion fund. Reserve Primary’s ‘‘breaking 

the buck,’’ in September 2008, called attention to 

the risk to principal and potential lack of sufficient 

liquidity of any MMMF investment. 

124Federate I letter at 6. 

125Federated estimated $2.8 trillion. Federated I 

letter at 2. UBS noted a figure of $3.8 trillion as of 

May 2009. UBS letter at 6. 

126Federated I letter at 1, CME letter at 4–5, J.P. 

Morgan letter at 1–2, Farr Financial letter at 1, UBS 

letter at 2. 

127 ICI letter at 4. ICI noted that the weighted 

average maturity (WAM) for MMMFs has been 

reduced from 90 to 60 days. As a result 60 percent 

of MMMFs have a WAM of 45 days or less. In 

contrast, more than half of all MMMFs had a WAM 

of greater than 45 days prior to the SEC’s 

amendments to its Rule 2a–7. 

those instruments which can be 

redeemed at the issuing bank within one 

business day, with any penalty for early 

withdrawal limited to accrued interest 

earned according to its written terms. 

The preservation of customer principal 

and the maintenance of liquidity are the 

two overriding determining factors in 

the permissibility of a CD for purposes 

of Regulation 1.25. 

Customer principal can be threatened 

by market fluctuations and early 

redemption penalties. Unlike a nonbrokered CD, the purchaser of a 

brokered CD cannot, in most instances, 

redeem its interest from the issuing 

bank. Rather, an investor seeking 

redemption prior to a CD’s maturity date 

must liquidate the CD in the secondary 

market. Depending on the brokered CD 

terms (interest rate and duration) and 

the current economic conditions, the 

market for a given CD can be illiquid 

and can result in a significant loss of 

principal. Penalties for early redemption 

may cut into customer principal unless 

such penalties are limited, as they are in 

paragraph (b)(2)(v) of Regulation 1.25, to 

accrued interest.118

The ability of a CD purchaser to 

redeem a CD at the issuing bank within 

one day is the second key factor in 

determining whether a CD is acceptable 

as a Regulation 1.25 investment. As 

noted above, the purchaser of a brokered 

CD cannot, in most instances, redeem its 

interest from the issuing bank. If the 

secondary market for a brokered CD is 

illiquid, it can prevent FCMs and DCOs 

from retrieving customer funds for the 

purpose of making margin calls. 

In response to MF Global/Newedge’s 

request for clarification, the 

Commission notes that a brokered CD 

with a put option back to the issuing 

bank is an acceptable investment, 

assuming that the issuing bank obligates 

itself to redeem within one business day 

and that the strike price for the put is 

not less than the original principal 

amount of the CD. 

4. Concentration Limits 

Regulation 1.25(b)(4) currently sets 

forth issuer-based concentration limits 

for direct investments, other than 

MMMFs, and securities subject to 

repurchase or reverse repurchase 

agreements and in-house transactions. 

In the NPRM, the Commission proposed 

to adopt asset-based concentration 

limits for direct investments and a 

counterparty concentration limit for 

reverse repurchase agreements in 

addition to amending its issuer-based 

concentration limits and rescinding 

concentration limits applied to in-house 

transactions. 

(a) Asset-Based Concentration Limits 

The Commission’s proposed assetbased concentration limits would 

restrict the amount of customer funds an 

FCM or DCO could hold in any one 

class of investments, expressed as a 

percentage of total assets held in 

segregation. 

In the NPRM, the Commission 

proposed the following asset-based 

limits: No concentration limit (100 

percent) for U.S. government securities; 

a 50 percent concentration limit for U.S. 

agency obligations fully guaranteed as to 

principal and interest by the United 

States; a 25 percent concentration limit 

for TLGP guaranteed commercial paper 

and corporate notes or bonds; a 25 

percent concentration limit for nonnegotiable CDs; a 10 percent 

concentration limit for municipal 

securities; and a 10 percent 

concentration limit for interests in 

MMMFs. 

The Commission requested comment 

on whether asset-based concentration 

limits are an effective means for 

facilitating investment portfolio 

diversification and whether there are 

other methods that should be 

considered. The Commission, in 

particular, sought opinions on what 

alternative asset-based concentration 

limit might be appropriate for MMMFs 

and, if such asset-based concentration 

limit is higher than 10 percent, what 

corresponding issuer-based 

concentration limit should be adopted. 

The Commission also solicited comment 

on whether MMMFs should be 

eliminated as a permitted investment.119

In discussing whether MMMF 

investments satisfy the overall objective 

of preserving principal and maintaining 

liquidity, the Commission specifically 

requested comment on whether changes 

in the settlement mechanisms for the triparty repo market might impact an 

MMMF’s ability to meet the 

requirements of Regulation 1.25.120 The 

Commission requested comment on 

whether MMMF investments should be 

limited to Treasury MMMFs, or to those 

MMMFs that have portfolios consisting 

only of permitted investments under 

Regulation 1.25.121

Eighteen comment letters discussed 

MMMFs. The overwhelming majority of 

comments focused on the proposed 

limitations on MMMFs, which many in 

the industry believed to be ‘‘arbitrary 

and unduly severe.’’ 122 According to 

Federated, the Dodd-Frank Act 

‘‘represents the collective effort of 

Congress and the executive branch to 

prevent a repetition of the activities 

largely confined to the financial services 

sector that precipitated the domino 

effect of the failure of a large 

systemically risky company, such as 

Lehman Brothers, that led to the events 

at the Reserve Primary Fund.’’ 123

Federated further asserted that unless 

the Commission does not believe that 

Congress’ ‘‘efforts were successful, the 

proposed limitations on [MMMFs] are 

unduly restrictive and unwarranted.’’ 124

Commenters discussed a variety of 

topics including the safety of MMMFs, 

the recent enhancements to SEC Rule 

2a–7, a comparison of the safety of 

MMMFs to other permitted investments, 

the appropriate concentration limits for 

MMMFs, and potential problems that 

would arise as a result of a 10 percent 

concentration limit, among other 

comments. 

First, commenters stressed that 

MMMFs are safe, liquid investments, 

comprising roughly $3–4 trillion in 

assets 125 and representing 

approximately 25 percent of the total 

assets in registered investment 

companies in the United States. 

Commenters noted that only two funds 

in the 40-year history of MMMFs have 

failed to return $1 per share to investors 

(and those funds returned more than 99 

cents and 96 cents on the dollar, 

respectively).126

According to many of the comment 

letters, the recent enhancements to SEC 

Rule 2a–7 have made MMMFs even 

safer and more prepared to withstand 

heavy redemption requests during a 

crisis. In this regard, heightened credit 

quality and shortened maturity limits 

increase liquidity, 127 as does a 

requirement that 10 percent of assets be 

in cash, Treasuries or securities that 


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128CME letter at 4–5, Federated I letter at 1, FIA/ 

ISDA letter at 6–8, MF Global/Newedge letter at 6, 

J.P. Morgan letter at 1–2, UBS letter at 2–4, Dreyfus 

letter at 2, RJO letter at 7–8, INTL/FCStone letter at 

2, BlackRock letter at 2–4, ADM letter at 1, BNYM 

letter at 2–3, BLS letter at 2. 

129CME letter at 6, Farr Financial letter at 2, ICI 

letter at 7, Dreyfus letter at 4, ADM letter at 3, 

Federated II letter (Bilson essay at 8). 

130 Dreyfus letter at 4. 

131UBS letter at 6, Dreyfus letter at 4. 

132Federated I letter at 1, CME letter at 4–5, MF 

Global/Newedge letter at 6, UBS letter at 5, 7, 

Dreyfus letter at 4. 

133CME letter at 6. 

134 ICI letter at 8. 

135Federated III letter at 2–3. 

136 Dreyfus letter at 2. 

137As pointed out by Farr Financial, FDIC 

insurance passes through to an FCM’s customers. 

See Farr Financial letter at 2–3. 

138Farr Financial letter at 2. 

139BlackRock letter at 2, 5. 

140 Id. 

141NFA letter at 2. 

142 ICI letter at 10. 

143 ICI letter at 6–8, Dreyfus letter at 4, BNYM 

letter at 2–3. 

144ADM letter at 1. 

145 ICI letter at 12. 

146 Dreyfus letter at 2. 

147FIA/ISDA letter at 8. 

148RJO letter at 8. 

149BlackRock letter at 4. 

150BlackRock letter at 2, 5. 

151CIEBA letter at 3. 

convert into cash within one day. The 

SEC has increased the transparency of 

MMMFs by requiring that MMMFs 

provide portfolio information, updated 

monthly, on their Web sites. In addition, 

MMMFs are now required to conduct 

periodic stress tests, which examine an 

MMMF’s ability to maintain a stable net 

asset value under hypothetical market 

conditions.128

Second, many commenters compared 

the safety of MMMFs to that of one or 

more other permitted investments. Six 

commenters averred that MMMFs are 

safer than Treasuries.129 One 

commenter argued that municipal bonds 

are less liquid than MMMFs.130 Two 

commenters argued that MMMFs were 

better investments than TLGP debt.131

Five commenters wrote that MMMFs 

compared favorably with CDs.132

Third, many commenters suggested 

that a 10 percent MMMF limitation 

would cause some inconsonant and 

unintended results. CME stated that, in 

theory, Regulation 1.25 as proposed 

would permit over 50 percent of a 

customer funds portfolio to be invested 

in TLGP securities, municipal securities 

and non-negotiable CDs. In practice, 

however, FCMs’ use of these investment 

categories is limited.133 ICI wrote that 

an incongruity exists where an FCM 

may invest all of its assets in a selfmanaged portfolio of Treasuries, but 

may only invest 10 percent of its assets 

in an MMMF consisting of the same 

securities.134 Federated expressed views 

similar to those of ICI, writing that 

investments in government funds 

should not be subject to any 

concentration limits. Federated also 

recommended that the Commission 

require that MMMFs maintain certain 

minimum financial thresholds in order 

to qualify as a Regulation 1.25 

investment. Federated suggested, as 

thresholds, that an MMMF should 

manage assets of at least $10 billion and 

that the MMMF’s management company 

should manage assets of at least $50 

billion.135 Dreyfus noted that, under the 

proposal, an FCM may construct a pool 

of individual securities outside the 

constraints of SEC Rule 2a–7 which 

would have maturities of longer than 

those required of MMMFs. Therefore, 

greater interest rate risk might be 

associated with a self-managed portfolio 

than with the portfolio in an MMMF.136

The decrease in MMMF investment 

might lead more funds to be held in 

cash in banks (with only $250,000 FDIC 

insurance).137 According to Farr 

Financial, another possible result of a 10 

percent limitation on MMMFs is that 

FCMs and DCOs would hold a large 

amount of Treasuries, and, in the event 

that an FCM or DCO would need to 

liquidate such Treasuries, would 

experience potential loss in the 

secondary market.138 BlackRock wrote 

that an overreliance on Treasuries and 

government securities would place 

portfolios in greater danger due to 

changes to interest rates. For example, a 

sudden rise in interest rates may 

negatively impact the principal 

valuation of Treasuries.139 If liquidation 

is required during such a circumstance, 

FCMs may experience a loss in 

principal.140

Fourth, several commenters 

highlighted other potential difficulties 

that could result from the proposed 10 

percent concentration limit, including 

issues of diversification, selfmanagement and liquidity. The NFA 

warned that by limiting investment in 

MMMFs and other instruments, the 

Commission risks decreasing 

diversification rather than increasing 

it.141 Along similar lines, ICI stated that 

the average MMMF is more diversified 

than the portfolio of bank CDs or 

municipal securities that FCMs or DCOs 

would be permitted to hold under the 

proposed amendments.142

Three commenters discussed the 

problems that arise from self-managed 

accounts. ICI, Dreyfus and BNYM 

suggest that by limiting MMMFs to 10 

percent, the Commission would be 

forcing FCMs and DCOs to manage 90 

percent of their portfolios themselves. 

Investments in TLGP debt, CDs and 

municipals require asset management 

skills that FCMs and DCOs might not 

have without hiring an investment 

adviser. While some FCMs and DCOs 

may be large enough to do this, many 

are not—and requiring FCMs to ‘‘go it 

alone’’ will cause customer funds to be 

at greater risk.143 ADM wrote that 

because intraday settlements from 

clearing organizations are not known 

until 12 noon CST or later, it would be 

difficult to maintain sufficient liquid 

assets without the use of MMMFs.144

In response to the Commission’s 

request for comment on the proposed 

changes in the tri-party repo market, 

which have not been fully implemented, 

ICI wrote that the changes would allow 

sellers in tri-party repurchase 

agreements to repurchase the 

underlying securities later in the 

afternoon. Previously, such sellers 

would repurchase securities in the 

morning using funds borrowed from 

their clearing banks. The proposed 

changes should not, according to ICI, 

adversely affect an MMMF’s ability to 

pay redemptions by the end of each day. 

Because the repurchases would occur 

while the Fedwire system is open, 

MMMFs can transfer the proceeds to 

their transfer agents to cover daily 

redemptions.145

The NPRM also requested comment 

on whether, or to what extent, MMMFs 

ought to be limited to Treasury funds. 

Dreyfus stated that it would not support 

such a limitation, as it believes that 

Government, prime, and municipal 

MMMFs are subject to sufficient risklimiting constraints that merit their 

availability to FCMs and DCOs.146

Treasury funds are traditionally smaller 

in size and less liquid than prime 

MMMFs, according to FIA/ISDA.147 RJO 

wrote that because Treasury funds lag 

interest rate movements for significant 

periods of time, they are likely not 

viable options for FCMs in upward 

interest rate environments or over long 

periods of time.148 Taking a different 

position, BlackRock suggested that 

Treasury MMMFs should be exempt 

from any asset-based limitations 

instituted by the Commission.149 In 

addition, BlackRock recommended that 

the Commission require investment 

decision-makers at FCMs to perform 

periodic assessments of their MMMF 

providers.150

CIEBA would support limiting 

MMMFs to only those funds which 

invest in securities that would be 

permitted investments under Regulation 

1.25.151 CIEBA did not include further 

discussion or explanation. 


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152Although MMMFs allow FCMs and DCOs to 

indirectly invest in instruments which would not 

be permitted under Regulation 1.25 as direct 

investments, the Commission believes that the 

credit quality, maturity limitations and liquidity 

required by the SEC make prime MMMFs 

acceptable investments, subject to the concentration 

limits imposed by paragraph (b)(3). 

153See Section II.A.1. CME recommended 25 

percent, BlackRock recommended 30 percent, and 

FIA/ISDA and MF Global/Newedge both 

recommended 50 percent. 

154See Section II.A.2. MF Global/Newedge 

recommended 25 percent and BlackRock 

recommended 25 percent–50 percent. The 

Commission is aware that MF Global/Newedge’s 

recommendation was for all corporate notes or 

bonds and commercial paper—not merely those 

which are TLGP debt. Regardless, such a 

recommendation is helpful in establishing a 

percentage that will allow for ample investment in 

instrument categories while still promoting 

diversification. 

155ADM letter at 2. 

As noted above, the Commission 

proposed a 10 percent asset-based 

concentration limit for investments in 

MMMFs. In response to comments, the 

Commission has decided to revise the 

rule language that was proposed. 

Specifically, the Commission will 

impose different concentration limits for 

investments in Treasury-only funds 

than for investments in all other 

MMMFs. The Commission also will 

distinguish between funds that do not 

have both $1 billion in assets and a 

management company that has at least 

$25 billion in MMMF assets under 

management (small MMMFs) and those 

that do (large MMMFs). Federated, as 

noted above, recommended that asset 

thresholds for MMMFs be set at $10 

billion and $50 billion, respectively. 

However, the Commission believes, at 

this time, that such thresholds may 

needlessly constrain the pool of 

MMMFs available for investment and 

result in an unsafe concentration of 

customer funds in a limited number of 

MMMFs. The modifications to the 

proposed rule text discussed below 

reflect the Commission’s consideration 

of the comments received on the 

proposed concentration limit for 

investments in MMMFs, in light of the 

overarching objective of preserving 

principal and maintaining liquidity of 

customer funds. 

First, an FCM or DCO may invest all 

of its customer segregated funds in 

Treasury-only MMMFs, subject to the 

limitation on investment in small 

MMMFs discussed below. The 

Commission agrees with commenters 

that since an FCM or DCO may invest 

all of its funds in Treasuries directly, an 

FCM or DCO therefore should be able to 

make the same investment indirectly via 

an MMMF. 

Second, for all other MMMFs, the 

Commission believes that a 50 percent 

asset-based concentration limit is 

appropriate, subject to the limitation on 

investment in small MMMFs discussed 

below. After considering the views 

presented by market participants, 

Commission staff and other regulators, 

the Commission has determined that a 

50 percent asset-based concentration 

limit strikes the right balance between 

providing FCMs and DCOs with 

sufficient Regulation 1.25 investment 

options and, at the same time, 

encouraging adequate portfolio 

diversification. 

MMMFs’ portfolio diversification, 

administrative ease, and the heightened 

prudential standards recently imposed 

by the SEC, continue to make them an 

attractive investment option. However, 

their volatility during the 2008 financial 

crisis, which culminated in one fund 

‘‘breaking the buck’’ and many more 

funds requiring infusions of capital, 

underscores the fact that investments in 

MMMFs are not without risk. The 

Commission is persuaded to increase 

the proposed asset-based concentration 

limit for MMMFs, other than Treasuryonly MMMFs, from 10 percent to 50 

percent in part by commenters who 

noted that MMMFs are safe and liquid 

relative to other permitted 

investments.152 Commenters were 

persistent in reminding the Commission 

that, aside from Reserve Primary, no 

MMMFs had ‘‘broken the buck’’ during 

the 2008 financial crisis and aftermath. 

The Commission is also cognizant that 

decreasing the number of investment 

options might have the unintended 

consequence of over-concentrating 

customer funds into a small universe of 

viable investments. Further, these 

concentration limits provide FCMs and 

DCOs with the ability to delegate 

investment decisions for their entire 

portfolio of customer segregated funds 

to MMMFs, should the FCMs and DCOs 

not wish to make such decisions on 

their own. 

To the extent that an FCM or DCO 

invests customer segregated funds in an 

MMMF, subject to the asset-based 

concentration limits outlined above, the 

FCM or DCO may only invest up to 10 

percent of its segregated funds in small 

MMMFs. The Commission believes that 

distinguishing between small MMMFs 

and large MMMFs is a necessary 

corollary to increasing the concentration 

limits proposed in the NPRM, since 

large MMMFs have capital bases better 

capable of handling a high volume of 

redemption requests in the event of a 

market event. To the extent that an FCM 

or DCO invests customer segregated 

funds in small MMMFs, the 10 percent 

asset-based concentration limit in the 

final rule is unchanged from the 

concentration limit set forth in the 

NPRM. However, having considered the 

comments received on this issue, the 

Commission has determined it 

appropriate to elevate the asset-based 

concentration limits from what had 

been proposed—both for Treasury-only 

MMMFs and for all other MMMFs—to 

the extent that an FCM or DCO invests 

in large MMMFs. 

Accordingly, the Commission is 

amending Regulation 1.25 by adding 

new paragraphs (b)(3)(i)(E)–(G), which 

implement the changes described above. 

The addition of these paragraphs 

enables the Commission to increase the 

concentration limits originally proposed 

without undermining the protection of 

customer funds and reduction of 

systemic risk, while addressing the 

concerns specifically raised in the 

comments. 

The Commission has concluded that 

all other asset-based concentration 

limits remain as proposed in the NPRM. 

The 50 percent asset-based limitation on 

U.S. agency obligations 153 and the 25 

percent asset-based limitation on each 

of TLGP corporate notes or bonds and 

TLGP commercial paper,154 are 

consistent with commenter 

recommendations. Therefore, the 

Commission is amending Regulation 

1.25(b)(3)(i), as proposed, to reflect the 

asset-based concentration limits 

described above. 

With respect to the calculation of 

concentration limits, ADM wrote that 

concentration limits should be 

calculated by aggregating Regulation 

1.25 funds and 30.7 funds.155 ADM 

explained, by way of example, that if 

there is a 50 percent concentration limit 

for investment X, along with $5 billion 

in the segregated account and $1 billion 

in the 30.7 account, that the maximum 

amount that could be invested in X 

would be $3 billion. From this 

comment, the Commission concludes 

that ADM would like the choice of 

investing up to 60 percent of its 

segregated account funds in investment 

X, as long as that amount, when 

combined with the size of the 30.7 

account, does not exceed 50 percent of 

the cumulative size of the segregated 

and 30.7 account. However, the 

Commission has determined that 

concentration limits are to be calculated 

on a fund-by-fund basis. In the example 

above, the maximum amount of 

segregated funds that could be invested 

in X would be $2.5 billion, and the 

maximum amount of 30.7 funds that 

could be invested in X would be $0.5 

billion. ADM presented no compelling 

argument as to why the aggregation of 


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156 ICI letter at 11. 

157 Dreyfus letter at 5. See also ICI letter at 10. 

158BlackRock letter at 4. 

159 Dreyfus letter at 5. 

160 ICI letter at 10–11. 

161 In response to Dreyfus and ICI’s comment 

regarding limits on family of funds, the Commission 

believes that a failure of, or a run on, an individual 

fund would likely cause a run on other funds in the 

family due to investors’ reputational concerns. 

162LCH letter at 3, MF Global/Newedge letter 

at 6. 

163FIA/ISDA letter at 9–10. 

164FIA/ISDA letter at 9–10, MF Global/Newedge 

letter at 7, J.P. Morgan letter at 2, LCH letter at 3, 

RJO letter at 3. 

165 INTL/FCStone at 2. 

166LCH letter at 3, MF Global/Newedge letter 

at 7. 

167 INTL/FCStone at 2. 

168FIA/ISDA letter at 10. 

169RJO letter at 3. 

170LCH letter at 3. 

funds held in Regulation 1.25 and 30.7 

accounts should be permitted. 

(b) Issuer-Based Concentration Limits 

The Commission proposed to amend 

its issuer-based limits for direct 

investments to include a 2 percent limit 

for an MMMF family of funds, 

expressed as a percentage of total assets 

held in segregation. Currently, there is 

no concentration limit applied to 

MMMFs. Under the NPRM, the 25 

percent issuer-based limitation for GSEs 

(now proposed to be encompassed 

within the term ‘‘U.S. agency 

obligations’’) and the 5 percent issuerbased limitation for municipal 

securities, commercial paper, corporate 

notes or bonds, and CDs would remain 

in place. 

Commenters expressed doubts over 

whether issuer-based concentration 

limits, on individual or families of 

MMMFs, would have a meaningful, 

positive effect on the safety of customer 

funds. Adverse market conditions 

would probably affect all funds, 

according to ICI, and therefore issuer 

concentration limits would do little to 

mitigate these risks.156

BlackRock, ICI and Dreyfus suggested 

that limits on family of funds may not 

achieve increased safety of customer 

funds as each MMMF in a family is 

managed on an individual basis and 

will not necessarily share risks with 

other MMMFs managed by the same 

adviser. Dreyfus wrote that it sees ‘‘no 

benefit * * * to requiring FCMs to have 

to potentially invest in a [prime MMMF] 

with one provider and a [government or 

Treasury MMMF] with another 

provider, on the basis that such an 

arrangement is safer than if the FCM 

invested in each of these types of funds 

with a single provider.’’ 157 BlackRock 

also noted that MMMF complexes do 

not typically aggregate and publish 

consolidated family data on a daily 

basis.158

Commenters also questioned the 

effectiveness of issuer-based limitations 

on individual funds. Dreyfus asserted 

that the operations and results of one 

fund do not impact the operation and 

results of another fund.159 ICI 

propounded that similar types of 

MMMFs often have common holdings. 

Thus, according to ICI, limiting 

investments in individual funds will 

have a marginal effect on the 

diversification of underlying credit 

risks.160

Taken as a whole, these arguments, 

that concentration limits will not 

increase the safety of customer funds, 

are untenable. The commenters assert 

that neither family-of-funds limits nor 

issuer-based limits will increase the 

diversification and safety of customer 

funds. If believed, this leads to the 

conclusion that it would be safer and 

more diverse (or at least as safe and 

diverse) for an FCM, investing the 

maximum amount in MMMFs, to invest 

all customer cash in one fund than it 

would be for that FCM to invest that 

customer cash among five funds in three 

families. As such, the Commission is 

not persuaded by the arguments.161

The Commission has considered the 

comments received on this issue, and is 

mindful of the comments and 

Commission analysis of the asset-based 

concentration limits discussed in the 

preceding section. Having considered 

the arguments raised, the Commission 

has decided to revise the rule language 

that was proposed. Specifically, the 

Commission has determined that there 

will be no family-of-funds or issuerbased concentration limit for MMMFs 

that consist entirely of Treasuries, and 

a 25 percent family of funds issuerbased limitation as well as a 10 percent 

individual fund issuer-based limitation 

for all other MMMFs. Investments in 

Treasury-only funds are not to be 

combined with investments in other 

MMMFs for purposes of calculating 

either family-of-funds or issuer-based 

concentration limits. The increase in the 

family of funds issuer-based 

concentration limit is related to the 

increase in the asset-based 

concentration limit and addresses the 

recommendations of commenters. The 

introduction of the 10 percent 

individual fund issuer-based 

concentration limit serves to add an 

additional layer of diversification and 

also aligns with recommendations of 

commenters. 

(c) Counterparty Concentration Limits 

In the NPRM, the Commission 

proposed a counterparty concentration 

limit of 5 percent of total assets held in 

segregation for securities subject to 

reverse repurchase agreements. Seven 

commenters discussed counterparty 

concentration limits. All expressed their 

belief that the 5 percent concentration 

limit was too low and that such a limit 

would greatly increase administrative 

risks and costs. Most commenters 

favored a 25 percent concentration 

limit, in the event that a concentration 

limit was imposed. 

FIA/ISDA, LCH, MF Global/Newedge, 

J.P. Morgan and RJO expressed similar 

views that a 5 percent concentration 

limit might actually decrease liquidity 

and increase operational and systemic 

risk. LCH and MF Global/Newedge 

wrote that a counterparty concentration 

limit would unnecessarily restrict a very 

liquid and secure investment that has 

provided flexibility and reasonable 

returns to FCMs and their customers.162

According to FIA/ISDA, because 

clearing members are often required to 

execute and unwind reverse repurchase 

agreements intraday and within a brief 

period of time, and because DCOs 

strictly define the securities they will 

accept as collateral, an FCM must 

review the securities received under 

reverse repurchase transactions to 

ensure that they are both eligible for 

delivery to the DCO and in compliance 

with applicable concentration limits.163

Several commenters observed that 

requiring an FCM to effect reverse 

repurchase transactions with multiple 

counterparties under tight time frames 

will substantially increase an FCM’s 

operational risk and invite errors.164 By 

way of example, INTL/FCStone noted 

that it currently has one counterparty 

and would potentially need to open 20 

reverse repurchase accounts were the 

proposed rule enacted.165 Further, two 

commenters wrote that a critical factor 

to consider is that, in the event of a 

counterparty’s default, all amounts are 

collateralized with permitted 

investments under Regulation 1.25.166

INTL/FCStone 167 and FIA/ISDA 168

recommended a 25 percent counterparty 

concentration limit. RJO wrote that 

limits are unnecessary—however if a 

limit were imposed, RJO recommended 

25 percent.169 LCH suggested a 10 

percent–20 percent limitation.170 MF 

Global/Newedge recommended having 

no counterparty limits; however to the 

extent that there must be, it 

recommended (a) limiting FCM 

repurchase and reverse repurchase 

transactions to those external 

counterparties maintaining a certain 

level of capital (such as $50 or $100 


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171MF Global/Newedge letter at 7. 

172ADM letter at 2. 

173 Id. 

174As noted above, certain commenters wished to 

have no counterparty concentration limits, a 

position with which the Commission does not 

agree. 

175CME letter at 7, FIA/ISDA letter at 13, BBH 

letter at 2. 

176BBH letter at 2, FIA/ISDA letter at 13. 

177BBH letter at 2. 

178 17 CFR 1.25(c)(5)(i). 

179See 70 FR 5585 (noting that ‘‘[t]he 

Commission believes the one-day liquidity 

requirement for investments in MMMFs is 

necessary to ensure that the funding requirements 

of FCMs will not be impeded by a long liquidity 

time frame’’). 

180 15 U.S.C. 80a–22(e). 

million) or (b) setting counterparty 

concentration limits at 25 percent.171

ADM wrote that it does not believe any 

concentration limit is necessary due to 

the collateralized nature of the loans.172

However, ADM stated that it would 

support only allowing certain collateral, 

such as Treasuries and GSEs, in 

repurchase transactions.173

As noted above, the Commission 

proposed a 5 percent counterparty 

concentration limit in the NPRM. 

Having considered the comments 

submitted in response to the proposal, 

the Commission has determined that a 

25 percent counterparty concentration 

limit is appropriate. 

The Commission continues to believe 

that counterparty concentration limits 

are necessary for safeguarding customer 

funds. Under current rules, an FCM or 

DCO could have 100 percent of its 

segregated funds subject to one reverse 

repurchase agreement. The obvious 

concern in such a scenario is the credit 

risk of the counterparty. This credit risk, 

while concentrated, is significantly 

mitigated by the fact that in exchange 

for cash, the FCM or DCO is holding 

Regulation 1.25-permitted securities of 

equivalent or greater value. However, a 

default by the counterparty would put 

pressure on the FCM or DCO to convert 

such securities into cash immediately 

and would exacerbate the market risk to 

the FCM or DCO, given that a decrease 

in the value of the security or an 

increase in interest rates could result in 

the FCM or DCO realizing a loss. Even 

though the market risk would be 

mitigated by asset-based and issuerbased concentration limits, a situation 

of this type could seriously jeopardize 

an FCM or DCO’s overall ability to 

preserve principal and maintain 

liquidity with respect to customer 

funds. 

The Commission is persuaded to 

increase the limit, from the proposed 

level of 5 percent in the NPRM to 25 

percent, primarily due to comments 

expressing concern about the 

administrative costs and burdens of a 

low counterparty concentration limit. 

Whereas a 5 percent limitation would 

require an FCM reverse-repurchasing all 

of its customer cash to have 20 

counterparties, a 25 percent limitation 

decreases the number of counterparties 

to four. Further, 25 percent is in line 

with commenter recommendations, 

which ranged from 10 to 25 percent.174

C. Money Market Mutual Funds 

The Commission has decided to make 

two technical amendments to paragraph 

(c) of Regulation 1.25. First, the 

Commission is clarifying the 

acknowledgment letter requirement 

under paragraph (c)(3); and second, the 

Commission is revising and clarifying 

the exceptions to the next-day 

redemption requirement under 

paragraph (c)(5)(ii). 

1. Acknowledgment Letters 

In the NPRM, the Commission sought 

to clarify that the intent of Regulation 

1.25(c)(3) is to require that an FCM or 

DCO obtain an acknowledgment letter 

from a party that has substantial control 

over a fund’s assets and has the 

knowledge and authority to facilitate 

redemption and payment or transfer of 

the customer segregated funds invested 

in shares of the MMMF. The 

Commission concluded that in many 

circumstances, the fund sponsor, the 

investment adviser, or fund manager 

would satisfy this requirement. The 

Commission also proposed to remove 

the current language in Regulation 

1.25(c)(3) relating to the issuer of the 

acknowledgment letter when the shares 

of the fund are held by the fund’s 

shareholder servicing agent. This 

revision was designed to eliminate any 

confusion as to whether the 

acknowledgment letter requirement is 

applied differently based on the 

presence or absence of a shareholder 

servicing agent. 

The Commission requested comment 

on whether the proposed standard for 

entities that may sign an 

acknowledgment letter is appropriate 

and whether there are other entities that 

could serve as examples. The 

Commission requested comment on 

whether removal of the ‘‘shareholder 

servicing agent’’ language helps clarify 

the intent of Regulation 1.25(c)(3). 

Three commenters discussed this 

proposal. CME, BBH and FIA/ISDA 

support the proposal, and FIA/ISDA and 

BBH had additional comments and 

suggested changes as well.175

BBH and FIA/ISDA requested that the 

Commission confirm that, in those 

circumstances in which an FCM 

deposits customer funds with a bank or 

other depository and thereafter instructs 

the bank to invest such customer funds 

in an MMMF, the bank is the 

appropriate entity from which the FCM 

should obtain the acknowledgment 

letter.176 BBH explained that such 

settlement banks are ‘‘universally 

recognized, both by regulation and 

standard contractual terms, as an entity 

that exercises legitimate control and 

authority over assets deposited both 

directly with it or held in an account at 

a third party depository or fund.’’ 177

The Commission is amending 

Regulation 1.25(c)(3) to reflect that an 

FCM or DCO must obtain an 

acknowledgment letter from a party that 

has substantial control over MMMF 

shares purchased with customer 

segregated funds and has the knowledge 

and authority to facilitate redemption 

and payment or transfer of the customer 

segregated funds invested in shares of 

the MMMF and is removing the current 

language in Regulation 1.25(c)(3) 

relating to the issuer of the 

acknowledgment letter when the shares 

of the fund are held by the fund’s 

shareholder servicing agent. In response 

to FIA/ISDA and BBH, the Commission 

agrees that when an FCM deposits 

customer funds in a bank or other 

depository and thereafter instructs the 

depository to invest such customer 

funds in an MMMF, the 

acknowledgment letter may come from 

the depository if it is acting as a 

custodian for the fund shares owned by 

the FCM or DCO. The Commission 

therefore clarifies in the rule text that a 

‘‘depository acting as custodian for fund 

shares’’ is an appropriate entity to issue 

an acknowledgment letter. 

2. Next-Day Redemption Requirement 

Regulation 1.25(c) requires that ‘‘[a] 

fund shall be legally obligated to redeem 

an interest and to make payment in 

satisfaction thereof by the business day 

following a redemption request.’’ 178

This ‘‘next-day redemption’’ 

requirement is a significant feature of 

Regulation 1.25 and is meant to ensure 

adequate liquidity.179 Regulation 

1.25(c)(5)(ii) lists four exceptions to the 

next-day redemption requirement, and 

incorporates by reference the emergency 

conditions listed in Section 22(e) of the 

Investment Company Act (Section 

22(e)).180 The Commission has, on 

occasion, fielded questions from FCMs 

regarding Regulation 1.25(c)(5), 

particularly because the exceptions 

listed in paragraph (c)(5)(ii) overlap 

with some of those appearing in Section 

22(e). 


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181 ICI letter at 11. 

182See SEC Press Release No. 2008–46, ‘‘Answers 

to Frequently Asked Investor Questions Regarding 

the Bear Stearns Companies, Inc.’’ (Mar. 18, 2008), 

available at http://www.sec.gov/news/press/2008/ 

2008-46.htm (noting that rumors of liquidity 

problems at Bear Stearns caused their 

counterparties to become concerned, creating a 

‘‘crisis of confidence’’ which led to the 

counterparties’ ‘‘unwilling[ness] to make secured 

funding available to Bear Stearns on customary 

terms’’). 

183CME letter at 3, FIA/ISDA letter at 9–11. 

184FIA/ISDA letter at 10–11. 

185RJO letter at 4. 

186MF Global/Newedge letter at 7. 

187See supra n. 100 (discussing petition 

procedures set forth in Regulation 13.2, 17 CFR 

13.2). 

188See Commission Form 1–FR–FCM Instructions 

at 12–9 (Mar. 2010) (‘‘In investing funds required 

to be maintained in separate section 30.7 

account(s), FCMs are bound by their fiduciary 

obligations to customers and the requirement that 

the secured amount required to be set aside be at 

In order to expressly incorporate SEC 

Rule 22e–3 into the permitted 

exceptions for purposes of clarity, and 

to otherwise clarify the existing 

exceptions to the next-day redemption 

requirement, the Commission proposed 

to amend paragraph (c)(5)(ii) of 

Regulation 1.25 by more closely aligning 

the language of that paragraph with the 

language in Section 22(e) and 

specifically including a reference to 

Rule 22e–3. The Commission proposed 

to include, as an appendix to the rule 

text (Regulation 1.25 Appendix), safe 

harbor language that could be used by 

MMMFs to ensure that their 

prospectuses comply with Regulation 

1.25(c)(5). 

The Commission requested comment 

on all aspects of its proposed 

amendments to the provisions regarding 

MMMFs in paragraph (c) of Regulation 

1.25. The Commission sought comment 

specifically on any proposed regulatory 

language that commenters believe 

requires further clarification. In 

addition, commenters were invited to 

submit views on the usefulness and 

substance of the proposed safe harbor 

language contained in the proposed 

Regulation 1.25 Appendix. 

Only one commenter, ICI, mentioned 

this aspect of the NPRM. ICI supported 

this proposal to clarify exemptions from 

next-day redemption and to include safe 

harbor language.181 Therefore, the 

Commission amends paragraph (c)(5)(ii) 

of Regulation 1.25 by more closely 

aligning the language of that paragraph 

with the language in Section 22(e) and 

specifically including a reference to 

Rule 22e–3. The Commission is also 

adding the Regulation 1.25 Appendix to 

the rule text, in order to provide 

MMMFs with safe harbor language to 

ensure that their prospectuses comply 

with Regulation 1.25(c)(5). 

D. Repurchase and Reverse Repurchase 

Agreements 

The Commission proposed 

specifically eliminating repurchase and 

reverse repurchase transactions with 

affiliate counterparties. Repurchase and 

reverse repurchase transactions are 

functionally similar to collateralized 

loans, whereby cash is exchanged for 

unencumbered collateral. In the NPRM, 

the Commission explained its view that 

the concentration of credit risk increases 

the likelihood that the default of one 

party could exacerbate financial strains 

and lead to the default of its affiliate. 

The Commission used the example of 

Bear Stearns Companies, Inc. (Bear 

Stearns) in 2008 182 to illustrate that 

even possession and control of liquid 

securities may be insufficient to 

alleviate concerns relating to 

transactions with financially troubled 

affiliated counterparties. 

The Commission received four 

comment letters discussing this topic. 

CME and FIA/ISDA both suggested that 

FCMs have much greater certainty and 

are exposed to substantially less 

counterparty risk to the extent that they 

enter into transactions with affiliates.183

FIA/ISDA stated that funds held in 

affiliate accounts are at no greater risk 

in the event of a default than they 

would be in the event of a default of a 

non-affiliate. In both cases, the 

requirements of Regulation 1.25(d) are 

the same. Further, FIA/ISDA wrote that 

the Bear Stearns example used by the 

Commission in the NPRM relates to 

Bear Stearns’ abilities to enter into 

agreements with third parties, not its 

affiliates.184 RJO noted that affiliates 

should be judged as acceptable if the 

affiliate meets or exceeds the capital 

base or some other methodology 

deemed satisfactory for adding an armslength counterparty.185 MF Global/ 

Newedge wrote that removing 

repurchase agreements with affiliates 

would not reduce FCM risk, ‘‘since 

FCMs would be unable to enter into and 

execute such transactions with and 

through entities and personnel with 

whom they have created an effective, 

efficient and liquid settlement 

framework.’’ 186

The Commission is not persuaded by 

these comments. In particular, while the 

Commission acknowledges that 

affiliates have a legal status that may 

distinguish such transactions from inhouse transactions, the concentration of 

credit risk and the potential for conflicts 

of interest during times of crisis remain 

significant concerns. Indeed, the 

Commission’s reference to Bear Stearns 

in the preamble was intended to serve 

as an illustration of how an elevated 

concentration of credit risk may 

produce broad, unforeseen 

consequences. 

Further, as discussed in the NPRM, 

the interest of consistency of the 

regulation weighs in favor of 

disallowing repurchase agreements 

between affiliates. The Commission 

finds it incongruous that an investment 

in the debt instrument of an affiliate 

(effectively a collateralized loan 

between affiliates) could be prohibited 

by paragraph (b)(6) while a repurchase 

agreement between affiliates (which is 

the functional equivalent of a short-term 

collateralized loan between affiliates) 

could be allowed. 

Finally, the Commission believes that 

firms engage in repurchase agreements 

with affiliates for purposes of balance 

sheet maintenance. Repurchase 

agreements with affiliates may cause a 

consolidated balance sheet to appear 

smaller than it would if the same 

transaction occurred with an 

unaffiliated third party because such 

transactions, while they may appear on 

sub-ledgers, are typically eliminated on 

the consolidated balance sheet. While 

FCMs and DCOs may prefer to use such 

transactions to manage their balance 

sheets, as mentioned in the context of 

in-house transactions in Section II.A.4 

of this release, the purpose of 

Regulation 1.25 is not to assist FCMs 

and DCOs with managing their balance 

sheets. Rather, the purpose of 

Regulation 1.25 is to permit FCMs and 

DCOs to invest customer funds in a 

manner that preserves principal and 

maintains liquidity. Because of the 

concerns expressed above, particularly 

with respect to the potential for 

conflicts of interest, the Commission 

believes that the interests of protecting 

customer funds are best served by 

eliminating repurchase agreements with 

affiliates. Therefore, the Commission is 

amending paragraph (d) as proposed.187

E. Regulation 30.7 

1. Harmonization 

In the NPRM, the Commission 

proposed to harmonize Regulation 30.7 

with the investment limitations of 

Regulation 1.25 by adding new 

paragraph (g) to Regulation 30.7. As 

noted above, the Commission had not 

previously restricted investments of 

30.7 funds to the permitted investments 

under Regulation 1.25, although 

Regulation 1.25 limitations can be used 

as a safe harbor for such investments.188


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all times liquid and sufficient to cover all 

obligations to such customers. Regulation 1.25 

investments would be appropriate, as would 

investments in any other readily marketable 

securities.’’). 

189See supra Section II.B.2 regarding the 

Commission’s policy decision to remove references 

to credit ratings from Regulation 1.25 and other 

regulations. 

190 JAC letter at 2. 

191Prior to 2003, Regulation 30.7(c) permitted an 

FCM to maintain 30.7 funds in, among other 

depositories, ‘‘[t]he clearing organization of any 

foreign board of trade.’’ ‘‘Foreign Futures and 

Foreign Options Transactions,’’ 52 FR 28980, 29000 

(Aug. 5, 1987). In 2002, the Commission requested 

comment, in an NPRM, on whether the list of 

depositories enumerated in Regulation 30.7(c) 

should be expanded. ‘‘Denomination of Customer 

Funds and Location of Depositories,’’ 67 FR 52641, 

52645 (Aug. 13, 2002). The Commission determined 

it appropriate to expand the list; however, in 

publishing the final rule, the Commission 

inadvertently failed to include ‘‘[t]he clearing 

organization of any foreign board of trade’’ on the 

list. See ‘‘Denomination of Customer Funds and 

Location of Depositories,’’ 68 FR 5545, 5550 (Feb. 

4, 2003) (‘‘Rule 30.7 will be amended to provide 

that the funds of foreign futures or options 

customers may, in addition to those depositories 

already enumerated * * *.’’ (emphasis added)). 

The technical amendment set forth in this notice 

corrects that administrative error. 

192CME letter at 7, JAC letter at 3, FIA/ISDA letter 

at 13, NFA letter at 3, RJO letter at 3. 

193 7 U.S.C. 19(a). 

194 7 U.S.C. 6(d). 195 7 U.S.C. 6(c). 196Based on CFTC data as of April 30, 2011. See 

CFTC Web site, Market Reports, Financial Data for 

FCMs at http://www.cftc.gov/MarketReports/ 

FinancialDataforFCMs/index.htm. 

The Commission now believes that it is 

appropriate to align the investment 

standards of Regulation 30.7 with those 

of Regulation 1.25 because many of the 

same prudential concerns arise with 

respect to both segregated customer 

funds and 30.7 funds. Such a limitation 

should increase the safety of 30.7 funds 

and provide clarity for the FCMs, DCOs, 

and designated self-regulatory 

organizations. Two comment letters, 

from JAC and FIA/ISDA discussed this 

subject and both supported the 

amendment. 

2. Ratings 

In the NPRM, the Commission 

proposed to remove all rating 

requirements from Regulation 30.7. This 

amendment is required by Section 939A 

of the Dodd-Frank Act and further 

reflects the Commission’s views on the 

unreliability of ratings as currently 

administered and its interest in aligning 

Regulation 30.7 with Regulation 1.25.189

The Commission requested comment on 

this proposal including whether there 

existed any sound alternatives to credit 

ratings. 

One comment letter, from FIA/ISDA, 

discussed the topic and supported the 

proposal. No comments provided an 

alternative to credit ratings. As 

proposed, the Commission is removing 

paragraph (c)(1)(ii)(B) of Regulation 30.7 

as it views a nationally recognized 

statistical rating organization (NRSRO) 

rating as unreliable to gauge the safety 

of a depository institution for 30.7 

funds. This change also serves to align 

Regulation 30.7 with Regulation 1.25 on 

the topic of NRSROs. 

3. Designation as a Depository for 30.7 

Funds 

As proposed, the Commission will no 

longer allow a customer to request that 

a bank or trust company located outside 

the United States be designated as a 

depository for 30.7 funds. Previously, 

under Regulation 30.7(c)(1)(ii)(C), a 

bank or trust company that did not 

otherwise meet the requirements of 

paragraph (c)(1)(ii) could still be 

designated as an acceptable depository 

by request of its customer and with the 

approval of the Commission. However, 

the Commission never allowed a bank 

or trust company located outside the 

United States to be a depository through 

these means, and has decided that it is 

appropriate to require that all 

depositories meet the regulatory capital 

requirement under paragraph 

(c)(1)(ii)(A). 

FIA/ISDA and ADM both supported 

this amendment in their comment 

letters. Based on the foregoing, the 

Commission is amending Regulation 

30.7, as proposed, by deleting paragraph 

(c)(1)(ii)(C). 

4. Technical Amendments 

JAC recommended reinserting 

‘‘foreign board of trade’’ in Regulation 

30.7(c)(1), believing it was inadvertently 

omitted in February of 2003.190 The 

Commission agrees that the February 

2003 Federal Register final rule notice 

contained a clear administrative error, 

and to address that administrative error, 

the Commission is reinserting ‘‘[t]he 

clearing organization of any foreign 

board of trade’’ in the rule text as new 

paragraph (c)(1)(v) and renumbering 

subsequent paragraphs accordingly.191

F. Implementation. 

RJO, FIA/ISDA, CME, JAC and NFA 

suggest a phased implementation period 

of 180 days.192 The Commission has 

determined to allow an implementation 

period of 180 days following the 

publication of the final rules. 

III. Cost Benefit Considerations 

Section 15(a) of the Act requires the 

Commission to consider the costs and 

benefits of its action before 

promulgating a regulation.193 In 

particular, costs and benefits must be 

evaluated in light of five broad areas of 

market and public concern: (1) 

Protection of market participants and 

the public; (2) efficiency, 

competitiveness, and financial integrity 

of futures markets; (3) price discovery; 

(4) sound risk management practices; 

and (5) other public interest 

considerations. The Commission may in 

its discretion give greater weight to any 

one of the five enumerated areas, 

depending upon the nature of the 

regulatory action. 

Section 4d of the Act 194 limits the 

investment of customer segregated 

funds to obligations of the United States 

and obligations fully guaranteed as to 

principal and interest by the United 

States (U.S. government securities), and 

general obligations of any State or of any 

political subdivision thereof (municipal 

securities). The Commission has 

exercised its authority to grant exempt 

relief under Section 4(c) of the Act to 

permit additional investments beyond 

those prescribed in Section 4d. 

Regulation 1.25 sets out the list of 

permissible investments, which the 

Commission has expanded substantially 

over the years.195 As detailed in the 

discussion above, the final rules narrow 

the scope of investment choices in order 

to reduce risk and to increase the safety 

of Regulation 1.25 investments, 

consistent with the statute. Further, 

certain changes to the rule relating to 

the elimination of credit ratings are 

mandated by Section 939A of the DoddFrank Act. 

FCMs currently hold over $170 billion 

in segregated customer funds and $40 

billion in funds held subject to 

Regulation 30.7.196 The funds are held 

as performance bond for the purpose of 

meeting margin calls and Commission 

regulations allow these funds to be 

invested by the FCMs and DCOs in 

enumerated investments subject to 

various restrictions. Through this 

rulemaking, the Commission has 

determined that certain investments are 

no longer permitted as they may not 

adequately meet the statute’s paramount 

goal of protecting customer funds. 

The Commission recognizes that 

restricting the type and form of 

permitted investments could result in 

certain FCMs and DCOs earning less 

income from their investments of 

customer funds. The Commission is 

unable to determine the magnitude of 

such income reduction, if any, because 

information was not provided to allow 

the Commission to estimate any such 

income reduction. No commenter 

provided information about the 

composition of the portfolio in which 

customer segregated funds are invested. 


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197The commenters cost/benefit concerns fall in 

two categories, summarized below with the 

Commission’s corresponding response. 

• Potentially reduced investment income may 

cause increases in customer fee. Some public 

commenters suggested that a loss of investment 

income on customer segregated funds and those 

funds held pursuant to Regulation 30.7 potentially 

attributable to the rules’ investment choice 

limitations, might incentivize FCMs and DCOs to 

raise customer fees to make up for reduced 

investment income. No objective evidence was 

provided to predict the likelihood of this speculated 

outcome. The Commission believes that the 

corresponding benefit—i.e., substantially reduced 

risk and greater protection of customer segregated 

funds—justifies this speculative cost, particularly 

given that the purpose of the segregated funds is not 

investment income, but customer fund protection. 

Moreover, as discussed herein, two factors mitigate 

the magnitude of concern for the significance of any 

such a potential income reduction. First, under the 

final rules, most asset classes are still available to 

managers and are only subject to concentration 

limits. All other types of investments remain 

permitted, including Treasuries, municipals, other 

U.S. agency obligations, foreign sovereign debt and 

MMMFs. Second, the comment letters do not 

specify how extensively FCMs and DCOs actually 

directly invest in those assets classes the rules will 

exclude. Rather, comments expressing that 

limitations on direct investments in MMMFs would 

occasion extra cost and additional investment 

expertise, suggest that FCMs and DCOs have 

eschewed investment in these products, at least to 

some degree. 

• Potentially increased portfolio management 

costs. Multiple commenters focused on the 

additional expense FCMs and DCOs might incur to 

acquire additional investment staff and expertise 

needed to manage portfolios under the new rules. 

Particular areas of concern related to the investment 

process in light of the removal of credit ratings from 

that process and portfolio management subject to 

the percentage limitations with regard to asset-type, 

issuer, and counterparty. Removal of credit ratings 

is not within Commission discretion. Moreover, the 

Commission believes the burden of on-boarding and 

risk managing additional counterparties, as well as 

the tracking of investments across more issuers, are 

offset by the benefit of increased portfolio 

diversification and more limited exposure to large 

credit and counterparty risk profiles. 

198 In the NPRM, the Commission invited the 

public ‘‘to submit any data or other information that 

may have quantifying or qualifying the costs and 

benefits of the Proposal with their comment 

letters.’’ The Commission received no such 

quantitative data or information with respect to 

these rules. 

199These investments, of course, remain subject 

to the ‘‘highly liquid’’ requirement in these rules. 

To be a permitted investment, a municipal security 

must have the ability to be converted into cash 

within one business day, without a material 

discount in value. 

As noted above, the list of permitted 

investments under the rules, 

notwithstanding the restrictions 

instituted herein, still represent a 

significantly wider selection of 

investment options than those permitted 

by the Act. Further, in most cases, the 

amended rules allow for investment in 

many of the same instruments as 

previously permitted, subject to assetbased and issuer-based concentration 

limits. 

In issuing these final rules, the 

Commission has considered the costs 

and benefits of each aspect of the rules, 

as well as alternatives to them. In 

addition, the Commission has evaluated 

comments received regarding costs and 

benefits in response to its proposal.197

Where quantification has not been 

reasonably estimable due to lack of 

necessary underlying information, the 

Commission has considered the costs 

and benefits of the final rules in 

qualitative terms.198 Generally, as 

discussed more specifically below with 

respect to the CEA section 15(a) factors, 

the Commission believes that the 

restrictions on segregated customer 

funds and Regulation 30.7 fund 

investments promote important benefits. 

These include greater security for 

customer funds and enhanced stability 

for the financial system as a whole. 

A discussion of the costs and benefits 

of this rule and the relevant comments 

is set out immediately below. The 

remainder of this Section III considers 

the costs and benefits of this rule under 

Section 15(a) of the CEA, organized by 

(i) impact on each class of permitted 

investment, (ii) certain other limitations 

on permitted investments, and (iii) 

Regulation 30.7. 

Municipal Securities 

Municipal securities are permitted 

investments pursuant to the Act. For the 

reasons discussed above, the final rule 

restricts the percentage of total customer 

segregated funds that may be held by an 

FCM or DCO in municipal securities to 

10 percent. This is in addition to the 5 

percent limitation of total customer 

segregated funds that previously existed 

for the investment in the municipal 

securities of any individual issuer. 

The Commission has determined that 

the overall benefits of the concentration 

limitations for municipal securities and 

the resultant portfolio risk reductions— 

as compared to those without such 

limitations—are compelling, 

notwithstanding any related costs. 

(1) Protection of Market Participants and 

the Public 

The public has a strong interest in the 

stability of the nation’s financial system, 

a goal of the Dodd-Frank Act. The new 

asset-based concentration limitation for 

municipal securities will protect market 

participants and the public by limiting 

losses to customer segregated funds in 

the event of a crisis in the municipal 

bond markets. 

The Commission believes that such 

restrictions are appropriate and will 

benefit the public and market 

participants by safeguarding customer 

funds. 

(2) Efficiency, Competitiveness and 

Financial Integrity of the Markets 

The Commission believes that this 

rule promotes market efficiency, 

competitiveness and financial integrity 

in an important way. Imposing portfolio 

concentration limits lowers the risk of 

FCMs and DCOs suffering losses and/or 

being unable to liquidate assets to meet 

margin calls. This type of liquidity loss 

may operate to undermine market 

integrity and public confidence in the 

absence of this rule. While there may be 

some potential for ‘‘forced sale’’ losses 

for FCMs and DCOs on investments that 

may now be subject to restrictions, the 

Commission cannot gauge the 

magnitude and believes that it has taken 

measures appropriate to the 

circumstances to mitigate any potential 

costs. More specifically, the 

Commission is not in a position to 

know, with any precision, the portfolio 

holdings of FCMs and DCOs with 

respect to municipal securities, nor can 

the Commission predict the prevailing 

market conditions if FCMs and DCOs 

must sell municipal securities. 

Consequently, the Commission cannot 

quantify this cost. Further, as mentioned 

above, the Commission does not believe 

that FCMs or DCOs invest heavily in 

municipal securities, so ‘‘forced sales,’’ 

if necessary, should be of little impact. 

However, to reduce any potential 

impact, slight though it may be, the 

rules allow for a 180 day phase-in 

period, giving FCMs and DCOs ample 

time to adjust their portfolios to the 

extent necessary to comply with the 

regulations. Since municipal securities 

remain eligible investments for FCMs 

and DCOs and may be held either 

directly or indirectly through 

MMMFs,199 the Commission believes 

that any potential impact on municipal 

securities markets generally also should 

be mitigated. Accordingly, the 

Commission believes that the significant 

benefits of having portfolios less 

concentrated in municipal securities 

justify any cost, as mitigated under the 

rules. 

(3) Price Discovery 

The Commission has considered the 

restrictions on municipal securities and 

has determined that the final rules 

should not have an impact on price 

discovery. 

(4) Sound Risk Management Practices 

As previously noted, the rules 

enhance risk management practices by 

reducing vulnerability to municipal 

securities defaults by the introduction of 

additional investment restrictions in the 


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form of asset-based concentration limits. 

However, given that the list of permitted 

investments remains relatively 

unchanged and that there is believed to 

be little investment in municipal 

securities at this time, there should be 

little or no additional resources required 

to comply with the final rule and the 

existing risk management strategies and 

systems should be largely unaffected. 

(5) Other Public Interest Considerations 

The greatest potential impact of this 

rule on public interest considerations 

stem from the increased stability of the 

financial system as a whole. The 

inclusion of asset-based concentration 

limits for municipal securities 

contributes to financial stability by 

encouraging sound investment strategies 

for customer segregated funds. For 

FCMs and DCOs, the expenses 

associated with managing within these 

limitations and the potential for reduced 

investment return opportunities are 

costs. As discussed above, municipal 

securities are not a widely used 

investment, however. Further, as a 

general matter, FCMs and DCOs still 

have a great deal of flexibility and the 

Commission believes that any added 

expense associated with a more active 

management of the investment 

portfolios should be minor relative to 

the benefits fostered. 

U.S. Agency Obligations 

U.S. agency obligations will continue 

to be permitted investments pursuant to 

the Commission’s authority under 

Section 4(c), subject to certain 

restrictions under the rules. In addition 

to the existing 25 percent limitation on 

the securities of any single U.S. agency 

being held with customer segregated 

funds, the new rules limit this asset 

class in aggregate to 50 percent of the 

total customer segregated funds held by 

the FCM or DCO. The rules also 

condition investment in debt issued by 

Fannie Mae and Freddie Mac only while 

these entities are operating under the 

conservatorship or receivership of the 

FHFA. 

(1) Protection of Market Participants and 

the Public 

In response to concerns regarding the 

safety of GSE debt securities, 

highlighted by the 2008 failures of both 

Fannie Mae and Freddie Mac, these 

additional restrictions are designed to 

protect market participants and the 

public from the excessive risk that 

concentrated investment in these assets 

might present. The reduction of credit 

risk and the portfolio diversification 

requirements set forth by the 

amendment will provide greater 

security for customer funds, and 

ultimately to the FCMs and DCOs that 

rely on those funds. 

(2) Efficiency, Competitiveness and 

Financial Integrity of the Markets 

The Commission believes that this 

rule promotes market efficiency, 

competitiveness and financial integrity 

in an important way. Imposing portfolio 

concentration limits lowers the risk the 

risk of FCMs and DCOs suffering losses 

and/or being unable to liquidate assets 

to meet margin calls. This type of 

liquidity loss may operate to undermine 

market integrity and public confidence 

in the absence of this rule. 

While there may be some potential for 

‘‘forced sale’’ losses for FCMs and DCOs 

on investments that may now be subject 

to restrictions, the Commission cannot 

gauge the magnitude and believes that it 

has taken measures appropriate to the 

circumstances to mitigate any potential 

costs. More specifically, the 

Commission is not in a position to 

know, with any precision, the portfolio 

holdings of FCMs and DCOs with 

respect to U.S. agency obligations, nor 

can the Commission predict the 

prevailing market conditions if FCMs 

and DCOs must sell U.S. agency 

obligations. Consequently, the 

Commission cannot quantify this cost. 

However, to reduce any potential cost, 

the rules contemplate a 180 day 

implementation period, giving FCMs 

and DCOs ample time to liquidate 

portfolios to the extent necessary to 

comply with the regulations. Since 

investments in U.S. agency obligations 

remain available for indirect investment 

through MMMFs, the Commission 

believes any impact on the markets for 

U.S. agency obligations generally also 

should be mitigated. Accordingly, the 

Commission believes that the significant 

potential benefits of having portfolios 

less concentrated in U.S. agency 

obligations justify any cost, as mitigated 

under the rules. 

(3) Price Discovery 

The Commission has considered the 

restrictions on U.S. agency obligations 

and has determined that the final rules 

should not have an impact on price 

discovery. 

(4) Sound Risk Management Procedures 

The greatest costs relative to sound 

risk management procedures have been 

mentioned previously. The introduction 

of additional investment restrictions for 

U.S. agency obligations in the form of 

asset-based and issuer-based 

concentration limits may require FCMs 

and DCOs to enhance their investment 

management and portfolio monitoring 

resources. However, given that 

investments in U.S. agency 

obligations—including GSE debt 

securities—are currently permitted, the 

risk management strategies and systems 

should largely be in place already. 

The Commission continues to believe 

that the overall benefits of the 

restrictions and concentration limits on 

U.S. agency obligations, as compared to 

those based on a regulatory standard 

without such limitations, are 

compelling, notwithstanding attendant 

costs of the restrictions and 

concentration limits. By limiting the 

concentration of an FCM’s or DCO’s 

investment in U.S. agency obligations, 

the Commission is encouraging a 

diverse portfolio that is more likely to 

withstand a crisis in the GSE debt 

securities market or a failure of one or 

more GSEs. 

(5) Other Public Interest Considerations 

The greatest potential effect of this 

rule on public interest considerations 

stem from the implications of these 

rules on the overall stability of the 

financial system. The inclusion of assetbased and issuer-based limits on U.S. 

agency obligations contributes to 

financial stability by reducing 

concentration risk for funds held in 

customer segregated accounts. For FCMs 

and DCOs, the expenses associated with 

administration and the potential for lost 

upside investment opportunities are 

costs. However, as discussed above, 

notwithstanding the limitations on U.S. 

agency obligations, FCMs and DCOs still 

have a great deal of flexibility to invest 

in such instruments and the added 

expense associated with a more active 

management of the investment 

portfolios should be minor relative to 

the benefits fostered. 

Certificates of Deposit 

CDs will continue to be permitted 

investments pursuant to the 

Commission’s authority under Section 

4(c), subject to certain restrictions under 

the rules. In addition to the current 

issuer-based limitation of 5 percent, the 

new rules impose a 25 percent assetbased limitation. The rules also 

condition investment in CDs to those 

that are redeemable at the issuing bank 

within one day, or are brokered CDs that 

have embedded put options. 

(1) Protection of Market Participants and 

the Public 

This rulemaking continues to allow 

CDs as a permitted investment for FCMs 

and DCOs while ensuring that such 

instruments adequately preserve the 

customers’ principal and maintain 

liquidity. The costs of this rulemaking 


emcdonald on DSK5VPTVN1PROD with RULES2
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include the administrative costs of 

moving from non-permitted CDs to 

permitted CDs (or other permitted 

investments) and potential lost upside 

investment opportunities from the 

inability to invest in non-permitted CDs. 

The Commission is unable to determine 

the reduction in income, if any, because 

it does not know the composition of the 

portfolio in which customer segregated 

funds are invested. The Commission 

believes that there is a strong benefit in 

creating a framework for CDs in which 

such instruments must be able to be 

redeemed, within one business day, at 

the issuing bank, however. The 

Commission believes that any cost 

brought about by this amendment is 

justified by a more diversified risk 

structure as a result of concentration 

limits. Further, given the availability of 

indirect investment in CDs generally 

through MMMFs, any income loss 

resulting from these limitations should 

be minor. 

Like other asset types, FCMs and 

DCOs may need additional resources 

and expertise, and incur the related 

expense, to manage a portfolio subject to 

the percentage limitations of the rules 

with regard to asset-type and issuer. 

With sizeable allowances for MMMFs, 

FCMs and DCOs will be able to continue 

to leverage the expertise of fund 

managers and access indirect 

investment in otherwise restricted asset 

types. 

(2) Efficiency, Competitiveness and 

Financial Integrity of the Markets 

The Commission believes that this 

rule promotes financial integrity in an 

important way. Imposing portfolio 

concentration limits lowers the risk of 

FCMs and DCOs suffering losses and/or 

being unable to liquidate assets to meet 

margin calls. This type of liquidity loss 

may operate to undermine market 

integrity and public confidence in the 

absence of this rule. 

While there may be some potential for 

‘‘forced sale’’ losses for FCMs and DCOs 

on CDs now subject to restrictions, the 

Commission cannot gauge the 

magnitude and believes that it has taken 

measures appropriate to the 

circumstances to mitigate any potential 

costs. More specifically, the 

Commission is not in a position to 

know, with any precision, the portfolio 

holdings of FCMs and DCOs with 

respect to CDs, nor can the Commission 

predict the prevailing market conditions 

if FCMs and DCOs must sell CDs. 

Consequently, the Commission cannot 

quantify this cost. However, to reduce 

any potential cost, the rules contemplate 

a 180 day implementation period, giving 

FCMs and DCOs ample time to liquidate 

portfolios to the extent necessary to 

comply with the regulations. Since CDs 

remain eligible investments for FCMs 

and DCOs and may be held either 

directly or indirectly through MMMFs, 

the Commission believes that any 

potential impact on CD markets 

generally also should be mitigated. 

Accordingly, the Commission believes 

that the significant potential benefits of 

having portfolios less concentrated in 

CDs justify any cost, as mitigated under 

the rules. 

(3) Price Discovery 

The Commission has reviewed the 

restrictions on CDs and determined that 

the final rules should not have an 

impact on price discovery. 

(4) Sound Risk Management Procedures 

The greatest costs relative to sound 

risk management procedures have been 

mentioned previously. The introduction 

of additional investment restrictions to 

CDs in the form of asset-based 

concentration limits may require FCMs 

and DCOs to enhance their investment 

management and portfolio monitoring 

resources. However, the risk 

management strategies and systems 

should largely be in place already. 

The Commission believes that the 

overall benefits of the concentration 

limitations and other restrictions on CDs 

and the resultant reductions in risk to 

portfolios, as compared to those based 

on a regulatory framework without such 

limitations, mitigate the costs. 

(5) Other Public Interest Considerations 

The greatest potential impact of this 

rule on public interest considerations 

stem from the implications of these 

rules on the stability of the financial 

system as a whole. The inclusion of 

asset-based limitations on CDs, as well 

as the restriction that all CDs must be 

redeemable at the issuing bank, 

contributes to financial stability by 

reducing concentration risk for funds 

held in customer segregated accounts. 

For FCMs and DCOs, the expenses 

associated with managing to these 

limitations on CDs and the potential for 

reduced upside investment return on 

CD investments are costs. However, as 

discussed above, notwithstanding these 

limitations, FCMs and DCOs may still 

invest directly in CDs and may invest 

indirectly through MMMFs. The added 

expense associated with a more active 

management of the investment 

portfolios should be minor relative to 

the benefits fostered. 

Commercial Paper and Corporate Debt 

Some commercial paper and 

corporate notes or bonds will continue 

to be permitted investments pursuant to 

the Commission’s authority under 

Section 4(c), subject to certain 

restrictions under the rules. In addition 

to the existing 5 percent limitation on 

the securities of any single issuer of 

such instruments being held with 

customer segregated funds, the new 

rules limit these asset classes in 

aggregate to 25 percent, respectively, of 

the total customer segregated assets held 

by the FCM or DCO. The rules also 

restrict investment in commercial paper 

and corporate notes or bonds to those 

that are federally guaranteed as to 

principal and interest under the TLGP. 

(1) Protection of Market Participants and 

the Public 

The lack of liquidity that impacted 

these markets during the recent 

financial crisis, and which necessitated 

the federal guarantee under TLGP, 

highlights the concerns of permitting 

FCMs and DCOs unrestricted 

investment of customer funds in these 

assets. The limits imposed by this rule 

will protect customer funds from being 

invested in concentrated pools of 

unrated commercial paper and 

corporate notes or bonds. While the 

requirement that these instruments be 

guaranteed by TLGP may, in effect, 

severely limit investment in these 

instruments by FCMs and DCOs, the 

actual costs of this limitation for FCMs 

and DCOs are unclear, given that there 

is little data evidencing the extent of 

their use as an investment option, and 

the fact that indirect investment is still 

permitted through the use of MMMFs. 

Like other asset types, FCMs and 

DCOs may need additional resources 

and expertise, and incur the related 

expense, to manage a portfolio of TLGP 

corporate notes or bonds and/or 

commercial paper subject to the 

percentage limitations of the rules and 

the TLGP restrictions. With sizeable 

allowances for MMMFs, FCMs and 

DCOs will be able to continue to 

leverage the expertise of fund managers 

and access indirect investment in 

otherwise restricted asset types. 

(2) Efficiency, Competitiveness and 

Financial Integrity of the Markets 

The Commission believes that this 

rule promotes financial integrity in an 

important way. Imposing portfolio 

concentration limits lowers the risk of 

FCMs and DCOs suffering losses and/or 

being unable to liquidate assets to meet 

margin calls. This type of liquidity loss 

may operate to undermine market 

integrity and public confidence in the 

absence of this rule. 

While there may be some potential for 

‘‘forced sale’’ losses for FCMs and DCOs 


emcdonald on DSK5VPTVN1PROD with RULES2
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on commercial paper and corporate debt 

now subject to restrictions, the 

Commission cannot gauge the 

magnitude and believes that it has taken 

measures appropriate to the 

circumstances to mitigate any potential 

costs. More specifically, the 

Commission is not in a position to 

know, with any precision, the portfolio 

holdings of FCMs and DCOs with 

respect to commercial paper and 

corporate debt, nor can the Commission 

predict the prevailing market conditions 

if FCMs and DCOs must sell commercial 

paper and corporate debt. Consequently, 

the Commission cannot quantify this 

cost. However, to reduce any potential 

cost, the rules contemplate a 180 day 

implementation period, giving FCMs 

and DCOs ample time to liquidate 

portfolios to the extent necessary to 

comply with the regulations. Since 

investments in commercial paper and 

corporate debt remain available for 

indirect investment through MMMFs, 

the Commission believes any impact on 

commercial paper and corporate debt 

markets also should be mitigated. 

Accordingly, the Commission believes 

that the significant potential benefits of 

having portfolios less concentrated in 

commercial paper and corporate debt 

justify any cost, as mitigated under the 

rule. 

(3) Price Discovery 

The Commission has reviewed the 

restrictions on commercial paper and 

corporate notes or bonds and 

determined that the final rules should 

not have an impact on price discovery. 

(4) Sound Risk Management Procedures 

The greatest costs relative to sound 

risk management procedures have been 

mentioned previously. The introduction 

of additional investment restrictions in 

the form of asset-based concentration 

limits and the TLGP restriction may 

require FCMs and DCOs to enhance 

their investment management and 

portfolio monitoring resources. 

However, the risk management 

strategies and systems should largely be 

in place already. 

The Commission believes that the 

overall benefits of the concentration 

limits and TLGP restrictions on 

commercial paper and corporate notes 

or bonds, and the resultant reductions 

in risk to portfolios, as compared to 

those based on a regulatory framework 

without such limitations, are 

compelling, notwithstanding attendant 

costs of the restrictions and 

concentration limits. By adding 

restrictions and increasing 

diversification through concentration 

limits, customer segregated funds 

should be better protected in the event 

of a crisis in the broader financial 

market. 

(5) Other Public Interest Considerations 

The greatest potential impact of this 

rule on public interest considerations 

stem from the implications of these 

rules for the stability of the financial 

system as a whole. The inclusion of 

asset-based limits on commercial paper 

and corporate notes or bonds, as well as 

the exclusion of corporate instruments 

that are not guaranteed by the TLGP, 

will contribute to financial stability by 

increasing the safety of funds in 

customer segregated accounts. For FCMs 

and DCOs, the expenses associated with 

managing these limitations and the 

potential for reduced upside investment 

opportunities are costs. However, as 

discussed above, notwithstanding the 

limitations on commercial paper and 

corporate notes or bonds, FCMs and 

DCOs still have a great deal of flexibility 

and the added expense associated with 

a more active management of the 

investment portfolios should be minor 

relative to the benefits fostered. 

Foreign Sovereign Debt 

Foreign sovereign debt is eliminated 

as a permitted investment in this 

rulemaking. However, the Commission 

invites FCMs or DCOs to request an 

exemption pursuant to the 

Commission’s authority under Section 

4(c), allowing them to invest in foreign 

sovereign debt: (1) To the extent that the 

FCM or DCO has balances in segregated 

accounts owed to its customers (or 

clearing member FCMs, as the case may 

be) in that country’s currency; and (2) to 

the extent that investment in such 

foreign sovereign debt would serve to 

preserve principal and maintain 

liquidity of customer funds, as required 

by Regulation 1.25. Upon an appropriate 

demonstration, the Commission has 

noted that it may be amenable to 

granting such an exemption. 

(1) Protection of Market Participants and 

the Public 

The recent sovereign debt crises 

highlight the concerns of permitting 

FCMs and DCOs to invest customer 

funds in foreign sovereign debt. The 

restriction of this investment class will 

protect customer funds from being 

invested in risky or illiquid foreign 

sovereign debt. While this rule 

eliminates investment in these 

instruments by FCMs and DCOs, the 

actual costs of this restriction on FCMs 

and DCOs are unquantifiable, in large 

part because the extent to which DCOs 

invest in foreign sovereign debt is 

uncertain. 

Certain commenters argued that 

investment in foreign sovereign debt is 

necessary to hedge currency risk, and a 

prohibition on doing so may be costly. 

While the Commission recognizes that 

the restriction may impose costs, such 

costs are mitigated by the ability of an 

entity to seek an exemption from the 

Commission. Further, in a scenario 

where a market event has caused a 

currency devaluation and/or the 

illiquidity of a country’s sovereign debt, 

the Commission believes that 

customers’ best interests are served by 

an FCM holding a devalued currency, 

which (albeit devalued) can be 

delivered immediately to the customer 

as opposed to an illiquid foreign 

sovereign debt issuance, which may not 

be able to be exchanged for any 

currency in a reasonably short 

timeframe. 

(2) Efficiency, Competitiveness and 

Financial Integrity of the Markets 

The Commission believes that this 

rule promotes financial integrity in an 

important way. Eliminating 

unpredictable and potentially risky 

instruments lowers the risk of FCMs and 

DCOs suffering losses and/or being 

unable to liquidate assets to meet 

margin calls. This type of liquidity loss 

may operate to undermine market 

integrity and public confidence in the 

absence of this rule. 

While there may be some potential for 

‘‘forced sale’’ losses for FCMs and DCOs 

on foreign sovereign debt now 

prohibited, the Commission cannot 

quantify any such losses and believes 

that through the exemption process 

under Section 4(c), it has mitigated any 

such potential costs. Moreover, the 

Commission is not in a position to 

know, with any precision, the portfolio 

holdings of FCMs and DCOs with 

respect to foreign sovereign debt, nor 

can the Commission predict the 

prevailing market conditions if FCMs 

and DCOs must sell such instruments. 

Consequently, the Commission cannot 

quantify this cost. However, to mitigate 

any such potential cost, the rules 

contemplate a 180-day implementation 

period, giving FCMs and DCOs ample 

time to liquidate portfolios to the extent 

necessary to comply with the 

regulations and/or allowing FCMs and 

DCOs the opportunity to request an 

exemption. 

(3) Price Discovery 

The Commission does not believe that 

the restrictions on foreign sovereign 

debt will have an impact on price 

discovery. 


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200President’s Working Group on Financial 

Markets, Money Market Fund Reform Options, at 

16–18 (2010). The full report may be accessed at 

http://www.treasury.gov/press-center/pressreleases/Documents/10.21%20PWG%20Report%20

Final.pdf. 

(4) Sound Risk Management Procedures 

The restriction on foreign sovereign 

debt is intended to require an FCM or 

DCO to protect against currency 

exposure in a way that fosters sound 

risk management, particularly the 

protection of customer funds. 

(5) Other Public Interest Considerations 

The prohibition on investment in 

foreign sovereign debt will contribute to 

financial stability by increasing the 

safety of funds in customer segregated 

accounts. For FCMs and DCOs, any 

expense associated with the elimination 

of foreign sovereign debt is a cost. 

However, as discussed above, 

notwithstanding the elimination of this 

investment class, the Commission 

believes that the benefits to the public 

and market participants of this 

provision of the rule are significant. 

Money Market Mutual Funds 

MMMF investments will continue to 

be permitted pursuant to the 

Commission’s authority under Section 

4(c), albeit with some restrictions. First, 

an FCM or DCO may invest all of its 

customer segregated funds in Treasuryonly MMMFs, but for all other MMMFs, 

as discussed below, the Commission 

believes that a 50 percent asset-based 

concentration is appropriate. In 

addition, an FCM or DCO may invest up 

to 10 percent of its assets in segregation 

in funds that do not have both $1 billion 

in assets and a management company 

that has at least $25 billion in MMMF 

assets under management (small 

MMMFs), while, subject to the caveats 

described above, an FCM or DCO may 

invest up to 50 percent of its assets in 

segregation in funds that do (large 

MMMFs). 

In arriving at these concentration 

limits, in addition to its own staff 

research, the Commission took into 

consideration information presented in 

meetings with the market participants, 

comment letters and discussions with 

other regulators. The Commission 

decided to allow investment without 

asset- or issuer-based limitations for 

Treasury-only MMMFs due to the fact 

that Regulation 1.25 allows direct 

investments entirely in Treasuries. 

Indirect investment in Treasuries via a 

Treasury-only MMMF is essentially the 

risk equivalent of a direct investment in 

Treasuries, while allowing an FCM or 

DCO the administrative ease of 

delegating the management of its 

portfolio to a MMMF. The Commission 

decided upon a 50 percent asset-based 

concentration limit for large prime 

MMMFs, as it remains concerned that, 

in another crisis, a run on a prime 

MMMF may threaten both the liquidity 

and principal of customer segregated 

funds. After weighing the information 

described above, the Commission 

determined that a 50 percent asset-based 

limitation struck the right balance 

between providing FCMs and DCOs 

with sufficient Regulation 1.25 

investment options and, at the same 

time, encouraging adequate portfolio 

diversification. The issuer-based 

limitation reflects the view that the 

Commission seeks to protect FCMs and 

DCOs from runs on particular funds and 

families of funds. As a necessary 

corollary for increasing the asset-based 

concentration limits, the Commission 

decided to implement the fund and 

fund family size requirements in order 

to ensure that MMMFs invested in 

heavily by FCMs and DCOs were large 

enough to handle a high volume of 

redemption requests while still allowing 

for limited investment in small 

MMMFs. 

Finally, the Commission notes that 

these restrictions are such that an FCM 

could invest all of its customer funds in 

MMMFs, by, as examples, investing 

entirely in a large Treasury-only MMMF 

or by investing 50 percent of its funds 

in large prime MMMFs (spread out 

among five individual funds and three 

fund families) and 50 percent in a large 

Treasury-only MMMF. The Commission 

believes that this should alleviate the 

concerns of FCMs that expressed, in 

their comment letters, a reluctance to 

manage their own portfolios and instead 

wished to delegate those responsibilities 

entirely to fund managers. 

(1) Protection of Market Participants and 

the Public 

The recent financial crisis exposed 

the risks attendant to MMMFs—in 

particular, their susceptibility to runs. 

Though only one fund broke the buck, 

many others were supported by their 

sponsors and/or affiliates during the 

crisis. In response, the SEC has made a 

number of changes to Rule 2a–7 to 

address the risks inherent in MMMFs. 

The changes are aimed at reducing the 

perceived credit and liquidity risks of 

the MMMFs’ underlying portfolios. 

However, as the President’s Working 

Group on Financial Markets has noted, 

systemic risks remain in the MMMF 

market, notwithstanding the SEC’s 

recent reforms.200 Absent further 

changes in the way MMMF shares are 

valued, redeemed and/or supported 

through private or public sector 

guarantees, future runs on MMMFs 

cannot be ruled out. 

The minimum $1 billion asset 

requirement for individual fund and $25 

billion asset requirement for family of 

funds of large MMMFs are designed to 

ensure that customer funds are typically 

invested in sufficiently large funds with 

diversified portfolios of holdings that 

are better positioned to withstand 

unexpected redemptions requests. 

Limited investment in small MMMFs 

was retained from the NPRM in order to 

provide flexibility for FCMs and DCOs 

and to promote diversification. The new 

asset-based concentration limitations for 

non-Treasury MMMFs in aggregate, by 

family and by individual fund will 

provide additional protection for 

customer segregated funds in the event 

of both runs on MMMFs generally, and 

more targeted runs that may affect a 

specific family of funds or an individual 

fund. The portfolio diversification 

requirements set forth by the 

amendment will provide greater 

security for customer funds, and 

ultimately to the FCMs and DCOs that 

rely on those funds. 

Individual FCMs and DCOs may need 

additional resources and expertise, and 

incur the related expense, to manage a 

portfolio subject to the percentage 

limitations of the rules with regard to 

asset-type, issuer and size. However, 

with sizeable allowances for MMMFs, 

FCMs and DCOs will be able to continue 

to leverage the expertise of fund 

managers. The Commission notes that 

under this rule, an FCM or DCO is able 

to invest all of their customer segregated 

funds in one or more MMMFs. 

Therefore, FCMs or DCOs not wishing to 

manage their portfolios may delegate 

entirely to MMMF managers. 

(2) Efficiency, Competitiveness and 

Financial Integrity of the Markets 

The Commission believes that this 

rule promotes financial integrity in an 

important way. Imposing portfolio 

concentration limits lowers the risk of 

FCMs and DCOs suffering losses and/or 

being unable to liquidate assets to meet 

margin calls. This type of liquidity loss 

may operate to undermine market 

integrity and public confidence in the 

absence of this rule. 

While there may be some potential for 

‘‘forced sale’’ losses for FCMs and DCOs 

on MMMFs that are above the 

concentration limits or not meet the 

asset requirements, the Commission 

cannot gauge the magnitude and 

believes that it has taken measures 

appropriate to the circumstances to 

mitigate any potential costs. More 

specifically, the Commission is not in a 


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position to know, with any precision, 

the portfolio holdings of FCMs and 

DCOs with respect to MMMFs, nor can 

the Commission predict the prevailing 

market conditions if FCMs and DCOs 

must sell MMMFs. Consequently, the 

Commission cannot quantify this cost. 

However, to reduce any potential cost, 

the rules contemplate a 180 day 

implementation period, giving FCMs 

and DCOs ample time to liquidate 

portfolios to the extent necessary to 

comply with the regulations. Since 

investments in MMMFs remain 

available, the Commission believes any 

impact on MMMF markets generally 

also should be mitigated. Accordingly, 

the Commission believes that the 

significant potential benefits of having 

portfolios less concentrated in a small 

number of MMMFs justify any cost, as 

mitigated under the rules. 

(3) Price Discovery 

The final rules should not have an 

impact on price discovery. 

(4) Sound Risk Management Procedures 

The greatest costs relative to sound 

risk management procedures have been 

mentioned previously. The introduction 

of additional investment restrictions on 

MMMFs in the form of asset-based and 

issuer-based concentration limits may 

require FCMs and DCOs to enhance 

their investment management and 

portfolio monitoring resources. 

However, to the extent that FCMs and 

DCOs had invested in MMMFs 

previously, the risk management 

strategies and systems should largely be 

in place already. 

(5) Other Public Interest Considerations 

The greatest potential benefit of this 

rule on public interest considerations 

stem from the implications of these 

rules on the stability of the financial 

system as a whole. The inclusion of 

asset-based concentration limitations on 

non-Treasury MMMFs, placing 

limitations on families of funds and on 

individual funds, and allowing only 

limited investment in funds not meeting 

certain asset limits contributes to 

financial stability by promoting the 

diversification of investment for funds 

held in customer segregated accounts. 

For FCMs and DCOs, the expenses 

associated with managing their MMMF 

investments and the potential for lost 

upside investment opportunities are 

costs. However, as discussed above, 

notwithstanding the limitations on the 

permitted investments, FCMs and DCOs 

may still invest all customer segregated 

funds in a portfolio of MMMFs, and the 

added expense associated with a more 

active management of the MMMF 

portfolio should be minor. 

Other Investment Limitations 

The final rules also include other 

limitations and restrictions on those 

investments that are permitted for 

customer segregated funds by FCMs and 

DCOs, including the elimination of inhouse transactions and repurchase 

agreements with affiliates as well as a 25 

percent counterparty concentration 

limit on repurchase agreements. 

(1) Protection of Market Participants and 

the Public 

As stated above, the guiding 

investment principle for customer funds 

is that investments are liquid and 

preserve principal. The lessons of the 

recent financial crisis highlighted the 

contagion that can occur in the financial 

markets from a single failure or default. 

As such, the new rules are designed to 

broadly spread counterparty risk, such 

that customer funds are protected and 

may be liquidated quickly, 

notwithstanding select failures in the 

marketplace. In-house transactions and 

repurchase agreements with affiliates 

have been eliminated due to the 

conflicts of interest that can arise during 

periods of crisis, the concentration risk 

associated with engaging in such 

transactions within an FCM-broker 

dealer entity (in the case of an in-house 

transaction) and within an affiliate 

structure (in the case of a repurchase 

agreements with affiliates), among other 

reasons. The 25 percent counterpartyconcentration limit has been introduced 

to ensure that an FCM or DCO does not 

have all of its customer funds subject to 

the risk profile of a single counterparty. 

(2) Efficiency, Competitiveness and 

Financial Integrity of the Markets 

The Commission believes that these 

additional limitations promote financial 

integrity in an important way. By 

broadly spreading counterparty risk and 

enhancing customer fund protections 

and liquidity, the risk of FCMs and 

DCOs suffering losses and/or being 

unable to liquidate assets to meet 

margin calls is decreased. This type of 

liquidity loss may operate to undermine 

market integrity and public confidence 

in the absence of this rule. 

Moreover, to the extent there are 

potential costs noted below, offsetting 

benefits justify them. Any decrease in 

efficiency resulting from the elimination 

of in-house transactions and repurchase 

agreements with affiliates need be 

considered in light of the benefits of the 

increased certainty of arms-length 

transactions between two legally 

distinct, unaffiliated parties. And, a 

crucial benefit offsets the administrative 

costs associated with having five 

counterparties rather than one: Reduced 

counterparty risk. 

(3) Price Discovery 

The final rules should not have an 

impact on price discovery. 

(4) Sound Risk Management Procedures 

There may be additional expense 

associated with the on-boarding and risk 

managing additional counterparties, but 

the scale of this additional burden does 

not appear large and is justified by the 

benefits of improved counterparty 

concentration limits. 

(5) Other Public Interest Considerations 

The greatest potential impact of this 

rule on public interest considerations 

stem from the increased stability of the 

financial system as a whole. The 

inclusion of counterparty concentration 

limits, in particular, contributes to 

financial stability by reducing risk for 

funds held in customer segregated 

accounts. 

Regulation 30.7 

The Commission has decided to 

harmonize Regulation 30.7 with the 

investment limitations of Regulation 

1.25. The Commission had not 

previously restricted investments of 

30.7 funds to the permitted investments 

under Regulation 1.25. The Commission 

now believes that it is appropriate to 

align the investment standards given the 

similar prudential concerns that arise 

with respect to both segregated 

customer funds and 30.7 funds. The 

Commission has also removed the credit 

ratings requirements for depositories of 

30.7 funds and eliminated the option of 

customers to designate, with the 

permission of the Commission, a 

depository not otherwise meeting the 

standards to be a depository of 30.7 

funds. 

(1) Protection of Market Participants and 

the Public 

The public has a strong interest in the 

stability of the nation’s financial system, 

a goal of the Dodd-Frank Act. Applying 

Regulation 1.25 standards to 30.7 funds 

will better insulate them against the 

negative shocks of future financial 

crises, thereby enhancing protection to 

market participants and the public. 

Also, no benefit justifies applying a 

different standard for 30.7 funds than 

for segregated customer funds. FCMs 

and DCOs traditionally have used 

Regulation 1.25 as a safe harbor for 30.7 

funds; accordingly, there is no basis to 

anticipate material additional expense 


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201 5 U.S.C. 601 et seq. 

202 47 FR 18618 (Apr. 30, 1982). 

203 Id. at 18619. 

204 66 FR 45604, 45609 (Aug. 29, 2001). 

as a result of extending these 

requirements to 30.7 funds. 

The removal of credit ratings from 

Regulation 30.7 was necessitated by 

Section 939A of the Dodd-Frank Act 

and is in line with the Commission’s 

removal of credit ratings under 

Regulation 1.25. The removal of the 

designation option for depositories 

stemmed from the fact that the 

Commission had never entertained such 

a request and from the belief that a 

depository should meet the capital 

requirements for depositories in order to 

hold 30.7 funds. 

(2) Efficiency, Competitiveness and 

Financial Integrity of the Markets 

The investments made with 30.7 

funds generally have been similar to 

those made under Regulation 1.25. 

Accordingly, the Commission believes 

that harmonization of Regulation 30.7 

with Regulation 1.25 promotes financial 

integrity in the same important ways 

and relative to less significant cost as 

discussed in the above. Specifically, 

imposition of the restrictions discussed 

above with respect to Regulation 1.25 

asset classes lowers the risk of FCMs 

and DCOs suffering losses and/or being 

unable to liquidate assets to meet 

margin calls. This type of liquidity loss 

may operate to undermine market 

integrity and public confidence in the 

absence of this rule. 

The Commission does not expect the 

removal of credit ratings to have a 

significant impact on choice of 

depositories for 30.7 funds. The 

Commission expects the elimination of 

the designation option to have no 

impact, since it has never been used. 

(3) Price Discovery 

The final rules regarding Regulation 

30.7 should not have an impact on price 

discovery. 

(4) Sound Risk Management Procedures 

As mentioned above, most FCMs and 

DCOs have used Regulation 1.25 as a 

safe harbor for 30.7 funds. As such, the 

incremental costs associated with 

applying the additional investment 

restrictions in the form of asset-based 

and issuer-based concentration limits 

should not be substantial. The risk 

management strategies and systems 

should largely be in place already, and 

will now be applied to 30.7 funds. 

The Commission believes that the 

overall benefits of applying Regulation 

1.25 standards to 30.7 funds, as 

compared to those based on a regulatory 

framework without such limitations, 

justify the less significant costs. By 

adding restrictions and increasing 

diversification through concentration 

limits, 30.7 funds should be better 

protected in the event of a crisis in the 

broader financial market. The removal 

of credit ratings for depositories and the 

removal of the designation option 

should not have a significant impact on 

risk management practices because 

depositories must still meet the capital 

requirements in order to qualify under 

Regulation 30.7 and, as mentioned, no 

depositories have ever qualified through 

designation. The only cost associated 

with the former would be the 

administrative cost of moving funds 

from one depository to another, in the 

event that a previously qualifying 

depository now no longer qualifies. 

(5) Other Public Interest Considerations 

The greatest potential impact of this 

rule on public interest considerations 

stem from the implications of these 

rules for the stability of the financial 

system as a whole. The application of 

Regulation 1.25 standards to 30.7 funds 

will contribute to financial stability by 

reducing concentration risk for 30.7 

funds. For FCMs and DCOs, the 

expenses associated with managing 

these limitations and the potential for 

lost upside investment opportunities are 

costs. However, as discussed above, the 

added expense associated with a more 

active management of the investment 

portfolios should be minor. 

IV. Related Matters 

A. Regulatory Flexibility Act 

The Regulatory Flexibility Act 

(RFA) 201 requires federal agencies, in 

promulgating rules, to consider the 

impact of those rules on small 

businesses. The rule amendments 

contained herein will affect FCMs and 

DCOs. The Commission has previously 

established certain definitions of ‘‘small 

entities’’ to be used by the Commission 

in evaluating the impact of its rules on 

small entities in accordance with the 

RFA.202 The Commission has previously 

determined that registered FCMs 203 and 

DCOs 204 are not small entities for the 

purpose of the RFA. Accordingly, 

pursuant to 5 U.S.C. 605(b), the 

Chairman, on behalf of the Commission, 

certifies that the final rules will not 

have a significant economic impact on 

a substantial number of small entities. 

B. Paperwork Reduction Act 

The Paperwork Reduction Act of 1995 

(PRA) imposes certain requirements on 

federal agencies (including the 

Commission) in connection with their 

conducting or sponsoring any collection 

of information as defined by the PRA. 

The final rules do not require a new 

collection of information on the part of 

any entities subject to the rule 

amendments. Accordingly, for purposes 

of the PRA, the Commission certifies 

that these rule amendments, 

promulgated in final form, do not 

impose any new reporting or 

recordkeeping requirements. 

Lists of Subjects 

17 CFR Part 1 

Brokers, Commodity futures, 

Consumer protection, Reporting and 

recordkeeping requirements. 

17 CFR Part 30 

Commodity futures, Consumer 

protection, Currency, Reporting and 

recordkeeping requirements. 

In consideration of the foregoing and 

pursuant to the authority contained in 

the Commodity Exchange Act, in 

particular, Sections 4d, 4(c), and 8a(5) 

thereof, 7 U.S.C. 6d, 6(c) and 12a(5), 

respectively, the Commission hereby 

amends Chapter I of Title 17 of the Code 

of Federal Regulations as follows: 

PART 1—GENERAL REGULATIONS 

UNDER THE COMMODITY EXCHANGE 

ACT 

■ 1. The authority citation for part 1 is 

revised to read as follows: 

Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 

6d, 6e, 6f, 6g, 6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, 

6p, 7, 7a, 7b, 8, 9, 12, 12a, 12c, 13a, 13a–1, 

16, 16a, 19, 21, 23, and 24, as amended by 

the Dodd-Frank Wall Street Reform and 

Consumer Protection Act, Pub. L. 111–203, 

124 Stat. 1376 (2010). 

■ 2. Section 1.25 is revised to read as 

follows: 

§ 1.25 Investment of customer funds. 

(a) Permitted investments. (1) Subject 

to the terms and conditions set forth in 

this section, a futures commission 

merchant or a derivatives clearing 

organization may invest customer 

money in the following instruments 

(permitted investments): 

(i) Obligations of the United States 

and obligations fully guaranteed as to 

principal and interest by the United 

States (U.S. government securities); 

(ii) General obligations of any State or 

of any political subdivision thereof 

(municipal securities); 

(iii) Obligations of any United States 

government corporation or enterprise 

sponsored by the United States 

government (U.S. agency obligations); 

(iv) Certificates of deposit issued by a 

bank (certificates of deposit) as defined 


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in section 3(a)(6) of the Securities 

Exchange Act of 1934, or a domestic 

branch of a foreign bank that carries 

deposits insured by the Federal Deposit 

Insurance Corporation; 

(v) Commercial paper fully 

guaranteed as to principal and interest 

by the United States under the 

Temporary Liquidity Guarantee Program 

as administered by the Federal Deposit 

Insurance Corporation (commercial 

paper); 

(vi) Corporate notes or bonds fully 

guaranteed as to principal and interest 

by the United States under the 

Temporary Liquidity Guarantee Program 

as administered by the Federal Deposit 

Insurance Corporation (corporate notes 

or bonds); and 

(vii) Interests in money market mutual 

funds. 

(2)(i) In addition, a futures 

commission merchant or derivatives 

clearing organization may buy and sell 

the permitted investments listed in 

paragraphs (a)(1)(i) through (vii) of this 

section pursuant to agreements for 

resale or repurchase of the instruments, 

in accordance with the provisions of 

paragraph (d) of this section. 

(ii) A futures commission merchant or 

a derivatives clearing organization may 

sell securities deposited by customers as 

margin pursuant to agreements to 

repurchase subject to the following: 

(A) Securities subject to such 

repurchase agreements must be ‘‘highly 

liquid’’ as defined in paragraph (b)(1) of 

this section. 

(B) Securities subject to such 

repurchase agreements must not be 

‘‘specifically identifiable property’’ as 

defined in § 190.01(kk) of this chapter. 

(C) The terms and conditions of such 

an agreement to repurchase must be in 

accordance with the provisions of 

paragraph (d) of this section. 

(D) Upon the default by a 

counterparty to a repurchase agreement, 

the futures commission merchant or 

derivatives clearing organization shall 

act promptly to ensure that the default 

does not result in any direct or indirect 

cost or expense to the customer. 

(3) Obligations issued by the Federal 

National Mortgage Association or the 

Federal Home Loan Mortgage 

Association are permitted while these 

entities operate under the 

conservatorship or receivership of the 

Federal Housing Finance Authority with 

capital support from the United States. 

(b) General terms and conditions. A 

futures commission merchant or a 

derivatives clearing organization is 

required to manage the permitted 

investments consistent with the 

objectives of preserving principal and 

maintaining liquidity and according to 

the following specific requirements: 

(1) Liquidity. Investments must be 

‘‘highly liquid’’ such that they have the 

ability to be converted into cash within 

one business day without material 

discount in value. 

(2) Restrictions on instrument 

features. (i) With the exception of 

money market mutual funds, no 

permitted investment may contain an 

embedded derivative of any kind, 

except as follows: 

(A) The issuer of an instrument 

otherwise permitted by this section may 

have an option to call, in whole or in 

part, at par, the principal amount of the 

instrument before its stated maturity 

date; or 

(B) An instrument that meets the 

requirements of paragraph (b)(2)(iv) of 

this section may provide for a cap, floor, 

or collar on the interest paid; provided, 

however, that the terms of such 

instrument obligate the issuer to repay 

the principal amount of the instrument 

at not less than par value upon maturity. 

(ii) No instrument may contain 

interest-only payment features. 

(iii) No instrument may provide 

payments linked to a commodity, 

currency, reference instrument, index, 

or benchmark except as provided in 

paragraph (b)(2)(iv) of this section, and 

it may not otherwise constitute a 

derivative instrument. 

(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 

one-month or three-month LIBOR 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 threemonth Treasury Bill rate, the one-month 

or three-month LIBOR rate, or the 

interest rate of any fixed rate instrument 

that is a permitted investment listed in 

paragraph (a)(1) of this section; 

(3) Benchmark rates must be 

expressed in the same currency as the 

adjustable rate securities that reference 

them; and 

(4) No interest payment on an 

adjustable rate security, in any period, 

can be a negative amount. 

(B) For purposes of this paragraph, the 

following definitions shall apply: 

(1) The term adjustable rate security 

means, a floating rate security, a 

variable rate security, or both. 

(2) The term floating rate security 

means a security, the terms of which 

provide for the adjustment of its interest 

rate whenever a specified interest rate 

changes and that, at any time until the 

final maturity of the instrument or the 

period remaining until the principal 

amount can be recovered through 

demand, can reasonably be expected to 

have market value that approximates its 

amortized cost. 

(3) The term variable rate security 

means a security, the terms of which 

provide for the adjustment of its interest 

rate on set dates (such as the last day of 

a month or calendar quarter) and that, 

upon each adjustment until the final 

maturity of the instrument or the period 

remaining until the principal amount 

can be recovered through demand, can 

reasonably be expected to have a market 

value that approximates its amortized 

cost. 

(v) Certificates of deposit must be 

redeemable at the issuing bank within 

one business day, with any penalty for 

early withdrawal limited to any accrued 

interest earned according to its written 

terms. 

(vi) Commercial paper and corporate 

notes or bonds must meet the following 

criteria: 

(A) The size of the issuance must be 

greater than $1 billion; 

(B) The instrument must be 

denominated in U.S. dollars; and 

(C) The instrument must be fully 

guaranteed as to principal and interest 

by the United States for its entire term. 

(3) Concentration—(i) Asset-based 

concentration limits for direct 

investments. (A) Investments in U.S. 

government securities shall not be 

subject to a concentration limit. 

(B) Investments in U.S. agency 

obligations may not exceed 50 percent 

of the total assets held in segregation by 

the futures commission merchant or 

derivatives clearing organization. 

(C) Investments in each of commercial 

paper, corporate notes or bonds and 

certificates of deposit may not exceed 25 

percent of the total assets held in 

segregation by the futures commission 

merchant or derivatives clearing 

organization. 

(D) Investments in municipal 

securities may not exceed 10 percent of 

the total assets held in segregation by 

the futures commission merchant or 

derivatives clearing organization. 

(E) Subject to paragraph (b)(3)(i)(G) of 

this section, investments in money 

market mutual funds comprising only 


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78800 Federal Register / Vol. 76, No. 243 / Monday, December 19, 2011 / Rules and Regulations 

U.S. government securities shall not be 

subject to a concentration limit. 

(F) Subject to paragraph (b)(3)(i)(G) of 

this section, investments in money 

market mutual funds, other than those 

described in paragraph (b)(3)(i)(E) of 

this section, may not exceed 50 percent 

of the total assets held in segregation by 

the futures commission merchant or 

derivatives clearing organization. 

(G) Investments in money market 

mutual funds comprising less than $1 

billion in assets and/or which have a 

management company comprising 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) Issuer-based concentration limits 

for direct investments. (A) Securities of 

any single issuer of U.S. agency 

obligations held by a futures 

commission merchant or derivatives 

clearing organization may not exceed 25 

percent of total assets held in 

segregation by the futures commission 

merchant or derivatives clearing 

organization. 

(B) Securities of any single issuer of 

municipal securities, certificates of 

deposit, commercial paper, or corporate 

notes or bonds held by a futures 

commission merchant or derivatives 

clearing organization may not exceed 

5 percent of total assets held in 

segregation by the futures commission 

merchant or derivatives clearing 

organization. 

(C) Interests in any single family of 

money market mutual funds described 

in paragraph (b)(3)(i)(F) of this section 

may not exceed 25 percent of total 

assets held in segregation by the futures 

commission merchant or derivatives 

clearing organization. 

(D) Interests in any individual money 

market mutual fund described in 

paragraph (b)(3)(i)(F) of this section may 

not exceed 10 percent of 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 money 

market mutual fund is not deemed to be 

a security issued by its sponsoring 

entity. 

(iii) Concentration limits for 

agreements to repurchase—(A) 

Repurchase agreements. For purposes of 

determining compliance with the assetbased and issuer-based concentration 

limits set forth in this section, securities 

sold by a futures commission merchant 

or derivatives clearing organization 

subject to agreements to repurchase 

shall be combined with securities held 

by the futures commission merchant or 

derivatives clearing organization as 

direct investments. 

(B) Reverse repurchase agreements. 

For purposes of determining compliance 

with the asset-based and issuer-based 

concentration limits set forth in this 

section, securities purchased by a 

futures commission merchant or 

derivatives clearing organization subject 

to agreements to resell shall be 

combined with securities held by the 

futures commission merchant or 

derivatives clearing organization as 

direct investments. 

(iv) Treatment of customer-owned 

securities. For purposes of determining 

compliance with the asset-based and 

issuer-based concentration limits set 

forth in this section, securities owned 

by the customers of a futures 

commission merchant and posted as 

margin collateral are not included in 

total assets held in segregation by the 

futures commission merchant, and 

securities posted by a futures 

commission merchant with a derivatives 

clearing organization are not included 

in total assets held in segregation by the 

derivatives clearing organization. 

(v) Counterparty concentration limits. 

Securities purchased by a futures 

commission merchant or derivatives 

clearing organization from a single 

counterparty, subject to an agreement to 

resell to that counterparty, shall not 

exceed 25 percent of total assets held in 

segregation by the futures commission 

merchant or derivatives clearing 

organization. 

(4) Time-to-maturity. (i) Except for 

investments in money market mutual 

funds, the dollar-weighted average of 

the time-to-maturity of the portfolio, as 

that average is computed pursuant to 

§ 270.2a–7 of this title, may not exceed 

24 months. 

(ii) For purposes of determining the 

time-to-maturity of the portfolio, an 

instrument that is set forth in 

paragraphs (a)(1)(i) through (vii) of this 

section may be treated as having a oneday time-to-maturity if the following 

terms and conditions are satisfied: 

(A) The instrument is deposited solely 

on an overnight basis with a derivatives 

clearing organization pursuant to the 

terms and conditions of a collateral 

management program that has become 

effective in accordance with § 39.4 of 

this chapter; 

(B) The instrument is one that the 

futures commission merchant owns or 

has an unqualified right to pledge, is not 

subject to any lien, and is deposited by 

the futures commission merchant into a 

segregated account at a derivatives 

clearing organization; 

(C) The derivatives clearing 

organization prices the instrument each 

day based on the current mark-to-market 

value; and 

(D) The derivatives clearing 

organization reduces the assigned value 

of the instrument each day by a haircut 

of at least 2 percent. 

(5) Investments in instruments issued 

by affiliates. (i) A futures commission 

merchant shall not invest customer 

funds in obligations of an entity 

affiliated with the futures commission 

merchant, and a derivatives clearing 

organization shall not invest customer 

funds in obligations of an entity 

affiliated with the derivatives clearing 

organization. An affiliate includes 

parent companies, including all entities 

through the ultimate holding company, 

subsidiaries to the lowest level, and 

companies under common ownership of 

such parent company or affiliates. 

(ii) A futures commission merchant or 

derivatives clearing organization may 

invest customer funds in a fund 

affiliated with that futures commission 

merchant or derivatives clearing 

organization. 

(6) Recordkeeping. A futures 

commission merchant and a derivatives 

clearing organization shall prepare and 

maintain a record that will show for 

each business day with respect to each 

type of investment made pursuant to 

this section, the following information: 

(i) The type of instruments in which 

customer funds have been invested; 

(ii) The original cost of the 

instruments; and 

(iii) The current market value of the 

instruments. 

(c) Money market mutual funds. The 

following provisions will apply to the 

investment of customer funds in money 

market mutual funds (the fund). 

(1) The fund must be an investment 

company that is registered under the 

Investment Company Act of 1940 with 

the Securities and Exchange 

Commission and that holds itself out to 

investors as a money market fund, in 

accordance with § 270.2a–7 of this title. 

(2) The fund must be sponsored by a 

federally-regulated financial institution, 

a bank as defined in section 3(a)(6) of 

the Securities Exchange Act of 1934, an 

investment adviser registered under the 

Investment Advisers Act of 1940, or a 

domestic branch of a foreign bank 

insured by the Federal Deposit 

Insurance Corporation. 

(3) A futures commission merchant or 

derivatives clearing organization shall 

maintain the confirmation relating to 


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the purchase in its records in 

accordance with § 1.31 and note the 

ownership of fund shares (by book-entry 

or otherwise) in a custody account of 

the futures commission merchant or 

derivatives clearing organization in 

accordance with § 1.26. The futures 

commission merchant or the derivatives 

clearing organization shall obtain the 

acknowledgment letter required by 

§ 1.26 from an entity that has substantial 

control over the fund shares purchased 

with customer segregated funds and has 

the knowledge and authority to facilitate 

redemption and payment or transfer of 

the customer segregated funds. Such 

entity may include the fund sponsor or 

depository acting as custodian for fund 

shares. 

(4) The net asset value of the fund 

must be computed by 9 a.m. of the 

business day following each business 

day and made available to the futures 

commission merchant or derivatives 

clearing organization by that time. 

(5)(i) General requirement for 

redemption of interests. A fund shall be 

legally obligated to redeem an interest 

and to make payment in satisfaction 

thereof by the business day following a 

redemption request, and the futures 

commission merchant or derivatives 

clearing organization shall retain 

documentation demonstrating 

compliance with this requirement. 

(ii) Exception. A fund may provide for 

the postponement of redemption and 

payment due to any of the following 

circumstances: 

(A) For any period during which there 

is a non-routine closure of the Fedwire 

or applicable Federal Reserve Banks; 

(B) For any period: 

(1) During which the New York Stock 

Exchange is closed other than 

customary week-end and holiday 

closings; or 

(2) During which trading on the New 

York Stock Exchange is restricted; 

(C) For any period during which an 

emergency exists as a result of which: 

(1) Disposal by the company of 

securities owned by it is not reasonably 

practicable; or 

(2) It is not reasonably practicable for 

such company fairly to determine the 

value of its net assets; 

(D) For any period as the Securities 

and Exchange Commission may by 

order permit for the protection of 

security holders of the company; 

(E) For any period during which the 

Securities and Exchange Commission 

has, by rule or regulation, deemed that: 

(1) Trading shall be restricted; or 

(2) An emergency exists; or 

(F) For any period during which each 

of the conditions of § 270.22e–3(a)(1) 

through (3) of this title are met. 

(6) The agreement pursuant to which 

the futures commission merchant or 

derivatives clearing organization has 

acquired and is holding its interest in a 

fund must contain no provision that 

would prevent the pledging or 

transferring of shares. 

(7) The Appendix to this section sets 

forth language that will satisfy the 

requirements of paragraph (c)(5) of this 

section. 

(d) Repurchase and reverse 

repurchase agreements. A futures 

commission merchant or derivatives 

clearing organization may buy and sell 

the permitted investments listed in 

paragraphs (a)(1)(i) through (vii) of this 

section pursuant to agreements for 

resale or repurchase of the securities 

(agreements to repurchase or resell), 

provided the agreements to repurchase 

or resell conform to the following 

requirements: 

(1) The securities are specifically 

identified by coupon rate, par amount, 

market value, maturity date, and CUSIP 

or ISIN number. 

(2) Permitted counterparties are 

limited to a bank as defined in section 

3(a)(6) of the Securities Exchange Act of 

1934, a domestic branch of a foreign 

bank insured by the Federal Deposit 

Insurance Corporation, a securities 

broker or dealer, or a government 

securities broker or government 

securities dealer registered with the 

Securities and Exchange Commission or 

which has filed notice pursuant to 

section 15C(a) of the Government 

Securities Act of 1986. 

(3) A futures commission merchant or 

derivatives clearing organization shall 

not enter into an agreement to 

repurchase or resell with a counterparty 

that is an affiliate of the futures 

commission merchant or derivatives 

clearing organization, respectively. An 

affiliate includes parent companies, 

including all entities through the 

ultimate holding company, subsidiaries 

to the lowest level, and companies 

under common ownership of such 

parent company or affiliates. 

(4) The transaction is executed in 

compliance with the concentration limit 

requirements applicable to the securities 

transferred to the customer segregated 

custodial account in connection with 

the agreements to repurchase referred to 

in paragraphs (b)(3)(iii)(A) and (B) of 

this section. 

(5) The transaction is made pursuant 

to a written agreement signed by the 

parties to the agreement, which is 

consistent with the conditions set forth 

in paragraphs (d)(1) through (13) of this 

section and which states that the parties 

thereto intend the transaction to be 

treated as a purchase and sale of 

securities. 

(6) The term of the agreement is no 

more than one business day, or reversal 

of the transaction is possible on 

demand. 

(7) Securities transferred to the 

futures commission merchant or 

derivatives clearing organization under 

the agreement are held in a safekeeping 

account with a bank as referred to in 

paragraph (d)(2) of this section, a 

derivatives clearing organization, or the 

Depository Trust Company in an 

account that complies with the 

requirements of § 1.26. 

(8) The futures commission merchant 

or the derivatives clearing organization 

may not use securities received under 

the agreement in another similar 

transaction and may not otherwise 

hypothecate or pledge such securities, 

except securities may be pledged on 

behalf of customers at another futures 

commission merchant or derivatives 

clearing organization. Substitution of 

securities is allowed, provided, 

however, that: 

(i) The qualifying securities being 

substituted and original securities are 

specifically identified by date of 

substitution, market values substituted, 

coupon rates, par amounts, maturity 

dates and CUSIP or ISIN numbers; 

(ii) Substitution is made on a 

‘‘delivery versus delivery’’ basis; and 

(iii) The market value of the 

substituted securities is at least equal to 

that of the original securities. 

(9) The transfer of securities to the 

customer segregated custodial account 

is made on a delivery versus payment 

basis in immediately available funds. 

The transfer of funds to the customer 

segregated cash account is made on a 

payment versus delivery basis. The 

transfer is not recognized as 

accomplished until the funds and/or 

securities are actually received by the 

custodian of the futures commission 

merchant’s or derivatives clearing 

organization’s customer funds or 

securities purchased on behalf of 

customers. The transfer or credit of 

securities covered by the agreement to 

the futures commission merchant’s or 

derivatives clearing organization’s 

customer segregated custodial account 

is made simultaneously with the 

disbursement of funds from the futures 

commission merchant’s or derivatives 

clearing organization’s customer 

segregated cash account at the custodian 

bank. On the sale or resale of securities, 

the futures commission merchant’s or 

derivatives clearing organization’s 

customer segregated cash account at the 

custodian bank must receive same-day 

funds credited to such segregated 


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78802 Federal Register / Vol. 76, No. 243 / Monday, December 19, 2011 / Rules and Regulations 

account simultaneously with the 

delivery or transfer of securities from 

the customer segregated custodial 

account. 

(10) A written confirmation to the 

futures commission merchant or 

derivatives clearing organization 

specifying the terms of the agreement 

and a safekeeping receipt are issued 

immediately upon entering into the 

transaction and a confirmation to the 

futures commission merchant or 

derivatives clearing organization is 

issued once the transaction is reversed. 

(11) The transactions effecting the 

agreement are recorded in the record 

required to be maintained under § 1.27 

of investments of customer funds, and 

the securities subject to such 

transactions are specifically identified 

in such record as described in paragraph 

(d)(1) of this section and further 

identified in such record as being 

subject to repurchase and reverse 

repurchase agreements. 

(12) An actual transfer of securities to 

the customer segregated custodial 

account by book entry is made 

consistent with Federal or State 

commercial law, as applicable. At all 

times, securities received subject to an 

agreement are reflected as ‘‘customer 

property.’’ 

(13) The agreement makes clear that, 

in the event of the bankruptcy of the 

futures commission merchant or 

derivatives clearing organization, any 

securities purchased with customer 

funds that are subject to an agreement 

may be immediately transferred. The 

agreement also makes clear that, in the 

event of a futures commission merchant 

or derivatives clearing organization 

bankruptcy, the counterparty has no 

right to compel liquidation of securities 

subject to an agreement or to make a 

priority claim for the difference between 

current market value of the securities 

and the price agreed upon for resale of 

the securities to the counterparty, if the 

former exceeds the latter. 

(e) Deposit of firm-owned securities 

into segregation. A futures commission 

merchant shall not be prohibited from 

directly depositing unencumbered 

securities of the type specified in this 

section, which it owns for its own 

account, into a segregated safekeeping 

account or from transferring any such 

securities from a segregated account to 

its own account, up to the extent of its 

residual financial interest in customers’ 

segregated funds; provided, however, 

that such investments, transfers of 

securities, and disposition of proceeds 

from the sale or maturity of such 

securities are recorded in the record of 

investments required to be maintained 

by § 1.27. All such securities may be 

segregated in safekeeping only with a 

bank, trust company, derivatives 

clearing organization, or other registered 

futures commission merchant. 

Furthermore, for purposes of §§ 1.25, 

1.26, 1.27, 1.28, and 1.29, investments 

permitted by § 1.25 that are owned by 

the futures commission merchant and 

deposited into such a segregated 

account shall be considered customer 

funds until such investments are 

withdrawn from segregation. 

Appendix to § 1.25—Money Market 

Mutual Fund Prospectus Provisions 

Acceptable for Compliance With 

Section 1.25(c)(5) 

Upon receipt of a proper redemption 

request submitted in a timely manner and 

otherwise in accordance with the redemption 

procedures set forth in this prospectus, the 

[Name of Fund] will redeem the requested 

shares and make a payment to you in 

satisfaction thereof no later than the business 

day following the redemption request. The 

[Name of Fund] may postpone and/or 

suspend redemption and payment beyond 

one business day only as follows: 

a. For any period during which there is a 

non-routine closure of the Fedwire or 

applicable Federal Reserve Banks; 

b. For any period (1) during which the New 

York Stock Exchange is closed other than 

customary week-end and holiday closings or 

(2) during which trading on the New York 

Stock Exchange is restricted; 

c. For any period during which an 

emergency exists as a result of which (1) 

disposal of securities owned by the [Name of 

Fund] is not reasonably practicable or (2) it 

is not reasonably practicable for the [Name of 

Fund] to fairly determine the net asset value 

of shares of the [Name of Fund]; 

d. For any period during which the 

Securities and Exchange Commission has, by 

rule or regulation, deemed that (1) trading 

shall be restricted or (2) an emergency exists; 

e. For any period that the Securities and 

Exchange Commission, may by order permit 

for your protection; or 

f. For any period during which the [Name 

of Fund,] as part of a necessary liquidation 

of the fund, has properly postponed and/or 

suspended redemption of shares and 

payment in accordance with federal 

securities laws. 

PART 30—FOREIGN FUTURES AND 

FOREIGN OPTIONS TRANSACTIONS 

■ 3. The authority citation for part 30 

continues to read as follows: 

Authority: 7 U.S.C. 1a, 2, 6, 6c, and 12a, 

unless otherwise noted. 

■ 4. In § 30.7, revise paragraph (c) and 

add paragraph (g) to read as follows: 

§ 30.7 Treatment of foreign futures or 

foreign options secured amount. 

* * * * * 

(c)(1) The separate account or 

accounts referred to in paragraph (a) of 

this section must be maintained under 

an account name that clearly identifies 

them as such, with any of the following 

depositories: 

(i) A bank or trust company located in 

the United States; 

(ii) A bank or trust company located 

outside the United States that has in 

excess of $1 billion of regulatory capital; 

(iii) A futures commission merchant 

registered as such with the Commission; 

(iv) A derivatives clearing 

organization; 

(v) The clearing organization of any 

foreign board of trade; 

(vi) A member of any foreign board of 

trade; or 

(vii) Such member or clearing 

organization’s designated depositories. 

(2) Each futures commission merchant 

must obtain and retain in its files for the 

period provided in § 1.31 of this chapter 

an acknowledgment from such 

depository that it was informed that 

such money, securities or property are 

held for or on behalf of foreign futures 

and foreign options customers and are 

being held in accordance with the 

provisions of these regulations. 

* * * * * 

(g) Each futures commission merchant 

that invests customer funds held in the 

account or accounts referred to in 

paragraph (a) of this section must invest 

such funds pursuant to the requirements 

of § 1.25 of this chapter. 

Issued in Washington, DC, on December 5, 

2011 by the Commission. 

David A. Stawick, 

Secretary of the Commission. 

Appendices to Investment of Customer 

Funds and Funds Held in an Account 

for Foreign Futures and Foreign 

Options Transactions—Commission 

Voting Summary and Statements of 

Commissioners 

Note: The following appendices will not 

appear in the Code of Federal Regulations. 

Appendix 1—Commission Voting 

Summary 

On this matter, Chairman Gensler, 

Commissioners Sommers, Chilton, O’Malia 

and Wetjen voted in the affirmative; no 

Commissioner voted in the negative. 

Appendix 2—Statement of Chairman 

Gary Gensler 

I support the final rule to enhance 

customer protections regarding where 

derivatives clearing organizations (DCOs) and 

futures commission merchants (FCMs) can 

invest customer funds. I believe that this rule 

is critical for the safeguarding of customer 

money. 

The Commodity Exchange Act in section 

4d(a)(2) prescribes that customer funds can 

only be placed in a set list of permitted 

investments. From 2000 to 2005, the 


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Federal Register / Vol. 76, No. 243 / Monday, December 19, 2011 / Rules and Regulations 78803 

Commission granted exemptions to this list, 

loosening the rules for the investment of 

customer funds. These exemptions allowed 

FCMs to invest customer funds in AAA-rated 

sovereign debt, as well as to lend customer 

money to another side of the firm through 

repurchase agreements. 

This rule prevents such in-house lending 

through repurchase agreements. I believe 

there is an inherent conflict of interest 

between parts of a firm doing these 

transactions. The rule also would limit an 

FCM’s ability to invest customer money in 

foreign sovereign debt. 

In addition, this rule fulfills a Dodd-Frank 

requirement that the CFTC remove all 

reliance on credit ratings from its regulations. 

[FR Doc. 2011–31689 Filed 12–16–11; 8:45 am] 

BILLING CODE P 


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