`[Federal Register Volume 90, Number 13 (Wednesday, January 22, 2025)]
[Rules and Regulations]
[Pages 7810-7877]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-30927]



[[Page 7809]]

Vol. 90

Wednesday,

No. 13

January 22, 2025

Part II





 Commodity Futures Trading Commission





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17 CFR Parts 1, 22, and 30





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

  Federal Register / Vol. 90 , No. 13 / Wednesday, January 22, 2025 / 
Rules and Regulations  

[[Page 7810]]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 1, 22, and 30

RIN 3038-AF24


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

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rule.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') is amending its regulations governing the types of 
investments that futures commission merchants and derivatives clearing 
organizations may make with funds held for the benefit of customers 
engaging in futures, foreign futures, and cleared swaps transactions. 
The Commission is also revising asset-based and issuer-based 
concentration limits for the investment of customer funds. The 
Commission is also specifying market risk capital charges that a 
futures commission merchant must take on new investments added to the 
list of permitted investments in computing the firm's adjusted net 
capital. The amendments also revise regulations that require each 
futures commission merchant to report to the Commission, and to the 
firm's designated self-regulatory organization, the name, location, and 
amount of customer funds held by each depository, including any 
investments of customer funds held by the depository. Lastly, the 
Commission is eliminating the requirement that each depository holding 
customer funds must provide the Commission with read-only electronic 
access to such accounts for the futures commission merchant to treat 
the funds as customer segregated funds.

DATES: 
    Effective date: This rule is effective February 21, 2025.
    Compliance dates: The compliance dates for the rule amendments are 
discussed in section VI of SUPPLEMENTARY INFORMATION in the preamble to 
this rule.

FOR FURTHER INFORMATION CONTACT: Amanda L. Olear, Director, (202) 418-
5213, [email protected]; Thomas J. Smith, Deputy Director, 202-418-5495, 
[email protected]; Warren Gorlick, Associate Director, 202-418-5195, 
[email protected]; Liliya Bozhanova, Associate Director, 202-418-6232, 
[email protected]; Jennifer M. Narvaez, Attorney Advisor, 202-418-
5742, [email protected], Market Participants Division, or Lihong 
McPhail, Research Economist, (202) 418-5722, [email protected], Office 
of the Chief Economist, Commodity Futures Trading Commission, Three 
Lafayette Centre, 1155 21st Street NW, Washington, DC 20581; Theodore 
Z. Polley, Associate Director, 312-596-0551, [email protected]; Division 
of Clearing and Risk, Commodity Futures Trading Commission, 77 West 
Jackson Boulevard, Suite 800, Chicago, Illinois 60604.

SUPPLEMENTARY INFORMATION:

Table of Contents

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

I. Introduction

A. Background and Statutory Authority

1. Segregation of Customer Funds by Futures Commission Merchants and 
Derivatives Clearing Organizations
    The Commodity Exchange Act (``Act'' or ``CEA'') \1\ and the 
Commission's regulations thereunder \2\ establish a framework to 
safeguard funds of customers engaged in CFTC-regulated derivative 
transactions. Core elements of this framework are requirements for a 
futures commission merchant (``FCM'') or a derivatives clearing 
organization (``DCO'') to treat customer funds as belonging to 
customers and not as the property of the FCM or DCO, and for the FCM or 
DCO to segregate customer funds from its own funds in designated 
customer accounts maintained at banks, trust companies, FCMs, or DCOs, 
as applicable.\3\ The segregation of customer funds from an FCM's or 
DCO's own funds is intended to ensure that customer funds are used only 
to support customer trading and transactions and to facilitate the 
return of the funds to customers in the event of the insolvency of the 
FCM or DCO.
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    \1\ 7 U.S.C. 1 et seq.
    \2\ The Commission's regulations are found in chapter I of title 
17 of the Code of Federal Regulations, 17 CFR parts 1 through 199.
    \3\ 7 U.S.C. 6d.
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    Segregated customer funds are classified as either: (i) ``futures 
customer funds;'' (ii) ``Cleared Swaps Customer Collateral;'' or (iii) 
``30.7 customer funds.'' \4\ The term ``futures customer funds'' is 
defined by Commission regulation 1.3 to mean, in relevant part, all 
money, securities, and property received by an FCM or DCO from, for, or 
on behalf of ``futures customers'' \5\ to margin, guarantee, or secure 
futures and options on futures transactions traded on CFTC-designated 
contract markets, and all money accruing to futures customers resulting 
from trading futures and options on futures. Section 4d(a)(2) of the 
Act requires an FCM to treat and deal with futures customer funds 
received to margin, guarantee, or secure trades or contracts of any 
futures customer, or accruing to a futures customer as the result of 
such trades or contracts, as belonging to the futures

[[Page 7811]]

customer.\6\ Section 4d(a)(2) further provides that an FCM may not 
commingle futures customer funds with the FCM's own funds, provided, 
however, that the FCM may commingle the futures customer funds of two 
or more futures customers and deposit the funds with any bank, trust 
company, DCO, or other FCM.\7\
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    \4\ See generally 17 CFR 1.20 (segregation framework for futures 
customer funds); 17 CFR 22.2 and 22.3 (segregation framework for 
Cleared Swaps Customer Collateral); and 17 CFR 30.7 (segregation 
framework for 30.7 customer funds).
    \5\ The term ``futures customer'' is defined by Commission 
regulation 1.3 to mean, in relevant part, any person who uses an FCM 
as an agent in connection with trading in any contract for the 
purchase or sale of a commodity for future delivery or any option on 
such contract. 17 CFR 1.3.
    \6\ 7 U.S.C. 6d(a)(2).
    \7\ Id.
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    Section 4d(b) of the Act establishes obligations for DCOs and other 
depositories receiving futures customer funds from FCMs pursuant to 
section 4d(a)(2) of the Act.\8\ Specifically, section 4d(b) provides 
that it is unlawful for any person, including a DCO, that has received 
futures customer funds to hold, dispose of, or use the funds as 
belonging to the depositing FCM or any person other than the futures 
customers of the FCM.\9\ The Commission adopted Commission regulations 
1.20 through 1.30, and Commission regulations 1.32 and 1.49, to 
implement the segregation requirements for futures customer funds 
mandated by sections 4d(a)(2) and 4d(b) of the Act.\10\
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    \8\ 7 U.S.C. 6d(b).
    \9\ Id.
    \10\ 17 CFR 1.20 through 1.30, 17 CFR 1.32, and 17 CFR 1.49, 
respectively.
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    With respect to cleared swap transactions, Commission regulations 
1.3 and 22.1 \11\ define the term ``Cleared Swaps Customer Collateral'' 
to mean, in relevant part, all money, securities, or other property 
received by an FCM or DCO from, for, or on behalf of, a ``Cleared Swaps 
Customer'' to margin, guarantee, or secure ``Cleared Swap'' 
positions.\12\ Section 4d(f)(2)(A) of the Act requires an FCM to treat 
Cleared Swaps Customer Collateral received from a Cleared Swaps 
Customer, or accruing to a Cleared Swaps Customer as a result of 
Cleared Swap positions, as belonging to the Cleared Swaps Customer.\13\ 
Section 4d(f)(2)(B) of the Act further provides that an FCM may not 
commingle Cleared Swaps Customer Collateral of a Cleared Swaps Customer 
with the FCM's own funds.\14\ The FCM may, however, commingle Cleared 
Swaps Customer Collateral of two or more Cleared Swaps Customers and 
deposit the funds in any bank, trust company, DCO, or other FCM.\15\ 
Additionally, section 4d(f)(6) of the Act provides that it is unlawful 
for any person, including a DCO and any depository institution, that 
receives Cleared Swaps Customer Collateral to hold, dispose of, or use 
the Cleared Swaps Customer Collateral as belonging to the depositing 
FCM or any person other than the Cleared Swaps Customer of the FCM.\16\ 
The Commission adopted Commission regulations 22.2 through 22.13, and 
Commission regulations 22.15 through 22.17, to implement the 
segregation requirements for Cleared Swaps Customer Collateral mandated 
by section 4d(f) of the Act.\17\
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    \11\ 17 CFR 22.1.
    \12\ Commission regulation 22.1 defines the term ``Cleared Swaps 
Customer'' to mean, in relevant part, any customer entering into a 
Cleared Swap. The Act and Commission regulation 22.1 further define 
the term ``Cleared Swap'' to mean any swap that is, directly or 
indirectly, submitted to, and cleared by, a DCO registered with the 
Commission. 7 U.S.C. 1a(7) and 17 CFR 22.1.
    \13\ 7 U.S.C. 6d(f)(2)(A).
    \14\ 7 U.S.C. 6d(f)(2)(B).
    \15\ 7 U.S.C. 6d(f)(3)(A)(i).
    \16\ 7 U.S.C. 6d(f)(6).
    \17\ 17 CFR 22.2 through 22.13, and 17 CFR 22.15 through 22.17, 
respectively. Protection of Cleared Swaps Customer Contracts and 
Collateral; Conforming Amendments to the Commodity Broker Bankruptcy 
Provisions, 77 FR 6336 (Feb. 7, 2012) (``Protection of Cleared Swaps 
Customer Contracts and Collateral'').
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    Part 30 of the Commission's regulations govern the requirements 
imposed on FCMs that carry futures positions for customers trading on 
foreign markets.\18\ Commission regulation 30.1 defines the term ``30.7 
customer funds'' to mean any money, securities, or other property 
received by an FCM from, for, or on behalf of a U.S. person or foreign-
domiciled person (a ``30.7 customer'') \19\ to margin, guarantee, or 
secure futures or options on futures positions executed on foreign 
boards of trade (``foreign futures'').\20\ Section 4(b)(2)(A) of the 
Act authorizes the Commission to adopt regulations requiring FCMs to 
safeguard 30.7 customer funds deposited by 30.7 customers for trading 
on foreign boards of trade,\21\ which the Commission did by adopting 
Commission regulation 30.7.\22\ As part of the safeguarding 
requirements, Commission regulation 30.7(e)(2) requires an FCM to 
segregate 30.7 customer funds from the FCM's own funds, and Commission 
regulation 30.7(b) provides that an FCM may hold 30.7 customer funds 
only with certain specified depositories, including banks, trust 
companies, DCOs, foreign brokers, and clearing organizations of foreign 
boards of trade.\23\
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    \18\ 17 CFR part 30.
    \19\ Commission regulation 30.1 defines the term ``30.7 
customer'' to mean any person located in the U.S., its territories 
or possessions, as well as any foreign-domiciled person, who trades 
in foreign futures or foreign options through an FCM. 17 CFR 30.1.
    \20\ 17 CFR 30.1.
    \21\ 7 U.S.C. 6(b)(2)(A).
    \22\ 17 CFR 30.7.
    \23\ 17 CFR 30.7(b) and 17 CFR 30.7(e)(2).
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    In order to simplify the discussion in this preamble, the terms 
``futures customer funds,'' ``Cleared Swaps Customer Collateral,'' and 
``30.7 customer funds,'' are used when referring to regulations 
applicable specifically to futures customers, Cleared Swaps Customers, 
and 30.7 customers, respectively. In addition, the term ``Customer 
Funds'' is used when referring collectively to ``futures customer 
funds,'' ``Cleared Swaps Customer Collateral,'' and ``30.7 customer 
funds.''
2. Authority for Futures Commission Merchants and Derivatives Clearing 
Organizations To Invest Customer Funds
    The Act establishes the authority for FCMs and DCOs to invest 
Customer Funds. Section 4d(a)(2) of the Act authorizes FCMs to invest 
futures customer funds in: (i) obligations of the U.S.; (ii) 
obligations fully guaranteed as to principal and interest by the U.S.; 
and (iii) general obligations of any State or of any political 
subdivision of a State.\24\ The Commission's predecessor agency, the 
Commodity Exchange Authority of the U.S. Department of Agriculture, 
adopted Commission regulation 1.25 to implement section 4d(a)(2) of the 
Act, and authorized FCMs and DCOs to invest futures customer funds in 
the instruments enumerated in section 4d(a)(2) (the ``Permitted 
Investments'').\25\
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    \24\ 7 U.S.C. 6d(a)(2).
    \25\ See generally Title 17--Commodity and Securities Exchanges, 
33 FR 14454 (Sept. 26, 1968), amending Commission regulation 1.25 
and providing that FCMs and clearing organizations may invest 
futures customer funds in obligations of the U.S., in general 
obligations of any State or of any political subdivision of any 
State, or in obligations fully guaranteed as to principal and 
interest by the U.S.
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    The Commission subsequently expanded the Permitted Investments in 
2000 to include certificates of deposit, commercial paper, corporate 
notes, foreign sovereign debt, and interests in money market funds.\26\ 
The Commission

[[Page 7812]]

also authorized FCMs and DCOs to buy the Permitted Investments under 
agreements to resell the securities (``reverse repurchase agreements'') 
and to sell the Permitted Investments under agreements to repurchase 
the securities (``repurchase agreements'').\27\ To minimize credit 
risk, market risk, and liquidity risk to the Permitted Investments, the 
Commission imposed conditions that are required to be met, including a 
restriction on the dollar-weighted average of the time-to-maturity of 
the securities held in segregated portfolios, asset-based and issuer-
based concentration limits, and prohibitions on certain investments 
containing embedded derivatives.\28\ More generally, Commission 
regulation 1.25 contains an overarching requirement that all Permitted 
Investments must be ``consistent with the objectives of preserving 
principal and maintaining liquidity.'' \29\ In adopting the 2000 
Permitted Investments Amendment, the Commission stated that it was 
expanding the range of instruments in which FCMs may invest customer 
funds beyond those listed in section 4d(a)(2) of the Act to enhance the 
yield available to FCMs, clearing organizations, and their customers 
without compromising the safety of futures customer funds.\30\
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    \26\ See generally Rules Relating to Intermediaries of Commodity 
Interest Transactions, 65 FR 77993 (Dec. 13, 2000) (amending 
Commission regulation 1.25 to permit FCMs and DCOs to invest 
customer funds in certificates of deposit, commercial paper, 
corporate notes, foreign sovereign debt, and interest in money 
market funds); and Investment of Customer Funds, 65 FR 82270 (Dec. 
28, 2000) (making technical corrections and accelerating the 
effective date of the final rules from February 12, 2001 to December 
28, 2000) (collectively, the ``2000 Permitted Investments 
Amendment''). The 2000 Permitted Investments Amendment was adopted 
pursuant to section 4(c) of the Act, which empowers the Commission 
to ``promote responsible economic or financial innovation and fair 
competition'' by exempting any transaction or class of transactions 
(including any person or class of persons offering, entering into, 
rendering advice or rendering other services with respect to, the 
agreement, contract, or transaction) from any of the provisions of 
the Act, subject to certain exceptions. The Commission may grant an 
exemption by rule, regulation, or order, after notice and 
opportunity for hearing, and may do so on application of any person 
or on its own initiative. 7 U.S.C. 6(c)(1). A further discussion of 
section 4(c)(1) of the Act is set forth in section V of this 
preamble.
    \27\ 2000 Permitted Investments Amendment at 78001-78004. 
Reverse repurchase agreements and repurchase agreements are 
collectively referred to as ``Repurchase Transactions'' in this 
preamble.
    \28\ 17 CFR 1.25(b).
    \29\ Id.
    \30\ 2000 Permitted Investments Amendment at 78007.
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    The list of investments that qualify as Permitted Investments has 
undergone several revisions following the 2000 Permitted Investments 
Amendment.\31\ In its current form, Commission regulation 1.25 lists 
seven categories of investments that qualify as Permitted Investments: 
(i) obligations of the U.S. and obligations fully guaranteed as to 
principal and interest by the U.S. (``U.S. government securities''); 
(ii) general obligations of any State or political subdivision of a 
State (``municipal securities''); (iii) obligations of any U.S. 
government corporation or enterprise sponsored by the U.S. (``U.S. 
agency obligations''); (iv) certificates of deposit issued by a bank; 
(v) commercial paper fully guaranteed by the U.S. under the Temporary 
Liquidity Guarantee Program (``TLGP'') as administered by the Federal 
Deposit Insurance Corporation (``FDIC'') (``commercial paper''); (vi) 
corporate notes and bonds fully guaranteed as to principal and interest 
by the U.S. under the TLGP (``corporate notes and bonds''); and (vii) 
interests in money market mutual funds.\32\ In addition, Commission 
regulation 1.25(a)(2) permits FCMs and DCOs to buy and sell the 
Permitted Investments under Repurchase Transactions.\33\
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    \31\ E.g., Investment of Customer Funds and Record of 
Investments, 70 FR 28190 (May 17, 2005) (``2005 Permitted 
Investments Amendment''), and Investment of Customer Funds and Funds 
Held in an Account for Foreign Futures and Foreign Options 
Transactions, 76 FR 78776 (Dec. 19, 2011) (``2011 Permitted 
Investments Amendment'').
    \32\ 17 CFR 1.25(a)(1).
    \33\ 17 CFR 1.25(a)(2).
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    Section 4(b)(2)(A) of the Act grants the Commission authority to 
adopt rules and regulations regarding an FCM's safeguarding of 30.7 
customer funds.\34\ Prior to 2011, an FCM was not subject to a specific 
regulation defining the investments that the firm could enter into with 
30.7 customer funds.\35\ In 2011, the Commission determined that the 
terms of Commission regulation 1.25 should also apply to an FCM's 
investment of 30.7 customer funds, and amended Commission regulation 
30.7 to provide that to the extent an FCM invests 30.7 customer funds, 
the firm must invest such funds subject to, and in compliance with, the 
terms and conditions of Commission regulation 1.25.\36\
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    \34\ 7 U.S.C. 6(b)(2)(A).
    \35\ 2011 Permitted Investments Amendment at 78777, providing 
that because Congress did not expressly apply the investment 
limitations set forth in section 4d of the Act to 30.7 customer 
funds, the Commission historically has not subjected such funds to 
the investment limitations applicable to futures customer funds.
    \36\ 17 CFR 30.7. The Commission stated that it was appropriate 
to align the investment standards of Commission regulation 30.7 with 
those of Commission regulation 1.25 because many of the same 
prudential concerns arise with respect to both segregated customer 
funds and 30.7 customer funds. 2011 Permitted Investment Amendment 
at 78791.
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    The Commission also extended the requirements of Commission 
regulation 1.25 to FCMs and DCOs investing Cleared Swaps Customer 
Collateral.\37\ The Commission adopted Commission regulations 22.2 and 
22.3 in 2012 \38\ pursuant to its authority under section 4d(f)(4) of 
the Act, which provides that Cleared Swaps Customer Collateral may be 
invested by an FCM or DCO in: (i) obligations of the U.S.; (ii) general 
obligations of any State or of any political subdivision of a State; 
(iii) obligations fully guaranteed as to principal and interest by the 
U.S.; and (iv) any other investment that the Commission may by rule or 
regulation prescribe.\39\ Section 4d(f)(4) of the Act further provides 
that the investments must be made in accordance with the rules and 
regulations, and subject to any conditions, that the Commission may 
prescribe.\40\
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    \37\ See 17 CFR 22.2(e)(1) and 17 CFR 22.3(d).
    \38\ See generally Protection of Cleared Swaps Customer 
Contracts and Collateral.
    \39\ 7 U.S.C. 6d(f).
    \40\ 7 U.S.C. 6d(f)(4).
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    In addition to enumerating the Permitted Investments that FCMs and 
DCOs may enter into with Customer Funds, Commission regulation 1.25 
also imposes several conditions on the investment of Customer Funds. 
Commission regulation 1.25(b)(3) contains both asset-based and issuer-
based concentration limits applicable to Permitted Investments. The 
asset-based concentration limits restrict the total amount of Customer 
Funds that an FCM or DCO may invest in any particular Permitted 
Investment instrument or asset class to a defined percentage of the 
total funds held in segregation by the FCM or DCO.\41\ The issuer-based 
concentration limits cap the total amount of Customer Funds that may be 
invested in Permitted Investment instruments offered, or managed, by a 
particular issuer to a defined percentage of the total funds held in 
segregation by the FCM or DCO.\42\
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    \41\ 17 CFR 1.25(b)(3)(i).
    \42\ 17 CFR 1.25(b)(3)(ii).
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    To limit risk to customers from the investment of Customer Funds, 
Commission regulations provide that FCMs and DCOs are financially 
responsible for any losses resulting from Permitted Investments and 
explicitly prohibit the allocation of investment losses to customers or 
clearing FCMs, respectively.\43\
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    \43\ Commission regulation 1.29 provides that FCMs or DCOs, as 
applicable, shall bear sole responsibility for any losses resulting 
from the investment of futures customer funds, and further provides 
that no investment losses shall be borne or otherwise allocated to 
FCM customers or to clearing FCMs and their customers. 17 CFR 
1.29(b).
    Commission regulation 22.2(e)(1) provides that an FCM shall bear 
sole responsibility for any losses resulting from the investment of 
Cleared Swaps Customer Collateral and may not allocate investment 
losses to Cleared Swaps Customers of the FCM. 17 CFR 22(e)(1).
    Commission regulation 30.7(i) provides that an FCM shall bear 
sole financial responsibility for any losses resulting from the 
investment of 30.7 customer funds, and further provides that no 
investment losses may be allocated to the 30.7 customers of the FCM. 
17 CFR 30.7(i).
    In addition, Commission regulation 22.3(d) provides that DCOs 
may invest Cleared Swaps Customer Collateral in Permitted 
Investments set forth in Commission regulation 1.25. The regulation, 
however, does not provide that a DCO is responsible for investment 
losses. The Commission proposed to amend Commission regulation 
22.3(d) to explicitly provide that a DCO shall bear sole 
responsibility for any losses resulting from the investment of 
Cleared Swaps Customer Collateral and may not allocate such losses 
to Cleared Swaps Customers. Investment of Customer Funds by Futures 
Commission Merchants and Derivatives Clearing Organizations, 88 FR 
81236 at 81238-81239, 81259 (Nov. 21, 2023).

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[[Page 7813]]

    The Commission has previously noted the importance of conducting 
periodic assessments of Commission regulation 1.25 and, as necessary, 
revising regulatory policies to strengthen safeguards designed to 
minimize risk while retaining an appropriate degree of investment 
flexibility and opportunities for capital efficiency for DCOs and FCMs 
investing customer segregated funds.\44\ In furtherance of these 
objectives, and in consideration of the requests for amendments to 
Commission regulation 1.25 discussed in section II of this preamble, 
the Commission published a notice of proposed rulemaking to amend the 
list of Permitted Investments in Commission regulation 1.25 and to 
adopt several related amendments to its rules governing the investment 
of Customer Funds by FCMs and DCOs.\45\
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    \44\ 2011 Permitted Investments Amendment at 78777.
    \45\ Investment of Customer Funds by Futures Commission 
Merchants and Derivatives Clearing Organizations, 88 FR 81236 (Nov. 
21, 2023) (``Proposal'').
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II. Requests for Amendments to the List of Permitted Investments

    The Futures Industry Association (``FIA'') and CME Group Inc. 
(``CME'') (collectively, the ``Petitioners'') submitted a joint 
petition requesting that the Commission issue an order under section 
4(c) of the Act, or take such other action as the Commission deems 
appropriate, to expand the list of Permitted Investments that FCMs and 
DCOs may enter into with Customer Funds.\46\ The Petitioners requested 
an extension of the Permitted Investments to include the foreign 
sovereign debt of Canada, France, Germany, Japan, and the United 
Kingdom (``Specified Foreign Sovereign Debt''), subject to the 
condition that any investment is limited to balances owed by FCMs and 
DCOs to customers and FCM clearing members, respectively, denominated 
in the applicable currency of Canada, France, Germany, Japan, or the 
United Kingdom.\47\ The Petitioners further requested that the 
Commission exempt FCMs and DCOs from the provisions of Commission 
regulation 1.25(d)(2) to authorize FCMs and DCOs to enter into 
Repurchase Transactions involving Specified Foreign Sovereign Debt with 
foreign banks and foreign securities brokers or dealers, and to deposit 
Specified Foreign Sovereign Debt in safekeeping accounts at foreign 
banks.\48\
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    \46\ Petition for Order under section 4(c) of the Commodity 
Exchange Act, dated May 24, 2023 (the ``Joint Petition''). On 
September 22, 2023, the Petitioners submitted updated data in 
support of the Joint Petition and corrected an inadvertent 
transposition of data items in the Joint Petition. Supplement to 
Petition for Order under section 4(c) of the Commodity Exchange Act 
(``Supplement to Joint Petition''). The Joint Petition and the 
Supplement to Joint Petition are available on the Commission's 
website, https://www.cftc.gov/media/9531/FIA_CMEPetition_Regulation125_052423/download and https://www.cftc.gov/media/9536/FIALetterSupplementing_Regulation125_092223/download.
    \47\ Joint Petition at p. 4. The currencies of Canada, France, 
Germany, Japan, and the United Kingdom are the Canadian dollar, the 
euro (France and Germany), the yen (Japan), and the British pound 
(United Kingdom).
    \48\ Joint Petition at p. 5.
    Commission regulation 1.25(d)(2) provides that an FCM or DCO may 
enter into Repurchase Transactions only with the following 
counterparties: (i) a bank as defined in section 3(a)(6) of the 
Securities Exchange Act of 1934; (ii) a domestic branch of a foreign 
bank insured by the FDIC; (iii) an SEC-registered securities broker 
or dealer; or (iv) an SEC-registered government securities broker or 
dealer. Section 3(a)(6) of the Securities Exchange Act of 1934 
defines the term ``bank'' to mean: (i) a banking institution 
organized under the laws of the U.S. or a Federal savings 
association; (ii) a member bank of the Federal Reserve System; (iii) 
any other banking institution or savings association doing business 
under the laws of any State or the U.S., a substantial portion of 
the business of which consists of receiving deposits or exercising 
fiduciary powers similar to those permitted to national banks under 
the authority of the Comptroller of the Currency, and which is 
supervised and examined by a State or Federal authority having 
supervision over banks or savings associations; and (iv) a receiver, 
conservator, or other liquidating agent of any institution or firm 
included in clauses (i), (ii), or (iii) above (``Section 3(a)(6) 
bank''). 15 U.S.C. 78c(a)(6). Foreign-domiciled banks and foreign 
securities brokers or dealers are not authorized counterparties for 
Repurchase Transactions under Commission regulation 1.25(d)(2).
    In addition, Commission regulation 1.25(d)(7) provides that 
securities transferred to an FCM or DCO under Repurchase 
Transactions must be held in safekeeping accounts with certain U.S.-
domiciled banks, a Federal Reserve Bank, a DCO, or the Depository 
Trust Company in an account that complies with the requirements of 
Commission regulation 1.26.
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    In support of the request, the Petitioners stated that the 
Commission issued an order in 2018 pursuant to section 4(c) of the Act 
providing a limited exemption to section 4d of the Act and Commission 
regulation 1.25 to permit DCOs to invest futures customer funds and 
Cleared Swaps Customer Collateral in the foreign sovereign debt of 
France and Germany.\49\ The Petitioners also asserted that the 
Commission's stated rationale for issuing the 2018 Order and providing 
an exemption to DCOs also applies to investments made by FCMs and 
extends to the sovereign debt of Canada, Japan, and the United Kingdom, 
in addition to France and Germany.
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    \49\ Order Granting Exemption from Certain Provisions of the 
Commodity Exchange Act Regarding Investment of Customer Funds and 
from Certain Related Commission Regulations, 83 FR 35241 (Jul. 25, 
2018) (``2018 Order''). The 2018 Order provides an exemption only to 
DCOs. FCMs are not subject to the 2018 Order.
---------------------------------------------------------------------------

    The 2018 Order's section 4(c) exemption for DCOs is subject to 
conditions, including that: (i) investment in French or German 
sovereign debt is limited to investments made with euro-denominated 
balances owed to the futures customers and Cleared Swaps Customers of 
FCM clearing members; (ii) the dollar-weighted average of the remaining 
time-to-maturity of a DCO's portfolio of investments in each of French 
and German sovereign debt may not exceed 60 days; and (iii) a DCO may 
not make a direct investment in any sovereign debt instrument of France 
or Germany that has a remaining time-to-maturity in excess of 180 
calendar days.\50\ The 2018 Order also provides that if the two-year 
credit default spread of the French or German sovereign debt exceeds 45 
basis points (``BPS''), the DCO may not make any new direct investments 
in the relevant sovereign debt using futures customer funds or Cleared 
Swaps Customer Collateral and must discontinue investing futures 
customer funds and Cleared Swaps Customer Collateral in the relevant 
debt through Repurchase Transactions as soon as practicable under the 
circumstances.\51\
---------------------------------------------------------------------------

    \50\ Conditions (3)(a), 3(c), and 3(d) of the 2018 Order at 
35245.
    \51\ Condition (3)(b) of the 2018 Order at 35245.
---------------------------------------------------------------------------

    The 2018 Order also grants an exemption from Commission regulation 
1.25(d)(2) to permit DCOs to enter into Repurchase Transactions 
involving French or German sovereign debt with foreign banks and 
foreign securities brokers or dealers as counterparties.\52\ A DCO may 
enter into Repurchase Transactions with a foreign bank or foreign 
securities broker or dealer provided that the firm qualifies as a 
permitted depository under Commission regulation 1.49(d)(3) and is 
located in a ``money center country'' \53\ or in another jurisdiction 
that has adopted the euro as its currency.\54\ The 2018 Order further 
grants an exemption from the requirement in Commission regulation 
1.25(d)(7) that securities transferred to an FCM or DCO under reverse 
repurchase agreements must be held in

[[Page 7814]]

safekeeping accounts with certain U.S.-domiciled banks, a Federal 
Reserve Bank, a DCO, or the Depository Trust Company, to permit DCOs to 
hold French or German sovereign debt received under reverse repurchase 
agreements in a safekeeping account with foreign banks that qualify as 
depositories for Customer Funds under Commission regulation 
1.49(d)(3).\55\
---------------------------------------------------------------------------

    \52\ Condition 2(a) of the 2018 Order at 35245.
    \53\ Commission regulation 1.49(a) defines the term ``money 
center country'' as Canada, France, Italy, Germany, Japan, and the 
United Kingdom.
    \54\ Conditions 2(b) and 3(e) of the 2018 Order at 35245. 
Commission regulation 1.49(d)(3) provides that to qualify as a 
depository for Customer Funds, a foreign depository must be a bank 
or trust company that has in excess of $1 billion in regulatory 
capital, a registered FCM, or a DCO. 17 CFR 1.49(d)(3).
    \55\ Condition 2(b) of the 2018 Order at 35245. Commission 
regulation 1.25(d)(7) provides that securities transferred to an FCM 
or DCO under a reverse repurchase agreement must be held in a 
safekeeping account only with the following depositories: (i) a 
section 3(a)(6) bank; (ii) a domestic branch of a foreign bank 
insured by the FDIC; (iii) a Federal Reserve Bank; (iv) a DCO; or 
(v) the Depository Trust Company. 17 CFR 1.25(d)(7). A foreign-
domiciled bank is currently not an authorized depository for 
securities transferred to an FCM or DCO under Commission regulation 
1.25(d)(7).
---------------------------------------------------------------------------

    The Petitioners further requested that FCMs and DCOs be permitted 
to invest Customer Funds in certain exchange-traded funds (``ETFs'') 
that invest primarily in short-term U.S. Treasury securities (``U.S. 
Treasury ETFs'').\56\ In support of their request, the Petitioners 
stated that U.S. Treasury ETFs have characteristics that may be 
consistent with those of other Permitted Investments and may provide 
FCMs and DCOs with an opportunity to diversify further their 
investments of customer funds.\57\
---------------------------------------------------------------------------

    \56\ Joint Petition at pp. 8-9.
    \57\ Id.
---------------------------------------------------------------------------

    The Commission also received a petition from Invesco Capital 
Management LLC (``Invesco''), which serves as a sponsor of various 
ETFs, advocating for the addition of U.S. Treasury ETF securities to 
the list of Permitted Investments.\58\ Invesco stated that U.S. 
Treasury ETFs would provide FCMs and DCOs with additional investment 
choices for Customer Funds, promote operational efficiencies, and offer 
potentially better investment returns for FCMs, DCOs, and their 
customers, and facilitate financial market innovation.\59\ Invesco 
further stated that listing U.S. Treasury ETFs as Permitted Investments 
would be consistent with the public interest and the customer 
protection regime under the Act and Commission regulations as U.S. 
Treasury ETFs may only invest in instruments that are otherwise 
eligible as Permitted Investments for Customer Funds.\60\ Invesco 
further noted that because U.S. Treasury ETFs invest in a sub-set of 
the same high-quality liquid instruments that are Permitted Investments 
under Commission regulation 1.25 (i.e., U.S. government securities), 
the ETFs offer an indirect, possibly simpler, and more cost-efficient 
way for FCMs and DCOs to invest Customer Funds in U.S. Treasury 
securities and obligations fully guaranteed as to principal and 
interest by the U.S. by eliminating the need for FCMs and DCOs to 
administer direct investments in individual U.S. government 
securities.\61\
---------------------------------------------------------------------------

    \58\ Letter from Anna Paglia, Chief Executive Officer, Invesco 
Capital Management LLC, dated September 28, 2023 (``Invesco 
Petition''), available at https://www.cftc.gov/media/9541/Invesco_CFTCPetition_Regulation125_092823/download. Invesco is 
registered with the Commission as a commodity pool operator and 
commodity trading advisor, and is registered with the Securities and 
Exchange Commission (``SEC'') as an investment adviser.
    \59\ Invesco Petition at p. 1.
    \60\ Id. at p. 9.
    \61\ Id. at p. 2.
---------------------------------------------------------------------------

    Lastly, the Petitioners also requested that the Commission amend 
its regulations consistent with CFTC Staff Letter 21-02 and CFTC Staff 
Letter 22-21 \62\ to permit FCMs and DCOs to invest Customer Funds in 
qualifying Permitted Investments that have adjustable rates of interest 
that correlate closely to SOFR.\63\
---------------------------------------------------------------------------

    \62\ CFTC Staff Letter 21-02, CFTC Regulation 1.25--Investment 
of Customer Funds--Time-Limited No-Action Position for Investments 
in Securities with an Adjustable Rate of Interest Benchmarked to the 
Secured Overnight Financing Rate (Jan. 4, 2021) (``Staff Letter 21-
02'') available at the Commission's website: https://www.cftc.gov/LawRegulation/CFTCStaffLetters/letters.htm?title=21-02&field_csl_letter_year_value=&field_csl_dodd_frank_exists_value=All
; CFTC Staff Letter 22-21, CFTC Regulation 1.25--Investment of 
Customer Funds in Securities with an Adjustable Rate of Interest 
Benchmarked to the Secured Overnight Financing Rate--Extension of 
Time-Limited No-Action Position Concerning Investments by Futures 
Commission Merchants and No-Action Position Concerning Investments 
by Derivatives Clearing Organizations (Dec. 23, 2022) (``Staff 
Letter 22-21'') available at the Commission's website: www.cftc.gov/LawRegulation/CFTCStaffLetters/letters.htm?title=22-21&field_csl_letter_year_value=&field_csl_dodd_frank_exists_value=All
.
    \63\ Joint Petition at p. 4.
---------------------------------------------------------------------------

III. Summary of the Proposal

    In order to revise Commission regulation 1.25 to address outdated 
provisions, and in consideration of the Joint Petition and the Invesco 
Petition, the Commission proposed to amend the list of Permitted 
Investments to: (i) add two new asset classes (i.e., Specified Foreign 
Sovereign Debt instruments and U.S. Treasury ETFs), subject to certain 
conditions; (ii) limit the scope of money market funds (``MMFs'') whose 
interests qualify as Permitted Investments; and (iii) remove corporate 
notes, corporate bonds, and commercial paper. The Commission also 
proposed amendments to FCM financial reporting requirements to reflect 
the proposed amendments to the list of Permitted Investments. The 
Commission further proposed changes to the counterparty and depository 
requirements of Commission regulation 1.25(d)(2) and (7), and revisions 
to the concentration limits for Permitted Investments set forth in 
Commission regulation 1.25(b)(3). The Commission also specified 
proposed capital charges that FCMs would have to apply to the proposed 
new Permitted Investment instruments and proposed a clarifying 
amendment to Commission regulation 22.3(d) to specify that DCOs bear 
the financial responsibility for losses resulting from investment of 
Customer Funds in Permitted Investments. The Commission further 
proposed to replace LIBOR with SOFR as a permitted benchmark for the 
interest rate of adjustable rate securities that qualify as Permitted 
Investments. Lastly, the Commission proposed to amend its regulations 
to eliminate the requirement that a depository holding customer funds 
must provide the Commission with read-only electronic access to such 
accounts for the FCM to treat the accounts as customer segregated fund 
accounts.\64\ Each of these proposed amendments are discussed in 
section IV. of this preamble.
---------------------------------------------------------------------------

    \64\ See generally Proposal.
---------------------------------------------------------------------------

    The comment period for the Proposal closed on January 17, 2024. The 
Commission received 17 comment letters from various interested parties, 
including investor advocacy groups, trade associations, and financial 
services companies.\65\ The majority of commenters expressed support 
for the Proposal, generally noting that the proposed amendments 
represent appropriate updates to the list of Permitted Investments. 
Several commenters specifically supported the inclusion of foreign 
sovereign debt and U.S. Treasury ETFs as Permitted Investments.\66\ 
Conversely, two

[[Page 7815]]

commenters opposed allowing FCMs and DCOs to invest Customer Funds in 
foreign sovereign debt.\67\ Many commenters also recommended revisions 
to the proposed conditions underlying the Proposal, including the 
conditions proposed for investment in certain short-term U.S. Treasury 
ETFs.\68\
---------------------------------------------------------------------------

    \65\ The following entities submitted comments: Alternative 
Investment Management Association (``AIMA''); Americans for 
Financial Reform Education Fund, Consumer Federation of America, 
Food & Water Watch, Institute for Agriculture and Trade Policy, and 
Public Citizen (collectively, the ``Investor Advocacy Group'' and 
the ``Investor Advocacy Group Joint Letter''); Better Markets; 
BlackRock, Inc. (``BlackRock''); Eurex Clearing AG (``Eurex''); 
Federated Hermes, Inc. (``Federated Hermes''); Futures Industry 
Association and CME Group Inc. (``FIA/CME Joint Letter''); The 
Global Association of Central Counterparties (``CCP Global''); 
Intercontinental Exchange Inc. (``ICE''); Invesco Capital Management 
LLC (``Invesco''); Investment Company Institute (``ICI''); Managed 
Funds Association (``MFA''); National Futures Association (``NFA''); 
Nodal Clear, LLC (``Nodal''); the Asset Management Group of the 
Securities Industry and Financial Markets Association (``SIFMA 
AMG''); State Street Global Advisors (``SSGA''); and World 
Federation of Exchanges (``WFE''). The comment letters are available 
at https://comments.cftc.gov/PublicComments/CommentList.aspx?id=7453.
    \66\ Invesco at pp. 2-3; ICI at p. 2; AIMA at pp. 2-3; FIA/CME 
Joint Letter at pp. 2, 4-15; MFA at pp. 2-6; Nodal at pp. 1-2; SIFMA 
AMG at pp. 2-8, 12; CCP Global at pp. 2-4 WFE at pp. 3-6.
    \67\ Better Markets at pp. 3-7; Investor Advocacy Group Joint 
Letter at pp. 1-2.
    \68\ AIMA at pp. 2-3; MFA at pp. 5-6; FIA/CME Joint Letter at 
pp. 11-16; CCP Global at pp. 3-4; BlackRock at pp. 2-6; Invesco at 
pp. 3-5; ICI at pp. 2-6 SIFMA AMG at pp. 4-6; SSGA at pp. 2-3; WFE 
at pp. 5-6.
---------------------------------------------------------------------------

    In consideration of the broad public input expressed in the public 
comments and the Commission's experience administering the rules that 
govern investments of Customer Funds by FCMs and DCOs, the Commission 
is adopting the proposed amendments, subject to the changes discussed 
below.\69\
---------------------------------------------------------------------------

    \69\ The final rulemaking is referred to as the ``Final Rule'' 
in this preamble.
---------------------------------------------------------------------------

IV. Final Rule

A. Investment of Customer Funds

1. Interests in Money Market Funds
a. Proposal
    Commission regulation 1.25(a)(1)(vii) currently provides that FCMs 
and DCOs may invest Customer Funds in interests in MMFs, subject to 
specified terms and conditions.\70\ To qualify as a Permitted 
Investment, an MMF must: (i) be an investment company registered with 
the SEC under the Investment Company Act of 1940 \71\ and hold itself 
out to investors as an MMF in accordance with SEC Rule 2a-7; \72\ (ii) 
be sponsored by a federally-regulated financial institution, a section 
3(a)(6) bank,\73\ an investment adviser registered under the Investment 
Advisers Act of 1940,\74\ or a domestic branch of a foreign bank 
insured by the FDIC; and (iii) compute, and make available to MMF 
shareholders, the net asset value (``NAV'') of the fund by 9 a.m. of 
the business day following each business day.\75\
---------------------------------------------------------------------------

    \70\ 17 CFR 1.25(a)(vii).
    \71\ 15 U.S.C. 80a-1--80a-64.
    \72\ 17 CFR 270.2a-7 (``SEC Rule 2a-7'').
    \73\ For a definition of section 3(a)(6) bank, see supra note 
52.
    \74\ 15 U.S.C. 80b-1--80b-21.
    \75\ 17 CFR 1.25(c).
---------------------------------------------------------------------------

    As further described below, the Commission proposed to amend 
Commission regulation 1.25(a)(1)(vii) to limit the scope of MMFs whose 
interests qualify as Permitted Investments in response to two sets of 
rule amendments adopted by the SEC regarding MMFs, which rendered, in 
the Commission's view, certain MMFs incompatible with the liquidity 
requirements of Commission regulation 1.25.\76\ Specifically, the 
Commission proposed to limit Permitted Investments in MMFs to interests 
in certain ``government money market funds,'' as defined in SEC Rule 
2a-7.\77\ A Government MMF is defined in SEC Rule 2a-7 as a fund that 
invests 99.5 percent or more of its total assets in cash, ``government 
securities,'' and/or Repurchase Transactions that are collateralized 
fully by cash or ``government securities.'' \78\ A ``government 
security'' is defined as any security issued or guaranteed as to 
principal or interest by the United States, or by a person controlled 
or supervised by and acting as instrumentality of the Government of the 
United States pursuant to authority granted by the Congress of the 
United States; or any certificate of deposit of any of the 
foregoing.\79\ Therefore, a ``government security'' encompasses ``U.S. 
government securities'' and ``U.S. agency obligations'' as defined 
under Commission regulation 1.25(a)(1)(i) and (iii), respectively.\80\
---------------------------------------------------------------------------

    \76\ Proposal at 81240-81243.
    \77\ Id. SEC Rule 2a-7 addresses MMFs that primarily invest in 
securities issued or guaranteed by the U.S. government (``government 
money market funds'' or ``Government MMFs''), MMFs that primarily 
invest in short-term corporate debt securities (``Prime MMFs''), and 
other types of MMFs that are not relevant to this Proposal, such as 
tax-exempt funds. 17 CFR 270.2a-7.
    \78\ 17 CFR 270.2a-7(a)(14).
    \79\ 15 U.S.C. 80a-2(a)(16).
    \80\ Commission regulation 1.25(a)(1)(i) and (iii) defines 
``U.S. government securities'' as obligations of the U.S. and 
obligations fully guaranteed as to principal and interest by the 
U.S. and ``U.S. agency obligations'' as obligations of any U.S. 
government corporation or enterprise sponsored by the U.S. 
government, respectively.
---------------------------------------------------------------------------

    As noted above, the Commission proposed to amend Commission 
regulation 1.25 to limit the scope of MMFs that qualify as Permitted 
Investments in response to SEC revisions to its MMF rules. 
Specifically, in 2014, the SEC amended SEC Rule 2a-7 to authorize an 
MMF to impose liquidity fees on participant redemptions, or to 
temporarily suspend participant redemptions, if the MMF's investment 
portfolio triggered certain liquidity thresholds.\81\ The 2014 SEC MMF 
Final Rule was adopted to mitigate the adverse effects on fund 
liquidity resulting from increased participant redemptions during times 
of financial stress.\82\ The 2014 SEC Redemption Provisions were 
mandatory for Prime MMFs, and Government MMFs could voluntarily elect 
to impose the 2014 SEC Redemption Provisions (``Electing Government 
MMFs'').\83\
---------------------------------------------------------------------------

    \81\ Money Market Fund Reform; Amendments to Form PF, 79 FR 
47736 (Aug. 14, 2014) (``2014 SEC MMF Final Rule''). See 17 CFR 
270.2a-7(c)(2).
    \82\ 2014 SEC MMF Final Rule at 47747. See also Proposal at 
81241-81243. The liquidity fees and suspension of redemptions 
provisions introduced by the 2014 SEC MMF Final Rule are referred to 
as the ``2014 SEC Redemption Provisions'' in this document.
    \83\ 17 CFR 270.2a-7(c)(2)(iii).
---------------------------------------------------------------------------

    Commission staff subsequently received inquiries from market 
participants concerning the permissibility of investing Customer Funds 
in MMF interests under Commission regulation 1.25 in light of the 2014 
SEC Redemption Provisions. In response, Commission staff issued CFTC 
Staff Letter 16-68 \84\ and CFTC Staff Letter 16-69 \85\ addressing the 
2014 SEC Redemption Provisions and the investment of Customer Funds in 
MMFs by FCMs and DCOs, respectively. Staff Letter 16-68 \86\ expresses 
DSIO's view that the 2014 SEC Redemption Provisions conflict with 
paragraphs (b)(1) \87\ and (c)(5)(i) \88\ of Commission regulation 
1.25, as the Redemption Provisions have the effect of potentially 
reducing the liquidity of Prime MMFs and Electing Government MMFs 
through the imposition of fees and suspension of redemptions. 
Therefore, DSIO stated that FCMs may no longer

[[Page 7816]]

invest Customer Funds in Prime MMFs and Electing Government MMFs.\89\
---------------------------------------------------------------------------

    \84\ CFTC Letter No. 16-68, No-Action Relief with Respect to 
CFTC Regulation 1.25 Regarding Money Market Funds (Aug. 8, 2016) 
(``Staff Letter 16-68'') available at the Commission's website: 
www.cftc.gov/LawRegulation/CFTCStaffLetters/letters.htm?title=16-68&field_csl_letter_year_value=&field_csl_dodd_frank_exists_value=All
.
    Staff Letter 16-68 was issued by the Commission's Division of 
Swap Dealer and Intermediary Oversight (``DSIO'') (subsequently 
renamed the Market Participants Division (``MPD'')).
    \85\ CFTC Letter No. 16-69, Staff Interpretation Regarding CFTC 
Part 39 In Light Of Revised SEC Rule 2a-7 (Aug. 8, 2016) (``Staff 
Letter 16-69''). Staff Letter 16-69 was issued by the Commission's 
Division of Clearing and Risk (``DCR'') and is available at the 
Commission's website: www.cftc.gov/LawRegulation/CFTCStaffLetters/letters.htm?title=16-69&field_csl_letter_year_value=&field_csl_dodd_frank_exists_value=All
.
    \86\ See also CFTC Staff Advisory No. 16-75, Practical 
Application of No-Action Letter No. 16-68 Regarding the Investments 
in Money Market Mutual Funds (Oct. 18, 2016) (``Staff Letter 16-
75'') (discussing the practical applicability and effect of Staff 
Letter 16-68) available at the Commission's website: https://www.cftc.gov/LawRegulation/CFTCStaffLetters/letters.htm?title=16-75&field_csl_letter_year_value=&field_csl_dodd_frank_exists_value=All
.
    \87\ 17 CFR 1.25(b)(1) (investments of customer funds must be 
highly liquid such that the investments must have the ability to be 
liquidated and converted into cash within one business day without 
material discount in value).
    \88\ 17 CFR 1.25(c)(5)(i) (to qualify as a Permitted Investment 
an MMF must be legally obligated to pay a fund investor (including 
an FCM) by the close of business on the day following a redemption 
request).
    \89\ Staff Letter 16-68 at p. 2. However, DSIO also states in 
Staff Letter 16-68 that it would not recommend an enforcement action 
to the Commission if an FCM invested Customer Funds held in 
segregation that represents an excess over the firm's targeted 
residual interest in Prime and Electing Government MMFs. Staff 
Letter 16-68 at pp. 3-4.
---------------------------------------------------------------------------

    Staff Letter 16-69 set forth DCR's interpretation that Commission 
regulations 39.15(c) and (e) \90\ prohibit a DCO from holding funds 
belonging to clearing members or their customers in Prime MMFs or 
Electing Government MMFs. Staff Letter 16-69 also states that the 2014 
SEC Redemption Provisions are not consistent with Commission regulation 
39.15(c), which requires a DCO to hold funds and assets belonging to 
clearing members and their customers in a manner that minimizes the 
risk of loss or of delay in the access by the DCO to such funds and 
assets. Staff Letter 16-69 further provides that the 2014 SEC 
Redemption Provisions are inconsistent with Commission regulation 
39.15(e), which limits a DCO to investing funds and assets belonging to 
clearing members and their customer in instruments with minimal credit, 
market, and liquidity risk. FCMs and DCOs have not invested Customer 
Funds in Prime MMFs or Electing Government MMFs since the issuance of 
Staff Letters 16-68 and 16-69 in 2016.\91\
---------------------------------------------------------------------------

    \90\ 17 CFR 39.15(c) and (e).
    \91\ While Staff Letter 16-68 provides that DSIO would not 
recommend an enforcement action against an FCM that invested 
Customer Funds in Prime and Electing Government MMFs, provided that 
the amount invested represents an amount held in customer segregated 
accounts that exceeds the firm's targeted residual interest amount, 
staff is not aware of FCMs investing Customer Funds in such MMFs.
---------------------------------------------------------------------------

    In August 2023, the SEC adopted additional amendments to its MMF 
rules, including amendments revising the 2014 SEC Redemption Provisions 
discussed above.\92\ The 2023 SEC MMF Reforms address issues observed 
by the SEC with MMFs in connection with the economic shock from the 
onset of the COVID-19 pandemic. Specifically, the SEC stated in March 
2020, that concerns about the impact of COVID-19 pandemic led investors 
to reallocate their assets into cash and short-term government 
securities. Certain Prime MMFs, in particular, experienced significant 
outflows, contributing to stress on short-term funding markets that 
resulted in government intervention to enhance the liquidity of such 
markets.\93\ The events of March 2020 led the SEC to re-evaluate 
certain aspects of the regulatory framework applicable to MMFs. In 
considering the potential factors that caused the increased redemption 
activity in March 2020, the SEC noted that, among other concerns, fears 
about the potential imposition of redemption gates and liquidity fees 
based on observed declines in some funds' weekly liquid assets appear 
to have incentivized investors to redeem from certain MMFs.\94\ 
Further, according to the SEC, the presence of a liquidity threshold 
for consideration of fees and gates appears to have affected fund 
managers' behavior, encouraging the sale of long-term portfolio assets 
to maintain weekly liquid assets above the 30 percent threshold.\95\ 
The SEC also cited evidence suggesting that investors are particularly 
sensitive to the potential imposition of redemption gates, which 
restricts MMF share redemption for the duration of the gate.\96\ In the 
SEC's view, generally supported by commenters' feedback, the gates and 
liquidity fees associated with predictable weekly liquid asset triggers 
proved counterproductive in stemming heavy redemptions from certain 
MMFs.\97\ Thus, the SEC concluded that MMFs needed better functioning 
tools for managing through stress while mitigating harm to 
shareholders.\98\
---------------------------------------------------------------------------

    \92\ Money Market Fund Reforms; Form PF Reporting Requirements 
for Large Liquidity Fund Advisers, Technical Amendments to Form N-
CSR and Form N-1A, 88 FR 51404 (Aug. 3, 2023) (``2023 SEC MMF 
Reforms''). The 2023 SEC MMF Reforms became effective on October 2, 
2023.
    \93\ As noted in the 2023 SEC MMF Reforms' adopting release, to 
support the short-term funding markets, on March 18, 2020, the 
Federal Reserve, with the approval of the Department of the 
Treasury, established the Money Market Mutual Fund Liquidity 
Facility. The facility provided loans to financial institutions on 
advantageous terms to purchase securities from MMFs that were 
raising liquidity. 2023 SEC MMF Reforms at 51408.
    \94\ 2023 SEC MMF Reforms at 51407. The term ``weekly liquid 
assets'' is generally defined as: (i) cash; (ii) direct obligations 
of the U.S. Government; (iii) U.S. Agency securities that are issued 
at a discount to the principal amount to be repaid at maturity and 
have a remaining time to maturity of 60 days or less; (iv) 
securities that mature, or are subject to a demand feature that is 
exercisable and payable, within 5 business days; or (v) amounts 
receivable and due unconditionally within 5 business days on pending 
sales of portfolio securities. 17 CFR 270-2a-7(c)(a)(28).
    \95\ 2023 SEC MMF Reforms at 51407.
    \96\ Id. at 51409.
    \97\ Id.
    \98\ Id. at 51408.
---------------------------------------------------------------------------

    Accordingly, in an effort to improve the resilience of MMFs and 
address the issue of preemptive investor redemption behavior, 
particularly in times of stress, the SEC adopted changes to the fee and 
gate provisions in SEC Rule 2a-7. The 2023 SEC MMF Reforms, among other 
things, amended the 2014 SEC Redemption Provisions by removing a Prime 
MMF's ability to temporarily suspend participant redemptions and by 
removing an Electing Government MMF's ability to voluntarily retain 
authority to suspend participant redemptions.\99\ The 2023 SEC MMF 
Reforms also require Prime MMFs to impose a liquidity fee when the fund 
experiences net redemptions that exceed 5 percent of the fund's net 
assets, and permit Prime MMFs to impose a discretionary liquidity fee 
if the fund's board of directors determines that a fee is in the best 
interest of the fund.\100\ Government MMFs are not required to 
implement the mandatory liquidity fee but may choose to rely on the 
ability to impose discretionary liquidity fees.\101\ Such fees, 
however, are no longer tied to the weekly liquid asset threshold.\102\
---------------------------------------------------------------------------

    \99\ Id. at 51410.
    \100\ 17 CFR 270.2a-7(c)(2)(i) and (ii) (as amended by the 2023 
SEC MMF Reforms). SEC Rule 2a-7(c)(2)(i) provides, in relevant part, 
that if a Prime MMF's board of directors, including a majority of 
the directors who are not interested persons of the fund, determines 
that a liquidity fee is in the best interest of the fund, the fund 
must institute a liquidity fee that does not exceed two percent of 
the value of the shares redeemed. In addition, SEC Rule 2a-
7(c)(2)(ii) provides, in relevant part, that a Prime MMF must apply 
a liquidity fee to all shares that are redeemed if the fund 
experiences total daily net redemptions that exceed 5 percent of the 
fund's net asset value, or such smaller amount of net redemptions as 
the board of directors of the fund determines.
    \101\ 17 CFR 270.2a-7(c)(2)(i)(B) (as amended by the 2023 SEC 
MMF Reforms). SEC Rule 2a-7(c)(2)(i)(B) permits Government MMFs to 
elect to impose the discretionary liquidity fees on shareholder 
redemptions.
    \102\ 17 CFR 270.2a-7(c)(2)(i) (as amended by the 2023 SEC MMF 
Reforms).
---------------------------------------------------------------------------

    The SEC's liquidity fee mechanism is designed to address 
shareholder dilution and the potential for first-mover advantage by 
allocating liquidity costs to redeeming investors. Although the 
mechanism may contribute to decreasing outflows from certain MMFs, the 
Commission preliminarily considered that the potential imposition of a 
fee would nonetheless potentially reduce the principal of an FCM's or 
DCO's investment in MMF shares, particularly during periods of market 
stress and high shareholder redemptions. Such potential loss of 
principal could have an adverse impact on the ability of an FCM or DCO 
to fully repay customers, who may need liquidity in their accounts to 
meet trading losses and/or margin calls. Therefore, consistent with the 
positions taken in Staff Letter 16-68 and Staff Letter 16-69, the 
Commission proposed to limit the scope of MMFs whose interests qualify 
as Permitted Investments to funds that are not subject to a liquidity 
fee (i.e., Government MMFs that are not Electing Government MMFs 
(referred to in this release as

[[Page 7817]]

``Permitted Government MMFs'')).\103\ As discussed in the Proposal, to 
qualify as a Permitted Government MMF, at least 99.5 percent of the 
fund's investment portfolio must be comprised of cash, government 
securities (i.e., U.S. Treasury securities, securities fully-guaranteed 
as to principal and interest by the U.S. Government, and U.S. agency 
obligations), and/or Repurchase Transactions that are fully 
collateralized by government securities as set forth in SEC Rule 2a-
7.\104\ The Commission's goal in proposing the amendment was to ensure 
that FCMs and DCOs invest Customer Funds in instruments that are 
consistent with the objectives of Commission regulation 1.25 of 
preserving principal and maintaining liquidity of the investments.
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    \103\ See Proposal at 81240-81243 and proposed paragraph 
(a)(1)(v) of Commission regulation 1.25.
    \104\ See Proposal at 81240-81241.
---------------------------------------------------------------------------

    To eliminate MMFs whose redemptions may be subject to a liquidity 
fee from the scope of Permitted Investments under Commission regulation 
1.25, the Commission proposed revising Commission regulation 
1.25(a)(1)(vii), which would be redesignated as Commission regulation 
1.25(a)(1)(iv) to accommodate other amendments to Commission regulation 
1.25(a) discussed in the Proposal, by replacing the term ``money market 
mutual fund'' with the term ``government money market funds as defined 
in Sec.  270.2a-7 of this title, provided that the funds do not elect 
to be subject to liquidity fees in accordance with Sec.  270.2a-7 of 
this title (government money market fund).'' \105\ The Commission also 
proposed further conforming changes throughout Commission regulation 
1.25, and the appendix to Commission regulation 1.25, by replacing all 
references to ``money market mutual fund'' with ``government money 
market fund.'' \106\ In addition, the appendix to Commission regulation 
1.25 was proposed to be redesignated as appendix E to part 1 to address 
a change in the rules of the Office of the Federal Register regarding 
the structure of regulatory text to be codified in the Code of Federal 
Regulations.\107\ Further, the Commission proposed conforming 
amendments to Commission regulations 1.26 and 30.7(d), which require an 
FCM and/or DCO, as applicable, that invests Customer Funds in Permitted 
Investments, including qualifying MMFs, to obtain and retain in its 
files a written acknowledgement letter from the depository holding the 
instruments stating that the depository was informed that the 
instruments belong to customers and are being held in accordance with 
the provisions of the Act and Commission regulations.\108\ The 
Commission also proposed conforming amendments to the appendices 
setting forth the template acknowledgment letters.\109\ Specifically, 
the Commission proposed to replace the references to ``money market 
mutual fund'' with ``government money market fund'' in Commission 
regulation 1.26, appendix A and appendix B to Commission regulation 
1.26 (to be redesignated appendix F and appendix G to part 1), 
Commission regulation 30.7(d), and appendix F to part 30 of the 
Commission's regulations.\110\
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    \105\ Proposal at 81240-81243, proposed Commission regulation 
1.25(a)(1)(v).
    \106\ Proposal at 81243.
    \107\ Id.
    \108\ Id. at 81263.
    \109\ Id.
    \110\ Id.
---------------------------------------------------------------------------

    The Commission also noted that the proposed amendments removing 
interests in MMFs whose redemptions may be subject to a liquidity fee 
from the scope of Permitted Investments would prohibit an FCM from 
depositing proprietary interests in such MMFs into Customer Funds 
accounts.\111\ The Commission stated that Commission regulations 
1.23(a)(1), 22.2(e)(3)(i), and 30.7(g)(1) permit FCMs to deposit 
proprietary cash and unencumbered securities into the accounts of 
futures customers, Cleared Swaps Customers, and 30.7 customers, 
respectively, to help ensure that at all times the accounts maintain 
sufficient funds to cover the amounts due to all customers.\112\ The 
proprietary securities deposited by FCMs into customer accounts, 
however, must satisfy the criteria of a Permitted Investment as 
specified in Commission regulation 1.25.\113\ Therefore, with respect 
to MMFs, FCMs would only be permitted to deposit proprietary interest 
in Permitted Government MMFs in the accounts of futures customers, 
Cleared Swaps Customers, and 30.7 customers under the Proposal.
---------------------------------------------------------------------------

    \111\ Proposal at 81242.
    \112\ 17 CFR 1.23(a)(1), 22.2(e)(3)(i), and 30.7(g)(1). A 
customer account is ``undersegregated'' if an FCM holds less funds 
in the account than is necessary to cover the total amount due to 
the customer at any given point in time.
    \113\ Id.
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b. Comments
    The Commission received six comments on the proposed limit of the 
scope of MMFs whose interests qualify as Permitted Investments to 
Permitted Government MMFs.\114\ Each of the commenters supported the 
proposed limitation.\115\ AIMA noted that the amendments would 
appropriately update the list of Permitted Investments in line with 
sound risk management practices.\116\ ICI stated that the proposed 
amendments are consistent with the regulatory objective of limiting 
Permitted Investments to safe, short-term instruments.\117\ Though 
supportive of the proposed amendments, BlackRock raised concerns about 
the Proposal's rationale, asserting that in discussing investor 
behavior during the March 2020 events, the Commission failed to 
acknowledge that there was a broader ``dash for cash'' occurring across 
asset classes, not just MMFs, at that time period.\118\
---------------------------------------------------------------------------

    \114\ See AIMA at p. 3; BlackRock at pp. 2, 6; Federated Hermes 
at pp. 1-2; FIA/CME Joint Letter at p. 21; ICI at p. 2; MFA at p. 6.
    \115\ Id.
    \116\ AIMA at p. 3.
    \117\ ICI at p. 2.
    \118\ BlackRock at p. 6.
---------------------------------------------------------------------------

    In addition to supporting the proposed revisions to the scope of 
the MMFs, FIA and CME recommended an amendment to the template 
acknowledgement letters for Government MMFs set forth in appendices A 
and B to Commission regulation 1.26 for direct investments by FCMs and 
DCOs of futures customer funds and Cleared Swaps Customer Collateral in 
MMFs, and appendix F to part 30 for direct investments by FCMs of 30.7 
customer funds in MMFs.\119\ Specifically, FIA and CME recommended that 
each template acknowledgment letter include a representation from the 
Government MMF that the fund does not elect to impose discretionary 
liquidity fees.\120\
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    \119\ FIA/CME Joint Letter at p. 21. As discussed in the 
Proposal, Commission regulations 1.26 and 30.7(d) require an FCM or 
DCO, as applicable, to obtain, and retain in its files, a written 
acknowledgment from each depository holding Permitted Investments. 
Proposal at 81263.
    \120\ Id. The FIA/CME Joint Letter included the following 
suggested language: ``Furthermore, you acknowledge and agree that 
the Shares are in a fund that holds itself out to investors as a 
government money market fund, in accordance with 17 CFR 270.2a-7. In 
addition, the Shares are in a fund that does not choose to rely on 
the ability to impose discretionary liquidity fees consistent with 
the requirements of 17 CFR 270.2a-7(c)(2)(i).'' FIA/CME Joint Letter 
at p. 21.
---------------------------------------------------------------------------

    Finally, in response to the Commission's request for comment on 
whether the Commission should revise Commission regulation 
1.25(b)(5)(ii) to prohibit FCMs and DCOs from investing Customer Funds 
in a fund affiliated with the FCM or DCO, commenters asserted that no 
changes were

[[Page 7818]]

necessary.\121\ These commenters noted that ``risk posed by 
affiliates'' is a component of the risk management program that FCMs 
are required to adopt pursuant to Commission regulation 1.11.\122\ The 
commenters further asserted that because Permitted Investments 
involving FCM affiliates are already subject to the policies, 
procedures, and controls of consolidated risk management programs, as 
well as existing statutory and regulatory requirements, there is no 
reason to revisit the Commission's previous consideration of this 
issue.\123\
---------------------------------------------------------------------------

    \121\ Proposal at 81243, Question 2. Commission regulation 
1.25(b)(5)(ii) provides, in relevant part, that an FCM or DCO may 
not invest Customer Funds in obligations of an affiliated entity, 
but permits investments by FCMs and DCOs in interest in funds 
affiliated with the applicable FCM or DCO.
    \122\ FIA/CME Joint Letter at p. 19; MFA at p. 6.
    \123\ Id. (referencing the Commission's final rule Enhancing 
Protections Afforded Customers and Customer Funds Held by Futures 
Commission Merchants and Derivatives Clearing Organizations, 78 FR 
68506 at 68520 Nov. 14, 2013) (``2013 Protections of Customer Funds 
Release''), which notes that an FCM's risk management policies and 
procedures under Commission regulation 1.11 must include procedures 
for assessing the appropriateness of investing customer funds in 
accordance with Commission regulation 1.25, and ``must take into 
consideration the market, credit, counterparty, operational, and 
liquidity risks associated with the investments.'')
---------------------------------------------------------------------------

c. Discussion
    The Commission has considered the comments received, and is 
adopting as proposed the amendments to Commission regulation 1.25 to 
limit the scope of MMFs that qualify as Permitted Investments for 
Customer Funds to Permitted Government MMFs. As stated in the Proposal, 
the Commission's intent in eliminating Prime MMFs and Electing 
Government MMFs from the list of Permitted Investments is to ensure 
that Customer Funds are managed with the objectives of preserving 
principal of the investments, consistent with the general requirements 
of Commission regulation 1.25(b).\124\ The SEC requirement for Prime 
MMFs to impose a liquidity fee on shareholder redemptions when the fund 
experiences net redemptions that exceed 5 percent of the fund's net 
assets and the separate authority granted by the SEC that permits funds 
to impose discretionary liquidity fees of up to 2 percent on 
shareholder redemptions if the board of directors determines that such 
a fee is in the best interest of the fund are not consistent with the 
obligation imposed under Commission regulation 1.25(b) on FCMs and DCOs 
to preserve the principal of Customer Funds invested in Permitted 
Investments. The imposition of mandatory or discretionary liquidity 
fees on an FCM's or DCO's redemption request from a Prime MMF or an 
Electing Government MMF may result in an FCM or DCO not realizing the 
full principal value of its investment upon its redemption request. The 
inability of the FCM or DCO to receive the full principal value of its 
investment of Customer Funds presents potential financial risk to the 
FCM or DCO as it may not have sufficient funds to fully repay the 
account balances of each customer. Thus, the Commission is revising the 
list of Permitted Investments to remove Prime MMFs and Electing 
Government MMFs.
---------------------------------------------------------------------------

    \124\ Proposal at 81242. Commission regulation 1.25(b) provides, 
in relevant part, that an FCM or DCO is required to manage its 
Permitted Investments consistent with the objectives of preserving 
principal and maintaining liquidity of the Customer Funds. 17 CFR 
1.25(b).
---------------------------------------------------------------------------

    The Commission is also maintaining current Commission regulation 
1.25(b)(5)(ii), which provides that an FCM or DCO may invest Customer 
Funds in a fund affiliated with that FCM or DCO. Consistent with its 
views expressed in connection with the risk management program mandated 
by Commission regulation 1.11,\125\ the Commission expects that FCMs 
will assess the appropriateness of investing Customer Funds in 
affiliated funds in accordance with this program.\126\ Similarly, 
because DCO Core Principle F and Commission regulation 39.15(e) require 
a DCO to hold Customer Funds only in instruments with minimal credit, 
market, and liquidity risks, the Commission expects that DCOs will 
assess the risk of investing Customer Funds in affiliated funds before 
doing so. In addition, investment advisers that act as investment 
managers of a fund have fiduciary duties to their client, the fund, 
under the Investment Adviser Act of 1940.\127\ In this context, the 
investment adviser has a duty to eliminate, or disclose and mitigate, 
conflicts of interest that may impact the advisory relationship.\128\ 
Therefore, as investors in a fund that qualifies as a Permitted 
Investment, FCMs and DCOs should not receive either preferential or 
disadvantageous treatment compared to other investors in the fund.
---------------------------------------------------------------------------

    \125\ 2013 Protections of Customer Funds Release at 68519-68520.
    \126\ Commission regulation 1.11(e)(1)(ii) provides that an 
FCM's risk management program must consider risks posed by 
affiliates, all lines of business of the FCM, and all other trading 
activity engaged in by the FCM. 17 CFR 1.11(e)(1)(ii).
    \127\ See Commission Interpretation Regarding Standard of 
Conduct for Investment Adviser, SEC, 84 FR 33669 (July 12, 2019) at 
33670.
    \128\ Id. at 33677.
---------------------------------------------------------------------------

    Lastly, in response to the comment asserting that the Commission 
failed to acknowledge the broader ``dash for cash'' that occurred 
across assets classes in March 2020,\129\ the Commission was recounting 
the SEC's rationale for adopting the 2023 SEC MMF Reforms. The 
Commission's own rationale for revising the scope of MMFs whose 
interests qualify as Permitted Investments is the potential reduced 
liquidity of Prime MMFs and Electing Government MMFs resulting from the 
implementation of liquidity fees by such funds under the SEC's 
regulatory framework.
---------------------------------------------------------------------------

    \129\ Blackrock at p. 6.
---------------------------------------------------------------------------

    To eliminate MMFs whose redemptions may be subject to a liquidity 
fee from the scope of Permitted Investments under Commission regulation 
1.25, the Commission is revising Commission regulation 1.25(a)(1)(vii), 
which is redesignated Commission regulation 1.25(a)(1)(iv) to 
accommodate other amendments to Commission regulation 1.25(a) discussed 
in this Final Rule, by replacing the term ``money market mutual fund'' 
with the term ``government money market funds as defined in Sec.  
270.2a-7 of this title, provided that the funds do not elect to be 
subject to liquidity fees in accordance with Sec.  270.2a-7 of this 
title (government money market fund).'' The Commission is also adopting 
further conforming changes throughout Commission regulation 1.25 and 
the appendix to Commission regulation 1.25 by replacing all references 
to ``money market mutual fund'' with ``government money market fund.'' 
In addition, the appendix to Commission regulation 1.25 is redesignated 
as appendix E to part 1 to address a change in the rules of the Office 
of the Federal Register regarding the structure of regulatory text to 
be codified in the Code of Federal Regulations.
    To reflect the Final Rule's amendments to the scope of MMFs that 
qualify as Permitted Investments, the Commission is also adopting 
conforming amendments to Commission regulation 1.26, appendices A and B 
to Commission regulation 1.26, Commission regulation 30.7(d), and 
appendix F to part 30 of the Commission's regulations, as proposed. 
Specifically, the Commission is adopting conforming amendments to 
paragraphs (a) and (b) of Commission regulation 1.26 to replace the 
term ``money market mutual fund'' with the term ``government money 
market fund.'' Paragraph (b) of Commission regulation 1.26 is further 
revised to reflect the redesignation of appendices A and B to 
Commission regulation 1.26 as

[[Page 7819]]

``appendices F and G to part 1 of the Commission's regulations'' and to 
reflect the redesignation of appendices A and B to Commission 
regulation 1.20 as ``appendices C and D to part 1.'' \130\ The 
Commission is also amending appendices A and B to Commission regulation 
1.26 (redesignated appendices F and G to part 1) to replace the term 
``Money Market Mutual Fund'' with ``Government Money Market Fund.''
---------------------------------------------------------------------------

    \130\ Commission regulation 1.26 currently refers to ``appendix 
A or B to this section'' and ``appendix A or B to Sec.  1.20.'' 
Appendix A and appendix B to Commission regulation 1.26 are being 
redesignated appendix F and appendix G to part 1, and appendix A and 
B to Commission regulation 1.20 are being redesignated appendix C 
and D to part 1, to address a change in the rules of the Office of 
the Federal Register regarding the structure of regulatory text to 
be codified in the Code of Federal Regulations.
---------------------------------------------------------------------------

    In addition, the Commission is making conforming changes to 
Commission regulation 30.7(d)(2) and 30.7(l)(5)(iii)(G) (redesignated 
Commission regulation 30.7(l)(5)(iii)(F)) to replace the term ``money 
market mutual fund'' with ``government money market fund.'' The 
Commission is also implementing changes to appendix F to part 30, to 
replace the term ``money market mutual fund'' with ``government money 
market fund.''
    In response to FIA/CME Joint Letter, the Commission is also 
adopting additional conforming changes to the template acknowledgement 
letters set forth in appendices A and B to Commission regulation 1.26 
(redesignated as appendices F and G to part 1) and in appendix F to 
part 30 to reflect the changes to the scope of MMFs that qualify as 
Permitted Investments.\131\ Specifically, the Commission is including a 
template representation that the Government MMF does not elect to 
impose discretionary liquidity fees. The Commission understands that 
including language to memorialize the representation in the template 
acknowledgement letter may create efficiencies for registrants seeking 
to ascertain that the MMF meets the eligibility conditions of 
Commission regulation 1.25. Thus, the Commission is including the 
following statement after the second full paragraph of the template 
acknowledgment letters in appendices A and B to Commission regulation 
1.26 (redesignated appendices F and G to part 1 for FCMs and DCOs, 
respectively) and appendix F to part 30: Furthermore, you acknowledge 
and agree that the Shares are in a fund that holds itself out to 
investors as a government money market fund, in accordance with 17 CFR 
270.2a-7. In addition, you acknowledge and agree that the Shares are in 
a fund that does not choose to rely on the ability to impose 
discretionary liquidity fees consistent with the requirements of 17 CFR 
270.2a-7(c)(2)(i).
---------------------------------------------------------------------------

    \131\ FIA/CME Joint Letter at p. 21.
---------------------------------------------------------------------------

    As discussed in section IV.E. of this preamble regarding the 
removal of read-only electronic access, FCMs do not need to obtain new 
acknowledgment letters for existing accounts at depositories holding 
Customer Funds reflecting this new language regarding government money 
market funds. Instead, revised acknowledgment letters must be obtained 
only for accounts opened after the effective date of this Final Rule or 
if the FCM is required to obtain a new acknowledgment letter for 
reasons unrelated to the addition of the government money market fund 
language after the effective date of this Final Rule.
2. Foreign Sovereign Debt
a. Proposal
    The Commission authorized FCMs and DCOs to invest futures customer 
funds in foreign sovereign debt as part of the 2000 Permitted 
Investments Amendment.\132\ The investments were subject to specified 
conditions, including that investments in the debt of a particular 
foreign sovereign were limited to balances owed by FCMs or DCOs to 
customers denominated in the currency of the applicable sovereign 
debt.\133\
---------------------------------------------------------------------------

    \132\ 2000 Permitted Investments Amendment at 78003.
    \133\ Id.
---------------------------------------------------------------------------

    The Commission subsequently proposed to eliminate foreign sovereign 
debt as a Permitted Investment in 2010 citing an interest in 
simplifying the regulation and safeguarding futures customer funds in 
light of economic crises experienced by a number of foreign 
sovereigns.\134\ Specifically, the 2010 Proposed Permitted Investments 
Amendment cited a Division of Clearing and Intermediary Oversight 
(``DCIO'') 2007 review of the investment of futures customer funds and 
30.7 customer funds.\135\ The 2007 Review revealed that only three of 
the total 87 active FCMs invested futures customer funds in foreign 
sovereign debt at any time during that year, and that only one FCM 
invested 30.7 customer funds in foreign sovereign debt.\136\
---------------------------------------------------------------------------

    \134\ Investment of Customer Funds and Funds Held in Account for 
Foreign Futures and Foreign Options Transactions, 75 FR 67645 (Nov. 
3, 2010) at 67645 (``2010 Proposed Permitted Investments 
Amendment'').
    \135\ Id. at 67643 (``2007 Review''). MPD is a successor 
division to DCIO. The 2007 Review was conducted to further staff's 
understanding of FCM investment strategies and practices for 
customer funds and to assess whether any changes to the Commission's 
regulations would be appropriate.
    \136\ Id. at 67645.
---------------------------------------------------------------------------

    The Commission subsequently eliminated foreign sovereign debt as a 
Permitted Investment in 2011.\137\ In eliminating foreign sovereign 
debt as a Permitted Investment, the Commission stated that it 
recognized that the safety of sovereign debt issuances of one country 
may vary greatly from the sovereign debt issuances of another country 
and that investments in certain sovereign debt may be consistent with 
the objective of preserving principal and maintaining liquidity of 
investments entered into with Customer Funds specified in Commission 
regulation 1.25.\138\ The Commission expanded on this view by stating 
that it was amenable to considering requests for section 4(c) 
exemptions to permit FCMs and DCOs to invest futures customer funds in 
foreign sovereign debt upon a demonstration that the investment is 
appropriate in light of the objectives of Commission regulation 1.25, 
and the issuance of the exemption satisfies the criteria set forth in 
section 4(c).\139\ Specifically, the Commission stated that it would 
consider permitting futures customer funds to be invested in the 
foreign sovereign debt of a country to the extent that: (i) FCMs or 
DCOs held balances in segregated accounts owed to customers denominated 
in that country's currency; and (ii) the foreign sovereign debt serves 
to preserve principal and maintain liquidity of futures customer funds 
as required for all other investments of Customer Funds under 
Commission regulation 1.25.\140\
---------------------------------------------------------------------------

    \137\ 2011 Permitted Investments Amendment at 78780-78782.
    \138\ Id. at 78782.
    \139\ Id.
    \140\ Id.
---------------------------------------------------------------------------

    As discussed in section II. of this preamble, the Commission issued 
an order in 2018 pursuant to section 4(c) granting DCOs a limited 
exemption from the prohibition on the investment of customer funds in 
foreign sovereign debt consistent with its views and the criteria 
expressed in the 2011 Permitted Investments Amendment.\141\ 
Specifically, the 2018 Order authorizes DCOs to invest euro-denominated 
futures customer funds and Cleared Swaps Customer Collateral in euro-
denominated sovereign debt issued by France or Germany.\142\ The 2018 
Order

[[Page 7820]]

also contains conditions designed to ensure that the investments 
preserve the principal and maintain the liquidity of customer funds. 
Specifically, the conditions provide that: (i) investments of futures 
customer funds and Cleared Swaps Customer Collateral in the sovereign 
debt of France and Germany is limited to investments made with euro 
customer cash; (ii) if the two-year credit default spread of France or 
Germany, as applicable, exceeds 45 BPS, a DCO must not make any new 
direct investments in the relevant debt using futures customer funds or 
Cleared Swaps Customer Collateral, and a DCO must discontinue investing 
futures customer funds and Cleared Swaps Customer Collateral in the 
relevant debt instruments through Repurchase Transactions as soon as 
practicable under the circumstances; (iii) the dollar-weighted average 
of the time-to-maturity of a DCO's portfolio of investments in each of 
France or Germany's sovereign debt may not exceed 60 days; (iv) a DCO 
may not make a direct investment in the sovereign debt instruments of 
France or Germany that have a remaining time-to-maturity of greater 
than 180 calendar days; (v) a DCO may use futures customer funds or 
Cleared Swaps Customer Collateral to enter into Repurchase Transactions 
for French or German sovereign debt with a counterparty that is a 
foreign bank that qualifies as a permitted depository under Commission 
regulation 1.49(d)(3) and that is located in a money center country (as 
defined in Commission regulation 1.49(a)(1)) or in another jurisdiction 
that has adopted the euro as it currency, a securities dealer located 
in a money center country as defined in Commission regulation 
1.49(a)(1) that is regulated by a national financial regulator, or the 
European Central Bank, The Deutsche Bundesbank, or the Banque de 
France; and (vi) a DCO may hold the sovereign debt of France or Germany 
purchased under Repurchase Transactions with a foreign depository only 
if the depository meets the location and qualification requirements 
contained in Commission regulation 1.49(c) and (d) and if the account 
complies with the requirements of Commission regulation 1.26.\143\
---------------------------------------------------------------------------

    \141\ 2018 Order.
    \142\ 2018 Order at 35244-35245. The petitioners of the 2018 
Order did not request any relief with respect to the investment of 
30.7 customer funds, which are held by FCMs for 30.7 customers are 
trading on foreign contract markets that are not Commission 
designated contract markets.
    \143\ Conditions 3(a)-(f) of the 2018 Order at 35245.
---------------------------------------------------------------------------

    As stated in section II. of this preamble, the FIA and CME 
submitted a joint petition requesting that the Commission expand the 
scope of the 2018 Order by permitting both DCOs and FCMs to invest 
Customer Funds (i.e., futures customer funds, Cleared Swaps Customer 
Collateral, and 30.7 customer funds, as applicable) in the sovereign 
debt of Canada, France, Germany, Japan, and the United Kingdom (i.e., 
the Specified Foreign Sovereign Debt).\144\ In support of the Joint 
Petition, the Petitioners asserted that the Commission's justification 
for issuing the 2018 Order to permit DCOs to invest futures customer 
funds and Cleared Swaps Customer Collateral in French and German 
sovereign debt is also applicable to FCMs. Specifically, the 
Petitioners stated that FCMs face the same challenges in assuring the 
protection of foreign currencies received from customers to margin 
cleared transactions as DCOs.\145\ In this regard, the Petitioners 
noted that, in issuing the 2018 Order, the Commission stated that cash 
held in unsecured deposit accounts at commercial banks is exposed to 
the credit risk of the banks.\146\ The Petitioners asserted that this 
credit risk can be effectively eliminated if an FCM or DCO is permitted 
to invest Customer Funds denominated in Canadian dollars (``CAD''), 
euros (``EUR''), Japanese yen (``JPY''), or Great Britain pounds 
(``GBP'') in the sovereign debt of Canada, France, Germany, Japan, or 
the UK (i.e., Specified Foreign Sovereign Debt).\147\ The Petitioners 
further stated that although investments through Repurchase 
Transactions involve exposure to a commercial counterparty, an FCM or 
DCO would receive the additional added benefit of receiving securities 
as collateral against that counterparty's credit risk.\148\
---------------------------------------------------------------------------

    \144\ See generally Joint Petition.
    \145\ Joint Petition at p. 2.
    \146\ Id.
    \147\ Id.
    \148\ Id. Consistent with arguments presented in connection with 
the 2018 Order, the Petitioners further argued that ``in the event a 
securities custodian enters insolvency proceedings, [a DCO or FCM] 
would have a claim to specific securities rather than a general 
claim against the assets of the custodian.'' Id. See also 2018 Order 
at 35242.
---------------------------------------------------------------------------

    After considering the Joint Petition and assessing changes to the 
holding of non-U.S. dollar currencies by FCMs and DCOs since the 2007 
Review, the Commission proposed to permit both FCMs and DCOs to invest 
Customer Funds in Specified Foreign Sovereign Debt securities.\149\ 
Specifically, the Commission proposed revising Commission regulation 
1.25 to include Specified Foreign Sovereign Debt instruments as 
Permitted Investments, subject to conditions that are consistent with 
the conditions specified in the Commission's 2018 Order. As detailed in 
the Proposal, an FCM or DCO: (i) would be permitted to invest Customer 
Funds in the sovereign debt of Canada, France, Germany, Japan, and the 
United Kingdom (i.e., the Specified Foreign Sovereign Debt); \150\ (ii) 
may only invest Customer Funds in the Specified Foreign Sovereign Debt 
of a particular country to the extent that the FCM or DCO has balances 
in accounts owed to customers denominated in such country's currency; 
\151\ (iii) would not be permitted to make new investments of Customer 
Funds in the Specified Foreign Sovereign Debt of a particular country 
if such country's two-year credit default spread exceeded 45 BPS; and, 
(iv) would be required to discontinue investing Customer Funds in the 
Specified Foreign Sovereign Debt of a particular country through 
Repurchase Transactions as soon as practicable under the circumstances 
if such country's two-year credit default spread exceeded 45 BPS.\152\
---------------------------------------------------------------------------

    \149\ Proposal at 81243-81248.
    \150\ Proposal at 81244 and proposed Commission regulation 
1.25(a)(1)(vii). The proposed condition defining the Specified 
Foreign Sovereign Debt is consistent with clause (1) of the 2018 
Order, which provides that the Commission's order is limited to the 
sovereign debt of France and Germany.
    \151\ Proposal at 81244-81245 and proposed Commission regulation 
1.25(a)(1)(vii)(A) and (B). The proposed condition is consistent 
with condition 3(a) of the 2018 Order, which limits a DCO's 
investment in French or German sovereign debt to the extent the DCO 
owes balances owed to customers denominated in euros.
    \152\ Proposal at 81245 and proposed Commission regulations 
1.25(f)(3). The proposed conditions are consistent with condition 
3(b) of the 2018 Order.
---------------------------------------------------------------------------

    The Commission also proposed to limit the time-to-maturity of 
investments in Specified Foreign Sovereign Debt.\153\ Specifically, the 
Commission proposed that an FCM or DCO would be required to ensure that 
the dollar-weighted average time-to-maturity of its portfolio of 
investments in the Specified Foreign Sovereign Debt, as the average is 
computed under SEC Rule 2a-7 under the Investment Company Act of 1940 
(``SEC Rule 2a-7'') \154\ on a country-by-country basis, does not 
exceed 60 calendar days.\155\ The Proposal further provided that if the 
portfolio includes Specified Foreign Sovereign Debt securities acquired 
under a reverse repurchase agreement, the FCM or DCO shall use the 
maturity of the reverse repurchase agreement to compute the dollar-
weighted average time-to-maturity of the portfolio as opposed to the 
remaining time-to-maturity of the securities.\156\ This

[[Page 7821]]

approach takes into account the contractual obligation to resell the 
securities within one business day or on demand as required by 
Commission regulation 1.25(d)(6).\157\ Conversely, if the FCM or DCO 
sells Specified Foreign Sovereign Debt securities under a repurchase 
agreement, the FCM or DCO shall include the debt securities in the 
calculation of the dollar-weighted average based on the remaining time-
to-maturity of each security sold, to account for the contractual 
obligation to repurchase such securities.\158\ In addition, an FCM or 
DCO would not be permitted to make direct investments in Specified 
Foreign Sovereign Debt securities with a remaining time-to-maturity 
greater than 180 calendar days.\159\
---------------------------------------------------------------------------

    \153\ Proposal at 81245-81246.
    \154\ 17 CFR 270.2a-7.
    \155\ Proposed Commission regulation 1.25(f)(1). The proposed 
condition is consistent with condition 3(c) of the 2018 Order.
    \156\ Consistent with SEC Rule 2a-7(i)(6), the reverse 
repurchase agreement would be deemed to have a maturity equal to the 
period remaining until the date on which the resale of the 
underlying instruments is scheduled to occur, or, where the 
agreement is subject to demand, the notice period applicable to a 
demand for the resale of the instruments. See proposed Commission 
regulation 1.25(f)(1).
    \157\ 17 CFR 1.25(d)(6).
    \158\ Proposal at 81245-81246 and proposed Commission regulation 
1.25(f)(1). In addition, under the Proposal, the dollar-weighted 
average of the time-to-maturity of the portfolio would be computed 
pursuant to SEC Rule 2a-7 (17 CFR 270.2a-7), consistent with the 
general time-to-maturity provision in Commission regulation 
1.25(b)(4)(i). Commission regulation 1.25(b)(4)(i) provides that 
except for investments in MMFs, the dollar-weighted average time-to-
maturity of an FCM's or DCO's portfolio of Permitted Investments, as 
computed under SEC Rule 2a-7, may not exceed 24 months. 17 CFR 
1.25(b)(4)(i). The Commission also proposed to amend Commission 
regulation 1.25(b)(4)(i) to exclude Specified Foreign Sovereign 
Debt, which, as discussed, would be subject to its own dollar-
weighted average time-to-maturity limit.
    \159\ Proposed Commission regulation 1.25(f)(2). The proposed 
condition is consistent with condition 3(d) of the 2018 Order.
---------------------------------------------------------------------------

    The Commission also proposed to expand the permissible Repurchase 
Transaction counterparties and depositories under Commission 
regulations 1.25(d)(2) and (7) to include certain foreign entities to 
effectively permit FCMs and DCOs to engage in Repurchase Transactions 
with Specified Foreign Sovereign Debt securities pursuant to Commission 
regulation 1.25(a)(2).\160\ Currently Commission regulation 1.25(d)(2) 
limits counterparties with whom an FCM or DCO may enter into Repurchase 
Transactions involving Customer Funds or Permitted Investments to a 
section 3(a)(6) \161\ bank, a domestic branch of a foreign bank insured 
by the FDIC, a securities broker or dealer, or a government securities 
dealer registered with the SEC or which has filed a notice pursuant to 
section 15C(a) of the Government Securities Act of 1986.\162\ 
Additionally, Commission regulation 1.25(d)(7) further requires an FCM 
or DCO to hold the securities transferred to the FCM or DCO under a 
reverse repurchase agreement in a safekeeping account with a bank as 
referred to in Commission regulation 1.25(d)(2), a Federal Reserve 
Bank, a DCO, or the Depository Trust Company.\163\
---------------------------------------------------------------------------

    \160\ Proposal at 81246-81247. Commission regulation 
1.25(a)(2)(i) provides that FCMs and DCOs may engage in Repurchase 
Transactions with Permitted Investments provided the transactions 
are in accordance with the provisions of Commission regulation 
1.25(d). 17 CFR 1.25(a)(2)(i).
    \161\ For a definition of section 3(a)(6) bank, see supra note 
52.
    \162\ Public Law 99-571, 100 Stat. 3208 (Oct. 28, 1986).
    \163\ 17 CFR 1.25(d)(7).
---------------------------------------------------------------------------

    The Commission noted in the Proposal that, absent amendment to the 
counterparty and depository provisions of Commission regulations 
1.25(d)(2) and (7), an FCM's and DCO's ability to buy and sell 
Specified Foreign Sovereign Debt pursuant to Repurchase Transactions 
would be restricted given that participants in such markets are 
predominantly non-U.S. entities.\164\ The Commission, therefore, 
proposed to add foreign banks and foreign securities brokers or dealers 
meeting certain requirements discussed below, as well as the European 
Central Bank and the central banks of Canada, France, Germany, Japan, 
and the United Kingdom, to the list of permitted counterparties for 
Repurchase Transactions.\165\ To be deemed a permitted counterparty, 
the Proposal provided that a foreign bank would have to qualify as a 
depository under Commission regulation 1.49(d)(3) by maintaining 
regulatory capital in excess of $1 billion, and would also have to be 
located in a money center country as defined in Commission regulation 
1.49(a)(1) (i.e., Canada, France, Italy, Germany, Japan, or the United 
Kingdom) or in another jurisdiction that adopted the currency of the 
permitted foreign sovereign debt.\166\ Similarly, a foreign securities 
broker or dealer would have to be located in a money center country and 
be regulated by a national financial regulator.\167\ The proposed 
provisions were designed to ensure that counterparties would be 
regulated entities comparable to counterparties currently permitted 
under Commission regulation 1.25(d)(2) and are consistent with the 
Repurchase Transaction counterparty conditions specified in the 2018 
Order.\168\
---------------------------------------------------------------------------

    \164\ Proposal at 81246-81247.
    \165\ Id., and proposed Commission regulation 1.25(d)(2).
    \166\ Id.
    \167\ Id.
    \168\ Condition (e) of the 2018 Order.
---------------------------------------------------------------------------

    The Commission also proposed to permit Specified Foreign Sovereign 
Debt securities transferred to an FCM or DCO under a reverse repurchase 
agreement to be held with a foreign bank that qualifies as a permitted 
depository under Commission regulation 1.49 by maintaining in excess of 
$1 billion in regulatory capital.\169\ The Commission noted that 
mandating the safekeeping of foreign securities purchased through 
reverse repurchase agreements with a U.S. custodian, as required under 
the current regulation, may be inefficient or impractical.\170\ The 
proposed amendment to permit a foreign bank that satisfies the 
requirements of current Commission regulation 1.49 was designed to 
ensure that any additional foreign depositories authorized to hold 
Specified Foreign Sovereign Debt securities would be comparable to 
those currently permitted under Commission regulation 1.25(d)(7), and 
is consistent with the conditions of the 2018 Order.\171\
---------------------------------------------------------------------------

    \169\ Proposed Commission regulation 1.25(d)(7).
    \170\ Proposal at 81247.
    \171\ Id. And Condition (f) of the 2018 Order.
---------------------------------------------------------------------------

    Lastly, the Commission proposed to amend Commission regulation 
1.25(b)(4)(i), which provides that except for investments in MMFs, the 
dollar-weighted average time-to-maturity of an FCM's or DCO's portfolio 
of Permitted Investments, as computed under SEC Rule 2a-7, may not 
exceed 24 months.\172\ The proposed amendment would exclude Specified 
Foreign Sovereign Debt from the calculation of the dollar-weighted 
average time-to-maturity of the portfolio specified under Commission 
regulation 1.25(b)(4)(i).\173\ The Commission proposed to exclude 
Specified Foreign Sovereign Debt as such debt would be subject to a 
separate dollar-weighted average time-to-maturity limit of 60 calendar 
days, which is substantially shorter than the two-year dollar-weighted 
average time-to-maturity requirement for the overall portfolio required 
by Commission regulation 1.25(b)(4)(i).
---------------------------------------------------------------------------

    \172\ Proposal at 81246.
    \173\ Proposed Commission regulation 1.25(b)(4)(i).
---------------------------------------------------------------------------

b. Comments
    The Commission received 12 comments in response to the proposed 
addition of Specified Foreign Sovereign Debt to the list of Permitted 
Investments for Customer Funds. Ten commenters supported the 
Proposal.\174\ Two commenters opposed the Proposal.\175\
---------------------------------------------------------------------------

    \174\ AIMA; CCP Global; Eurex; FIA/CME Joint Letter; ICE; MFA; 
NFA; Nodal; SIMFA AMG; and WFE.
    \175\ Investor Advocacy Group Joint Letter and Better Markets.
---------------------------------------------------------------------------

    Several commenters expressing support for the Proposal stated that 
permitting investment in the Specified Foreign Sovereign Debt provides 
FCMs

[[Page 7822]]

and DCOs with a risk management tool to effectively manage foreign 
currency risk from holding Customer Funds denominated in non-U.S. 
dollars.\176\ In this regard, MFA stated that Commission regulation 
1.25 currently requires an FCM holding excess non-U.S. dollar Customer 
Funds to first convert such currency to U.S. dollars before investing 
the funds in Permitted Investments, thereby exposing the FCM and 
customers to foreign currency risk.\177\ MFA further stated that a more 
prudent risk management approach would be for an FCM to invest excess 
CAD, EUR, GBP, and JPY in corresponding Specified Foreign Sovereign 
Debt securities, which eliminates the foreign currency exposure to the 
FCM and customers.\178\ Similarly, AIMA asserted that allowing FCMs and 
DCOs to invest foreign-denominated Customer Funds in short-term 
sovereign bonds of the same currency would reduce the currency risk 
associated with investing those funds in U.S. dollar-denominated 
investments.\179\ FIA and CME echoed these comments, stating that the 
Proposal expands the risk management tools available to FCMs and DCOs 
to manage risk associated with holding Customer Funds by mitigating 
foreign currency risk resulting from converting foreign currencies into 
U.S. dollars in order to invest in U.S. dollar-denominated Permitted 
Investments.\180\
---------------------------------------------------------------------------

    \176\ AIMA at p. 2; FIA/CME Joint Letter at p. 2; MFA at pp. 1-
2; CCP Global at p. 1; WFE at p. 4.
    \177\ MFA at pp. 3-4.
    \178\ Id.
    \179\ AIMA at p. 2.
    \180\ FIA/CME Joint Letter at pp. 2, 6-7.
---------------------------------------------------------------------------

    Several commenters also observed that the ability to invest foreign 
currency balances owed to customers in Specified Foreign Sovereign Debt 
securities reduces potential credit risk that FCMs and DCOs would 
otherwise be exposed to by depositing the foreign currencies in 
unsecured commercial bank accounts.\181\ CCP Global stated that, 
consistent with the Joint Petition, the ability of FCMs and DCOs to 
invest customer foreign currencies in Specified Foreign Sovereign Debt 
securities effectively eliminates the credit risk of commercial banks 
that FCMs and DCOs are exposed to, while holding such funds in 
unsecured deposit accounts.\182\ AIMA noted that investing foreign 
currencies belonging to customers, particularly non-U.S. clients, in 
Specified Foreign Sovereign Debt is a more prudent option than 
depositing funds with a foreign depository institution that provides 
less insolvency protection, as such deposits would be at greater risk 
of being treated as unsecured claims compared to securities held in 
custody.\183\ FIA and CME stated that in the event of a foreign 
depository's insolvency, claims to uninsured cash balances are at 
greater risk of being treated as unsecured claims against the 
depository estate than claims to specific securities held in 
custody.\184\ FIA and CME further stated that FCMs, DCOs, and customers 
are in a better risk posture when FCMs and DCOs are able to diversify 
non-U.S. dollar exposures by leveraging both permitted non-U.S. 
depositories for cash as well as Permitted Investments in Specified 
Foreign Sovereign Debt securities.\185\
---------------------------------------------------------------------------

    \181\ AIMA at p. 2; Eurex at p. 2; WFE at p. 4; MFA at pp. 2-5; 
FIA/CME Joint Letter at pp. 2-11; CCP Global at p.1; Nodal at p. 2; 
NFA at p. 1.
    \182\ CCP Global at p. 1.
    \183\ AIMA at p. 2.
    \184\ FIA/CME Joint Letter at p. 7.
    \185\ Id.
---------------------------------------------------------------------------

    FIA and CME further commented that the significant growth in the 
holding of foreign currencies, particularly CAD, EUR, JPY, and GBP, 
which comprise the currencies of the Specified Foreign Sovereign Debt 
securities, provides compelling evidence demonstrating the risk 
management rationale for expanding the list of Permitted Investments to 
include Specified Foreign Sovereign Debt securities.\186\ Specifically, 
FIA and CME referenced the Proposal, where the Commission stated that 
as of August 15, 2023, FCMs collectively held an aggregate U.S. dollar 
equivalent of $51 billion of Customer Funds denominated in the 
currencies of the Specified Foreign Sovereign Debt, which represented 
approximately 10 percent of the total $490 billion of Customer Funds 
held in segregated accounts on that date.\187\ FIA and CME stated that 
the increase in foreign currency-denominated Customer Funds is 
attributable primarily to the growth in cleared swaps, which only 
commenced when the Commission issued the 2011 Permitted Investments 
Amendment eliminating foreign sovereign debt as a Permitted 
Investment.\188\ In FIA and CME's view, it would be impractical--and 
unfair to Cleared Swaps Customers--to continue incentivizing FCMs to 
manage currency fluctuation risk by refusing margin deposits not 
denominated in U.S. dollars or requiring customers depositing such 
balances to assume the foreign currency risk.\189\
---------------------------------------------------------------------------

    \186\ Id.
    \187\ Id. See also Proposal at 81243-81244.
    \188\ FIA/CME Joint Letter at p. 7. FIA and CME stated that 
Cleared Swaps Customers deposit initial margin in foreign currency 
to a much greater extent than do futures customers or 30.7 
customers. Specifically, FIA and CME stated that based on a survey 
of members, the growth of CAD, EUR, GBP and JPY customer balances 
(measured by the total equity value of accounts holding cash, 
securities, and positions denominated in those currencies, expressed 
in U.S. dollar-equivalent basis) between November 30, 2018 and 
November 30, 2023 has been most pronounced for the Cleared Swaps 
origin. FIA and CME stated that for members surveyed, CAD/EUR/GBP/
JPY Cleared Swaps Customer Collateral balances totaled USD 1.6 
billion in 2018 and USD 9.8 billion in 2023, a 600 percent increase. 
FIA/CME Joint Letter at pp. 7-8, note 37.
    \189\ FIA/CME Joint Letter at pp. 7-8.
---------------------------------------------------------------------------

    FIA and CME also observed that as non-U.S. dollar customer funds 
balances have increased, so has the customer demand for FCM flexibility 
in servicing multi-currency accounts.\190\ The commenters explained 
that many customers, particularly Cleared Swaps Customers, deposit non-
U.S. dollar cash and rely on FCMs to manage those deposits to satisfy 
margin calls on their behalf denominated in one or more other 
currencies. They further asserted that since several of the Commission-
registered DCOs clearing swaps are located in the United Kingdom and 
the European Union, the complexity of single-currency margining 
processes is compounded by the operational complexity of Cleared Swaps 
Customer Collateral segregation and ``residual interest'' 
requirements.\191\ In particular, FIA and CME stated that to comply 
with Commission regulation 22.2(f)(4), which requires that an FCM 
maintain in segregation, at all times, ``an amount equal to the sum of 
any credit balances that the Cleared Swaps Customers of the [FCM] have 
in their accounts,'' FCMs may need to source non-U.S. dollar assets to 
cover deficits in advance of settlement with DCOs outside of U.S. 
banking hours.\192\ In this regard, FIA and CME asserted that having 
the ability to convert non-cash balances into Specified Foreign 
Sovereign Debt and to use Specified Foreign Sovereign Debt instruments 
to cover deficits incurred outside of U.S. banking hours would assist 
FCMs to control the higher level of operational risk associated with 
single-currency margining and Cleared Customer Collateral-specific 
segregation compliance processes.\193\
---------------------------------------------------------------------------

    \190\ FIA/CME Joint Letter at p. 8.
    \191\ Id.
    \192\ Id. and 17 CFR 22.2(f)(4). Commission regulation 
22.2(e)(3) further states that an FCM may deposit in the Cleared 
Swaps Customer Accounts its own money, securities, or other property 
to ensure that it is always in compliance with the segregation 
requirements of Commission regulation 22.2(f), provided, that the 
proprietary funds deposited are cash or unencumbered Permitted 
Investments. 17 CFR 22.2.
    \193\ FIA/CME Joint Letter at p. 8, citing as an example an FCM 
transferring proprietary funds in the form of Specified Foreign 
Sovereign Debt instruments to a Cleared Swaps Customer Collateral 
Account to cover a deficit and ensure compliance with its 
segregation requirements outside of U.S. banking hours.

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

[[Page 7823]]

    Commenters also supported the Proposal by noting that the credit, 
liquidity, and volatility characteristics of Specified Foreign 
Sovereign Debt securities are comparable to those of U.S. Treasury 
securities.\194\ Specifically, FIA and CME stated that if measuring 
liquidity by the bid-ask spread, ``the short-term Specified Foreign 
Sovereign Debt instruments in scope of the Proposed Regulation all 
demonstrate abundant market liquidity; they are comparable to, if not 
identical with, bid-ask spreads in U.S. government securities of the 
same tenors.'' \195\ WFE further emphasized the low risk of default 
associated with these instruments.\196\
---------------------------------------------------------------------------

    \194\ E.g., Eurex at p. 2; ICE at p. 2. See also MFA at p. 3 and 
FIA/CME Joint Letter at p. 5 (noting that if liquidity is measured 
by bid-ask spread (i.e., the difference between the lowest ask price 
and the highest bid price), the short-term Specified Foreign 
Sovereign Debt instruments referenced in the Proposal are all highly 
liquid and comparable from a liquidity perspective to U.S. 
government securities with the same tenors).
    \195\ FIA/CME Joint Letter at p. 5.
    \196\ WFE at p. 4 (referencing available credit ratings for the 
relevant foreign sovereign debt instruments).
---------------------------------------------------------------------------

    Better Markets and the Investor Advocacy Group opposed the proposed 
addition of Specified Foreign Sovereign Debt to the list of Permitted 
Investments, stating that such investments could compromise the 
protection of Customer Funds and put customers at undue financial 
risk.\197\ Specifically, Better Markets stated that investments in 
foreign sovereign debt can exhibit variable degrees of liquidity, 
affected by factors such as market conditions, geopolitical stability, 
and economic policies.\198\ Better Markets further stated that in times 
of financial stress or market volatility, foreign sovereign debt 
instruments may not be readily convertible to cash without significant 
loss of value. Better Markets argued that the reduced liquidity could 
hinder the ability of DCOs and FCMs to promptly meet withdrawal 
requests or margin calls, potentially compromising their operational 
efficiency and financial stability.\199\ Better Markets further stated 
that the increased exposure to credit and market risks could lead to 
situations where losses from investments in foreign sovereign debt 
impact DCOs' and FCMs' financial health to the extent of potentially 
limiting DCOs' and FCMs' ability to return Customer Funds. Better 
Markets also asserted that the proposed conditions to investing in 
Specified Foreign Sovereign Debt, such as the 45 BPS cap on the two-
year credit default swap spread and the limits on the time-to-maturity 
of investments, may not be sufficient to mitigate the underlying 
liquidity concerns.\200\ Better Markets also criticized the use of 
credit default swap spreads as an indicator of the creditworthiness of 
the issuing sovereign, noting that the reliability of credit default 
swap spreads depends heavily on the health and liquidity of the credit 
default swaps market.\201\
---------------------------------------------------------------------------

    \197\ Better Markets at p. 3; Investor Advocacy Group Joint 
Letter at p. 1.
    \198\ Better Markets at pp. 5-6.
    \199\ Id.
    \200\ Id. at p. 6.
    \201\ Id.
---------------------------------------------------------------------------

    Better Markets also asserted that allowing investments of Customer 
Funds in foreign sovereign debt would constitute a relaxation of 
regulatory enhancements introduced following the failures of MF Global 
Inc. (``MF Global'') and Peregrine Financial Group 
(``Peregrine'').\202\ Specifically, Better Markets stated that the 
failures of both MF Global and Peregrine resulted from misuse of 
customer funds and fraud, which caused significant customer 
losses.\203\ In addition, the Investor Advocacy Group noted that the 
failure of MF Global resulted, at least in part, due to risky 
investments in foreign sovereign debt.\204\
---------------------------------------------------------------------------

    \202\ Id. at p. 2.
    \203\ Id.
    \204\ Investor Advocacy Group Joint Letter at p. 1 (the 
expansion of Permitted Investments to include foreign debt 
instruments of France, Germany, Canada, Japan, and the United 
Kingdom could put customers at undue financial risk and asserting 
that avoiding such risk was the rationale for prohibiting 
investments in foreign sovereign debt in 2011 after the MF Global 
meltdown).
---------------------------------------------------------------------------

    More generally, Better Markets and the Investor Advocacy Group 
contended that the Commission lacks a compelling, public interest-
focused rationale for expanding the list of Permitted Investments to 
include Specified Foreign Sovereign Debt.\205\ In particular, these 
commenters criticized the Commission's consideration of the potential 
increase in profits for DCOs and FCMs as a benefit of the proposed 
expansion of the list of Permitted Investments.\206\ Better Markets 
also argued that higher profits for DCOs and FCMs do not inherently 
guarantee reduced customer charges.\207\ Instead, Better Markets stated 
that the current financial landscape, characterized with high interest 
rates, has generated substantial additional revenue for FCMs, 
reportedly amounting to hundreds of millions of dollars, and has led to 
an expectation of an expansion of the number of FCMs entering the 
market.\208\
---------------------------------------------------------------------------

    \205\ Better Markets at p. 6; Investor Advocacy Group Joint 
Letter at pp. 1-2.
    \206\ Investor Advocacy Group Joint Letter at p. 1.
    \207\ Better Markets at p. 4. Better Markets states that there 
is substantial historical evidencing that benefits accruing at the 
higher end of the economic spectrum (e.g., DCOs and FCMs) do not 
``trickle down'' effectively to lower levels (e.g., customers), 
citing 50 years of tax cuts for the rich failed to trickle down, 
economics study says, CBS News Money Watch (December 17, 2020), 
available at https://www.cbsnews.com/news/tax-cuts-rich-5-years-no-trickel-down/.
    \208\ Id. Better Markets, citing Futures Commission Merchants 
Target Expansion, Traders Magazine (June 26, 2023), available at 
https://www.tradersmagazine.com/departments/clearing/fcms-target-expansion/.
---------------------------------------------------------------------------

    Separately, four commenters responded to the Commission's request 
for comment on whether the Commission should impose a ``cooling-off '' 
period, following an exceedance of the 45 BPS limit on the two-year 
credit default swap spread of the issuing foreign sovereign, during 
which investments in Specified Foreign Sovereign Debt would remain 
prohibited.\209\ FIA and CME stated that a ``cooling-off'' period was 
not necessary because, in their view, an exceedance of the 45 BPS limit 
would most likely be related to broader market volatility conditions, 
the improvement of which itself constitutes a cooling-off period.\210\ 
CCP Global agreed with the Commission that there should be a mechanism 
to exclude a sovereign's debt in the event of an increased credit risk, 
but advocated for a phased ``cooling-off'' period and flexibility in 
terms of the number of breaches before investments are limited.\211\ 
CCP Global also warned against potential ``cliff-edge'' effects due to 
the use of hard limits, which could aggravate volatility in the 
underlying bond market.\212\ CCP Global further noted that given the 
limited maturity of investments in reverse repurchase agreements (i.e., 
reverse repurchase agreements must be limited to an overnight maturity 
or reversible upon demand), imposing an immediate limitation on new 
investments would have the effect of requiring a large proportion of 
all FCM and DCO investments in reverse repurchase agreements 
collateralized by the relevant debt to be re-allocated within one 
business day.\213\ WFE similarly recommended that the Commission 
consider a minimum period of time or number of times that this limit is 
breached before investment in the applicable Specified Foreign 
Sovereign

[[Page 7824]]

Debt security is prohibited.\214\ ICE stated that requiring DCOs to 
discontinue investment in Specified Foreign Sovereign Debt securities 
due to fluctuations in credit default swap spreads could be 
disruptive.\215\ In ICE's view, this restriction is not necessary given 
the jurisdictions involved.\216\
---------------------------------------------------------------------------

    \209\ Proposal at 81247, Question 4. Comments in response to 
Question 4 were submitted by CCP Global at pp. 2-3; FIA/CME Joint 
Letter at pp. 10-11; ICE at p. 3; and WFE at p. 4.
    \210\ FIA/CME Joint Letter at p. 11.
    \211\ CCP Global at p. 2.
    \212\ Id.
    \213\ Id.
    \214\ WFE at p. 4.
    \215\ ICE at p. 3.
    \216\ ICE at p. 3. FIA and CME also noted that immediate 
divestment should not be required after a change in credit default 
spread. See FIA/CME Joint Letter at p. 10.
---------------------------------------------------------------------------

    FIA and CME also observed that the Commission did not indicate 
whether the calculation of the 45 BPS credit default spread condition 
should be based on the bid, offer or mid-level.\217\ FIA and CME 
proposed that the 45 BPS credit default spread condition be determined 
using mid-level pricing.\218\ FIA and CME stated that mid-level pricing 
is a widely accepted pricing convention, including for sovereign 
debt.\219\
---------------------------------------------------------------------------

    \217\ FIA/CME Joint Letter at p. 10.
    \218\ Id.
    \219\ Id.
---------------------------------------------------------------------------

    In addition, FIA and CME reiterated their request, originally 
expressed in the Joint Petition, that the Commission set a six-month 
dollar-weighted average time-to-maturity limit for the portfolio of 
Specified Foreign Sovereign Debt, and a maximum two-year remaining 
time-to-maturity condition for individual instruments.\220\ Although 
FIA and CME agreed with the Commission's observation in the Proposal 
that the new issuance supply of Specified Foreign Sovereign Debt 
meeting the proposed restrictions appears ``adequate to satisfy the 
demand for investments of Customer Funds in the relevant instruments,'' 
FIA and CME asserted that the time-to-maturity restrictions ``may be 
safely expanded, thereby enhancing liquidity (with the attendant 
additional benefit of enhanced price stability and diversification 
across currencies and tenors), without increasing credit risk.'' \221\
---------------------------------------------------------------------------

    \220\ FIA/CME Joint Letter at pp. 9-10. Joint Petition at pp. 5-
6 (asserting that the new issuance supply of the Specified Foreign 
Sovereign Debt meeting the restrictions is limited and would be 
thinly traded/quoted).
    \221\ FIA/CME Joint Letter at pp. 9-10.
---------------------------------------------------------------------------

    Commenters also supported the Commission's proposal to revise 
Commission regulations 1.25(d)(2) and (7) by expanding the eligible 
counterparties for Repurchase Transactions for Specified Foreign 
Sovereign Debt securities to include foreign banks, foreign securities 
brokers and dealers, and the central banks of Canada, France, Germany, 
Japan, and the United Kingdom, and by including foreign banks as 
eligible custodians for securities received by FCMs and DCOs under 
agreements to resell the securities.\222\ ICE stated that the principal 
custodians for foreign sovereign debt securities are located outside of 
the U.S., and that custody through a U.S. institution as required under 
Commission regulation 1.25 would be impractical or involve an indirect 
custodial relationship through a foreign bank or dealer in the relevant 
jurisdiction. ICE also requested that the Commission revise Commission 
regulation 1.25(d)(7) to explicitly include the central banks of 
Canada, France, Germany, Japan, the United Kingdom, and the European 
Central Bank as eligible custodians for Specified Foreign Sovereign 
Debt securities.\223\
---------------------------------------------------------------------------

    \222\ ICE at p. 3; FIA/CME Joint Letter at p. 9; WFE at p. 4. 
See also Proposal at 81246-81247 and proposed Commission regulation 
1.25(d)(2) and (7).
    \223\ ICE at p. 3.
---------------------------------------------------------------------------

    Separately, three commenters asserted that the Proposal's goals of 
increasing investment vehicles for DCOs, while minimizing credit risk, 
market risk, and liquidity risk could be effectively met if DCOs were 
allowed to deposit Customer Funds at the Federal Reserve Banks.\224\ 
The commenters thus recommended that the Commission advocate for 
Federal Reserve deposit access for all DCOs.\225\
---------------------------------------------------------------------------

    \224\ Eurex at p. 2, CCP Global at p. 2, Nodal at p. 2.
    \225\ Id.
---------------------------------------------------------------------------

    BlackRock also requested that the Commission amend Commission 
regulation 1.25(d)(2) to allow FCMs and DCOs to invest Customer Funds 
pursuant to Repurchase Transactions cleared by a covered clearing 
agency registered with the SEC under section 17A of the Securities 
Exchange Act.\226\
---------------------------------------------------------------------------

    \226\ BlackRock at p. 7-8 (referring to the recommendation made 
by the Global Market Structure Subcommittee of the Commission's 
Global Markets Advisory Committee on November 6, 2023). See Proposal 
by FICC to add CCPs as Permitted Repo Counterparties under CFTC Rule 
1.25 Recommendation, November 6, 2023, available at https://www.cftc.gov/PressRoom/Events/opaeventgmac110623.
---------------------------------------------------------------------------

c. Discussion
    The Commission is amending Commission regulation 1.25 to add 
Specified Foreign Sovereign Debt to the list of Permitted Investments 
as proposed, subject to certain clarifications and revisions to address 
comments. The amendments incorporate and expand upon the exemptive 
relief provided by the Commission in the 2018 Order by authorizing DCOs 
to invest Customer Funds in the sovereign debt of Canada, Japan, and 
the United Kingdom in addition to the sovereign debt of France and 
Germany. The amendments also expand upon the 2018 Order by authorizing 
FCMs to invest Customer Funds in the Specified Foreign Sovereign 
Debt.\227\
---------------------------------------------------------------------------

    \227\ Final Commission regulation 1.25(a)(1)(vi). The Final Rule 
thus supersedes the 2018 Order.
---------------------------------------------------------------------------

    After considering the public comments, the Commission continues to 
believe that adding Specified Foreign Sovereign Debt securities as a 
Permitted Investment provides FCMs and DCOs with an option to manage 
the potential foreign exchange risk that may arise in their 
administration and investment of Customer Funds. Specifically, absent 
the ability to invest Customer Funds in identically-denominated 
sovereign debt securities, an FCM or DCO seeking to invest customer 
foreign currency deposits would need to convert the currencies to a 
U.S. dollar-denominated asset, which would introduce potential foreign 
currency fluctuation risk to the FCMs and DCOs.\228\ If the U.S. dollar 
decreases in value relative to the particular foreign currency, the FCM 
or DCO may not receive sufficient foreign currency to cover the full 
amount owed to its customers upon the conversion of the U.S. dollar-
denominated investment back to the applicable foreign currency. This 
may further impact an FCM's or DCO's obligation under Commission 
regulation 1.25(b)(1) to preserve the principal of Customer Funds 
invested in Permitted Investments. Thus, to provide FCMs and DCOs with 
an investment option that allows them to manage potential foreign 
exchange risk, while staying consistent with the general objectives set 
forth in Commission regulation 1.25 of preserving principal and 
maintaining liquidity of Permitted Investments,\229\ the Commission is 
adopting the conditions discussed above as proposed. These conditions 
are consistent with the criteria specified in

[[Page 7825]]

the 2011 Permitted Investments Amendment \230\ and the conditions set 
forth in the Commission's 2018 Order.\231\
---------------------------------------------------------------------------

    \228\ In reaching this conclusion, the Commission considered, 
among other factors, the daily volatility of exchange rates of the 
relevant currency pairs. Specifically, based on data from the 
Federal Reserve Bank of St. Louis' FRED database, the Commission 
noted that for the period from September 2018 to September 2023, the 
standard deviation of the daily percentage change of exchange rate 
between the relevant currency pairs was 0.45 percent for the CAD/USD 
pair, 0.46 percent for the EUR/USD pair, 0.61 percent for the GBP/
USD pair, and 0.55 percent for the JPY/USD pair, indicating a 
currency fluctuation that is an additional risk factor with respect 
to the return on investment of customer foreign currency deposits in 
U.S. dollar-denominated assets. The Commission also adopted foreign 
sovereign debt as a Permitted Investment in 2000 to mitigate the 
potential foreign currency fluctuation risk facing FCMs and DCOs in 
converting foreign currencies to U.S. dollars for investment 
purposes. 2000 Permitted Investments Amendment at 78003.
    \229\ 17 CFR 1.25(b).
    \230\ 2011 Permitted Investments Amendment at 78782 (stating 
that the Commission would consider permitting foreign sovereign debt 
investments to the extent that: (i) the petitioner has balances in 
segregated accounts owed to customers or clearing member FCMs in 
that country's currency; and (ii) the sovereign debt serves to 
preserve principal and maintain liquidity of customer funds as 
required for all other investments of customer funds under 
Commission regulation 1.25).
    \231\ 2018 Order at 35245.
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    First, an FCM or DCO will be permitted to invest in the foreign 
sovereign debt of only Canada, France, Germany, Japan, and the United 
Kingdom. The Commission's determination to include the foreign 
sovereign debt to these five countries is based on various factors. As 
a preliminary matter, each of these countries, including the U.S., is a 
member of the Group of 7 (``G7''), which represents the world's largest 
industrial democracies, and qualifies as a ``money center country'' as 
the term is defined in Commission regulation 1.49(a)(1).\232\ 
Additionally, the currencies of the five jurisdictions represent a 
material portion of the total amount of non-U.S. dollar-denominated 
obligations that FCMs owe to customers. FCMs collectively held an 
aggregate of a U.S. dollar equivalent of $64 billion of Customer Funds 
denominated in CAD, EUR, JPY, and GBP on August 13, 2024.\233\ The $64 
billion represented approximately 12 percent of the total $511 billion 
of Customer Funds held by FCMs in segregated accounts on August 13, 
2024.\234\
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    \232\ 17 CFR 1.49(a). In the absence of customer instructions to 
the contrary, Commission regulation 1.49(c) limits permissible 
locations of depositories of Customer Funds to the U.S., the country 
of origin of the currency, and a ``money center country.'' The 
concept of ``money center country'' is defined to mean Canada, 
France, Italy, Germany, Japan, and the United Kingdom, and is 
intended to correspond, together with the U.S., to the list of G7 
countries. Denomination of Customer Funds and Location of 
Depositories, 68 FR 5551 (Feb. 4, 2003) at 5546.
    \233\ Based on data provided by CME. The amount has increased 
compared to the amount the Commission considered in the Proposal 
(i.e., $51 billion, representing approximately 10 percent of the 
Customer Funds held in segregation, on August 15, 2023). Proposal at 
81243-81244.
    \234\ The $511 billion represents the U.S. dollar equivalent of 
the total value of margin assets held by FCMs for futures customers, 
Cleared Swaps Customers, and 30.7 customers as reported to CME as of 
August 15, 2023. The breakdown by currency was as follows: CAD 17 
billion; EUR 19 billion; GBP 7 billion; and JPY 21 billion. Some of 
these funds may have also been posted by the FCMs to DCOs as 
customer margin collateral.
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    In addition, prior to proposing to allow FCMs and DCOs to invest in 
the sovereign debt of the enumerated countries, the Commission analyzed 
the credit, liquidity, and volatility characteristics of Specified 
Foreign Sovereign Debt. In particular, the Commission considered data 
provided by the Petitioners in support of the Joint Petition's 
statement that the credit default swaps of Canada, France, Germany, 
Japan, and the United Kingdom have relatively narrow spreads similar to 
the credit default spread of the U.S.\235\ To assess the liquidity of 
Specified Foreign Sovereign Debt, the Commission also considered the 
amounts of outstanding marketable Canadian, French, German, Japanese, 
and United Kingdom debt instruments with time-to-maturity of two years 
or less.\236\
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    \235\ Proposal at 81244, note 110 (referencing Joint Petition at 
pp. 6-7). Data provided in the Joint Petition, subsequently 
clarified by the Supplement to Joint Petition, indicates that in the 
period between April 2018 and April 2023, the average 2-year credit 
default swap spreads of Canada, France, Germany, Japan, and the UK 
were 13.9 BPS, 9.6 BPS, 5.3 BPS, 7.4 BPS, and 12.2 BPS, 
respectively, whereas the average 2-year credit default swap spread 
of the U.S. was 15.1 BPS. Joint Petition at p. 7 and Supplement to 
Joint Petition at p. 1.
    \236\ Id. note 111 (referencing appendix A to Joint Petition and 
Supplement to Joint Petition at p. 1, which indicate that the 
outstanding debt in instruments with time-to-maturity of two years 
or less issued by Canada, France, Germany, Japan, and the United 
Kingdom, based on information available on Bloomberg as of July 11, 
2023, was equal to the USD equivalence of $447 billion, $594 
billion, $557 billion, $2.6 trillion, and $534 billion, 
respectively; Bank of International Settlements' Debt Securities 
Statistics, available here: https://www.bis.org/statistics/secstats_to180923.htm; and 2021 Survey on Liquidity in Government 
Bond Secondary Markets, Organization for Economic Co-operation and 
Development, available here: https://www.oecd-ilibrary.org/governance/oecd-sovereign-borrowing-outlook-2022_3f4e2676-en, which 
confirms that Specified Foreign Sovereign Debt instruments presented 
good liquidity characteristics in 2021).
---------------------------------------------------------------------------

    With regard to the volatility characteristics of Specified Foreign 
Sovereign Debt, the Commission concluded that expanding the list of 
Permitted Investments to include the sovereign debt of these five G7 
countries is warranted based on available data that the price risk of 
the relevant foreign sovereign debt is comparable to that of U.S. 
Treasury securities that are already included in the list of Permitted 
Investments. Specifically, using one-year sovereign debt instruments 
yield data for the period September 21, 2018 to September 20, 2023, the 
Commission observed that the standard deviation of daily yield change 
for one-year U.S. Treasury bills was 9 BPS, whereas the same measure 
for Canadian, French, German, Japanese, and United Kingdom one-year 
debt instruments ranged from 1 to 7 BPS.\237\ The Commission's 
determination that the price risk of Specified Foreign Sovereign Debt 
instruments is comparable to that of U.S. Treasury securities, and 
therefore merits inclusion in the list of Permitted Investments, is 
based on data from an inquiry including the more recent period of 
September 20, 2023 to September 5, 2024, using the standard deviation 
of daily yield change for one-year debt instruments.\238\ Finally, in 
proposing to add Specified Foreign Sovereign Debt to the list of 
Permitted Investments, the Commission surmised that holding high-
quality foreign sovereign debt may pose less risk to Customer Funds 
than the credit risk of commercial banks through unsecured bank demand 
deposit accounts.\239\
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    \237\ The Commission reviewed yield data available through 
Bloomberg, a proprietary financial data provider, for 1-year 
sovereign debt instruments issued by Canada, France, Germany, Japan, 
the United Kingdom, and the U.S.
    \238\ The Commission reviewed one-year sovereign debt 
instruments yield data, available through Bloomberg, for the period 
from September 21, 2018 to September 5, 2024. During this period, 
the standard deviation of daily yield change for U.S. Treasury bills 
was approximately 9 BPS, whereas the same measure for Canadian, 
French, German, Japanese, and United Kingdom one-year debt 
instruments ranged from approximately 1 to approximately 6 BPS.
    \239\ The Commission discussed the preferability from a risk 
management perspective of investing foreign currency in high quality 
foreign sovereign debt relative to the credit risk posed by 
unsecured demand deposit accounts at commercial banks in issuing the 
2018 Order permitting DCOs to invest futures customer funds and 
Cleared Swaps Customer Collateral in French and German sovereign 
debt. 2018 Order at 35245-35246.
---------------------------------------------------------------------------

    Second, an FCM or DCO is permitted to invest in the Specified 
Foreign Sovereign Debt of a country only to the extent that the FCM or 
DCO has balances in accounts owed to customers denominated in the 
country's currency.\240\ This restriction takes into account both the 
need to ensure the safety of Customer Funds and the Commission's desire 
to provide a degree of investment flexibility to FCMs and DCOs.\241\ As 
noted in the Proposal, an

[[Page 7826]]

FCM or DCO seeking to invest deposits or amounts owed to customers 
denominated in foreign currencies, absent the ability to invest in 
identically-denominated sovereign debt securities, would need to 
convert the foreign currencies to a U.S. dollar-denominated asset, 
which would increase the FCM's or DCO's exposure to foreign currency 
fluctuation risk.\242\ Commenters did not raise concerns regarding this 
condition, and as such, the Commission is adopting this requirement as 
proposed.
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    \240\ Final Commission regulation 1.25(a)(1)(vi).
    \241\ As discussed above, prior to 2011, the Commission 
permitted an FCM or DCO to invest Customer Funds in foreign 
sovereign debt subject to the condition that the FCM or DCO held 
balances owed to customers denominated in the currency of the 
foreign country. In the wake of the 2008 financial crisis, the 
Commission eliminated foreign sovereign debt from the list of 
permitted investments noting at the time that ``in many cases, the 
potential volatility of foreign sovereign debt in the current 
economic environment and the varying degrees of financial stability 
of different issuers make foreign sovereign debt inappropriate for 
hedging foreign currency risk.'' 2011 Permitted Investments 
Amendment at 78781. Yet the Commission recognized that ``the safety 
of sovereign debt issuances of one country may vary greatly from 
those of another, and that investment in certain sovereign debt 
might be consistent with the objectives of preserving principal and 
maintaining liquidity, as required by Regulation 1.25.'' Id. at 
78782. For the reasons discussed above, the Commission is 
reinstating certain foreign sovereign debt consistent with the 
Commission's statement in the 2011 Permitted Investments Amendment 
that it would consider permitting such investments provided that the 
investments: (i) are limited to balances owed to customers 
denominated in the currency of the applicable foreign sovereign, and 
(ii) serve to preserve the principal and maintain the liquidity of 
Customer Funds. Id. at 78782. The Final Rule is also consistent with 
the Commission's approach in the 2018 Order of permitting DCOs to 
invest in the sovereign debt of France and Germany to the extent 
such foreign sovereign debt satisfies specific criteria 
demonstrating consistency with the credit, liquidity, and volatility 
of short-term U.S. Treasury securities.
    \242\ 2011 Permitted Investments Amendment at 78003.
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    Third, the Commission proposed to permit FCMs and DCOs to invest in 
Specified Foreign Sovereign Debt provided that the two-year credit 
default spread of the issuing sovereign is 45 BPS or less.\243\ As 
discussed in the Proposal, the 45 BPS limit is consistent with the 
conditions specified in the 2018 Order.\244\ The Commission set the cap 
of 45 BPS in the 2018 Order based on a historical analysis of the two-
year credit default spread of the U.S. (``U.S. Spread'').\245\ Forty-
five BPS was, at the time, approximately two standard deviations above 
the mean U.S. Spread over the preceding eight years.\246\ The 
Commission observed that over that eight-year period of July 3, 2009 to 
July 3, 2017, the U.S. Spread was 45 BPS or less approximately 95 
percent of the time and exceeded 45 BPS approximately 5 percent of the 
time. During the same period, the two-year German spread exceeded 45 
BPS approximately 6 percent of the time and the two-year French spread 
exceeded 45 BPS approximately 25 percent of the time, with all 
exceedances occurring between July 2009 and September 2012, in the 
aftermath of the 2008 financial crisis and the European sovereign debt 
crisis.\247\
---------------------------------------------------------------------------

    \243\ Proposed Commission regulation 1.25(f)(3).
    \244\ Proposal at 81245.
    \245\ 2018 Order at 35243.
    \246\ In 2018, the Commission reviewed the daily U.S. Spread 
from July 3, 2009 to July 3, 2017. Over that time period, the U.S. 
Spread had a mean of approximately 26.5 BPS and a standard deviation 
of approximately 9.72 BPS. Forty-five BPS were approximately two 
standard deviations above the 26.5 mean.
    \247\ See 2018 Order at 35243.
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    During the more recent period of September 21, 2018 to September 
20, 2023 preceding the issuance of the Proposal, the U.S. Spread had a 
mean of approximately 16.4 BPS,\248\ which was lower than the mean 
spread of 26.5 BPS for the July 3, 2009 to July 3, 2017 period. In that 
same time period, the two-year credit default swap spread of the 
sovereigns issuing the Specified Foreign Sovereign Debt did not exceed 
45 BPS. Thus, based on these U.S. Spread and Specified Foreign 
Sovereign Debt data, the Commission is maintaining the cap of 45 BPS 
established in the 2018 Order.\249\
---------------------------------------------------------------------------

    \248\ Based on an assessment conducted by CFTC staff on 
September 20, 2023.
    \249\ Using the daily U.S. Spread data from July 3, 2009 to July 
3, 2017 and assuming the two-year credit default spread follows a 
normal distribution, the Commission estimated that there was less 
than 2.5 percent likelihood that the U.S. credit default spread 
would exceed 45 BPS over a two-year period. In addition, the 
Commission's estimate, based on the daily U.S. Spread data from 
September 21, 2018 to September 5, 2024, indicates that there is 
less than 1 percent likelihood, under both normal and empirical 
distributions, that the two-year credit default swap spread of the 
sovereigns issuing Specified Foreign Sovereign Debt would exceed 45 
BPS. Therefore, the Commission has determined to adopt a threshold 
of 45 BPS for countries whose debt may qualify as a Permitted 
Investment under Commission regulation 1.25.
---------------------------------------------------------------------------

    Consistent with the Proposal, if the credit default spread of the 
issuing sovereign exceeds the 45 BPS cap, FCMs and DCOs will not be 
permitted to make further investments, but neither will they be 
required to immediately divest their current investments in Specified 
Foreign Sovereign Debt. The prohibition on new investments will reduce 
the exposure to Customer Funds by avoiding the risk of default on the 
Specified Foreign Sovereign Debt. In situations where the 45 BPS cap is 
exceeded, FCMs and DCOs will hold Customer Funds denominated in foreign 
currency in cash or invest the foreign currency in U.S. dollar-
denominated Permitted Investments rather than Specified Foreign 
Sovereign Debt. In addition, the requirement that the dollar-weighted 
average time-to-maturity of the portfolio of Specified Foreign 
Sovereign Debt not exceed 60 calendar days helps mitigate price risks 
to the Customer Funds that might arise from a country's two-year credit 
default spread exceeding the 45 BPS limit.
    In addition, in response to a comment stating that the Commission 
did not specify how the 45 BPS limit should be calculated, the 
Commission is clarifying that the 45 BPS credit default spread must be 
determined using mid-level pricing, rather than the bid or ask 
price.\250\ The mid-price is the average of the bid and ask prices, 
representing a midpoint between what buyers are willing to pay (bid) 
and what sellers are asking for (ask). This mid-point price provides a 
more balanced view of the security's credit risk, without the skew of 
immediate buy or sell pressures.
---------------------------------------------------------------------------

    \250\ FIA/CME Joint Letter at p. 10 (recommending that the 
spread be determined using the mid-level and asserting that mid-
level pricing is a widely accepted pricing convention for a wide 
range of asset classes including sovereign debt).
---------------------------------------------------------------------------

    The Commission also requested comments as to whether it was 
appropriate to impose a ``cooling-off'' period before an FCM or DCO 
could invest Customer Funds in the Specified Foreign Sovereign Debt of 
a particular country once the two-year credit default spread of the 
country exceeded 45 BPS.\251\ As commenters noted, market conditions 
based on broader volatility will self-resolve and result in a market 
driven ``cooling-off'' period.\252\ Moreover, because FCMs and DCOs 
will not be able to make new investments in Specified Foreign Sovereign 
Debt until the credit default spread is back within the required 
limits, any ``cooling-off'' period promulgated by the Commission could 
potentially be arbitrary and inconsistent with the market's assessment 
that the increased credit risk that resulted in the exceedance of the 
45 BPS cap no longer exists. Thus, the Commission is not specifying a 
``cooling-off'' period during which FCMs and DCOs may not engage in 
investment in the applicable Specified Foreign Sovereign Debt.
---------------------------------------------------------------------------

    \251\ Proposal at 81247, Question 4.
    \252\ FIA/CME Joint Letter at pp. 10-11.
---------------------------------------------------------------------------

    However, the Commission has determined to immediately halt the 
purchase of additional Specified Foreign Sovereign Debt once the 45 BPS 
cap is exceeded. Specifically, the Commission does not agree with 
commenters who suggested that there should be ``flexibility'' with 
respect to the number of breaches of the 45 BPS cap before investments 
are limited,\253\ because the breach of the 45 BPS cap indicates the 
market's assessment of an increased likelihood of credit risk. The 
Commission acknowledges those comments cautioning that there is a 
potential for unintended consequences such as ``cliff-edge effects,'' 
\254\ but it is for that reason that the Commission is taking a 
measured and balanced approach to such situations where the 45 BPS 
limit has been exceeded. Therefore, the Commission is not requiring 
that FCMs and DCOs sell

[[Page 7827]]

Specified Foreign Sovereign Debt that has already been purchased 
because it could increase volatility and the potential for procyclical 
impacts. The Commission, however, maintains its position that FCMs and 
DCOs must stop making direct investments in, or engaging in Repurchase 
Transactions involving, Specified Foreign Sovereign Debt of a country 
whose credit default swap spread on two-year debt instruments has 
exceeded 45 BPS.
---------------------------------------------------------------------------

    \253\ See CCP Global at p. 2; WFE at p. 4-5.
    \254\ See CCP Global at p. 2.
---------------------------------------------------------------------------

    The Commission is also adopting the 60-calendar-day dollar-weighted 
average time-to-maturity of investments in Specified Foreign Sovereign 
Debt, as proposed.\255\ As discussed in the Proposal, the restrictions 
on time-to-maturity will ensure that an FCM's or DCO's portfolio of 
Specified Foreign Sovereign Debt is comprised of sovereign debt 
instruments that mature within a relatively short period of time.\256\ 
The short time-to-maturity requirement is intended to assist FCMs and 
DCOs in managing and mitigating potential market and/or credit risk by 
providing FCMs and DCOs with the option of holding the foreign 
sovereign debt securities to maturity during periods of market stress 
and price volatility rather than selling the securities at potentially 
significant discounts. The option to hold the debt securities to 
maturity may be particularly valuable to FCMs and DCOs from a risk 
management perspective during periods of significant interest rate 
movements, which could exacerbate market risk in sovereign debt 
markets. Thus, the Commission has determined to adopt a 60-calendar-day 
dollar-weighted average time-to-maturity requirement for Specified 
Foreign Sovereign Debt securities, computed on a portfolio of 
securities on a country-by-country basis, and a 180-calendar-day 
maximum remaining time-to-maturity requirement for each individual 
Specified Foreign Sovereign Debt security.
---------------------------------------------------------------------------

    \255\ Final Commission regulation 1.25(f)(1) and (2).
    \256\ Proposal at 81245-81246.
---------------------------------------------------------------------------

    In addition, data regarding the new issuances of short-term 
Specified Foreign Sovereign Debt supports the lower 60-day dollar-
weighted average time-to-maturity requirement and the 180-day maximum 
remaining time-to-maturity requirement proposed.\257\ Therefore, the 
proposed time-to-maturity conditions more effectively account for 
liquidity needs with the market and credit risk management 
considerations than the six-month dollar-weighted portfolio average and 
two-year individual remaining time-to-maturity limits recommended by 
FIA and CME. Furthermore, as discussed in the Proposal, using the 
maturity of reverse repurchase agreements in calculating the dollar-
weighted average of the portfolio of investments in Specified Foreign 
Sovereign Debt will reduce the average time-to-maturity of the 
portfolio as a whole. This approach takes into account the expected 
resale of the instruments, which must be contractually scheduled to 
occur within one business day or on demand as required by Commission 
regulation 1.25(d)(6).\258\ Conversely, if the FCM or DCO sells 
Specified Foreign Sovereign Debt instruments under a repurchase 
agreement, the FCM or DCO is required to include the instruments in the 
calculation of the dollar-weighted average based on the remaining time-
to-maturity of each instrument sold, to account for the expected 
repurchase of such instruments.\259\
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    \257\ Data made available by the Bank of Canada, l'Agence France 
Tr[eacute]sor (the French Finance Agency), the Bundesrepublik 
Deutschland Finanzagentur (the German Finance Agency), the Japan 
Ministry of Finance, and the United Kingdom Debt Management Office 
indicate that the five jurisdictions issue a sizable amount of debt 
securities with time-to-maturity of less than 180 days on a frequent 
basis. Specifically, in July 2024, Canada auctioned approximately 
USD 35 billion, France auctioned approximately $26.2 billion, 
Germany auctioned approximately $8.2 billion, Japan auctioned 
approximately $12.5 billion, and the United Kingdom auctioned 
approximately $41 billion in debt instruments with time-to-maturity 
of six months or less (see Canadian Treasury bills auction results 
at https://www.bankofcanada.ca/markets/government-securities-auctions/calls-for-tenders-and-results/regular-treasury-bills/; 
French BTF auction history at https://www.aft.gouv.fr/en/dernieres-adjudications); German Bubills issuance results at https://www.deutsche-finanzagentur.de/en/federal-securities/issuances/issuance-results (refer to reopening of 12-month Bubills with 
residual maturities between three and six months); Japanese T-bills 
auction results at https://www.mof.go.jp/english/policy/jgbs/auction/past_auction_results/index.html; and United Kingdom Treasury 
Bill tender results at https://www.dmo.gov.uk/data/treasury-bills/tender-results/).
    \258\ 17 CFR 1.25(d)(6).
    \259\ Final Commission regulation 1.25(f)(1).
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    In addition, as discussed in the Proposal, with the adoption of the 
60-day dollar-weighted portfolio average time-to-maturity requirement, 
the Commission is also amending Commission regulation 1.25(b)(4)(i) to 
exclude Specified Foreign Sovereign Debt from the calculation of the 
dollar-weighted average time-to-maturity of the FCM's or DCO's full 
portfolio of investment of Customer Funds.\260\ This amendment reflects 
that Specified Foreign Sovereign Debt will be subject to its own 
dollar-weighted average time-to-maturity limit.
---------------------------------------------------------------------------

    \260\ Proposal at 81246.
---------------------------------------------------------------------------

    The Commission acknowledges the request of Eurex, CCP Global, and 
Nodal in their public comments \261\ that the Commission work with the 
Federal Reserve Board to permit all DCOs to deposit Customer Funds at 
the Federal Reserve Banks. The Commission supports DCOs having deposit 
accounts at Federal Reserve Banks; \262\ however, granting access to 
such accounts is not within the jurisdiction of the Commission.
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    \261\ Eurex at p. 2, CCP Global at p. 2, Nodal at p. 2.
    \262\ See, e.g., Behnam urges wider CCP access to Fed deposit 
accounts, Risk.net (Apr. 1, 2022), available at https://www.risk.net/regulation/7945026/behnam-urges-wider-ccp-access-to-fed-deposit-accounts.
---------------------------------------------------------------------------

    Consistent with the Proposal, the Commission is also amending 
Commission regulations 1.25(d)(2) and (7) to expand permissible 
counterparties and depositories that can be used in connection with 
Repurchase Transactions to include certain foreign entities. Without 
amendment to these counterparty and depository provisions, an FCM's and 
DCO's ability to buy and sell Specified Foreign Sovereign Debt 
securities pursuant to Repurchase Transactions would be restricted 
because participants in the foreign market are predominantly non-U.S. 
entities. The Commission is therefore adding foreign banks and foreign 
brokers or dealers meeting certain requirements, as well as the 
European Central Bank and the central banks of Canada, France, Germany, 
Japan, and the United Kingdom, to the list of permitted 
counterparties.\263\ To be deemed a permitted counterparty, a foreign 
bank must qualify as a depository under Commission regulation 
1.49(d)(3) by holding regulatory capital in excess of $1 billion, and 
must be located in a money center country as defined in Commission 
regulation 1.49(a)(1) (i.e., Canada, France, Italy, Germany, Japan, and 
the United Kingdom) or in another jurisdiction that has adopted the 
currency of the permitted foreign sovereign debt. Similarly, a foreign 
broker or dealer must be located in a money center country and be 
regulated by a foreign financial regulator or a provincial financial 
regulator with respect to a Canadian securities broker or dealer.\264\ 
The newly adopted

[[Page 7828]]

provisions are designed to ensure that the counterparties to an FCM's 
or DCO's Repurchase Transactions are regulated entities comparable to 
those counterparties already permitted under Commission regulation 
1.25(d)(2). The final revisions to Commission regulation 1.25(d)(2) are 
also consistent with the counterparty conditions set forth in the 2018 
Order.\265\
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    \263\ Final Commission regulation 1.25(d)(2). ICE requested in 
its comment letter that the Commission explicitly include the 
central banks of Canada, France, Germany, Japan, the United Kingdom, 
and the European Central Bank. See ICE at p. 3. The Commission is 
including these recommendations in the terms of the Final Rule.
    \264\ The Commission is revising the Final Rule to provide that 
Canadian securities brokers or dealers may be subject to applicable 
provincial financial regulators in recognition of the Canadian 
regulatory structure vests supervisory authority with provincial 
regulators. Final Commission regulation 1.25(d)(2).
    \265\ 2018 Order, Condition (e) at 35245.
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    In response to Better Markets' assertion that allowing investments 
in Specified Foreign Sovereign Debt is relaxing some of the stringent 
requirements put in place after the collapse of MF Global,\266\ the 
Commission notes that the impetus for eliminating foreign sovereign 
debt from the list of Permitted Investments in 2011 was not the 
bankruptcy of MF Global. Under the 2000 Permitted Investments 
Amendment, FCMs and DCOs were permitted to invest in the foreign 
sovereign debt of any foreign sovereign provided that the FCM or DCO 
owed balances denominated in that currency to customers. The Commission 
eliminated foreign sovereign debt in the 2011 Permitted Investments 
Amendment primarily due to its concerns with the varying degree of 
financial stability of different issuers as well as because it was not 
persuaded that foreign sovereign debt was used with sufficient 
frequency to justify commenters' claims that such debt assisted with 
the diversification of Customer Funds.\267\ However, as previously 
stated, with respect to concerns regarding the economic stability of 
certain countries, the Commission recognized that the safety of 
sovereign debt issuances of one country may vary greatly from those of 
another. In this context, the Commission stated that it was amenable to 
considering applications for exemptions with respect to investments in 
certain foreign sovereign debt instruments upon a demonstration that 
the investment in the sovereign debt of one or more countries is 
appropriate in light of the objectives of Commission regulation 1.25 
and that the issuance of the exemption satisfies the criteria set forth 
in section 4(c) of the Act.\268\
---------------------------------------------------------------------------

    \266\ Better Markets at p. 3.
    \267\ 2011 Permitted Investments Amendment at 78781.
    \268\ Id. at 78782.
---------------------------------------------------------------------------

    The Commission continues to recognize that the safety of sovereign 
debt issuances of one country may vary greatly from the sovereign debt 
issuances of another country. Because of this, the Commission finds 
that investment in Specified Foreign Sovereign Debt that meets the 
tightly circumscribed risk characteristics set forth in the 2018 Order 
and restated in the Final Rule is consistent with the objectives of 
preserving principal and maintaining liquidity of investments specified 
in Commission regulation 1.25.\269\ In light of the varying liquidity 
and credit risk associated with foreign sovereign debt, the Commission 
is recognizing jurisdictions whose short-term debt instruments meet the 
general objectives set forth in Commission regulation 1.25 of 
preserving principal and maintaining liquidity, subject to the 
conditions discussed above that are consistent with the conditions 
specified in the 2018 Order.
---------------------------------------------------------------------------

    \269\ Id. at 78782.
---------------------------------------------------------------------------

    In addition, MF Global's trading losses, which Better Markets 
references in asserting that FCMs' and DCOs' investments in Specified 
Foreign Sovereign Debt might compromise the protection of Customer 
Funds,\270\ were undertaken as speculative proprietary investments and 
not as investments of Customer Funds. MF Global engaged in, among other 
speculative investments, proprietary repurchase-to-maturity 
transactions collateralized with sovereign debt issued by various 
European countries that were experiencing economic distress.\271\ As 
the value of the European sovereign debt positions deteriorated in the 
summer of 2011, and as MF Global's credit ratings were downgraded in 
the fall of 2011, MF Global was required to pay additional variation 
and initial margin on its proprietary transactions.\272\ To satisfy the 
firm's liquidity needs and, more generally, to support the firm's 
proprietary transactions and the operations of the firm's affiliates, 
MF Global unlawfully used Customer Funds.\273\ The firm's misuse of 
Customer Funds violated the Act and Commission regulations and would 
have been impermissible regardless of the type of investments involved 
in such malfeasance.\274\
---------------------------------------------------------------------------

    \270\ Better Markets at p. 3.
    \271\ Another MF Global affiliate was also involved in the 
transactions, but MF Global held the economic risk of ownership. 
First Report of Louis J. Freeh, Chapter 11 Trustee of MF Global 
Holdings LTD., et al., for the Period of October 31, 2011 through 
June 4, 2012 (``MF Global Trustee Report'') at p. 33, available at 
https://www.cftc.gov/sites/default/files/idc/groups/public/@newsroom/documents/file/h0711reportoflouisjfreeh060412.pdf.
    \272\ Id. at pp. 36-37.
    \273\ CFTC Release No. 7508-17, Consent Order: Jon S. Corzine 
(Jan. 5, 2017) at p. 6.
    \274\ Moreover, MF Global had invested not in the sovereign debt 
of Canada, France, Germany, Japan and the United Kingdom, which meet 
the liquidity, volatility, and credit characteristics that are 
consistent with the overall objectives set forth in Commission 
regulation 1.25 of preserving principal and maintaining liquidity of 
Customer Funds, but rather, such Customer Funds were ultimately used 
to support high-risk transactions involving the sovereign debt of 
Belgium, Ireland, Italy, Portugal, and Spain. None of these 
jurisdictions are on the list of allowable foreign sovereign debt 
that is being added to the list of Permitted Investments. See MF 
Global Trustee Report at p. 40.
---------------------------------------------------------------------------

    Peregrine's failure was also the result of the misappropriation of 
Customer Funds and violations of the Commission segregation 
requirements for Customer Funds.\275\ Peregrine's owner and Chief 
Executive Officer plead guilty to the embezzlement of customer funds 
and making false statements to the Commission.\276\ These unlawful 
actions have no bearing on the types of Permitted Investments 
authorized by the Commission.
---------------------------------------------------------------------------

    \275\ CFTC Release No. 7116-15.
    \276\ U.S. Attorney's Office Northern District of Iowa, Press 
Release, Peregrine Financial Group CEO Sentenced To 50 Years For 
Fraud, Embezzlement, And Lying To Regulators [Court's Sentence Is 
The Maximum Allowed By Law]. January 31, 2013. Available at https://www.justice.gov/usao-ndia/pr/peregrine-financial-group-ceo-sentenced-50-years-fraud-embezzlement-and-lying.
---------------------------------------------------------------------------

    Moreover, the Commission adopted major revisions to its rules to 
enhance the protection of Customer Funds in response to the MF Global 
and Peregrine bankruptcies. Specifically, the Commission adopted 
Commission regulation 1.11,\277\ which requires each FCM carrying 
customer accounts to establish a risk management program designed to 
monitor and manage risks associated with the activities of the FCM, 
including risks associated with the segregation of Customer Funds, FCM 
operations, and capital resources.\278\ Commission regulation 1.11 
requires an FCM to establish written policies and procedures that are 
reasonably designed to ensure that Customer Funds are separately 
accounted for and segregated as belonging to customers as required by 
the Act and Commission regulations. Furthermore, the written policies 
and procedures must, at a minimum, include or address: (i) a process 
for assessing the appropriateness of specific investments of Customer 
Funds in Permitted Investments, including the consideration of the 
market, credit, counterparty, operational, and liquidity risks 
associated with the investments, and an assessment of whether the 
investments are managed consistent with the objectives of preserving 
principal and maintaining liquidity of Customer Funds; (ii) a process 
for the evaluation of depositories of segregated

[[Page 7829]]

funds, including, at a minimum, documented criteria addressing the 
depository's capitalization, creditworthiness, operational reliability, 
and access to liquidity; (iii) an account opening process for 
depositories, including documented authorization requirements, 
procedures to ensure that customer segregated funds are not deposited 
with a depository prior to the FCM receiving a written acknowledgment 
letter, and procedures to ensure that the account is properly titled as 
a customer segregated account under the Act and Commission regulations; 
and (iv) a program to monitor an approved depository on an ongoing 
basis to assess its continued satisfaction of the FCM's established 
criteria, including a thorough due diligence review of each depository 
at least annually.\279\
---------------------------------------------------------------------------

    \277\ 17 CFR 1.11.
    \278\ 2013 Protections of Customer Funds Release at 68517-68521. 
See also 17 CFR 1.11.
    \279\ 17 CFR 1.11(e)(3).
---------------------------------------------------------------------------

    The Commission also revised Commission regulation 1.10 to require, 
among other things, an FCM to report and maintain a targeted amount of 
residual interest (i.e., excess segregated funds above the full balance 
owed to customers) that the FCM seeks to hold in segregated accounts as 
a buffer to prevent the accounts from becoming undersegregated.\280\ 
Additionally, the Commission amended Commission regulation 1.16 to 
ensure the high quality of annual audits of the FCM's financial 
statements by public accountants. The amendments to Commission 
regulation 1.16 require public accountants to be registered with, and 
examined by, the Public Company Accounting Oversight Board (``PCAOB''), 
and further require that the public accountant's audit report state 
whether the audit was conducted in accordance with auditing standards 
established or adopted by the PCAOB.\281\
---------------------------------------------------------------------------

    \280\ 2013 Protections of Customer Funds Release at 68513-68516.
    \281\ Id. at 68577.
---------------------------------------------------------------------------

    The Commission further revised Commission regulation 1.12 to 
enhance reporting by FCMs to the Commission. Specifically, Commission 
regulation 1.12 was amended to define several additional reportable 
events that require an FCM to file a notice with the Commission and 
with the FCM's designated self-regulatory organization.\282\ Among 
other changes, the revisions included a requirement for FCMs to provide 
immediate notice whenever the FCM discovers or is informed that it has 
invested Customer Funds in investments that do not qualify as Permitted 
Investments, or if the FCM holds Permitted Investments in a manner that 
is not in compliance with the provisions of Commission regulation 
1.25.\283\
---------------------------------------------------------------------------

    \282\ Id. at 68521-68522.
    \283\ Id. at 68522.
---------------------------------------------------------------------------

    The additional Customer Funds safeguards adopted in 2013 are not 
affected by the amendments adopted in this Final Rule.\284\ In light of 
the enhanced safeguards that are now in place with respect to the 
segregation of Customer Funds,\285\ and the limitation of investment in 
foreign sovereign debt to jurisdictions whose debt meets certain 
liquidity, volatility, and credit characteristics consistent with the 
overall objectives set forth in Commission regulation 1.25 of 
preserving principal and maintaining liquidity of Customer Funds, 
concerns regarding the past failures of MF Global and Peregrine are 
already addressed.
---------------------------------------------------------------------------

    \284\ The Commission acknowledges, as discussed further in 
section IV.E. of this preamble, that the read-only electronic access 
to account information provisions are being removed. However, the 
same information will be accessible through CME and NFA programs 
that compare the daily balances reported by each of the depositories 
with balances reported by the FCMs in their daily segregation 
reports that are filed with CME and/or NFA. This will allow the same 
information to be accessible to the Commission without the current 
difficulties involved in the read-only access currently maintained.
    \285\ See generally 2013 Protections of Customer Funds Release.
---------------------------------------------------------------------------

    The Commission is not addressing BlackRock's request for amendments 
to Commission regulation 1.25(d)(2) to allow FCMs and DCOs to invest 
Customer Funds pursuant to Repurchase Transactions cleared by a covered 
clearing agency registered with the SEC because this requested change 
was not proposed and discussed as part of the Proposal.\286\ Any 
potential amendment to effectuate such change would be addressed 
separately from this Final Rule.
---------------------------------------------------------------------------

    \286\ BlackRock at p. 7-8 (referring to the recommendation made 
by the Global Market Structure Subcommittee of the Commission's 
Global Markets Advisory Committee on November 6, 2023). See 
generally Proposal by FICC to add CCPs as Permitted Repo 
Counterparties under CFTC Rule 1.25 Recommendation, November 6, 
2023, available at https://www.cftc.gov/PressRoom/Events/opaeventgmac110623.
---------------------------------------------------------------------------

    Finally, as discussed previously, some commenters raised concerns 
about the profits of FCMs and DCOs and whether increased profits were 
in line with the public interest language in the Act to justify these 
changes to the list of Permitted Investments.\287\ In assessing the 
public interest as part of its analysis of the conditions of section 
4(c) of the Act, the Commission has considered more than just the 
potential profits of FCMs and DCOs.\288\ As discussed above, the use of 
foreign sovereign debt provides FCMs and DCOs with an effective risk 
management tool for foreign currency exchange risk. By investing 
customers' foreign currency deposits in the sovereign debt of the 
applicable foreign currency, an FCM or DCO avoids the need to convert 
the foreign currency deposits into U.S. dollar-denominated assets and 
reduces potential foreign currency fluctuation risk associated with 
such transactions. The ability to manage foreign currency fluctuation 
risk benefits FCMs, DCOs, customers, and the markets. In addition, as 
discussed above, holding Customer Funds in foreign sovereign debt 
securities with custodians may provide enhanced protections to the 
funds relative to holding the funds as unsecured deposits with 
commercial banks.
---------------------------------------------------------------------------

    \287\ See Investor Advocacy Group Joint Letter at p. 1 (arguing 
that ``[t]he CFTC must not embed revenues and profits of exchanges 
and brokers into the fabric of its definition of the public 
interest.''); Better Markets at p. 4 (asserting that ``[i]n the 
context of FCMs, higher profits do not inherently guarantee reduced 
customer charges. The dynamics of profit allocation within 
businesses, market competition, and economic realities often 
complicate the direct correlation between increased profits and 
reduced costs for customers.'').
    \288\ 7 U.S.C. 6(c). With respect to investments of futures 
customer funds, the Commission is changing the list of Permitted 
Investments pursuant to authority under section 4(c) of the Act.
---------------------------------------------------------------------------

    Furthermore, permitting investments in Specified Foreign Sovereign 
Debt facilitates FCMs' and DCOs' overall risk management in recognition 
of how the market has evolved since the 2007 Review.\289\ As previously 
noted, the 2007 Review revealed that only three of the total 87 active 
FCMs invested futures customer funds in foreign sovereign debt at any 
time during that year, and that only one FCM invested 30.7 customer 
funds in foreign sovereign debt.\290\ This contrasts sharply to the $64 
billion U.S. dollar equivalent of Customer Funds held in CAD, EUR, GBP, 
and JPY by FCMs today.
---------------------------------------------------------------------------

    \289\ 2010 Proposed Permitted Investments Amendment at 67643.
    \290\ Id. at 67645.
---------------------------------------------------------------------------

    The Commission has also determined that it is in the public 
interest to allow FCMs and DCOs to invest in foreign sovereign debt 
because there will be increased resources for financial stability and 
responsible innovation. Any increase in profits by FCMs and DCOs as a 
result of these expanded investment options would generate income and 
potentially increase their presence in the futures market and other 
relevant markets to support greater competition. This is particularly 
important because the futures industry has experienced considerable 
consolidation, with the number of FCMs

[[Page 7830]]

declining from over 400 in the late 1970s,\291\ to 177 FCMs in January 
2004,\292\ to just 64 as of May 2024.\293\ Over approximately the same 
period, however, there has been a dramatic increase in Customer Funds 
held at FCMs to support derivatives trading, with client margin 
requirements increasing by about 700 percent in the past 20 years, from 
approximately $60 billion to over $500 billion in 2023.\294\ Such a 
significant reduction in the number of FCMs concentrates risk related 
to Customer Funds in fewer firms, thereby increasing the possibility of 
systemic risk, particularly as the decline in the number of FCMs 
creates challenges in porting customer positions to another firm in the 
event of an FCM failure. Therefore, the changes in this Final Rule that 
could potentially increase revenue generated by FCMs could serve to 
increase entrants to the FCM market by making entrance more attractive 
and mitigate forces that would result in further consolidation of the 
market, thereby supporting both institutional and retail customers' 
access to FCMs and reducing concentration and potential systemic 
risk.\295\
---------------------------------------------------------------------------

    \291\ See Statement of CFTC Commissioner Giancarlo to the Market 
Risk Advisory Committee (``MRAC''), June 1, 2015.
    \292\ Selected FCM Financial Data as of January 31, 2004, 
COMMODITY FUTURES TRADING COMM'N (2004), available at https://www.cftc.gov/sites/default/files/files/tm/fcm/tmfcmdata0401.pdf.
    \293\ Emm, E., Gay, G., Shen, M., Futures commission merchants, 
customer funds and capital requirements: An organizational analysis 
of the futures industry, Journal of Commodity Markets 18 (2020) 
100093; Financial Data on FCMs as of February 29, 2024, available at 
https://www.cftc.gov/MarketReports/financialfcmdata/index.htm.
    \294\ Transcript, MRAC, April 9, 2024, p. 78, available at 
https://www.cftc.gov/sites/default/files/2024/07/1721936529/mrac_transcript040924.pdf.
    \295\ Better Markets questioned the need for any ``regulatory 
change aimed at further increasing profitability.'' Better Markets 
at p. 4. In support of its assertion, Better Markets cited a Traders 
Magazine article that references a 2023 study by Acuiti asserting 
that rising interest rates and higher trading volumes could 
potentially increase the number of FCM registrants. See A. Lyudvig, 
Futures Commission Merchants Target Expansion (June 26, 2023) 
available at https://www.tradersmagazine.com/departments/clearing/fcms-target-expansion/ (``Traders Magazine Article''); see also 
Acuiti, The Growing Opportunity in Derivatives Clearing, (2023), 
available at https://www.acuiti.io/wp-content/uploads/2023/06/The-Growing-Opportunities-in-Derivatives-Clearing.pdf (``2023 Acuiti 
Study''). However, the Acuiti study also found that ``[t]he market 
needs more FCMs,'' and that for some firms, such as proprietary 
trading and smaller hedge funds, the ``reliance on a smaller number 
of providers presents a major risk to their operational models.'' 
2023 Acuiti Study at 13. In addition, the Acuiti study was nuanced 
in its prediction of new entrants, finding that ``[o]pinion was more 
mixed on whether increased interest rates were likely to attract new 
FCMs to market.'' Id. at 6. In the Commission's view, the Acuiti 
study shows further support for the Commission's interest in 
providing additional avenues for FCMs to generate revenue to 
potentially reduce costs to clients, rather than the alternative 
perspective articulated by Better Markets that such regulatory 
changes are not in the public interest.
---------------------------------------------------------------------------

    There is no guarantee that the potential for additional profits 
will benefit customers directly at all times; however, as described 
above, the increased investment options may potentially reduce 
concentration in the FCM industry, mitigate foreign currency risk, and 
facilitate FCMs' ability to answer margin calls in foreign currency, 
all of which directly benefit FCM customers.
    In consideration of comments received, the Commission is amending 
Commission regulation 1.25(a)(1) to add Specified Foreign Sovereign 
Debt to the list of Permitted Investments, subject to the conditions as 
described above. The Commission is adding Commission regulation 
1.25(a)(vi), as redesignated to accommodate other amendments to the 
list of Permitted Investments pursuant to this Final Rule. Paragraph 
(vi) reflects the addition of general obligations of Canada, France, 
Germany, Japan, and the United Kingdom as a Permitted Investment.
3. Interests in U.S. Treasury Exchange-Traded Funds
a. Proposal
    As part of its periodic reassessment of the list of Permitted 
Investments of Customer Funds, and as a result of its consideration of 
industry input provided in the Joint Petition and the Invesco Petition, 
the Commission proposed to include shares in certain U.S. Treasury ETFs 
to the list of Permitted Investments under Commission regulation 1.25. 
ETFs are collective investment vehicles that issue redeemable 
securities that are also traded at the market price on national 
securities exchanges.\296\ Like other investment companies, an ETF 
pools the assets of multiple investors and invests those assets 
according to a set investment objective and principal investment 
strategies. Each share of an ETF represents an undivided fractional 
interest in the underlying assets of the ETF.\297\ Similar to indexed 
mutual funds, many ETFs are designed to passively track a particular 
market index, investing in all, or a representative sample, of the 
instruments included in the index, and aiming to achieve the same 
return as the tracked index.\298\ Other ETFs are actively managed, with 
portfolio managers buying and selling securities in accordance with an 
investment strategy.\299\
---------------------------------------------------------------------------

    \296\ See generally Exchange-Traded Funds, 84 FR 57162 (Oct. 24, 
2019) (``SEC ETFs Release'').
    \297\ Id. at 57164.
    \298\ See generally ``Exchange-Traded Funds,'' publication by 
FINRA, available at: https://www.finra.org/investors/learn-to-invest/types-investments/investment-funds/exchange-traded-fund.
    \299\ Id.
---------------------------------------------------------------------------

    As an open-end investment company,\300\ similar to a mutual 
fund,\301\ an ETF continuously offers its shares for sale. Unlike 
mutual funds, however, ETFs do not sell shares to, or redeem shares 
from, investors directly. Instead, ETFs issue (and redeem) shares to 
(and from) ``authorized participants''--market intermediaries that have 
a contractual arrangement with the ETF (or its distributor) and are 
members or participants of a clearing agency registered with the SEC--
in blocks called ``creation units.'' \302\ Authorized participants play 
a key role for ETF shares as they are the only investors that are 
allowed to transact directly with the ETF.\303\ An authorized 
participant must: (i) be an SEC-registered broker or dealer or other 
securities market participant (such as a bank or other financial 
institution that is not required to register as a broker or dealer to 
engage in securities transactions); (ii) be a full participating member 
of the National Securities Clearing Corporation and the Depository 
Trust Company; and (iii) have entered into an authorized participant 
agreement with the ETF (and potentially other parties, such as the 
ETF's sponsor, distributor, or transfer agent).\304\
---------------------------------------------------------------------------

    \300\ An ``open-end company'' is defined as a ``management 
company which is offering for sale or has outstanding any redeemable 
security of which it is the issuer.'' 15 U.S.C. 80a-5. Some ETFs may 
also be structured as unit-investment trusts (e.g., SPDR[supreg] S&P 
500[supreg] ETF Trust and SPDR[supreg] Dow Jones Industrial Average 
ETF Trust), which have characteristics of both open-end and closed-
end companies. 15 U.S.C. 80a-4 (defining unit investment trusts); 
Unit Investment Trusts (UITs), Glossary, available at https://www.investor.gov/introduction-investing/investing-basics/glossary/unit-investment-trusts-uits. The regulatory framework set forth by 
SEC Rule 6c-11, however, applies only to ETFs that are organized as 
open-end investment companies. 17 CFR 270.6c-11.
    \301\ A ``mutual fund'' is a type of open-end investment 
company, meaning that investors can purchase and redeem shares in 
the fund on a continuous basis at the NAV of the shares. See 
generally Securities and Exchange Commission, Mutual Funds and ETFs, 
A Guide for Investors, available at https://www.sec.gov/investor/pubs/sec-guide-to-mutual-funds.pdf. Mutual funds pool the money of 
many investors to purchase a range of securities and other assets to 
meet specified investment objectives. Id.
    \302\ See 17 CFR 270.6c-11 (defining ``exchange-traded fund'').
    \303\ Invesco Petition at p. 5.
    \304\ Id.

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

[[Page 7831]]

    An authorized participant may act as a principal for its own 
account or as an agent for others when purchasing or redeeming creation 
units.\305\ Purchases and redemptions of ETF shares by an authorized 
participant are referred to as ``primary market transactions'' and 
occur at the next-calculated NAV. As noted above, ETF shares can also 
be purchased and sold in the secondary market at market prices that may 
reflect a discount or premium to the ETF's NAV.
---------------------------------------------------------------------------

    \305\ SEC ETFs Release at 57164; see also David Abner, The ETF 
Handbook: How to Value and Trade Exchange-Traded Funds, 2nd ed. 
(2016).
---------------------------------------------------------------------------

    In assessing the potential expansion of the list of Permitted 
Investments, the Commission considered statements emphasizing the 
liquidity of U.S. Treasury ETF shares and the diversification 
opportunity that such ETFs provide for Customer Funds.\306\ In 
particular, as discussed in the Proposal, the Petitioners stated that 
U.S. Treasury ETFs have characteristics that they believe are 
consistent with those of current Permitted Investments and may provide 
FCMs and DCOs with an opportunity to diversify their investments of 
Customer Funds.\307\ Similarly, the Invesco Petition focused on the 
fact that U.S. Treasury ETFs invest in a sub-set of the same high-
quality liquid instruments that are Permitted Investments under 
Commission regulation 1.25 (i.e., U.S. government securities).\308\ 
Invesco also noted that ETFs, as registered investment companies whose 
shares are registered under the Securities Act and Exchange Act, must 
comply with a number of SEC financial reporting requirements and 
liquidity risk management program requirements.\309\ Finally, Invesco 
asserted that the design and characteristics, such as price and 
investment transparency, and intra-day trading and liquidity, are 
additional features that help make interests in U.S. Treasury ETFs a 
safe and efficient vehicle for investment of Customer Funds.\310\
---------------------------------------------------------------------------

    \306\ Proposal at 81248.
    \307\ Id. and Joint Petition at pp. 8-9.
    \308\ Proposal at 81248 and Invesco Petition at p. 2.
    \309\ Proposal at 81248 and Invesco Petition at pp. 6-7. 
Financial requirements include: (i) annual shareholder report, 
including audited financial statements (17 CFR 270.30e-1); (ii) 
semi-annual shareholder report, including unaudited financial 
statements (17 CFR 270.30e-1); (iii) monthly portfolio statistics 
and holdings filed quarterly (17 CFR 270.30b1-9); (iv) annual census 
report containing financial-related information (17 CFR 270.30a-1); 
and (v) periodic reports with respect to portfolio liquidity and 
derivatives use (17 CFR 270.30b1-10). With respect to liquidity risk 
management, SEC regulations require open-end investment companies, 
including ETFs, to adopt and implement a liquidity risk management 
program that is reasonably designed to assess and manage liquidity 
risk, which is defined to mean the risk that the fund could not meet 
requests to redeem shares issued by the fund without significant 
dilution of remaining investors' interests in the fund (17 CFR 
270.22e-4).
    \310\ Invesco Petition at p. 2.
---------------------------------------------------------------------------

    The Commission also conducted an independent preliminary analysis 
of the risk profile and volatility of ETFs investing primarily in 
short-term U.S. Treasury securities and observed that during the period 
covered by the analysis, the relevant ETFs presented characteristics 
that were comparable to that of the underlying U.S. Treasury security 
investments.\311\ Specifically, using data available on Bloomberg, the 
Commission observed that for the period June 2020-September 2023, the 
Invesco Collateral Treasury ETF, as well as four other short-term U.S. 
Treasury ETFs that CME accepts as performance bond--SPDR[supreg] 
Bloomberg 1-3 Month T-Bill ETF, Goldman Sachs Access Treasury 0-1 Year 
ETF, iShares 0-3 Month Treasury Bond ETF, and iShares Short Treasury 
Bond ETF--had a standard deviation for a two-day period of risk of 
approximately 6 BPS, whereas one-year U.S. Treasury securities had a 
standard deviation of 8 BPS for the same period.
---------------------------------------------------------------------------

    \311\ Proposal at 81250.
---------------------------------------------------------------------------

    Further, the Commission considered the limited types of investments 
that meet the requirements of Commission regulation 1.25. As a result 
of various regulatory reforms discussed in the Proposal, several asset 
classes included in Commission regulation 1.25 no longer qualify as 
Permitted Investments.\312\ In particular, as discussed in section 
III.A.1. of the Proposal, the range of MMFs whose securities qualify as 
Permitted Investments has contracted, as only interests in Permitted 
Government MMFs currently meet the eligibility criteria of Commission 
regulation 1.25.\313\ In addition, as discussed in section III.A.4. of 
the Proposal, commercial paper and corporate notes and bonds no longer 
qualify as Permitted Investments with the expiration of the TLGP.\314\
---------------------------------------------------------------------------

    \312\ Proposal at 81248.
    \313\ Proposal at 81241-81242.
    \314\ Proposal at 81253.
---------------------------------------------------------------------------

    The Commission also noted the increased demand for high quality 
collateral, including for assets that currently qualify as Permitted 
Investments under Commission regulation 1.25, resulting from certain 
regulatory reforms.\315\ As an example, the Commission discussed the 
regulatory framework for swaps, adopted in the aftermath of the 2008 
financial crisis through the Dodd-Frank Wall Street Reform and Consumer 
Protection Act. The Commission remarked that the framework requires, 
among other things, the clearing of certain swaps or the margining of 
certain uncleared swaps, thus requiring market participants dealing in 
swaps to post margin to clearinghouses, or post and collect margin with 
swap counterparties, in specified forms of liquid collateral.\316\ The 
Commission inferred that these margining requirements might be driving 
an increased demand for assets that currently qualify as Permitted 
Investments.\317\
---------------------------------------------------------------------------

    \315\ Proposal at 81248.
    \316\ Id.
    \317\ Id.
---------------------------------------------------------------------------

    In the Proposal, the Commission expressed its preliminary belief 
that expanding the range of available Permitted Investments to include 
interests in ETFs that meet specified conditions would provide FCMs and 
DCOs with greater flexibility and opportunities for capital efficiency 
in the investment of Customer Funds, without unacceptably increasing 
risk to customers.\318\ The Commission also expressed its belief that 
the proposed addition of interests in ETFs as Permitted Investments 
under Commission regulation 1.25(a) would foster innovation and promote 
competition in the ETF market and the financial services industry more 
generally.\319\ The Commission also considered that CME accepts shares 
of short-term U.S. Treasury ETFs as performance bond for clearing 
members to margin customer and proprietary trades, noting that 
interests in U.S. Treasury ETFs that qualify as Permitted Investments 
could ultimately be pledged by FCMs as margin collateral.\320\ 
Consistent with existing regulatory limitations on customer risk 
associated with the investment of Customer Funds by FCMs and DCOs, 
under the terms of the Proposal, FCMs and DCOs would be financially 
responsible for bearing any loss on an investment of Customer Funds in 
a U.S.

[[Page 7832]]

Treasury ETF.\321\ Thus, to ensure compliance with the requirements 
applicable to other Permitted Investments as well as the general 
objectives of Commission regulation 1.25 to preserve principal and 
maintain liquidity of Permitted Investments, the Commission proposed to 
impose certain conditions on ETFs \322\ for their interests to qualify 
as Permitted Investments (``Qualified ETF''), as discussed below.
---------------------------------------------------------------------------

    \318\ Id.
    \319\ Id.
    \320\ Proposal at 81249 and CME Advisory Notice, Modifications 
to Schedule of Acceptable Performance Bond--Addition of Short-Term 
U.S. Treasury ETFs (Aug. 2, 2022) (``2022 CME Advisory Notice''), 
available at https://www.cmegroup.com/notices/clearing/2022/08/Chadv22-293.pdf (acceptable ETFs must track a U.S. Treasury index 
and must have a minimum 80 percent investment in U.S. Treasury 
securities with a time to maturity of 1 year or less).
    \321\ Commission regulation 1.29(b) (an FCM or DCO, as 
applicable, shall bear sole responsibility for any losses resulting 
from the investment of futures customer funds in Permitted 
Investments) and Commission regulations 22.2(e)(1) and 30.7(i) (an 
FCM shall bear sole responsibility for any losses resulting from the 
investment of Cleared Swaps Customer Collateral and 30.7 funds, 
respectively, in Permitted Investments). As further discussed in 
section IV.C. of this preamble, the Commission is also adopting an 
amendment to Commission regulation 22.3(d) to clarify that DCOs are 
financially responsible for investments of Cleared Swaps Customer 
Collateral in Permitted Investments.
    \322\ Proposal at 81249-81253.
---------------------------------------------------------------------------

    Given the similarities between ETFs investing primarily in short-
term U.S. Treasury securities and MMFs whose interests already qualify 
as Permitted Investments,\323\ the Commission preliminarily determined 
to impose all pertinent requirements applicable to MMFs under 
Commission regulation 1.25(a) to such ETFs, subject to certain 
modifications to address the unique characteristics of the ETFs.\324\ 
In particular, consistent with Commission regulation 1.25(c), which 
sets forth provisions for MMFs whose interests qualify as Permitted 
Investments, the Proposal would require that a Qualified ETF be an 
investment company that is registered under the Investment Company Act 
of 1940 with the SEC and holds itself out to investors as an ETF under 
SEC Rule 6c-11.\325\ Additionally, the ETF would be required to be 
sponsored by a federally regulated financial institution, a section 
3(a)(6) bank,\326\ an investment adviser registered under the 
Investment Advisers Act of 1940, or a domestic branch of a foreign bank 
insured by the FDIC.\327\
---------------------------------------------------------------------------

    \323\ Proposal at 81249.
    \324\ Proposal at 81249.
    \325\ Proposal at 81249 and proposed Commission regulation 
1.25(c)(1).
    \326\ For a definition of section 3(a)(6) bank, see supra note 
52.
    \327\ Proposal at 81249 and proposed Commission regulation 
1.25(c)(2), as applying to Qualified ETFs per proposed introductory 
text of paragraph (c) of Commission regulation 1.25.
---------------------------------------------------------------------------

    In addition, the Commission proposed to limit Qualified ETFs to 
funds that are passively managed and that seek to replicate the 
performance of a published short-term U.S. Treasury security index 
composed of bonds, notes, and bills with a remaining time-to-maturity 
of 12 months or less, issued by, or unconditionally guaranteed as to 
timely payment of principal and interest by, the U.S. Department of the 
Treasury.\328\ The Commission further proposed to require that the 
securities comprising the short-term U.S. Treasury index represent at 
least 95 percent of the ETF's investment portfolio.\329\ In that 
regard, the Commission noted that pursuant to SEC requirements, certain 
registered investment companies, including ETFs, must adopt a policy to 
invest at least 80 percent of the value of their assets in accordance 
with the investment focus suggested by the fund's name.\330\ The 
Commission, however, preliminarily concluded that a stricter standard 
of 95 percent should to help ensure that FCMs and DCOs invest Customer 
Funds in accordance with Commission regulation 1.25's general 
objectives of preserving principal and maintaining liquidity.\331\
---------------------------------------------------------------------------

    \328\ Proposed Commission regulation 1.25(a)(1)(vi).
    \329\ Proposal at 81294 and proposed Commission regulation 
1.25(c)(8)(ii).
    \330\ Proposal at 81249.
    \331\ Id.
---------------------------------------------------------------------------

    The Commission further proposed, consistent with the current 
requirements applicable to interests in MMFs, to prohibit the agreement 
governing an FCM's or DCO's acquisition and holding of interests in 
Qualified ETFs from containing provisions that would prevent the 
pledging of the Qualified ETF's shares.\332\ The proposed amendments 
would also require FCMs and DCOs to maintain confirmations relating to 
their purchase of interests in a Qualified ETF in their records in 
accordance with Commission regulation 1.31, and document the ownership 
of the interests (by book-entry or otherwise) in the FCMs' and DCOs' 
custody accounts in accordance with Commission regulation 1.26.\333\ 
FCMs and DCOs would additionally be required to obtain the 
acknowledgment letter required by Commission regulation 1.26 from an 
entity that has substantial control over the ETF interests purchased 
with Customer Funds and that has the knowledge and authority to 
facilitate redemption and payment or transfer of the Customer 
Funds.\334\
---------------------------------------------------------------------------

    \332\ Proposal at 81250 and paragraph (c)(6) of Commission 
regulation 1.25 as applying to Qualified ETFs per proposed revised 
introductory text of paragraph (c) of Commission regulation 1.25.
    \333\ Paragraph (c)(3) of Commission regulation 1.25 as applying 
to Qualified ETFs per proposed revised introductory text of 
paragraph (c) of Commission regulation 1.25.
    \334\ Proposal at 81250.
---------------------------------------------------------------------------

    Also, under the terms of the Proposal, a Qualified ETF would be 
required to compute the NAV by 9 a.m. of the business day following 
each business day and make it available to FCMs or DCOs, as applicable, 
by that time.\335\ In addition, the Qualified ETF would be legally 
obligated to redeem its interests and make payment in satisfaction of 
the interests by the business day following a redemption request.\336\ 
The Proposal also provided that FCMs or DCOs, as applicable, would be 
required to retain documentation demonstrating compliance with this 
requirement.\337\ Because Commission regulation 1.25(c)(5)(ii) 
currently provides an exception to the next-day redemption obligation 
for MMFs for defined extraordinary circumstances, such as the non-
routine closures of the Fedwire or applicable Federal Reserve Banks, 
and any period during which the SEC by order restricts redemptions for 
the protection of security holders in the fund, the Commission sought 
comments on whether these redemption exceptions should be extended to 
Qualified ETFs.\338\
---------------------------------------------------------------------------

    \335\ Paragraph (c)(4) of Commission regulation 1.25 as applying 
to Qualified ETFs per proposed revised introductory text of 
paragraph (c) of Commission regulation 1.25. The proposed 
requirement was intended to allow for the valuation of the Qualified 
ETF's investment portfolio to be available by 9 a.m. of the business 
day following an investment in the ETF, so that the valuation is 
available in time for FCMs to perform their daily segregation 
calculations, which are required to be completed by noon each 
business day, reflecting balances as of the close of business on the 
previous business day. 2000 Permitted Investments Amendment at 
78003.
    \336\ Paragraph (c)(5)(i) of Commission regulation 1.25 as 
applying to Qualified ETFs per proposed revised introductory text of 
paragraph (c) of Commission regulation 1.25.
    \337\ Id.
    \338\ Proposal at 81253, Question 11.
---------------------------------------------------------------------------

    The Commission also proposed several conditions specific to 
Qualified ETFs. Specifically, articulating concerns related to 
compliance with the Customer Funds segregation requirements and 
Commission regulation 1.25(b)(1) liquidity standards, the Commission 
proposed to require an FCM or DCO that invests Customer Funds in the 
shares of a Qualified ETF to be an authorized participant of the 
ETF.\339\ The Commission reasoned that if an FCM or DCO had to purchase 
or redeem Qualified ETF shares through an intermediated transaction 
involving a third-party authorized participant, the FCM or DCO would 
have to transfer Customer Funds out of a segregated account maintained 
in compliance with section 4d of the Act or part 30 of Commission's 
regulations, which would

[[Page 7833]]

introduce risk that the account could be undersegregated.\340\ The 
Commission also expressed concern that the transfer of Customer Funds 
to the authorized participant might be in contravention of Commission 
regulations that provide that Customer Funds may only be deposited with 
a bank or trust company, a DCO, or another FCM.\341\ The Commission was 
further concerned that relying on a third-party authorized participant 
could protract redemptions, thus violating the requirement in 
Commission regulation 1.25(b)(1) that Permitted Investments have the 
ability to be converted into cash within one business day without 
material discount in value.\342\ The Commission requested comment on 
whether there were alternative approaches to requiring FCMs or DCOs to 
be authorized participants that could address or mitigate the 
Commission's concerns regarding the segregation of Customer Funds 
during the purchase and redemption process.\343\
---------------------------------------------------------------------------

    \339\ Proposal at 81251 and proposed paragraph (c)(8) of 
Commission regulation 1.25.
    \340\ Proposal at 81250-81251. As a result of the transfer of 
Customer Funds to the authorized participant, the customer 
segregated account might not be fully funded, potentially violating 
Commission regulations that require FCMs to maintain, at all times, 
in the segregated account, money, securities and property in an 
amount that is at least sufficient in the aggregate to cover their 
total obligations to all customers. Id. at 81251 and 17 CFR 1.20(a), 
17 CFR 22.2(f), and 17 CFR 30.7(a).
    \341\ Proposal at 81251 and 17 CFR 1.20(b), 17 CFR 22.2(b), and 
17 CFR 30.7(b). The Commission noted that with respect to 30.7 
customer funds, Commission regulation 30.7(b) also permits funds to 
be deposited with the clearing organization of any foreign board of 
trade, a member of any foreign board of trade, or such member's or 
clearing organization's designated depositories. 17 CFR 30.7(b).
    \342\ Proposal at 81251.
    \343\ Proposal at 81252, Question 9.
---------------------------------------------------------------------------

    Given the time limits for the redemption and liquidation of 
Permitted Investments in Commission regulation 1.25, the Commission 
also proposed that Qualified ETFs be required to redeem their shares in 
cash because in-cash redemptions could allow for a more expeditious 
liquidation of the shares as compared to in-kind redemptions.\344\ The 
Commission also proposed to require, as a condition for qualification 
as a Permitted Investment, that Qualified ETFs be acceptable by a DCO 
as performance bond from clearing members to margin customer 
trades.\345\
---------------------------------------------------------------------------

    \344\ Proposal at 81251 and proposed Commission regulation 
1.25(c)(8)(i).
    \345\ Proposal at 81251 and proposed Commission regulation 
1.25(c)(8)(iii).
---------------------------------------------------------------------------

b. Comments
    The Commission received ten comments in support of the addition of 
Qualified ETFs to the list of Permitted Investments.\346\ No commenters 
opposed the addition of Qualified ETFs.
---------------------------------------------------------------------------

    \346\ AIMA at p. 2; BlackRock at p. 2; CCP Global at p. 3; FIA/
CME Joint Letter at p. 11; ICI at p. 2; Invesco at p. 2; MFA at p. 
5; Nodal at p. 2; SIFMA AMG at p. 3; SSGA at p. 2.
---------------------------------------------------------------------------

    Some commenters expressed their belief that investments in 
Qualified ETFs are generally safe, short-term investments consistent 
with the objectives of Commission regulation 1.25 regarding preserving 
principal and maintaining liquidity of Customer Funds.\347\ Commenters 
also stated that the inclusion of U.S. Treasury ETFs would provide FCMs 
and DCOs the opportunity to diversify their investments.\348\ SIFMA AMG 
asserted that at the time of the Commission's last review of Permitted 
Investments in 2011, the U.S. Treasury ETF market was not well 
developed, but that at present, it ``provides several options'' that 
would meet the standards for Permitted Investments under Commission 
regulation 1.25.\349\ Commenters also highlighted the similarity in 
characteristics between U.S. Treasury ETF securities and other 
instruments that currently qualify as Permitted Investments.\350\ In 
particular, Invesco noted that ``customers will continue to be 
safeguarded because Treasury ETFs' underlying holdings are comprised of 
a sub-set of the same high-quality liquid instruments that are 
otherwise permitted under the Commodity Exchange Act and Regulation 
1.25.'' \351\ Consistent with statements made in the Invesco 
Petition,\352\ commenters also asserted that investments by FCMs and 
DCOs in Qualified ETFs would be operationally efficient and cost-
effective, because FCMs and DCOs would have the opportunity to invest 
in an ETF holding a portfolio of U.S. Treasury securities instead of 
investing directly in the individual U.S. Treasury securities.\353\ 
Several commenters also stated that the design and characteristics of 
ETFs, such as price and investment holdings transparency, as well as 
intra-day trading and liquidity, present additional features that make 
short-term U.S. Treasury ETFs efficient vehicles for investment of 
Customer Funds.\354\
---------------------------------------------------------------------------

    \347\ CCP Global at pp. 3-4; ICI at pp. 2-6; Invesco at pp. 2-3.
    \348\ AIMA at p. 2; BlackRock at p. 2; CCP Global at p. 3; FIA/
CME Joint Letter at p. 2; ICI at p. 2; SIFMA AMG at pp. 3-4; SSGA at 
p. 2; WFE at p. 5.
    \349\ SIFMA AMG at pp. 3-4.
    \350\ Invesco at p. 2; SIFMA AMG at p. 3; SSGA at p. 2; WFE at 
p. 5.
    \351\ Invesco at p. 2.
    \352\ Id. at p. 11. The Invesco Petition asserts that U.S. 
Treasury ETFs eliminate operational challenges and certain expenses 
that FCMs and DCOs would experience by directly investing in U.S. 
Treasury securities, including managing and reinvesting interest 
payments, periodically rolling positions, and maintaining multiple 
CUSIPs, requiring professionals to manage the duration, yield, and 
liquidity of portfolio securities.
    \353\ SIFMA AMG at p. 4; Invesco at p. 2 (n. 4).
    \354\ BlackRock at p. 3; CCP Global at p. 3; Invesco at p. 2; 
SIFMA AMG at p. 5; SSGA at p. 2.
---------------------------------------------------------------------------

    On the other hand, commenters expressed concerns regarding some of 
the proposed conditions for investing in ETFs and urged the Commission 
to reconsider them. Several commenters expressed reservations or 
opposed the proposed requirement that FCMs and DCOs be authorized 
participants.\355\ Some commenters stated that this requirement 
deviates from existing ETF market structure and would unnecessarily 
limit the FCMs and DCOs that could invest in Qualified ETFs.\356\ In 
particular, WFE posited that the requirement ``would severely limit the 
parties that could invest in [Qualified] ETFs to'' entities that are 
registered as broker-dealers and authorized participants, criteria that 
DCOs do not satisfy.\357\ Similarly, ICI questioned whether DCOs could 
even become authorized participants,\358\ and raised potential 
operational challenges associated with FCMs and DCOs becoming 
authorized participants.\359\ ICI explained that although many FCMs are 
authorized participants, some FCMs may take the view that becoming an 
authorized participant is not consistent with their business model, or 
they may otherwise not want to take on the additional regulatory, 
compliance, and operational costs associated with becoming an 
authorized participant.\360\
---------------------------------------------------------------------------

    \355\ AIMA at p. 2; BlackRock at p. 2 and pp. 4-5; CCP Global at 
p. 3; FIA/CME Joint Letter at pp. 11-13; ICI at pp. 3-4; Invesco at 
pp. 3-5; SIFMA AMG at pp. 5-7; SSGA at p.2; WFE at p. 5.
    \356\ BlackRock at p. 2; CCP Global at p. 3; FIA/CME Joint 
Letter at pp. 14-15; ICI at p. 3; Invesco at p. 3; SSGA at p.2; WFE 
at p. 5.
    \357\ WFE at p. 5.
    \358\ ICI at p. 3.
    \359\ Id.
    \360\ Id.
---------------------------------------------------------------------------

    Commenters further asserted that the Commission's concerns 
regarding compliance with the Customer Funds segregation requirements 
and the prompt liquidation of the Qualified ETF shares could be 
effectively addressed through existing market practices.\361\ 
Commenters had several suggestions for alternative arrangements. The 
majority of commenters opposing the requirement that FCMs and DCOs be 
authorized participants advocated for the Commission to allow for 
transactions to occur on a delivery-versus-payment (``DVP'') basis via 
an authorized participant acting as an agent for the FCM or DCO 
(``Authorized

[[Page 7834]]

Participant Agency Model'').\362\ Through the Authorized Participant 
Agency Model, the FCMs and DCOs would have access to the primary 
market, without being an authorized participant themselves, pursuant to 
an agreement with other authorized participants that would transact as 
agents on their behalf.\363\ According to the commenters, the 
Authorized Participant Agency Model would allow FCMs and DCOs to access 
an ETF's primary market on the same terms as if they were authorized 
participants themselves and receive the benefits associated therewith 
(e.g., same day or next-day settlement and transacting at NAV).\364\ As 
explained in the Invesco comment letter, when operating on a DVP basis 
through the Authorized Participant Agency Model, the FCM or DCO would 
not, in the case of a redemption, transfer Qualified ETF shares to the 
Qualified ETF (through the authorized participant) until cash is 
received by such FCM or DCO.\365\ In the case of a creation 
transaction, cash would not be transferred by the FCM or DCO to the 
Qualified ETF (through the authorized participant) until the Qualified 
ETF shares are received.\366\ Invesco further stated that at no time 
would Customer Funds (either cash or Qualified ETF shares) be in the 
custody of any entity outside of the applicable FCM's or DCO's 
segregated Customer Funds depository.\367\ Further, under the 
Authorized Participant Agency Model, the redemption or creation would 
occur at NAV and settle within a day.\368\ Several commenters also 
noted that this DVP process would be similar to what is applicable to 
repurchase agreements currently allowed under CFTC regulations.\369\ 
Finally, AIMA suggested allowing the DCOs to provide a letter of credit 
to an ETF and the ETF would agree to pay a penalty for late 
redemptions.\370\ ICI also stated that market-based solutions, such as 
providing letters of credit to the authorized participant could resolve 
potential exposure concerns that an authorized participant could have 
if it engages in redemption transactions before receiving the ETF 
shares.\371\ Another alternative commenters suggested was to allow FCMs 
and DCOs to transact on the secondary market, again on a DVP 
basis.\372\ SIFMA AMG stated that recent changes in SEC regulations, 
effective in May 2024, shorten the standard settlement cycle for most 
institutional securities transactions from two business days after the 
trade date (T+2) to one (T+1).\373\ Thus, SIFMA AMG asserted that as 
long as transactions are done on a DVP basis, secondary market 
transactions to sell Qualified ETF shares should be permitted.\374\
---------------------------------------------------------------------------

    \361\ SIFMA AMG at p. 6.
    \362\ CCP Global at p. 3, Invesco at p. 4; FIA/CME Joint Letter 
at pp. 13-15; BlackRock at p. 4; ICI at pp. 3-4; SIFMA AMG at pp. 2, 
5-7; SSGA at p. 2.
    \363\ Invesco at p. 4.
    \364\ Id.
    \365\ Id.
    \366\ Id.
    \367\ Id.
    \368\ Id.
    \369\ Invesco at p. 4; SIFMA AMG at p. 6 (noting that pursuant 
to Commission regulation 1.25(d)(9), a repurchase agreement that is 
a Permitted Investment must provide for the transfer of securities 
or cash on a DVP basis to a customer segregated account.).
    \370\ AIMA at p. 2.
    \371\ ICI at p. 4.
    \372\ BlackRock at pp. 4-5; CCP Global at p. 3; FIA/CME Joint 
Letter at pp. 14-15; SIFMA AMG at pp. 2-3, 5-6; SSGA at p. 2.
    \373\ SIFMA AMG at p. 6; see also Shortening the Securities 
Transaction Settlement Cycle, 88 FR 13872 (March 6, 2023).
    \374\ SIFMA AMG at p. 6.
---------------------------------------------------------------------------

    With regard to the proposed requirement that Qualified ETFs be 
required to redeem their shares in cash, commenters largely advocated 
that the Commission allow Qualified ETFs to redeem in kind as well as 
in cash.\375\ Specifically, BlackRock recommended that the Commission 
revise the condition to allow for redemptions in cash or in kind with a 
same day settlement (T+0) option.\376\ BlackRock argued that in-kind 
redemptions are standard for many ETFs as they provide an efficient way 
for portfolio managers to execute changes in an ETF's portfolio.\377\ 
ICI echoed BlackRock's recommendation and stated that in-kind 
redemptions can offer investors more efficient tax treatment.\378\ ICI 
explained that an ETF's ability to redeem in kind permits it to defer 
tax realization for remaining shareholders in the ETF, thus reducing 
capital gains payments and related distributions, as compared to 
redeeming shares for cash.\379\ ICI argued that requiring ETFs to 
redeem in cash would not only potentially reduce the benefits of 
deferred tax treatment to a Treasury ETF's shareholders, but may limit 
the potential universe of Qualified ETFs, thus reducing diversification 
opportunities for FCMs and DCOs.\380\ ICI further asserted that several 
ETFs, including several Treasury ETFs, have a T+0 redemption cycle, 
which allows for delivery of in-kind securities on the day of the trade 
so that securities can be sold the next business day.\381\ ICI asserted 
that the ability to redeem at a T+0 settlement cycle would satisfy the 
Commission's concerns regarding next day liquidation of the underlying 
U.S. Treasury securities.\382\ Further, FIA and CME stated that 
allowing in-kind redemptions is at times more advantageous given that 
U.S. Treasury securities themselves are a highly liquid 
investment.\383\ Additionally, FIA and CME noted that requiring cash 
redemptions ``could potentially cause an inequitable first-mover 
advantage; liquidation of a significant portion of the fund to meet a 
redemption could cause a drop in the value of the underlying assets and 
in turn of the shares of the fund.'' \384\
---------------------------------------------------------------------------

    \375\ BlackRock at pp. 2, 5; FIA/CME Joint Letter at pp. 12-13; 
ICI at pp. 4-5; MFA at pp. 5-6; SIFMA AMG at pp. 7-8; SSGA at p. 3.
    \376\ BlackRock at pp. 2, 5. BlackRock further noted that the 
SEC recognized the benefits of in-kind redemptions in SEC Rule 6c-
11, stating ``ETFs that meet redemptions in cash may maintain larger 
cash positions to meet redemption obligations, potentially resulting 
in cash drag on the ETF's performance. The use of cash baskets also 
may be less tax-efficient than using in-kind baskets to satisfy 
redemptions, and may result in additional transaction costs for the 
purchase and sale of portfolio holdings.'' Id. at p. 5.
    \377\ Id.
    \378\ ICI at pp. 4-5.
    \379\ Id. at p. 4.
    \380\ Id.
    \381\ Id. See also AIMA at p. 2; BlackRock at p. 2.
    \382\ ICI at p. 4.
    \383\ FIA/CME Joint Letter at pp. 12-13. See also WFE at p. 6.
    \384\ Id.
---------------------------------------------------------------------------

    Asserting that in-kind redemptions are a key feature of a U.S. 
Treasury ETF's pricing mechanism, SIFMA AMG raised concerns that an in-
cash redemption mandate could potentially distort the price of a 
Qualified ETF.\385\ SIFMA AMG argued that, as a result, an FCM or DCO 
may be subject to a settlement price that is not at the fund's NAV 
(i.e., not its fair value).\386\ SIFMA AMG also noted that some DCOs 
accept U.S. Treasury securities as margin and an FCM might want to have 
the option to redeem shares in kind to post such securities with the 
clearinghouse or to return U.S. Treasury collateral to customers.\387\ 
Further, according to SIFMA AMG's understanding, when an authorized 
participant makes an in-kind redemption request, whether for itself or 
on behalf of another market participant with whom it has an agency 
arrangement, a Qualified ETF is able to complete settlement within one 
business day.\388\ Finally, SIFMA AMG asserted that in-kind redemptions 
also avoid certain transaction fees, keeping cost lower for 
investors.\389\
---------------------------------------------------------------------------

    \385\ SIFMA AMG at pp. 7-8.
    \386\ Id. at p. 8.
    \387\ SIFMA AMG at pp. 7-8.
    \388\ Id.
    \389\ Id. at p. 8.
---------------------------------------------------------------------------

    Several commenters also criticized the condition that DCOs accept 
the interest in the Qualified ETF as

[[Page 7835]]

performance bond.\390\ Among them, FIA and CME observed that CME is the 
only DCO that currently accepts U.S. Treasury ETFs as collateral, and 
that if CME were to modify or cease its acceptance of such ETFs, the 
change would be disruptive to FCMs.\391\ FIA and CME cautioned that the 
Commission should not conflate the standards governing collateral 
acceptability at DCOs with the requirements for Permitted 
Investments.\392\ Consistent with these concerns, other commenters 
argued that DCOs and FCMs have their own risk management policies, 
which consider the institution's unique characteristics and specific 
risk management needs.\393\ SIFMA AMG further asserted that using a 
DCO's initial margin standards as a proxy for determining whether a 
U.S. Treasury ETF is a safe investment instrument for Customer Funds is 
not appropriate.\394\ In this regard, SIFMA AMG argued that the 
Commission should rely instead on factors that address the preservation 
of principal and liquidity already specified in Commission regulation 
1.25. They further asserted that using a DCO's performance bond 
criteria as a gatekeeper unnecessarily constrains the diversification 
determination that should be made by each FCM or DCO using factors set 
out in Commission regulation 1.25.\395\
---------------------------------------------------------------------------

    \390\ Blackrock at p. 6; WFE at p. 6; FIA/CME at p. 13; SIFMA 
AMG at p. 7; CCP Global at p. 3-4.
    \391\ FIA/CME Joint Letter at p. 13.
    \392\ FIA/CME Joint Letter at p. 13 (referencing Commission 
regulation 39.13(g)(10), which provides that DCOs must limit the 
assets they accept as initial margin to those that have minimal 
credit, market, liquidity risk, and Commission regulation 39.33, 
which provides that DCOs' financial resources may include highly 
marketable collateral, including high quality, liquid, general 
obligations of a sovereign nation provided that these assets are 
readily available and convertible into cash pursuant to prearranged 
and highly reliable funding arrangements under extreme but plausible 
market conditions); CCP Global at p. 4.
    \393\ CCP Global at p. 4; SIFMA AMG at p. 7.
    \394\ SIFMA AMG at p. 7.
    \395\ Id.
---------------------------------------------------------------------------

    Commenters also generally opposed the proposed condition that 
Qualified ETFs invest at least 95 percent of their portfolio in 
securities comprising the short-term U.S. Treasury index that the fund 
is designed to track, suggesting instead that the Commission adopt an 
80 percent threshold requirement, which is consistent with current 
market conventions.\396\ ICI pointed out that many ETFs, including 
certain Treasury ETFs, have adopted an 80 percent investment policy 
pursuant to SEC Rule 35d-1 under the Investment Company Act of 1940 
(``SEC Rule 35d-1''), which requires a fund to have adopted a ``policy 
to invest, under normal circumstances, at least 80% of the value of its 
assets in investments in accordance with the investment focus that the 
fund's name suggests.'' \397\ CCP Global and WFE stated that the 
proposed condition was unnecessarily punitive.\398\ WFE added that the 
proposed 95 percent threshold could cause funds to deviate from their 
index.\399\ Conversely, although they did not oppose the Commission's 
95 percent portfolio threshold requirement, BlackRock and ICI requested 
clarification on the impacts of this increased threshold on the ETF's 
stated investment policies and associated documentation.\400\ BlackRock 
and ICI asked if the Commission were to adopt the proposed 95 percent 
portfolio threshold, that the Commission clarify that an investment 
requirement would be satisfied by funds that maintain investments 
meeting the specified threshold, even if the fund's prospectus permits 
the fund to hold securities outside of the threshold.\401\ ICI stated 
that if the 95 percent threshold was adopted as a fundamental 
investment policy, changing the investment policy would require a 
shareholder proxy vote, which is costly and burdensome to obtain.\402\ 
Therefore, ICI recommended that the Commission confirm that it is 
establishing a portfolio test for a Qualified ETF, which would not 
require the Treasury ETFs to change any existing investment policies or 
associated disclosures.\403\ ICI also requested that cash be allowed to 
satisfy the threshold requirement set in addition to eligible U.S. 
Treasury securities.\404\ FIA and CME noted, however, that FCMs and 
DCOs rely on the composition thresholds stated in funds' prospectus 
terms in conducting due diligence of investments and expressed concerns 
that there may not be industry-wide amendments to prospectus terms in 
response to the 95 percent threshold requirement.\405\ WFE also 
recommended that the Commission clarify the steps that would be taken 
in the situation where a percentage threshold requirement is breached 
and an FCM or DCO is expected to divest from the fund.\406\
---------------------------------------------------------------------------

    \396\ AIMA at p. 3; CCP Global at p. 3; MFA at p. 5; FIA/CME 
Joint Letter at p. 12; WFE at p.6.
    \397\ ICI at p. 5; see also 17 CFR 270.35d-1.
    \398\ CCP Global at p. 3; WFE at p. 6.
    \399\ WFE at p. 6.
    \400\ BlackRock at p. 3; ICI at p. 5.
    \401\ BlackRock at p. 3; see also ICI at p. 6.
    \402\ ICI at p. 5.
    \403\ ICI at p. 6.
    \404\ ICI at p. 5; see also BlackRock at p. 2; CCP Global at p. 
3; FIA/CME Joint Letter at p. 12 (note 58); WFE at p. 6.
    \405\ FIA/CME Joint Letter at p. 12.
    \406\ WFE at p. 6.
---------------------------------------------------------------------------

    In addition, five commenters requested that the Commission revise 
the portfolio composition requirements to allow for additional 
investments.\407\ Specifically, commenters recommended that in addition 
to short-term U.S. Treasury securities, the Commission allow Qualified 
ETFs to invest in certain repurchase agreements, cash, and ``cash 
equivalents,'' including MMFs.\408\ Three commenters asserted that the 
revision would provide appropriate flexibility, while preserving the 
high quality and liquid nature of the ETF.\409\ Arguing that the 
Commission should align the Qualified ETF's portfolio requirements with 
the requirements applicable to Permitted Government MMFs, a few 
commenters also requested that the Commission allow Qualified ETFs to 
invest in short-term securities issued by U.S. government agencies that 
are fully guaranteed as to principal and interest by the U.S. 
government.\410\
---------------------------------------------------------------------------

    \407\ BlackRock at pp. 2-3; CCP Global at p. 3; FIA/CME Joint 
Letter at pp. 11-12; MFA at p. 5; WFE at p 6.
    \408\ BlackRock at p. 3 (arguing that the Commission should 
expand the eligible underlying investments to align them with those 
allowed for Permitted Government MMFs, i.e., cash, government 
securities, and/or repurchase agreements that are fully 
collateralized); CCP Global at p 3 (arguing that the Commission 
should allow Qualified ETFs to invest in U.S. Treasury securities, 
cash, Repurchase Transactions collateralized in U.S. Treasury 
securities, and U.S. Treasury MMFs); FIA/CME Joint Letter at p. 12 
(recommending that the Commission allow a Qualified ETF to invest in 
securities with a maximum remaining maturity of 12 months or less 
issued or guaranteed by the U.S. Treasury, including securities 
issued by U.S. government agencies that are backed by the full faith 
and credit of the U.S. government, as well as government MMFs, and/
or Repurchase Transactions with a remaining term to final maturity 
of 12 months or less collateralized by U.S. Treasury securities or 
other government securities (as defined under SEC Rule 2a-7) with a 
remaining term to final maturity of 12 months or less); MFA at p. 5 
(arguing that the Commission should allow Qualified ETFs to invest 
in securities with a maximum remaining maturity of less than 12 
months issued or guaranteed by the U.S. Treasury, including short-
term securities issued by U.S. government agencies that are backed 
by the full faith and credit of the U.S. government, government 
MMFs, and/or Repurchase Transactions with a remaining term to final 
maturity of 12 months or less collateralized by U.S. Treasury 
securities or other government securities with a remaining term to 
final maturity of 12 months or less).
    \409\ BlackRock at p. 3; FIA/CME Joint Letter at p. 12; WFE at 
p. 6.
    \410\ BlackRock at p. 3; FIA/CME Joint Letter at p. 11; MFA at 
p. 5.
---------------------------------------------------------------------------

    In connection with the proposed requirement that FCMs and DCOs 
obtain the acknowledgement letter required by Commission regulation 
1.26 from an ``entity with substantial control over the

[[Page 7836]]

ETF interests,'' \411\ FIA and CME requested clarification regarding 
the appropriate signatory to the letter. FIA and CME noted that the 
entity with substantial control over the ETF interests may differ 
depending on whether the Final Rule requires FCMs and DCOs to be 
authorized participants.\412\ Specifically, FIA and CME noted that if, 
in referring to the ``depository acting as custodian for the ETF 
interests,'' the Commission intends to refer to the custodian of the 
Qualified ETF, such depository is likely not the entity with 
substantial control over the Qualified ETF interests given that it will 
not have a record of the FCM's or DCO's interests in the Qualified ETF 
and the ``depository's role, including in effecting purchase/
redemption/transfer transactions, will be at the direction of the 
Qualified ETF.'' \413\
---------------------------------------------------------------------------

    \411\ Proposal at 81250 and proposed Commission regulation 
1.25(c)(3).
    \412\ FIA/CME Joint Letter at p. 15.
    \413\ Id. at pp. 15-16.
---------------------------------------------------------------------------

    Finally, in response to the Commission's question whether there are 
any extraordinary circumstances, similar to the events listed in 
Commission regulation 1.25(c)(5)(ii) with respect to MMFs, that may 
justify an exception to the proposed next-day redemption requirement 
with regard to Qualified ETFs, three commenters recommended that the 
redemption exceptions for MMFs be made available for Treasury 
ETFs.\414\ FIA and CME argued that Qualified ETFs and Permitted 
Government MMFs have comparable credit, market, and liquidity risk and 
therefore should be subject to the same regulatory treatment of 
extraordinary circumstances in which redemptions could be 
postponed.\415\ ICI also supported exceptions to the next-day 
redemption requirement for ETFs and noted that many ETFs include 
disclosure in their registration statements regarding the ability to 
suspend redemption and payment consistent with section 22(e) of the 
Investment Company Act of 1940.\416\
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    \414\ ICI at p. 6 (focusing on the circumstances specified in 
section 22(e) of the Investment Company Act of 1940); FIA/CME Joint 
Letter at p. 18; SSGA at p. 3.
    \415\ FIA/CME Joint Letter at p. 18.
    \416\ ICI at p. 6. ICI further stated that since section 22(e) 
of the Investment Company Act of 1940 applies to ETFs as well as 
MMFs, the redemption exemptions under Commission regulation 
1.25(c)(5)(ii), which are consistent with, and expand upon, the 
exceptions listed in section 22(e), should also apply to ETFs. Id.; 
see also section 22(e) of the Investment Company Act of 1940, 15 
U.S.C. 80a-22(e) (restricting investment companies from suspending 
the right of redemption or postponing the date of payment or 
satisfaction upon redemption of any redeemable security, for more 
than seven days, except in certain enumerated circumstances 
including New York Stock Exchange closures outside of customary 
week-end and holiday closings or periods when trading on the New 
York Stock Exchange is restricted).
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c. Discussion
    After considering the comments received, the Commission is adopting 
the proposed addition of interests in Qualified ETFs to the list of 
Permitted Investments, subject to certain modifications discussed 
below. The Commission reiterates that the inclusion of Qualified ETFs 
as a Permitted Investment should foster innovation and promote 
competition in the ETF market and the financial services industry more 
generally. Further, the addition of Qualified ETFs should also foster 
diversification in the investment of Customer Funds through a new type 
of financial instrument that allows FCMs and DCOs to purchase a type of 
collateral (i.e., U.S. Treasury securities) that is already a Permitted 
Investment without having to acquire the securities directly or through 
an MMF. That is, the Commission agrees with commenters that by allowing 
FCMs and DCOs to invest Customer Funds in Qualified ETFs, the 
Commission would provide FCMs and DCOs with an efficient means for 
investing indirectly in Permitted Investments, specifically U.S. 
Treasury securities, while allowing FCMs and DCOs to reduce the 
expenses and resources required to manage individual, direct 
investments in such instruments.\417\ Further, because Qualified ETFs 
would be required to meet the conditions discussed below, Qualified 
ETFs would be comparable to Permitted Government MMFs whose interests 
currently qualify as Permitted Investments under Commission regulation 
1.25(a).\418\
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    \417\ Invesco at p. 2; SIFMA AMG at p. 4.
    \418\ SEC Rule 2a-7, which applies to MMFs, restricts the types 
of investments in which MMFs can invest their assets, limits the 
terms of the investments, and imposes liquidity requirements with 
respect to the investments, among other things. 17 CFR 270.2a-
7(d)(2) (providing that MMFs must limit their portfolio investments 
to U.S. dollar-dominated securities that at the time of acquisition 
are eligible securities), 17 CFR 270.2a-7(d)(1) (limiting the terms 
of maturity of MMFs' investments), and 17 CFR 270.2a-7(d)(4) 
(providing that MMFs must hold securities that are sufficiently 
liquid to meet reasonably foreseeable shareholder redemptions and 
setting forth other liquidity requirements). Although SEC Rule 2a-7 
does not apply to ETFs, as described below, this Final Rule admits 
as a Permitted Investment only ETFs providing investors with 
substantial protections that are comparable, though not identical, 
to those afforded to MMF investors.
---------------------------------------------------------------------------

    In response to the comments received, the Commission has determined 
to revise the requirement that an FCM or DCO be an authorized 
participant in order to invest Customer Funds in Qualified ETFs.\419\ 
Instead, under the terms of the Final Rule, an FCM or DCO would be able 
to invest Customer Funds in interests of a Qualified ETF either as an 
authorized participant of the Qualified ETF or by entering into an 
agency agreement with an authorized participant, whereby the authorized 
participant would transact with the ETF on behalf of the FCM or DCO. In 
both instances, the transactions must take place on a DVP basis, such 
that no Customer Funds are transferred out of the segregated customer 
accounts maintained in compliance with section 4d of the Act and/or 
part 30 of the Commission's regulations until property of equal or 
greater value is deposited in the customer segregated accounts.
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    \419\ Proposal at 81252 and proposed Commission regulation 
1.25(c)(8).
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    The Commission understands that generally the process of 
transacting on a DVP basis through an authorized participant acting on 
behalf of an FCM or DCO would function as follows. In the case of a 
creation transaction, the authorized participant would use its 
proprietary funds to acquire a creation basket of U.S. Treasury 
securities before placing an order with the Qualified ETFs for the 
purchase of creation units. Upon receipt of the Qualified ETF shares, 
the authorized participant would transfer such shares to the FCM's or 
DCO's customer segregated accounts and receive payment from the FCM or 
DCO customer segregated account on a DVP basis. Under no circumstances 
would the authorized participant receive payment of Customer Funds from 
the FCM or DCO until the authorized participant has transferred the 
Qualified ETF interests to the FCM's or DCO's customer segregated 
accounts.
    In the case of a redemption transaction, the authorized participant 
would either pre-fund the redemption with the FCM or DCO (i.e., 
transfer proprietary cash funds to the FCM's or DCO's customer 
segregated accounts prior to the transfer of the Qualified ETF shares 
from the customer segregated accounts to the authorized participant) or 
post cash collateral with the fund to obtain U.S. Treasury securities 
prior to receiving the Qualified ETF shares from the FCM or DCO and 
then transferring the shares to the fund. The authorized participant 
would receive a fee from the FCM or DCO for the service. For the 
process to comply with the Commission's segregation requirements, the 
fee may not be paid with Customer Funds. In addition, although the 
authorized participant would be acting as an agent of the FCM or DCO, 
the ETF would not hold the FCM or DCO

[[Page 7837]]

accountable for any failure of the authorized participant to perform 
its obligations to the ETF.\420\ The Commission has addressed the 
concern of commenters who requested an alternative to the proposed 
requirement that the FCM or DCO be an authorized participant in the 
revisions from the Proposal discussed above that enable an FCM or DCO 
to invest Customer Funds in interests of a Qualified ETF through an 
agency agreement with an authorized participant.
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    \420\ The Commission's understanding on this matter is based on 
representations made by ICI and Invesco during a conversation with 
Commission staff on August 5, 2024, during which ICI and Invesco 
further explained the statements in their comment letters. In its 
comment letter, ICI noted that market-based solutions, such as 
submitting letters of credit to the authorized participant ``could 
resolve potential exposure concerns that an [authorized participant] 
could have if engaging in redemption transactions before receiving 
the ETF shares.'' ICI at p.3. Additionally, one other commenter, 
AIMA, suggested permitting a DCO to submit a letter of credit to the 
ETF in lieu of requiring a DCO to become an authorized participant. 
AIMA at p. 2. During a conversation with Commission staff on August 
5, 2024, however, ICI represented that the submission of letters of 
credit is not a common business practice.
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    Moreover, regardless of the exact process used by FCMs and DCOs to 
transact with an authorized participant, for the transaction to be 
compliant with Commission regulations, the FCM or DCO must ensure that: 
(i) all Commission segregation requirements are met throughout the 
process; (ii) the transaction occurs on a DVP basis; (iii) no fees and/
or other costs associated with the transaction are charged to the 
customer segregated accounts; and (iv) no person, including, but not 
limited to, the ETF or the authorized participant has any claim over 
Customer Funds held by the FCM or DCO.
    Eliminating the requirement that FCMs and DCOs be authorized 
participants from the Final Rule should expand the opportunity to 
invest Customer Funds in Qualified ETFs beyond those FCMs and DCOs that 
have the resources to become authorized participants. This change 
addresses concerns raised by commenters that requiring FCMs and DCOs to 
be authorized participants would unfairly favor the limited number of 
FCMs that are already authorized participants and disadvantage DCOs 
that may not meet the criteria of an authorized participant.\421\ 
Further, as noted by commenters, some FCMs may not want to incur the 
regulatory, compliance, and operational costs associated with becoming 
an authorized participant.\422\ In addition to these costs, which some 
FCMs may find excessive, commenters asserted that there are ``potential 
operational burdens and registration requirements for becoming an 
authorized participant [that] may outweigh the potential benefits of 
investing customer funds in ETFs.'' \423\ The Commission is persuaded 
by commenters that the stated challenges to becoming an authorized 
participant may burden FCMs and DCOs so substantially that they are 
unable to take advantage of Qualified ETFs as an investment option. 
Thus, removing the requirement that FCMs and DCOs be authorized 
participants should provide an opportunity for all FCMs and DCOs, 
regardless of their size or specific business model, to invest Customer 
Funds in Qualified ETFs if the FCMs and DCOs determine that such 
investment is consistent with their risk-management policies.
---------------------------------------------------------------------------

    \421\ WFE at p. 5; ICI at p. 3.
    \422\ ICI at p. 3 (n. 8).
    \423\ BlackRock at p. 5.
---------------------------------------------------------------------------

    As noted above, several commenters requested that the Commission 
also allow FCMs and DCOs to invest Customer Funds in shares of 
Qualified ETFs via secondary market transactions on a DVP basis.\424\ 
The Commission understands that the changes to the standard settlement 
cycle of certain broker-dealer transactions, including transactions in 
ETFs, that became effective in May 2024,\425\ may allow liquidation of 
Qualified ETF shares to occur on the secondary market in compliance 
with Commission regulation 1.25's general liquidity requirement, which 
provides that Permitted Investments must have the ability to be 
converted into cash within one business day without material discount 
in value.\426\ Commenters also noted that there has been substantial 
growth in the secondary ETF market, which has made pricing differences 
from the primary market minimal.\427\ The Commission has also observed 
that individual Treasury bills, when purchased on the secondary market, 
may have a wider bid-ask spread when compared to Treasury ETF 
shares.\428\ Therefore, the Commission has determined not to restrict 
FCMs and DCOs from investing Customer Funds in shares of Qualified ETFS 
by buying and selling such shares on the secondary market, provided 
such transactions are transacted in compliance with the Commission's 
segregation requirements, and consistent with Commission regulation 
1.25's liquidity requirements, as well as all other applicable 
provisions.\429\ The Commission also notes, as further discussed in 
section IV.C. of this preamble, that the Final Rule provides that FCMs 
would be subject to a 6 percent capital charge on investments in 
Qualified ETF shares that do not comprise a full creation unit.\430\
---------------------------------------------------------------------------

    \424\ BlackRock at pp. 4-5; CCP Global at p. 3; SSGA at p. 2; 
SIFMA AMG at pp. 2-3, 5-6; FIA/CME Joint Letter at pp. 14-15.
    \425\ Shortening the Securities Transaction Settlement Cycle, 88 
FR 13872 (March 6, 2023).
    \426\ 17 CFR 1.25(b)(1).
    \427\ FIA/CME Joint Letter at p. 15; CCP Global at p. 3.
    \428\ The Commission reviewed Bloomberg data from five ETFs: 
iShares Short Treasury Bond ETF (SHV); SPDR Bloomberg 1-3 Month T-
Bill ETF (BIL); iShares 0-3 Month Treasury Bond ETF (SGOV); Goldman 
Sachs Access Treasury 0-1 Year ETF (GBIL); and Invesco Short Term 
Treasury ETF (TBLL).
    \429\ An FCM or DCO is required to manage the purchase and sale 
of Qualified ETF shares on the secondary market consistent with the 
Commission's segregation requirements, particularly the requirement 
to ensure that the firm is not undersegregated at any point in time. 
In this respect, an FCM or DCO may elect to use proprietary funds to 
purchase Qualified ETF shares and subsequently transfer the shares 
to a customer segregated account. Alternatively, to the extent that 
an FCM or DCO holds funds in customer segregated accounts in excess 
of the total amount owed to customers (including any applicable 
residual interest requirements), the FCM or DCO may withdraw such 
funds and use such funds to purchase shares of Qualified ETFs. 
Furthermore, an FCM or DCO liquidating Qualified ETF shares that are 
held in customer segregated accounts must ensure that the removal of 
such shares does not result in the customer accounts becoming 
undersegregated (including any applicable residual interest 
requirements). Alternatively, the FCM or DCO must transfer 
proprietary cash or other Permitted Investments into customer 
segregated accounts in an amount equal or greater than the fair 
market value of the Qualified ETF Shares prior to the removal of the 
shares from the customer segregated accounts.
    \430\ See Letter titled Net Capital Treatment of Certain U.S. 
Treasury Exchange-Traded Funds, issued by the Division of Trading 
and Markets to Ms. Kris Dailey, Vice President, Risk Oversight & 
Operational Regulations, Financial Industry Regulatory Authority, 
June 2, 2022 (``SEC ETF Letter''). The SEC ETF Letter is available 
at the SEC's website: https://www.sec.gov/divisions/marketreg/mr-noaction/2022/finra-060222-15c3-1.pdf.
---------------------------------------------------------------------------

    In adopting the Final Rule, the Commission has also determined to 
modify the proposed requirement that FCMs and DCOs redeem Qualified 
ETFs in cash. The Commission understands that ETFs typically redeem 
interests in kind, although they may also redeem in cash or both in 
kind and in cash. As discussed above, the Commission proposed to 
require that Qualified ETFs redeem their shares within one business day 
following the submission of the redemption request to help ensure a 
more expeditious liquidation of the Qualified ETF shares, consistent 
with the time limit for redemptions applicable to MMFs under Commission 
regulation 1.25(c)(5) and the general liquidity requirement in 
Commission regulation 1.25(b)(1).\431\ The

[[Page 7838]]

Commission has considered the comments asserting that redemptions in 
kind can satisfy the liquidity requirements imposed by Commission 
regulation 1.25.\432\ Specifically, the Commission has considered 
arguments that short-term U.S. Treasury ETFs may commit to redeem 
shares on the same business day of the redemption request, thus 
allowing FCMs and DCOs to liquidate the underlying U.S. Treasury 
securities within one business day, as required by Commission 
regulation 1.25.\433\ The Commission, however, understands that such 
redemption timeframe may be conditioned upon the fund receiving the 
redemption request before a certain cut-off time during the business 
day.\434\ In addition, liquidation of the underlying U.S. Treasury 
securities may be delayed during periods of market turmoil. Such delay 
may, in particular, hinder the FCM's ability to return Customer Funds 
to customers or to post variation margin to the clearing house. To 
ensure that FCMs and DCOs are able to liquidate an investment in a 
Qualified ETF within the timeframe mandated by Commission regulation 
1.25, the Commission has determined to require FCMs and DCOs that are 
not authorized participants to redeem Qualified ETF shares in cash 
within one business day of the redemption request. To that effect, an 
FCM DCO conducting the redemption through an authorized participant 
acting as the FCM's or DCO's agent must ensure that its contractual 
agreement with the authorized participant requires the authorized 
participant to transfer cash to the customer segregated account of the 
FCM or DCO, on a DVP basis, within one business day of the redemption 
request. For FCMs that are authorized participants of the Qualified 
ETF, the Commission has determined to allow such FCMs to redeem 
Qualified ETF shares in kind, provided that the FCM has the operational 
ability to convert the instruments received pursuant to the redemption 
into cash within one business day of the redemption request. The 
Commission is making this determination based on the understanding that 
FCMs that qualify as authorized participants are securities brokers or 
dealers that have the operational capacity and arrangements in place to 
convert the U.S. Treasury securities received upon redemption into cash 
in a timely manner. The Commission believes that such policy, where the 
FCM or DCO is obligated to have the necessary contractual agreements in 
place to redeem Qualified ETF shares in cash or to swiftly convert U.S. 
Treasury securities into cash, as applicable, but the Qualified ETFs 
preserve the possibility to redeem in kind, should resolve commenters' 
concerns that applying an in-cash redemption condition to the ETF would 
limit the potential universe of ETFs that qualify as a Permitted 
Investment.\435\ It should also resolve other commenters' concerns 
discussed above that requiring an ETF to redeem in cash might cause an 
inequitable first-mover advantage.\436\
---------------------------------------------------------------------------

    \431\ Proposal at 81251.
    \432\ BlackRock at pp. 2,5; ICI at pp. 4-5; MFA at pp. 5-6; SSGA 
at p. 3; SIFMA AMG at pp. 7-8; FIA/CME Joint Letter at pp. 12-13.
    \433\ ICI at p. 4; AIMA at p. 2; BlackRock at p. 5; Invesco at 
p. 4; see also Invesco Petition at p. 6.
    \434\ Invesco Petition at p. 6 (noting that an U.S. Treasury ETF 
generally offers and redeems shares with settlement on the same day 
(if creation or redemption orders are received before 12:00 p.m. 
Eastern time) or the next business day (if creation or redemption 
orders are received on or after 12:00 p.m. Eastern time) at the NAV 
next calculated in creation units in exchange for the deposit or 
delivery of a basket of securities).
    \435\ ICI at p. 4.
    \436\ FIA/CME Joint Letter at pp. 12-13.
---------------------------------------------------------------------------

    Further, following consideration of comments received, the 
Commission has determined not to adopt, as a condition for 
qualification as a Permitted Investment, the proposed requirement that 
Qualified ETFs be acceptable by a DCO as performance bond from clearing 
members to margin customer trades. In making this determination, the 
Commission acknowledges the views of various commenters that the 
standards for DCO collateral acceptability and the standards for 
Permitted Investments should not be conflated.\437\ Specifically, 
Commission regulation 1.25(b) requires that an FCM or DCO ``manage the 
permitted investments consistent with the objectives of preserving 
principal and maintaining liquidity.'' \438\ By comparison, Commission 
regulation 39.13(g)(10) requires DCOs to ``limit the assets it accept 
as initial margin to those that have minimal credit, market, and 
liquidity risk.'' \439\ Although there are similarities between these 
requirements, the Commission confirms that an FCM's or DCO's investment 
choices for Permitted Investments of Customer Funds should be governed 
by the standards set forth in Commission regulation 1.25. The 
Commission also recognizes the potential unintended consequences for 
FCMs if CME--currently the only DCO that accepts short-term U.S. 
Treasury ETFs as a performance bond--changes its collateral 
acceptability policy and stops accepting such ETFs, particularly if the 
change in policy is unrelated to the safety and liquidity of the 
collateral instrument.\440\
---------------------------------------------------------------------------

    \437\ CCP Global at p. 4; FIA/CME Joint Letter at p. 13; SIFMA 
AMG at p. 7.
    \438\ 17 CFR 1.25(b).
    \439\ 17 CFR 39.13(g)(10). Further, 17 CFR 39.33(c)(3)(E) allows 
DCO's financial resources to include highly marketable collateral, 
including high quality, liquid, general obligations of a sovereign 
nation that must be readily available and convertible into cash 
pursuant to prearranged and highly reliable funding arrangements, 
even in extreme but plausible market conditions.
    \440\ FIA/CME Joint Letter at p. 13.
---------------------------------------------------------------------------

    The Commission is also adopting with some changes the requirement 
that the Qualified ETF invest at least 95 percent of its assets in 
eligible securities comprising the short-term U.S. Treasury index whose 
performance the fund seeks to replicate and cash. In the Final Rule, 
eligible short-term securities are defined as bonds, notes, and bills 
with a remaining maturity of 12 months or less, issued by, or 
unconditionally guaranteed as to the timely payment of principal and 
interest by, the U.S. Department of the Treasury. In response to 
comments, the Commission did not intend to limit the amount of cash 
that Qualified ETFs hold and is therefore adjusting the requirement to 
clarify that cash is an eligible underlying asset for purposes of the 
95 percent threshold.\441\ The Commission understands that many ETFs, 
including certain U.S. Treasury ETFs, have adopted an investment policy 
consistent with SEC Rule 35d-1,\442\ which requires that certain 
registered investment companies, including ETFs, adopt a policy to 
invest at least 80 percent of the value of their assets in accordance 
with the investment focus suggested by the fund's name.\443\ The 
Commission, however, has determined to maintain a stricter standard 
than an 80 percent minimum in order to help ensure that FCMs and DCOs 
invest Customer Funds in accordance with Commission regulation 1.25's 
general objectives of preserving principal and maintaining liquidity.
---------------------------------------------------------------------------

    \441\ ICI at p. 5; FIA/CME Joint Letter at p. 12 (note 58); CCP 
Global at p. 3; WFE at p. 6; BlackRock at p. 2.
    \442\ AIMA at p. 3; MFA at p. 5; FIA/CME Joint Letter at p. 12; 
CCP Global at p. 3; ICI at p. 5.
    \443\ SEC Rule 35d-1 under the Investment Company Act of 1940 
(indicating that a fund name suggesting that the fund focuses its 
investments in a particular type of investments or in investments in 
a particular industry would be a materially deceptive and misleading 
name unless the fund has adopted a policy to invest, under normal 
circumstances, at least 80 percent of the value of its assets in the 
particular type of investments or in investments in the particular 
industry suggested by the fund's name). 17 CFR 270.35d-1.
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    The Commission acknowledges commenters' concerns regarding the 
potential burdens and costs associated with changing the fund's 
fundamental investment policy to reflect the adoption of a 95 percent 
portfolio

[[Page 7839]]

threshold.\444\ Therefore, the Commission is clarifying that a U.S. 
Treasury ETF meets the 95 percent portfolio threshold requirement if 
the fund effectively invests 95 percent or more of its assets in 
eligible securities and cash, even if the fund's registration statement 
sets a lower threshold. However, to ensure that a U.S. Treasury ETF 
meets the conditions for qualification as a Permitted Investment, FCMs 
and DCOs must verify that the fund satisfies the 95 percent threshold 
requirement. Thus, FCMs and DCOs are required to monitor the Qualified 
ETF's portfolio and should do so on a monthly basis, consistent with 
existing regulations applicable to FCMs to submit monthly financial 
reports within 17 business days after the end of each month,\445\ 
particularly in the absence of registration statement language 
reflecting the fund's commitment to adhere to the 95 percent threshold 
requirement.
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    \444\ BlackRock at p. 3; ICI at p. 5.
    \445\ 17 CFR 1.10(b)(1).
---------------------------------------------------------------------------

    Further, the Commission confirms that, under the Final Rule, if the 
aggregate of the ETF's cash holdings and assets invested in eligible 
securities comprising the short-term U.S. Treasury index falls below 95 
percent of the fund's total assets, the FCM or DCO is not permitted to 
make additional investments of Customer Funds in the Qualified ETF. 
Rather, as the Commission stated in the Proposal, the FCM or DCO should 
take reasonable actions to divest interests in the fund, while managing 
Customer Funds in a manner consistent with Commission regulation 1.25's 
general objectives of preserving principal and maintaining 
liquidity.\446\ In response to a comment requesting further 
clarification on the actions to be taken should a threshold breach by 
the fund occur,\447\ the Commission confirms, as discussed in the 
Proposal, that depending on the market conditions, such actions may 
include taking steps to progressively reduce the amount of Customer 
Funds invested in Qualified ETFs rather than immediately divesting the 
full amount of the investments in a potentially volatile market.\448\
---------------------------------------------------------------------------

    \446\ Proposal at 81249-81250.
    \447\ WFE at p. 6.
    \448\ Proposal at 81249-81250.
---------------------------------------------------------------------------

    In addition, the Commission has determined to maintain the scope of 
eligible underlying instruments to be included in the 95 percent 
threshold to bonds, notes, and bills with a remaining maturity of 12 
months or less, issued by, or unconditionally guaranteed as to the 
timely payment of principal and interest by, the U.S. Department of the 
Treasury, and cash. In response to comments advocating that the scope 
of Qualified ETFs be expanded to funds that invest in certain short-
term U.S. agency obligations,\449\ the Commission acknowledges that the 
universe of short-term U.S. agency obligations that are fully and 
unconditionally guaranteed as to the timely payment of principal and 
interest by the U.S. Department of the Treasury is limited and that 
securities issued by U.S. government-sponsored enterprises do not fall 
into this category. The Commission, however, declines to expand the 
scope of eligible underlying instruments included in the 95 percent 
threshold to U.S. agency obligations that are not unconditionally 
guaranteed by the U.S. Department of the Treasury, because such 
obligations present different liquidity characteristics than U.S. 
Treasury securities. Given that many U.S. agency obligations are also 
mortgage-backed securities, they have structural features that produce 
less predictable cashflow and additional risks than U.S. Treasury 
securities.\450\ The Commission is adopting the 95 percent threshold 
requirement as proposed.\451\
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    \449\ BlackRock at p. 3 (arguing that the Commission should 
expand the eligible underlying investments to align them with those 
allowed for Permitted Government MMFs, i.e., cash, government 
securities, and/or repurchase agreements that are fully 
collateralized); CCP Global at p 3 (arguing that the Commission 
should allow Qualified ETFs to invest in U.S. Treasury securities, 
cash, Repurchase Transactions collateralized in U.S. Treasury 
securities, and U.S. Treasury MMFs); FIA/CME Joint Letter at p. 12 
(recommending that the Commission allow a Qualified ETF to invest in 
securities with a maximum remaining maturity of 12 months or less 
issued or guaranteed by the U.S. Treasury, including securities 
issued by U.S. government agencies that are backed by the full faith 
and credit of the U.S. government, as well as government MMFs, and/
or Repurchase Transactions with a remaining term to final maturity 
of 12 months or less collateralized by U.S. Treasury securities or 
other government securities (as defined under SEC Rule 2a-7) with a 
remaining term to final maturity of 12 months or less); MFA at p. 5 
(arguing that the Commission should allow Qualified ETFs to invest 
in securities with a maximum remaining maturity of less than 12 
months issued or guaranteed by the U.S. Treasury, including short-
term securities issued by U.S. government agencies that are backed 
by the full faith and credit of the U.S. government, government 
MMFs, and/or Repurchase Transactions with a remaining term to final 
maturity of 12 months or less collateralized by U.S. Treasury 
securities or other government securities with a remaining term to 
final maturity of 12 months or less).
    \450\ Federal Reserve Bank of New York, Staff Report: Mortgage 
Backed Securities, No. 1001 February 2022 available at https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr1001.pdf.
    \451\ Also, as discussed in section IV.C. of this preamble, FCMs 
will be required to determine capital charges for Qualified ETF 
shares based on SEC staff guidance. The SEC ETF Letter only applies 
to certain ETFs, specifically those that invest ``solely in cash and 
government securities that are eligible securities under paragraph 
(a)(11) of SEC Rule 2a-7, limited to U.S. Treasury floating and 
fixed rate bills, notes, and bonds with a remaining term to final 
maturity of 12 months or less, government money market funds as 
defined in Rule 2a-7, and/or Repurchase Transactions with a 
remaining term to final maturity of 12 months or less collateralized 
by U.S. Treasury securities or other government securities with a 
remaining term to final maturity of 12 months or less.'' SEC ETF 
Letter, available at: https://www.sec.gov/divisions/marketreg/mr-noaction/2022/finra-060222-15c3-1.pdf. The portfolio composition of 
an ETF that invests a portion of its assets in short-term U.S. 
agency obligations that are unconditionally guaranteed as to the 
timely payment of principal and interest by the U.S. Department of 
the Treasury should not differ materially from that of an ETF that 
invests solely in U.S. Treasury securities and cash. Therefore, the 
Commission requires that FCMs determine capital charges for 
Qualified ETFs whose portfolio includes U.S. agency obligations that 
are unconditionally guaranteed as to the timely payment of principal 
and interest by the U.S. Department of the Treasury based on the SEC 
ETF Letter.
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    In consideration of comments received,\452\ the Commission is not 
adopting the proposed revision to Commission regulation 1.25(c)(5)(ii) 
that would have precluded Qualified ETFs from postponing redemption and 
payment under the circumstances enumerated in that paragraph. As a 
result of this modification, Qualified ETFs will also be able to rely 
on Commission regulation 1.25(c)(5)(ii), as applicable. Specifically, 
the exception provided under Commission regulation 1.25(c)(5)(ii)(A) 
relates to a non-routine closure of the Fedwire or applicable Federal 
Reserve Banks and, under the Final Rule, will be extended to Qualified 
ETFs in addition to Government MMFs. Next-day redemption exceptions 
detailed at Commission regulation 1.25(c)(5)(ii)(B)-(D) correspond to 
exceptions provided in section 22(e) of the Investment Company Act and 
therefore apply to registered investment companies generally. As a 
result, because Qualified ETFs will be required to be investment 
companies registered under the Investment Company Act of 1940, these 
exceptions will also apply to Qualified ETFs. The exception in 
Commission regulation 1.25(c)(5)(ii)(E) refers to periods during which 
the SEC has by rule or regulation deemed that trading should be 
restricted or that an emergency exists. This exception could 
potentially apply to all registered investment companies and will apply 
to Qualified ETFs. Finally, the exception in Commission regulation 
1.25(c)(5)(ii)(F) refers to the condition of SEC Rule 22e-3,\453\ which 
is only

[[Page 7840]]

applicable to MMFs, and will not apply to Qualified ETFs.
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    \452\ FIA/CME Joint Letter at p. 18; ICI at p. 6; SSGA at p. 3.
    \453\ Section 22(e) of the Investment Company Act of 1940, 
codified at 15 U.S.C. 80a-22(e), restricts investment companies from 
suspending the right of redemption or postponing the date of payment 
or satisfaction upon redemption of any redeemable security, for more 
than seven days, except in certain enumerated circumstances 
including New York Stock Exchange closures outside of customary 
week-end and holiday closings or periods when trading on the New 
York Stock Exchange is restricted. Section 22(e)(3) allows the SEC 
to define, by order, additional circumstances, during which 
redemptions may be restricted ``for the protection of security 
holders of the company.'' 15 U.S.C. 80a-22(e)(3).
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    The Commission has determined not to adopt the proposed requirement 
that FCMs and DCOs obtain the acknowledgment letter required by 
Commission regulation 1.26 from an entity that has substantial control 
over the ETF interests purchased with Customer Funds and that has 
knowledge and authority to facilitate redemption and payment or 
transfer of the Customer Funds. Under the terms of the Final Rule, FCMs 
and DCOs will instead be required to obtain the acknowledgement letter 
mandated by Commission regulation 1.20, as required for any investment 
of Customer Funds in Permitted Investments except Permitted Government 
MMFs. This change from the Proposal is based on the Commission's 
understanding that, unlike MMF shares that may be held directly with 
the fund or its affiliate, Qualified ETFs shares will be held with a 
depository.\454\ The deletion of this proposed requirement also 
addresses FIA's and CME's comment about the lack of clarity with 
respect to the ``entity that has substantial control'' over the 
Qualified ETF, from which the acknowledgement letter would have to be 
obtained.\455\
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    \454\ The Commission's understanding on this matter is based on 
an email from Kevin Ercoline, Associate General Counsel, ICI, to 
Commission staff, dated August 15, 2024, ICI Email 20240913, 
available at https://comments.cftc.gov/PublicComments/ViewExParte.aspx?id=1826&SearchText=. As explained in the August 15, 
2024 email, it is common practice that an FCM or DCO purchases ETF 
shares and custodies them with the FCM's or DCO's custodian.
    \455\ FIA/CME Joint Letter at p. 15.
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    The Commission is adopting the remaining conditions for Qualified 
ETF eligibility set forth in the Proposal as proposed without change. 
That is, under the terms of the Final Rule, an FCM or DCO that acquires 
and holds interests in Qualified ETFs may not enter into an agreement 
that would prevent it from pledging the Qualified ETF's shares. FCMs 
and DCOs must also maintain confirmations relating to their purchase of 
interests in a Qualified ETF in their records.
    Additionally, the NAV for the Qualified ETF must be computed by 9 
a.m. of the business day following each business day and made available 
to FCMs or DCOs, as applicable, by that time.\456\ This requirement is 
intended to allow for the valuation of the Qualified ETF's investment 
portfolio to be available by 9 a.m. the business day following an 
investment in the ETF, so that the valuation is available in time for 
FCMs to perform their daily segregation calculations, which are 
required to be completed by noon each business day, reflecting balances 
as of the close of business on the previous business day.\457\
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    \456\ Paragraph (c)(4) of Commission regulation 1.25 as applying 
to Qualified ETFs per proposed revised introductory text of 
paragraph (c) of Commission regulation 1.25.
    \457\ 2000 Permitted Investments Amendment at 78003.
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    Further, the Qualified ETF must be legally obligated to redeem its 
interests and make payment in satisfaction of the interests by the 
business day following a redemption request.\458\ As discussed above, 
limiting Qualified ETFs to funds that track the performance of a 
published short-term U.S. Treasury security index should facilitate 
redemptions of Qualified ETFs' shares being completed within one 
business day, consistent with Commission regulations 1.25(c)(5)(i) and 
1.25(b)(1).\459\
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    \458\ Paragraph (c)(5)(i) of Commission regulation 1.25 as 
applying to Qualified ETFs per proposed revised introductory text of 
paragraph (c) of Commission regulation 1.25.
    \459\ See 17 CFR 1.25(c)(5) (MMFs must be legally obligated to 
redeem their interests and to make payment in satisfaction of the 
interests by the business day following a redemption request) and 17 
CFR 1.25(b)(1) (Permitted Investments must be ``highly liquid'' such 
that the investments have the ability to be converted into cash 
within one business day without material discount in value).
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    The Commission is adding paragraph (v) to Commission regulation 
1.25(a)(1), as redesignated to accommodate other amendments to the list 
of Permitted Investments pursuant to the Final Rule, to add the 
interests of Qualified ETFs (U.S. Treasury exchange-traded funds) to 
the list of Permitted Investments under Commission regulation 1.25. The 
Commission is adopting further conforming changes throughout Commission 
regulation 1.25. As discussed above, the Final Rule provides for the 
replacement of ``money market mutual fund'' or ``money market mutual 
funds'' with ``government money market fund'' or ``government money 
market funds'' throughout Commission regulation 1.25. The Commission is 
inserting next to the term ``government money market fund'' or 
``government money market funds,'' the term ``U.S. Treasury exchange-
traded fund'' or ``U.S. Treasury exchange-traded funds,'' as 
appropriate, preceded by an appropriate conjunction (i.e., ``or'' or 
``and''), as necessary.
    The Commission is revising Commission regulation 1.25(c)(1) to 
incorporate the condition as set forth in the Proposal that a Qualified 
ETF must be an investment company that is registered under the 
Investment Company Act of 1940 with the SEC and holds itself out to 
investors as an ETF under SEC Rule 6c-11.\460\
---------------------------------------------------------------------------

    \460\ Proposed Commission regulation 1.25(c)(1).
---------------------------------------------------------------------------

    Consistent with the Proposal, the Commission is also adding a new 
paragraph (8) to Commission regulation 1.25(c) to incorporate the 
requirement that investments of Customer Funds in Qualified ETFs occur 
on a DVP basis. In a modification from the Proposal, however, new 
Commission regulation 1.25(c)(8) does not specify that Qualified ETF 
interests must be redeemable by the FCM or DCO ``in its capacity of an 
authorized participant.'' The Commission is also not specifying the 
ETF's interests must be ``redeemable in cash'' but rather that the FCM 
or DCO must have the necessary contractual arrangements in place to 
liquidate the ETF shares in cash in compliance with Commission 
regulation 1.25's liquidity requirements. New Commission regulation 
1.25(c)(8) provides that an FCM or DCO transacting with a Qualified ETF 
through an authorized participant must redeem interests in the 
Qualified ETF in cash, whereas an FCM that is an authorized participant 
of the Qualified ETF may redeem interests in the Qualified ETF in kind, 
provided the FCM is able to convert the U.S. Treasury securities 
received pursuant to the redemption in cash within one business day of 
the redemption request.
    To account for the possibility that, as part of their investment 
strategy and within the limits of applicable SEC rules, Qualified ETFs 
may engage in derivatives transactions, the Commission is adopting the 
revision set forth in the Proposal to amend Commission regulation 
1.25(b)(2)(i) to indicate that the prohibition of investments 
containing embedded derivatives does not apply to Qualified ETFs.
    The Commission is also adopting the revision set forth in the 
Proposal to amend Commission regulation 1.25(b)(4)(i), which provides 
that, except for investments in MMFs, the dollar-weighted average time-
to-maturity of an FCM's or DCO's portfolio of Permitted Investments, as 
computed under SEC Rule 2a-7, may not exceed 24 months. The amendment 
revises Commission regulation 1.25(b)(4)(i) to exclude Qualified ETFs 
from the

[[Page 7841]]

calculation of the dollar-weighted average time-to-maturity of the 
portfolio of Permitted Investments.\461\ The Commission is implementing 
this change because interests in Qualified ETFs do not have maturity 
dates as the Qualified ETF manages the rolling of maturing U.S. 
Treasury securities into new investments.
---------------------------------------------------------------------------

    \461\ Revised Commission regulation 1.25(b)(4)(i).
---------------------------------------------------------------------------

4. Investments in Commercial Paper and Corporate Notes or Corporate 
Bonds
    Commission regulation 1.25(b) currently provides that FCMs and DCOs 
may invest Customer Funds in commercial paper, corporate notes, and 
corporates bonds that are guaranteed under the TLGP administered by the 
FDIC. The TLGP program, however, expired in 2012.\462\ Therefore, 
commercial paper, corporate notes, and corporate bonds have not been 
Permitted Investments for more than a decade. To address the 
termination of the TLGP, the Commission proposed to remove commercial 
paper, corporate notes, and corporate bonds from the list of Permitted 
Investments in Commission regulation 1.25.\463\
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    \462\ Temporary Liquidity Guarantee Program, available at 
https://www.fdic.gov/Regulations/resources/tlgp/index.html (``Under 
the [Debt Guarantee Program], the FDIC guaranteed in full, through 
maturity or June 30, 2012, whichever came first, the senior 
unsecured debt issued by a participating entity between October 14, 
2008, and June 30, 2009. In 2009, the issuance period was extended 
through October 31, 2009. The FDIC's guarantee on each debt 
instrument was also extended in 2009 to the earlier of the stated 
maturity date of the debt or December 31, 2012.'').
    \463\ Proposal at 81253.
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    The Commission received three comments supporting the removal of 
commercial paper, corporate notes, and corporate bonds as Permitted 
Investments.\464\ No commenters opposed the proposed revisions. FIA, 
CME, and MFA, expressed general support for the removal of commercial 
paper, corporate notes, and corporate bonds from the list of Permitted 
Investments.\465\ AIMA commented that the removal of commercial paper, 
corporate notes, and corporate bonds from the list of Permitted 
Investments, along with the other proposed changes, would 
``appropriately update the list of permitted investments in line with 
sound risk management practices, allow DCOs and FCMs greater 
flexibility to manage risks and reduce currency and concentration 
risk.'' \466\
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    \464\ AIMA at p. 2; FIA/CME Joint Letter at p. 20; MFA at p.7.
    \465\ FIA/CME Joint Letter at p. 20; MFA at p. 7.
    \466\ AIMA at p. 2.
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    The Commission has considered the comments received and has 
determined to amend the list of Permitted Investments by revising 
Commission regulation 1.25(a)(1) to eliminate commercial paper, 
corporate notes, and corporate bonds as proposed, because these 
instruments have not been Permitted Investments since the expiration of 
the TLGP in 2012.\467\
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    \467\ In light of the Proposal's proposed elimination of 
commercial paper, corporate notes, and corporate bonds from the list 
of Permitted Investments, the FIA/CME Joint Letter suggested a 
technical amendment to remove paragraph (b)(2)(vi) from Commission 
regulation 1.25, which sets forth conditions that commercial paper, 
corporate notes, and corporate bonds must satisfy to be Permitted 
Investments. FIA/CME Joint Letter at p. 21. The Proposal included 
the deletion of current Commission regulation 1.25(b)(2)(vi), and 
the Commission is deleting current paragraph (b)(2)(vi) as proposed. 
Proposal at 81273.
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5. Investments in Permitted Investments With Adjustable Rates of 
Interest
    Commission regulation 1.25(b)(2)(iv)(A) currently provides that 
Permitted Investments may contain variable or floating interest rates 
provided, among other things, that: (i) the interest payments on 
variable rate securities correlate closely, on an unleveraged basis, to 
a benchmark of either the Federal Funds target or effective rate, the 
prime rate, the three-month Treasury Bill rate, the one-month or three-
month LIBOR, or the interest rate of any fixed rate instrument that is 
a listed Permitted Investment under Commission regulation 1.25(a); 
\468\ and (ii) the interest rate, in any period, on floating rate 
securities is determined solely by reference, on an unleveraged basis, 
to a benchmark of either the Federal Funds target or effective rate, 
the prime rate, the three-month Treasury Bill rate, the one-month or 
three-month LIBOR,\469\ or the interest rate of any fixed rate 
instrument that is a listed Permitted Investment under Commission 
regulation 1.25(a).\470\
---------------------------------------------------------------------------

    \468\ 17 CFR 1.25(b)(2)(iv)(A)(1).
    \469\ For simplicity, subsequent references to ``one-month or 
three-month LIBOR rate'' will be referred to as ``LIBOR'' unless 
otherwise required by the context of the discussion.
    \470\ 17 CFR 1.25(b)(2)(iv)(A)(2).
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    LIBOR had commonly been used as a reference rate in various 
commercial and financial contracts, including corporate and municipal 
bonds, commercial loans, floating rate mortgages, asset-backed 
securities, consumer loans, and interest rate swaps and other 
derivatives.\471\ After a loss of confidence in LIBOR as a reliable 
benchmark following a number of enforcement actions concerning attempts 
to manipulate the benchmark,\472\ the U.K. Financial Conduct Authority 
(``UK FCA'') announced on March 5, 2021 that LIBOR would cease to be 
published and would effectively be discontinued.\473\
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    \471\ Proposal at 81253-81254. See also, Staff Statement on 
LIBOR Transition, SEC Division of Corporation Finance, Division of 
Investment Management, Division of Trading and Markets, and Office 
of the Chief Accountant (July 12, 2019), available at https://www.sec.gov/news/public-statement/libor-transition.
    \472\ See e.g., In re Barclays PLC, CFTC Docket No. 12-25 (June 
27, 2012); In re UBS AG, CFTC Docket No. 13-09 (Dec. 19, 2012).
    \473\ See generally CFTC Staff Letter No. 21-26, Revised No-
Action Positions to Facilitate an Orderly Transition of Swaps from 
Inter-Bank Offered Rates to Alternative Benchmarks (Dec. 20, 2021) 
(``Staff Letter 21-26'') available at the Commission's website: . 
The UK FCA, which regulates ICE Benchmark Administration Limited, 
the administrator of ICE LIBOR, confirmed that LIBOR would either 
cease to be provided by any administrator or would no longer be 
representative for the 1-week and 2-month U.S. dollar LIBOR 
settings, immediately after December 31, 2021, and for all other 
U.S. dollar LIBOR settings immediately after June 30, 2023).
---------------------------------------------------------------------------

    Prior to the UK FCA announcement, the Federal Reserve Bank of New 
York had convened the Alternative Reference Rate Committee (``ARRC'') 
in 2014 to identify best practices for U.S. alternative reference rates 
as well as best practices for contract robustness, to develop an 
adoption plan, and to create an implementation plan with metrics of 
success and a timeline.\474\ In June 2017, the ARRC identified SOFR, a 
broad Treasury repurchase agreements financing rate, as the preferred 
alternative benchmark to U.S. dollar LIBOR for certain new U.S. dollar 
derivatives and financial contracts.\475\ SOFR is a broad measure of 
the cost of borrowing cash overnight collateralized by U.S. Treasury 
securities in the Repurchase Transaction market used by financial 
institutions, governments, and corporations.\476\ SOFR is calculated as 
a volume-weighted median of transaction-level triparty repo data 
collected from the Bank of New York Mellon as well as data on bilateral 
U.S. Treasury Repurchase Transactions cleared through the Fixed Income 
Clearing Corporation.\477\ The Federal Reserve Bank of New York 
(``FRBNY''), in cooperation with the U.S. Office of Financial Research, 
publishes SOFR by 8:00 a.m. each business day.\478\
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    \474\ Staff Letter 21-26 at p. 3.
    \475\ ARRC, ``The ARRC Selects a Broad Repo Rate as its 
Preferred Alternative Reference Rate,'' June 22, 2017, available at 
https://www.newyorkfed.org/medialibrary/microsites/arrc/files/2017/ARRC-press-release-Jun-22-2017.pdf.
    \476\ See Secured Overnight Financing Rate Data, published by 
the Federal Reserve Bank of New York (``FRBNY'') and available at 
https://apps.newyorkfed.org/markets/autorates/sof.
    \477\ Id.
    \478\ See Additional Information about the Treasury Repo 
Reference Rates, published by the FRBNY and available at https://www.newyorkfed.org/markets/treasury-repo-reference-rates-information.
---------------------------------------------------------------------------

    In response to the anticipated termination of the publication of 
LIBOR

[[Page 7842]]

and the increasing acceptance and use of SOFR as a benchmark interest 
rate, MPD issued Staff Letter 21-02 on January 4, 2021.\479\ Staff 
Letter 21-02 provides that MPD would not recommend enforcement action 
to the Commission if an FCM invested Customer Funds in Permitted 
Investments that contain adjustable interest rates benchmarked to SOFR. 
Staff Letter 21-02 was a time-limited no-action position that was to 
expire on December 31, 2022. MPD and DCR, however, issued a joint 
letter on December 23, 2022, Staff Letter 22-21, extending the 
effective date of the no-action position to December 31, 2024, and 
expanding the scope of the no-action position to include Permitted 
Investments made by DCOs.\480\ Due to the transition from LIBOR to 
SOFR, the Commission proposed to amend Commission regulation 
1.25(b)(2)(iv)(A) by replacing LIBOR with SOFR as a permitted benchmark 
for Permitted Investments that contain an adjustable rate of interest. 
The Commission also requested comment on whether it should consider 
other additional interest rates beyond SOFR as permitted benchmarks for 
adjustable rate securities under Commission Regulation 1.25.\481\
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    \479\ CFTC Staff Letter 21-02.
    \480\ CFTC Staff Letter 22-21.
    \481\ Proposal at p. 81254, Question 15.
---------------------------------------------------------------------------

    The Commission received three comments regarding the proposed 
transition to SOFR, and all three comments supported the proposed 
amendment to replace LIBOR with SOFR as a permitted benchmark for 
adjustable rate securities under Commission regulation 
1.25(b)(2)(iv)(A).\482\ In addition to supporting the addition of SOFR, 
FIA, CME, and MFA also recommended that the Commission amend Commission 
regulation 1.25 to permit FCMs and DCOs to invest Customer Funds in 
adjustable rate securities that reference SONIA, [euro]STR, TONAR, and 
COBRA, to the extent that an FCM or DCO has balances owed to customers 
denominated in GBP, EUR, JPY, or CAD, respectively.\483\ In support of 
its recommendation, the FIA/CME Joint Letter states that these 
additional alternative reference rates have been selected by public/
private-sector working groups, similar to the ARRC, formed by the Bank 
of England (SONIA), the European Central Bank ([euro]STR), the Bank of 
Japan (TONAR), and the Bank of Canada (COBRA), in connection with the 
transition away from LIBOR rates in these currencies.\484\
---------------------------------------------------------------------------

    \482\ MFA at pp. 2, 7; FIA/CME Joint Letter at p. 20; SIFMA AMG 
at p. 12.
    \483\ MFA at p. 7; FIA/CME Joint Letter at p. 20.
    \484\ FIA/CME Joint Letter at p. 20.
---------------------------------------------------------------------------

    The Commission has considered the comments received and upon 
further consideration is adopting the proposed revision to Commission 
regulation 1.25(b)(2)(iv)(A)(1) and (2) subject to a clarification 
regarding the SOFR rates that qualify as acceptable benchmarks. The 
Final Rule specifies that adjustable rate securities may reference the 
overnight, 1-month, 3-month, and 6-month SOFR rate published by the 
FRBNY. The Final Rule also permits adjustable rate securities to be 
benchmarked to the CME Term SOFR Rate published by the CME Group 
Benchmark Administration Limited.\485\ The CME Term SOFR Rate is 
computed by the CME Group Benchmark Administration Limited based on 
SOFR futures contracts traded on the CME. The FRBNY and CME Group 
Benchmark Administration Limited published SOFR rates are reliable 
reference rates as they are calculated in a transparent manner based on 
actual trading activity in the overnight or futures markets and subject 
to regulatory oversight. The replacement of LIBOR with SOFR advances 
the objective of Commission regulation 1.25 of preserving principal and 
maintaining liquidity by requiring the use of reliable benchmarks in 
the qualification of adjustable rate securities as Permitted 
Investments.
---------------------------------------------------------------------------

    \485\ CME Group Benchmark Administration Limited is registered 
benchmark administrator, authorized and supervised by the UK FCA. 
CME Term SOFR Rates provide an indication of the forward-looking 
measurement of overnight SOFR, based on market expectations implied 
from derivatives markets. See generally CME's web page on CME Term 
SOFR Rates available at https://www.cmegroup.com/market-data/cme-group-benchmark-administration/term-sofr.html.
---------------------------------------------------------------------------

    The Commission has decided not to adopt the additional alternative 
rates suggested by the commenters. At this time, the Commission has not 
observed any investment instruments that would qualify as Permitted 
Investments using these alternative reference rates. Furthermore, as 
discussed above and in the Proposal, the Commission has performed an 
extensive review of SOFR and has followed the work of the ARRC in 
developing SOFR. It has not, however, engaged in a similar review of 
the additional alternative reference rates at this time.
    To give effect to the adoption of SOFR as a permitted benchmark for 
Permitted Investments with an adjustable rate of interest, paragraphs 
(b)(2)(iv)(A)(1) and (2) of Commission regulation 1.25 are amended by 
replacing the phrase ``one-month or three-month LIBOR rate'' with the 
phrase ``Secured Overnight Financing Rate.'' \486\ These amendments are 
consistent with the Commission's intent of providing FCMs and DCOs with 
a certain degree of flexibility in selecting Permitted Investments with 
adjustable rates of interest, and align with the evolution of the 
market.\487\
---------------------------------------------------------------------------

    \486\ Final Commission regulation 1.25(b)(2)(iv)(A)(1) and (2).
    \487\ 2005 Permitted Investments Amendment at 28192 (it is 
appropriate to afford latitude in establishing benchmarks for 
Permitted Investments to enable FCMs and DCOs to more readily 
respond to changes in the market).
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6. Investments in Certificates of Deposit Issued by Banks
    Commission regulation 1.25(a)(1)(iv) currently permits, subject to 
certain conditions, FCMs and DCOs to invest Customer Funds in 
certificates of deposit (``CDs'') issued by a section 3(a)(6) bank or a 
domestic branch of a foreign bank that carries deposits insured by the 
FDIC (``bank CDs''). To qualify as a Permitted Investment under 
Commission regulation 1.25, a bank CD must be redeemable at the issuing 
bank within one business day, with any penalty for early withdrawal 
limited to accrued interest earned according to the terms of the bank 
CD agreement.\488\
---------------------------------------------------------------------------

    \488\ Commission regulation 1.25(b)(2)(v); 17 CFR 1.25(b)(2)(v).
---------------------------------------------------------------------------

    As stated in the Proposal, the Commission's experience has been 
that FCMs and DCOs have not elected bank CDs as an investment option 
for Customer Funds.\489\ In connection with the Proposal, Commission 
staff reviewed SIDR Reports filed by FCMs for the period September 15, 
2022 through February 15, 2023 and noted no FCMs reporting investments 
of Customer Funds in bank CDs.\490\
---------------------------------------------------------------------------

    \489\ Proposal at 81254-81255. Although FCMs have not 
communicated a specific reason for the lack of investments in bank 
CDs, the Commission understands that few, if any, bank CDs meet the 
requirements in Commission regulation 1.25(b)(v) that the CD is 
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. 17 CFR 1.25(b)(v).
    \490\ Proposal at 81254-81255. Commission regulations 1.32(f), 
22.2(g)(5), and 30.7(l)(5) require each FCM to submit a SIDR Report 
to the Commission and the FCM's designated self-regulatory 
organization (``DSRO'') listing the names of all banks, trust 
companies, FCMs, DCOs, and any other depositories or custodians 
holding futures customer funds, Cleared Swaps Customer Collateral, 
or 30.7 customer funds, respectively. FCMs are further required to 
include the total amount invested in each of the Permitted 
Investments in the SIDR Report. FCMs are required to submit the SIDR 
Report as of the 15th day of each month (or the next business day if 
the 15th day of the month is not a business day) and the last 
business day of the month. 17 CFR 1.32(f), 17 CFR 22.2(g)(5), and 17 
CFR 30.7(l)(5). The Commission is also revising the SIDR Report to 
reflect the revisions to the list of Permitted Investments adopted 
by the Commission under this rulemaking. See section IV.D. for a 
discussion of the final amendments to the SIDR Report.
    With respect to an FCM, a DSRO is the self-regulatory 
organization that has been delegated the responsibility under a 
formal plan approved by the Commission pursuant to Commission 
Regulation 1.52 to monitor and examine the FCM for compliance with 
Commission and self-regulatory organization minimum financial and 
related financial reporting requirements. 17 CFR 1.52.

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[[Page 7843]]

    In the Proposal, the Commission requested comment on whether 
Commission regulation 1.25 should be amended by removing bank CDs from 
the list of Permitted Investments given the historical lack of usage by 
FCMs and DCOs.\491\ Specifically, the Commission requested comment on 
whether the elimination of bank CDs as a Permitted Investment would 
have a material adverse impact on FCMs' and DCOs' ability to invest 
Customer Funds.\492\ The Commission also requested comment regarding 
whether there were provisions of Commission regulation 1.25, or other 
legal or operational issues, that hinder or prevent FCMs and DCOs from 
investing Customer Funds in bank CDs.\493\ The Commission also 
requested comment on whether FCMs and DCOs may elect to invest Customer 
Funds in bank CDs with the current rising interest rate environment for 
bank deposits and bank CDs.\494\ In addition, the Commission requested 
comment on what factors it should consider before removing bank CDs 
from the list of Permitted Investments.\495\ Lastly, the Commission 
stated that based on the comments received, and the Commission's 
further consideration of this issue, it may determine to revise the 
list of Permitted Investments by removing bank CDs in the final 
rulemaking.\496\
---------------------------------------------------------------------------

    \491\ Id.
    \492\ Proposal at 81255, Question 17.
    \493\ Id., Questions 18 and 19.
    \494\ Id., Question 20.
    \495\ Id., Question 21.
    \496\ Id. In the Proposal, the Commission also detailed the 
additional conforming amendments that it would make to Commission 
regulations to reflect the potential elimination of bank CDs from 
Commission regulation 1.25(a)(1). Proposal at 81255.
---------------------------------------------------------------------------

    Three comments responded to the Commission's request for comment on 
this subject.\497\ Two commenters supported the removal of bank CDs as 
Permitted Investments. FIA and CME stated in their joint letter that 
bank CDs should be removed from the list of Permitted Investments as 
they are not aware of the recent use of bank CDs as a Permitted 
Investment, nor has any FIA member stated that it foresees investing 
Customer Funds in bank CDs.\498\ Nodal also supported the removal of 
bank CDs from the list of Permitted Investments, noting that from a 
risk perspective, bank CDs replace, but do not materially mitigate, 
counterparty risk faced by FCMs and DCOs with respect to direct bank 
deposits.\499\ ICE stated, however, that it did not believe that it 
would be beneficial to remove bank CDs as Permitted Investments even if 
the use of such investments by FCMs and DCOs is currently limited.\500\
---------------------------------------------------------------------------

    \497\ FIA/CME Joint Letter at p. 20; Nodal pp. 3-4; ICE at p. 4.
    \498\ FIA/CME Joint Letter at p. 20.
    \499\ FIA/CME Joint Letter at p. 20; Nodal at pp. 3-4.
    \500\ ICE at p. 4.
---------------------------------------------------------------------------

    The Commission has considered the comments received and is removing 
bank CDs from the list of Permitted Investments in Commission 
regulation 1.25(a)(1) as proposed. The Commission adopted bank CDs as a 
Permitted Investment in 2000.\501\ Since its adoption, the Commission 
has not observed any material use of bank CDs as an investment 
instrument for Customer Funds. Although ICE stated that it did not 
believe that it was beneficial to remove bank CDs, the lack of use of 
bank CDs suggests that FCMs and DCOs do not view bank CDs as viable 
investments for Customer Funds. Furthermore, the FIA/CME Joint Letter 
states that no FIA member has indicated that it foresees investing 
Customer Funds in bank CDs.\502\
---------------------------------------------------------------------------

    \501\ Proposal at 81237.
    \502\ FIA/CME Joint Letter at p. 20.
---------------------------------------------------------------------------

    The Commission is therefore deleting paragraph (a)(1)(iv) of 
Commission regulation 1.25 and redesignating paragraphs (i) through 
(vii) of Commission regulation 1.25(a)(1) to reflect the removal of 
bank CDs from the revised list of Permitted Investments. In addition, 
the Commission is deleting paragraph (b)(2)(v) of Commission regulation 
1.25, which sets forth restrictions on the features of permitted bank 
CDs, and is revising and/or deleting, as appropriate in light of other 
amendments, paragraphs (b)(3)(i)(C) and (b)(3)(ii)(B) of Commission 
regulation 1.25, which set forth asset-based and issuer-based 
concentration limits for certain instruments currently included in the 
list of Permitted Investments, to reflect the elimination of bank CDs 
from that list. The Commission is also making conforming amendments to 
Commission regulations 1.32(f)(3), 22.2(g)(5), and 30.7(l)(5), which 
define the content of the SIDR Reports described in section IV.D. of 
this preamble, to reflect the removal of bank CDs from the list of 
Permitted Investments in Commission regulation 1.25. Finally, the 
Commission has deleted the requirement for an FCM to report the 
balances invested in bank CDs in the SIDR Report.

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

a. Proposal
    Commission regulation 1.25(b)(3) establishes asset-based and 
issuer-based concentration limits for an FCM's or DCO's investment of 
Customer Funds in Permitted Investments.\503\ The asset-based and 
issuer-based concentration limits are set at the same levels for 
investments of futures customer funds, Cleared Swaps Customer 
Collateral, and 30.7 customer funds.\504\ An FCM or DCO is also 
required to calculate the asset-based and issuer-based concentration 
limits separately for futures customer funds, Cleared Swaps Customer 
Collateral, and 30.7 customer funds based on the total amount of funds 
held by the FCM or DCO in each respective segregation 
classification.\505\
---------------------------------------------------------------------------

    \503\ 17 CFR 1.25(b)(3).
    \504\ The asset-based and issuer-based concentration limits for 
futures customer funds are set forth in Commission regulation 
1.25(b)(3). With respect to 30.7 customer funds, Commission 
regulation 30.7(h)(1) provides that an FCM may invest 30.7 customer 
funds subject to, and in compliance with, the terms and conditions 
of Commission regulation 1.25, which includes the asset-based and 
issuer-based concentration limits. 17 CFR 30.7(h)(1). With respect 
to Cleared Swaps Customer Collateral, Commission regulations 
22.2(e)(1) and 22.3(d) provide that an FCM or DCO, respectively, may 
invest Cleared Swaps Customer Collateral in accordance with 
Commission regulation 1.25, which includes the asset-based and 
issuer-based concentration limits. 17 CFR 22.2(e)(1) and 17 CFR 
22.3(d).
    \505\ 2011 Permitted Investments Amendment at 78787 
(concentration limits are to be calculated on a customer-segregation 
origin by customer-segregation origin basis, i.e., based on separate 
segregation account classes).
---------------------------------------------------------------------------

    As explained in the Proposal, an FCM or DCO is currently permitted 
to directly invest futures customer funds, Cleared Swaps Customer 
Collateral, and 30.7 customer funds in each of the Permitted 
Investments up to the following asset-based limits: (i) U.S. government 
securities--100 percent; (ii) U.S. agency obligations--50 percent; 
(iii) for each investment asset class of bank CDs, commercial paper, 
and corporate notes and bonds--25 percent; and (iv) municipal 
securities--10 percent.\506\
---------------------------------------------------------------------------

    \506\ Proposal at 81255-81259; Commission regulation 
1.25(b)(3)(i)(A)-(D); 17 CFR 1.25(b)(3)(i)(A)-(D). The term ``U.S. 
government securities'' refers to general obligations of the U.S. 
and obligations fully guaranteed as to principal and interest by the 
U.S. See 17 CFR 1.25(a)(1)(i).
---------------------------------------------------------------------------

    With respect to MMFs, an FCM or DCO may currently invest up to 100 
percent of the total futures customer funds, Cleared Swaps Customer 
Collateral, and 30.7 customer funds that it holds in MMFs that invest 
only in U.S. government securities, provided

[[Page 7844]]

that the size of the funds' portfolio is at least $1 billion and the 
funds' management company has at least $25 billion of assets under 
management.\507\ If a fund has less than $1 billion of assets under 
management, or if the manager of the fund has less than $25 billion of 
assets under management, the FCM or DCO may invest up to 10 percent of 
its total futures customer funds, Cleared Swaps Customer Collateral, 
and 30.7 customer funds in the fund.\508\ For Prime MMFs, an FCM or DCO 
may invest up to 50 percent of the total futures customer funds, 
Cleared Swaps Customer Collateral, and 30.7 customer funds in such 
MMFs; however, the asset-based concentration is limited to 10 percent 
if a fund has less than $1 billion in assets under management or if the 
fund's manager has less than $25 billion of assets under 
management.\509\
---------------------------------------------------------------------------

    \507\ 17 CFR 1.25(b)(3)(i)(E).
    \508\ 17 CFR 1.25(b)(3)(i)(G).
    \509\ 17 CFR 1.25(b)(3)(i)(F) and (G).
---------------------------------------------------------------------------

    With respect to issuer-based concentration limits, an FCM or DCO is 
permitted to invest up to 100 percent of the total futures customer 
funds, Cleared Swaps Customer Collateral, and 30.7 customer funds that 
it holds in U.S. government securities.\510\ An FCM or DCO also may 
invest futures customer funds, Cleared Swaps Customer Collateral, and 
30.7 customer funds directly in qualifying Permitted Investments, other 
than U.S. government securities, subject to the following issuer-based 
concentration limits: (i) obligations of any single issuer of U.S. 
agency obligations--25 percent; (ii) obligations of any single issuer 
of municipal securities, bank CDs, commercial paper, or corporate notes 
or bonds--5 percent.\511\
---------------------------------------------------------------------------

    \510\ See 17 CFR 1.25(b)(3)(ii), which excludes U.S. government 
securities from the issuer-based concentration limits. See also 2011 
Permitted Investments Amendment at 78788.
    \511\ 17 CFR 1.25(b)(3)(ii)(A) and (B).
---------------------------------------------------------------------------

    With respect to MMFs, an FCM or DCO may invest up to 100 percent of 
the total futures customer funds, Cleared Swaps Customer Collateral, 
and 30.7 customer funds in a single MMF that invests only in U.S. 
government securities.\512\ With respect to MMFs that maintain 
investment portfolios that hold instruments other than U.S. government 
securities, an FCM or DCO is subject to the following issuer-based 
concentration limits: (i) interest in any single MMF family may not 
exceed 25 percent of customer funds held; and (ii) interest in any 
individual MMF may not exceed 10 percent of customer funds held.\513\
---------------------------------------------------------------------------

    \512\ See 17 CFR 1.25(b)(3)(ii), which excludes MMFs that invest 
only in U.S. government securities from the issuer-based 
concentration limits.
    \513\ 17 CFR 1.25(b)(3)(ii)(C) and (D).
---------------------------------------------------------------------------

    The Commission proposed to amend the asset-based and issuer-based 
concentration limits in Commission regulation 1.25(b)(3) to reflect the 
proposed revisions to the list of Permitted Investments discussed in 
the Proposal and to adjust the limits based on the Commission's 
experience administering Commission regulation 1.25.\514\ As discussed 
in section IV.A.1. of this preamble, the Commission proposed to limit 
the scope of MMFs whose interests qualify as Permitted Investments to 
Permitted Government MMFs. Under the Proposal, a Permitted Government 
MMF would be defined by reference to SEC Rule 2a-7 as an MMF that 
invests at least 99.5 percent or more of its total assets in cash, 
government securities, and/or Repurchase Transactions that are fully 
collateralized.\515\ The scope of underlying instruments in which a 
Permitted Government MMF would be allowed to invest is broader than 
that of the MMFs currently excluded from the concentration limits of 
Commission regulation 1.25(c) (i.e., MMFs investing solely in U.S. 
government securities). To account for the potential increase in risk 
associated with such broader scope, and in the interest of imposing a 
simple and consistent approach to concentration limits, the Commission 
proposed to establish a single concentration limit of 50 percent for 
all Permitted Government MMFs of a certain size, without distinguishing 
between funds investing solely in U.S. government securities and those 
whose portfolio may also include U.S. agency obligations and/or other 
instruments within the limits of SEC Rule 2a-7. More precisely, under 
the Proposal, an FCM's or DCO's investment of Customer Funds in 
interests in Permitted Government MMFs with at least $1 billion in 
assets and whose management company manages at least $25 billion in 
assets would be limited to no more than 50 percent of the total 
Customer Funds computed separately for each of the segregated funds 
account classes of futures customer funds, Cleared Swaps Customer 
Collateral, and 30.7 customer funds.\516\ The proposed asset-based 
concentration limits are consistent with the concentration limits 
applicable to U.S. agency obligations, which along with U.S. Treasury 
securities, are a permitted underlying instrument for Permitted 
Government MMFs.\517\
---------------------------------------------------------------------------

    \514\ Proposal at 81255-81259.
    \515\ Proposal at 81241 and 81256.
    \516\ Proposed Commission regulation 1.25(b)(3)(i)(E).
    \517\ 17 CFR 1.25(b)(3)(i)(B).
---------------------------------------------------------------------------

    The Commission also proposed to maintain the current 10 percent 
asset-based concentration limit on investments in MMFs that hold less 
than $1 billion in assets or have a management company with less than 
$25 billion in assets under management.\518\ For purposes of clarity, 
the Commission proposed to delete the conjunction ``and'' in that 
provision to indicate that the fund size threshold and the management 
company size threshold are to be construed as alternative prongs 
triggering the 10 percent limit.
---------------------------------------------------------------------------

    \518\ Proposed Commission regulation 1.25(b)(3)(i)(F).
---------------------------------------------------------------------------

    In addition, to mitigate the potential risks arising from 
concentration in any particular fund or family of funds, the Commission 
proposed issuer-based concentration limits for investments in Permitted 
Government MMFs. Specifically, the Commission proposed to limit 
investments of Customer Funds in any single family of Permitted 
Government MMFs to 25 percent and investments of Customer Funds in any 
individual Permitted Government MMFs to 5 percent of the total assets 
held in each of the segregated account classes of futures customer 
funds, Cleared Swaps Customer Collateral, and 30.7 customer funds.\519\
---------------------------------------------------------------------------

    \519\ Proposed Commission regulations 1.25(b)(3)(ii)(C) and (D), 
respectively.
---------------------------------------------------------------------------

    Further, as part of the proposed amendments to the concentration 
limits in Commission regulation 1.25,\520\ the Commission proposed to 
revise the asset-based and issuer-based concentration limits set forth 
in paragraphs (b)(3)(i)(F) and (b)(3)(ii)(C) and (D), respectively, to 
reflect the removal of Prime MMFs from the list of Permitted 
Investments.
---------------------------------------------------------------------------

    \520\ See discussion in section IV.B. of this preamble.
---------------------------------------------------------------------------

    As discussed in section IV.A.3. of this preamble, the Commission is 
adding Qualified ETFs to the list of Permitted Investments.\521\ The 
Commission proposed to impose conditions on Qualified ETFs that are 
substantially similar to the conditions that are imposed on Permitted 
Government MMFs whose interests qualify as Permitted Investments.\522\ 
Given the similarity of the terms that would apply to Permitted 
Government MMFs and Qualified ETFs under the Proposal, and the 
comparable credit, market, and liquidity risk associated with these

[[Page 7845]]

types of funds, the Commission preliminarily determined that it would 
be appropriate for Qualified ETFs to have the same asset-based and 
issuer-based concentration limits as those proposed for Permitted 
Government MMFs.
---------------------------------------------------------------------------

    \521\ Proposed Commission regulation 1.25(a)(1)(vi).
    \522\ See section IV.A.3. of this preamble.
---------------------------------------------------------------------------

    Under the Proposal, an FCM's or DCO's investment of Customer Funds 
in Qualified ETFs with at least $1 billion in assets and whose 
management company manages at least $25 billion in assets would be 
limited to an asset-based concentration limit of 50 percent of total 
funds held in each of the segregated account classes of futures 
customer funds, Cleared Swaps Customer Collateral, and 30.7 customer 
funds.\523\ The Commission also proposed to extend the current 10 
percent asset-based concentration limit for investments in MMFs that 
hold less than $1 billion in assets or whose management company manages 
less than $25 billion in assets under management to Qualified ETFs. In 
addition, to mitigate the potential risks arising from concentration in 
any particular fund or family of funds, the Commission proposed to 
limit investments of Customer Funds in any single family of Qualified 
ETFs to 25 percent and investments of Customer Funds in any individual 
Qualified ETF to 5 percent of the total assets held in each of the 
segregated account classes of futures customer funds, Cleared Swaps 
Customer Collateral, and 30.7 customer funds.\524\ Because there may be 
at least five U.S. Treasury ETFs that could potentially qualify as 
Permitted Investments, the Commission preliminarily believed that the 
proposed issuer-based concentration limits would not be overly 
restrictive.\525\
---------------------------------------------------------------------------

    \523\ Proposed Commission regulation 1.25(b)(3)(i)(E).
    \524\ Proposed Commission regulations 1.25(b)(3)(ii)(C) and (D). 
These limits are the same for both Permitted Government MMFs and 
Qualified ETFs.
    \525\ 2022 CME Advisory Notice, supra note 320 (announcing that 
CME has added five Short-Term U.S. Treasury ETFs to the list of 
accepted margin collateral). The five ETFs added by the CME would 
meet the proposed condition of being accepted as performance bond by 
a DCO. For purposes of clarity, FCMs and DCOs would need to assess 
ETFs' eligibility in light of all applicable conditions.
---------------------------------------------------------------------------

    The Commission also proposed revisions to the asset-based and 
issuer-based concentration limits to remove limits on commercial paper, 
and corporate notes and bonds, given that the Commission proposed to 
eliminate these instruments from the list of Permitted 
Investments.\526\ The Commission stated that if bank CDs were removed 
from the list of Permitted Investments based on public feedback, the 
Commission would eliminate the asset-based and issuer-based 
concentration limits for these instruments as well.\527\
---------------------------------------------------------------------------

    \526\ Proposed Commission regulation 1.25(b)(3)(i)(C) (removing 
commercial paper and corporate notes and bonds from the 25 percent 
asset-based concentration limit); proposed Commission regulation 
1.25(b)(3)(ii)(B) (removing commercial paper and corporate notes and 
bonds from the 5 percent issuer-based concentration limit).
    \527\ Proposal at 81257-81258.
---------------------------------------------------------------------------

    Finally, the Commission proposed to expand the types of investments 
that would qualify as Permitted Investments to include Specified 
Foreign Sovereign Debt. However, the Commission did not propose asset-
based or issuer-based concentration limits on an FCM's or DCO's 
investments in Specified Foreign Sovereign Debt. Among other 
considerations, the Commission noted, in the Proposal, that proposed 
Commission regulation 1.25(a)(1)(vii), which permits an FCM or DCO to 
invest Customer Funds in Specified Foreign Sovereign Debt only to the 
extent that the FCM or DCO has balances owed to customers denominated 
in the currency of the applicable country, is expected to effectively 
limit the amount of Customer Funds that an FCM or DCO may invest in 
Specified Foreign Sovereign Debt.
    The concentration limits in Commission regulation 1.25 are minimum 
requirements.\528\ As discussed in the Proposal, pursuant to Commission 
regulation 1.11, an FCM is required to monitor and manage market, 
credit, liquidity, foreign currency, legal, operational, settlement, 
segregation, capital, and any other applicable risks associated with 
its activity, as part of the FCM's risk management program.\529\ If, 
based on its independent risk assessment, an FCM determines that 
stricter concentration limits with respect to Permitted Investments of 
Customer Funds are appropriate, the FCM is required to implement such 
stricter limits, in accordance with Commission regulation 1.11. 
Similarly, Commission regulation 39.13(g)(10) requires a DCO to limit 
the assets it accepts as initial margin to those that have minimal 
credit, market, and liquidity risks, whereas Commission regulation 
39.13(g)(13) requires the DCO to apply appropriate limitations or 
charges on the concentration of assets posted as initial margin, as 
necessary, to ensure its ability to liquidate such assets quickly with 
minimal adverse price effects.
---------------------------------------------------------------------------

    \528\ Proposal at 81258. The Commission has stated in prior 
rulemakings that FCMs are expected to carefully evaluate the 
appropriateness of each permitted investment in terms of its 
investment objectives and compliance with the time-to-maturity, 
concentration limits, and other requirements of Rule 1.25. 2005 
Permitted Investments Amendment at 28192. As noted in other parts of 
this preamble, the Commission has adopted Commission regulation 1.11 
to require FCMs to establish a risk management program that 
considers risks posed by affiliates, all lines of business of the 
FCM, and all other trading activity engaged in by the FCM. See supra 
note 126, section IV.A.2.c, and section IV.B.a. DCOs are subject to 
similar risk management requirements as laid out in Commission 
regulation 39.13.
    \529\ 17 CFR 1.11.
---------------------------------------------------------------------------

    In addition, if as a result of market events or extraneous 
circumstances, such as a change in an MMF's size, the FCM or DCO 
inadvertently breaches the concentration thresholds, the FCM or DCO 
would be expected to undertake prompt actions to restore compliance 
with the concentration limits, while managing the investments of 
Customer Funds in a manner consistent with the general objectives of 
preserving principal and maintaining liquidity. Depending on the market 
conditions, such actions may include taking steps to progressively 
reduce the amount of Customer Funds invested in a particular asset 
class instead of immediately divesting the full portfolio of 
investments in a potentially volatile market.
b. Comments
    The Commission requested comment on all aspects of its Proposal 
relating to concentration limits, including the proposed asset-based 
and issuer-based concentration limits for Permitted Government MMFs and 
Qualified ETFs. The Commission received nine comments addressing 
concentration limits.\530\ Eurex and WFE supported the Commission's 
decision not to impose asset-based or issuer-based concentration limits 
on Specified Foreign Sovereign Debt, citing consistency with the 2018 
Order.\531\ A number of other commenters, however, recommended changes 
to the asset-based and issuer-based concentration limits for Permitted 
Government MMFs and Qualified ETFs proposed by the Commission as 
discussed below.\532\
---------------------------------------------------------------------------

    \530\ AIMA at pp. 2-3; BlackRock at p. 7; Eurex at pp. 2-3; 
Federated Hermes at pp. 1-3; ICI at pp. 2, 6-10; Nodal at pp. 2-3; 
SIFMA AMG at pp. 2, 8-12, FIA/CME Joint Letter at pp. 16-18; WFE at 
p. 4.
    \531\ Eurex at p. 2; WFE at p. 5.
    \532\ AIMA at pp. 2-3; BlackRock at p. 7; Federated Hermes at 
pp. 1-3; ICI at pp. 2, 6-10; Nodal at pp. 2-3; SIFMA AMG at pp. 2, 
8-12, FIA/CME Joint Letter at pp. 16-18.
---------------------------------------------------------------------------

    Regarding the proposed change of imposing a 50 percent asset-based 
concentration limit for all Permitted Government MMFs with at least $1 
billion in assets and whose management company manages at least $25 
billion in assets, FIA and CME did not support the

[[Page 7846]]

Commission's proposed changes and urged the Commission to keep the 
current asset-based limits.\533\ FIA and CME argued that the Commission 
should continue to allow investments in ``Treasury-only'' MMFs without 
imposing asset-based concentration limits.\534\ These commenters 
contended that large Government MMFs invest in high-quality securities, 
have stable market value NAVs, have robust liquidity profiles, have 
implemented significant cybersecurity safeguards, and operate in a 
manner that is consistent with the Commission's customer asset 
protection regime.\535\ Thus, FIA and CME asserted that the 
Commission's statement in the 2011 Permitted Investments Amendment that 
``[i]ndirect investments 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'' is no less true today than it 
was in 2011.\536\ Further, FIA and CME asserted that Government MMFs 
``arguably present greater diversification and more resiliency for 
investors than government securities themselves in rare instances of 
volatility or stress in the government securities market.'' \537\ FIA 
and CME also argued that although financial institutions, including 
FCMs and DCOs, like all commercial entities, could be targets for 
cyber-attacks that may adversely impact normal operating capabilities 
and impair an FCM's or DCO's ability to redeem, promptly on demand, 
interests in Permitted Government MMFs or Qualified ETFs, FCMs and DCOs 
are already ``subject to comprehensive regulatory requirements to 
implement policies, procedures, and controls to detect, prevent, 
monitor, and mitigate operational risk, including cybersecurity risk.'' 
\538\ FIA and CME further noted that the Commission has proposed to 
augment and reinforce these required policies, procedures, and controls 
with a new requirement for FCMs to establish an ``operational 
resilience framework.'' \539\ As a result of the existing protections, 
FIA and CME believe that the proposed concentration limits are not 
well-tailored to the regulatory objectives that the Commission 
articulated in the Proposal.\540\ BlackRock also suggested that the 
Commission keep the existing asset-based concentration limit framework 
because, in their view, the framework is operating as intended.\541\ 
ICI did not object to the changes to the asset-based concentration 
limits proposed for Permitted Government MMFs given their relative risk 
and liquidity profiles.\542\
---------------------------------------------------------------------------

    \533\ FIA/CME Joint Letter at p. 17.
    \534\ Id. Commission regulation 1.25(c) currently excludes from 
the concentration limits MMFs investing solely in U.S. government 
securities as this term is currently used in Commission regulation 
1.25. Because the Commission proposed to defined Permitted 
Government MMF by reference to SEC Rule 2a-7 as an MMF that invests 
99.5 percent or more of its assets in cash, government securities 
(defined in 15 U.S.C. 80a-2(a)(16) to broadly include U.S. Treasury 
securities and U.S. agency obligations), and/or Repurchase 
Transactions that must be collateralized fully, the scope of 
underlying instruments in which a Permitted Government MMF would be 
allowed to invest is broader than that of MMFs currently excluded 
from the concentration limits. Proposal at 81256.
    \535\ FIA/CME Joint Letter at p. 17.
    \536\ Id.; 2011 Permitted Investments Amendment at 78796.
    \537\ FIA/CME Joint Letter at p. 17.
    \538\ Id. at 16 (referencing Commission Regulations 1.11, 39.13, 
39.18(b), 160.30, and 162.21).
    \539\ Id. (referencing Operational Resilience Framework for 
Futures Commission Merchants, Swap Dealers, and Major Swap 
Participants, 89 FR 4706 (Jan. 24, 2024)).
    \540\ Id. at 17.
    \541\ BlackRock at p. 7.
    \542\ ICI at p. 8.
---------------------------------------------------------------------------

    Regarding the proposed changes to issuer-based concentration 
limits, AIMA, Federated Hermes, ICI, and Nodal recommended a 25 percent 
single fund concentration limit for both Permitted Government MMFs and 
Qualified ETFs, a limit that they asserted would be more consistent 
with market practices.\543\ Federated Hermes argued that the proposed 5 
percent issuer-based concentration limit per fund for Permitted 
Government MMFs was ``unnecessarily restrictive and [an] arbitrary 
number.'' \544\ This commenter objected to the proposed limit because, 
from their perspective, the proposed limit is not based on meaningful 
data and the risks the Commission raises as concerns are already 
addressed by SEC Rule 38a-1,\545\ which Federated Hermes summarizes as 
requiring registered investment companies, including Permitted 
Government MMFs, to adopt and implement written compliance policies and 
procedures reasonably designed to prevent violation of the Federal 
securities laws. In addition, Federated Hermes, and other commenters, 
pointed to the SEC's proposed rule that would require funds to adopt 
and implement compliance policies and procedures, and cybersecurity 
programs, to detect, respond to, and recover from a cybersecurity 
incident, and that are reasonably designed to ensure that a fund can 
continue to operate during a cybersecurity event.\546\
---------------------------------------------------------------------------

    \543\ AIMA at p. 3; Federated Hermes at p. 1; ICI at pp. 6-7 
(arguing that a failure to appropriately calibrate the proposed 
concentration limits will result in the reduced utility of Permitted 
Government MMFs and Treasury ETFs for many FCMs and DCOs, especially 
smaller firms); Nodal at p. 3 (calling for a ``flat limit of 25%'' 
for both individual and any single family of funds).
    \544\ Federated Hermes at p. 1.
    \545\ SEC Rule 38a-1 requires registered investment companies to 
adopt and implement written policies and procedures reasonably 
designed to prevent Federal securities laws violations; obtain 
approval by the registered investment company's board of the 
policies and procedures of the registered investment company and the 
policies and procedures of certain service providers; review the 
adequacy of those policies and procedures at least annually; and 
designate a chief compliance officer responsible for the 
administration of the registered investment company's policies and 
procedures. 17 CFR 270.38a-1.
    \546\ Federated Hermes at pp. 2-3 (referencing a Federal 
Register release, 88 FR 16921 (March 21, 2023), reopening the 
comment period for an SEC proposal, Cybersecurity Risk Management 
for Investment Advisers, Registered Investment Companies, and 
Business Development Companies, 87 FR 13524 (March 9, 2022) (``SEC 
Investment Management Cybersecurity Release'').
---------------------------------------------------------------------------

    FIA, CME, BlackRock, and SIFMA AMG expressed support for keeping 
the current issuer-based concentration limit thresholds of 10 percent 
for individual funds, and 25 percent for fund families.\547\ FIA, CME, 
and BlackRock contended that these limits are better aligned with 
current market structure given that there are few, if any, families of 
Permitted Government MMFs and Qualified ETFs that include more than two 
individual eligible funds.\548\ Relatedly, Nodal, which was one of the 
commenters that supported a 25 percent limit for individual funds, 
stated that many fund families only have one Government MMF, which 
would result in an effective limit of 5 percent per fund family instead 
of the proposed 25 percent.\549\ AIMA echoed this point by noting that 
the proposed limits are ``not consistent with market practice given 
that there are very few families of eligible MMFs or ETFs that offer 
more than two eligible individual funds.'' \550\
---------------------------------------------------------------------------

    \547\ FIA/CME Joint Letter at p. 18; BlackRock at p. 7; SIFMA 
AMG at p. 10 (n. 35) (referencing the SEC Investment Management 
Cybersecurity Release).
    \548\ FIA/CME Joint Letter at p. 18.
    \549\ Nodal at p. 2.
    \550\ AIMA at p. 3. As an alternative, AIMA supports an 
individual fund limit of 25 percent. Id.
---------------------------------------------------------------------------

    SIFMA AMG also criticized the proposed 5 percent issuer 
concentration limit and advocated for keeping the current 10 percent 
concentration limit.\551\ SIFMA AMG expressed a general concern about 
the use of cybersecurity risk as a justification for a Commission 
rulemaking in areas unrelated to cybersecurity, which, in SIFMA AMG's 
opinion, could provide

[[Page 7847]]

``an unfounded, unquantifiable precedent for future rulemakings.'' 
\552\
---------------------------------------------------------------------------

    \551\ SIFMA AMG at p. 10.
    \552\ Id.
---------------------------------------------------------------------------

    SIFMA AMG further noted that ``MMFs and U.S. Treasury ETFs are 
sponsored by SEC-registered investment advisers that are subject to 
their own cyber safeguards and regulatory obligations.'' \553\ In 
particular, SIFMA AMG cited SEC Regulation S-P,\554\ which requires 
registered broker-dealers, investment companies, and investment 
advisers to ``develop, implement, and maintain written policies and 
procedures that address administrative, technical, and physical 
safeguards for the protection of customer information,'' \555\ as well 
as the SEC Investment Management Cybersecurity Release that was also 
cited by other commenters.\556\
---------------------------------------------------------------------------

    \553\ Id.
    \554\ 17 CFR 248.30.
    \555\ 17 CFR 248.30 sets forth regulatory obligations for the 
protection of customer information, response programs for 
unauthorized access to customer information, and requirements 
relating to the disposal of customer information.
    \556\ SIFMA AMG at p. 10 (referencing SEC Investment Management 
Cybersecurity Release).
---------------------------------------------------------------------------

    SIFMA AMG also asserted that the Proposal had not adequately 
explained why the proposed 5 percent limit more appropriately addressed 
the Commission's concerns over redemption and liquidity risks.\557\ 
This commenter also asserted that a low issuer-based concentration 
limit would require more monitoring by FCMs and DCOs and potentially 
increase transaction fees.\558\ Finally, SIFMA AMG noted that only five 
Qualified ETFs are currently accepted as performance bond by a DCO 
which would mean that only 25 percent of the Customer Funds held by the 
FCM or DCO may be invested in a Qualified ETF even though the 
concentration limit overall is 50 percent for Qualified ETFs.\559\ 
SIFMA AMG opined that the Commission should instead allow FCMs and DCOs 
to allocate based upon their own risk assessments of the Permitted 
Investments in which they choose to invest Customer Funds, subject to 
``more appropriate guardrails like the current 10% limit.'' \560\
---------------------------------------------------------------------------

    \557\ Id.
    \558\ Id.
    \559\ Id.
    \560\ Id.
---------------------------------------------------------------------------

c. Discussion
    After consideration of the comments received, coupled with the 
Commission's concerns regarding the safety of Customer Funds, the 
Commission has decided to adopt, with one exception described below, 
the proposed concentration limits as set forth in the Proposal. 
Specifically, the Commission is adopting a single asset-based 
concentration limit of 50 percent for all Permitted Government MMFs of 
at least $1 billion in assets and whose management company manages at 
least $25 billion in assets. For MMFs that hold less than $1 billion in 
assets or have a management company with less than $25 billion in 
assets under management, the Commission is maintaining the current 10 
percent asset-based concentration limit.\561\
---------------------------------------------------------------------------

    \561\ As proposed, the Commission is also deleting the 
conjunction ``and'' in Commission regulation 1.25(b)(i)(G), 
redesignated as Commission regulation 1.25(b)(i)(E) and revised to 
reflect other amendments adopted in this Final Rule, to clarify that 
the fund size threshold and the management company size threshold 
are to be construed as alternative prongs triggering the 10 percent 
limit.
---------------------------------------------------------------------------

    Regarding issuer-based concentration limits for Permitted 
Government MMFs, the Commission is limiting investments of Customer 
Funds in any single family of Permitted Government MMFs to 25 percent, 
as set forth in the Proposal. With respect to investments of Customer 
Funds in any individual Permitted Government MMF, however, the 
Commission is increasing the permissible concentration to 10 percent of 
the total assets held in each of the segregated account classes of 
futures customer funds, Cleared Swaps Customer Collateral, and 30.7 
customer funds. This is a change from the 5 percent that was set forth 
in the Proposal.
    For Qualified ETFs, the asset-based concentration limits will be 
the same as those set forth in this Final Rule for Permitted Government 
MMFs. For Qualified ETFs with at least $1 billion in assets and whose 
management company manages at least $25 billion in assets, the asset-
based concentration limit will be 50 percent of total funds held in 
each of the three categories of Customer Funds. For Qualified ETFs that 
hold less than $1 billion in assets or whose management company manages 
less than $25 billion in assets under management, the asset-based 
concentration limit will be 10 percent. The issuer-based concentration 
limit for Qualified ETFs will be 25 percent for a single family of 
Qualified ETFs, which is unchanged from the Proposal. With respect to 
any individual Qualified ETF, however, consistent with the upward 
revision for Permitted Government MMFs, the concentration limit will be 
10 percent, rather than 5 percent as set forth in the Proposal.
    The new concentration limits are summarized below:

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                      Current concentration limits                    New concentration limits
             Instrument                       Size          --------------------------------------------------------------------------------------------
                                                                   Asset-based            Issuer-based           Asset-based            Issuer-based
--------------------------------------------------------------------------------------------------------------------------------------------------------
U.S. government securities.........  N/A...................  No limit..............  No limit.............  No limit.............  No limit.
Municipal Securities...............  N/A...................  10%...................  5%...................  10%..................  5%.
U.S. agency obligations............  N/A...................  50%...................  25%..................  50%..................  25%.
Bank CDs...........................  N/A...................  25%...................  5%...................  N/A..................  N/A.
Government MMFs investing solely in  >$1B assets and         No limit..............  No limit.............  50%..................  25% per family 10%
 U.S. government securities (i.e.,    management company                                                                            per fund.
 securities issued or fully           with >25B in assets.
 guaranteed by the U.S. government).
                                     <$1B assets or          10%...................  10% (de facto limit    10%..................  .....................
                                      management company                              based on asset-based
                                      with <$25B in assets.                           limit).

[[Page 7848]]

 
Government MMFs as defined in SEC    >$1B assets and         50%...................  25% per family 10%     50%..................  .....................
 Rule 2a-7 (including MMFs whose      management company                              per fund..
 portfolio includes U.S. agency       with >25B in assets.
 obligations and other instruments).
                                     <$1B assets or          10%...................  .....................  10%..................  .....................
                                      management company
                                      with <$25B in assets.
Qualified ETFs.....................  >$1B assets and         N/A...................  N/A..................  50%..................  25% per family 10%
                                      management company                                                                            per fund
                                      with >25B in assets.
                                     <$1B assets or          N/A...................  N/A..................  10%..................  .....................
                                      management company
                                      with <$25B in assets.
--------------------------------------------------------------------------------------------------------------------------------------------------------

    As in the Proposal, Specified Foreign Sovereign Debt will be 
excluded from the concentration limits.\562\ This is consistent with 
the current exclusion of U.S. government securities from the asset-
based and issuer-based concentration limits. The Commission reiterates 
that the relative strength of the economies and limited default risk of 
Canada, France, Germany, Japan, and the United Kingdom are demonstrated 
by such countries being ranked among the seven largest economies in the 
International Monetary Fund's classification of advanced 
economies,\563\ and by the countries being members of the G7, which 
represents the world's largest industrial democracies. In addition, the 
Commission has determined that the two-year debt instruments that would 
qualify as Specified Foreign Sovereign Debt have credit, liquidity, and 
volatility characteristics that are consistent with two-year U.S. 
Treasury securities.
---------------------------------------------------------------------------

    \562\ Proposal at 81258.
    \563\ Id. See also Statistical Appendix to the World Economic 
Outlook, April 2023, International Monetary Fund, available here: 
https://www.imf.org/en/Publications/WEO/Issues/2023/04/11/world-economic-outlook-april-2023.
---------------------------------------------------------------------------

    Furthermore, the new condition that would permit an FCM or DCO to 
invest Customer Funds in Specified Foreign Sovereign Debt only to the 
extent that the FCM or DCO has balances owed to customers denominated 
in the currency of the applicable country should limit the amount of 
Customer Funds that an FCM or DCO may invest in the Specified Foreign 
Sovereign debt.\564\ Additionally, the condition that an FCM or DCO 
must stop making direct investments, or engaging in reverse repurchase 
agreements, involving the Specified Foreign Sovereign Debt of a country 
whose credit default spread on two-year debt instruments exceeds 45 BPS 
would further preserve the principal of customers' foreign currency 
deposits held by FCMs and DCOs.\565\ Lastly, not imposing asset-based 
or issuer-based concentration limits on an FCM's or DCO's investments 
in Specified Foreign Sovereign Debt is consistent with the Commission's 
2018 Order, which did not impose concentration limits on a DCO's 
investment of futures customer funds or Cleared Swaps Customer 
Collateral in the sovereign debt of France or Germany. Accordingly, the 
Commission will not adopt asset-based and issuer-based concentration 
limits for investments in Specified Foreign Sovereign Debt.
---------------------------------------------------------------------------

    \564\ Proposed Commission regulation 1.25(a)(1)(vii).
    \565\ Proposed Commission regulation 1.25(f)(3).
---------------------------------------------------------------------------

    As discussed above, the Commission received a substantial number of 
comments with respect to the issue of asset-based and issuer-based 
concentration limits pertaining to the proposed limits for Permitted 
Government MMFs and Qualified ETFs.\566\ These include the comments 
previously discussed from FIA, CME, and BlackRock that advocated for no 
asset-based concentration limit for Permitted Government MMFs and 
Qualified ETFs, emphasizing the greater diversification and resiliency 
such funds provide in times of market stress.\567\
---------------------------------------------------------------------------

    \566\ See generally section IV.B.b.
    \567\ FIA/CME Joint Letter at p. 17; BlackRock at pp. 2, 7.
---------------------------------------------------------------------------

    The Commission has considered these comments but continues to 
believe that the asset-based concentration limits set forth in the 
Proposal are an effective tool in ensuring that Customer Funds are 
invested in a manner that limits risks arising from a high 
concentration in any particular Permitted Investment asset class. Based 
on its experience administering its customer protection rules, the 
Commission declines to allow FCMs and DCOs to invest up to 100 percent 
of segregated Customer Funds in any category of Permitted Government 
MMFs and Qualified ETFs.
    That the new Permitted Government MMF category is broader in scope 
than MMFs investing solely in U.S. government securities is 
particularly relevant here. This new Permitted Government MMF category 
is defined by reference to SEC Rule 2a-7 as an MMF that invests at 
least 99.5 percent or more of its total assets in cash, government 
securities, and/or Repurchase Transactions that are collateralized 
fully.\568\ The scope of underlying instruments in which a Permitted 
Government MMF would be allowed to invest is therefore broader than 
that of the MMFs currently excluded from the concentration limits of 
Commission regulation 1.25(c) (i.e., MMFs investing solely in U.S. 
government securities). To account for the potential increase in risk 
associated with such broader scope, and in the

[[Page 7849]]

interest of imposing a simple and consistent approach to concentration 
limits, the Commission proposed, and the Commission is now adopting, a 
single concentration limit of 50 percent for all Permitted Government 
MMFs of a certain size, without distinguishing between funds investing 
solely in U.S. government securities and those whose portfolio may also 
include U.S. agency obligations and/or other instruments within the 
limits of SEC Rule 2a-7. More precisely, under the Proposal, an FCM's 
or DCO's investment of Customer Funds in interests in Permitted 
Government MMFs with at least $1 billion in assets and whose management 
company manages at least $25 billion in assets would be limited to no 
more than 50 percent of the total Customer Funds computed separately 
for each of the segregated account classes of futures customer funds, 
Cleared Swaps Customer Collateral, and 30.7 customer funds.\569\ This 
asset-based concentration limit that the Commission is adopting is 
consistent with the concentration limits applicable to U.S. agency 
obligations, which, along with U.S. Treasury securities, are a 
permitted underlying instrument for Permitted Government MMFs.
---------------------------------------------------------------------------

    \568\ 2000 Permitted Investments Amendment at 78010. The 2000 
Permitted Investments Amendment provided in paragraph (a)(1)(vii) of 
Commission regulation 1.25 that an FCM or DCO could invest in debt 
of a foreign sovereign subject to certain conditions, including that 
the FCM or DCO had balances owed to customers denominated in that 
country's currency.
    \569\ Proposed Commission regulation 1.25(c)(3)(i)(D).
---------------------------------------------------------------------------

    The new Permitted Investment category of Qualified ETFs provides 
additional flexibility to FCMs and DCOs with respect to the investment 
of Customer Funds, as FCMs and DCOs could invest 50 percent in 
Permitted Government MMFs, and the other 50 percent in Qualified ETFs 
under the Final Rule, which lessens any practical impact of an overall 
asset-based concentration limit of 50 percent for each type of fund.
    Moreover, Commission staff reviewed SIDR Reports filed by FCMs for 
the period between January 16, 2024 and June 28, 2024. The available 
data from the reports indicate that FCMs are investing a relatively low 
proportion of the Customer Funds they hold in MMFs in comparison to 
direct purchases of U.S. Government Securities, and that such firms' 
investments in MMFs are sufficiently small that they are unlikely to 
rise to levels that would breach the asset-based concentration limits 
that the Commission is adopting in this Final Rule.\570\
---------------------------------------------------------------------------

    \570\ The Commission acknowledges the possibility that FCMs may 
make greater use of MMFs going forward and may reconsider the asset-
based concentration levels for such funds, as appropriate, if that 
were to occur.
---------------------------------------------------------------------------

    With respect to issuer-based concentration limits for Permitted 
Government MMFs and Qualified ETFs, as discussed above, no commenter on 
this issue supported the proposed 5 percent limit on any individual 
Permitted Government MMF or Qualified ETF. The commenters differed, 
however, as to whether the applicable limit for any individual 
Permitted Government MMF or Qualified ETF should be the 10 percent 
limit that is the existing limit for certain MMFs, or a higher limit of 
25 percent that is applicable to fund families.\571\
---------------------------------------------------------------------------

    \571\ As discussed previously, FIA and CME in their Joint 
Letter, as well as BlackRock and SIFMA AMG, expressed support for 
setting the individual fund concentration limit at 10 percent. By 
contrast, AIMA, Federated Hermes, ICI, and Nodal advocated for a 25 
percent limit for any individual fund.
---------------------------------------------------------------------------

    In light of these comments, the Commission is adopting issuer-based 
concentration limits for MMFs and ETFs that differ from those in the 
Proposal. With respect to the issuer-based concentration limits on 
Permitted Government MMFs, the Commission proposed to limit investments 
of Customer Funds in any single family of Government MMFs to 25 
percent, consistent with the existing requirements applicable to MMFs, 
but to reduce the existing 10 percent limit for investments of Customer 
Funds in any individual Government MMF, to just 5 percent. The 
Commission proposed the same limits for Qualified ETFs. In proposing 
stricter concentration limits, the Commission intended to facilitate 
the preservation of principal and maintenance of liquidity of Customer 
Funds through sound diversification standards and to mitigate the 
potential risk that a large portion of Customer Funds could become 
inaccessible due to cybersecurity or operational incidents, among other 
events.\572\
---------------------------------------------------------------------------

    \572\ Proposal at 81257.
---------------------------------------------------------------------------

    In light of comments received, however, the Commission has 
determined to raise the proposed 5 percent individual fund 
concentration limit for both Permitted Government MMFs and Qualified 
ETFs to 10 percent. In proposing to reduce the individual fund 
threshold to just 5 percent, the Commission's concerns with respect to 
the risk to principal and potential lack of sufficient liquidity for 
both Permitted Government MMFs and Qualified ETFs were illustrated by 
the 2008 ``breaking the buck'' by the Reserve Primary Fund as described 
in the Proposal.\573\ But as ICI pointed out, this example involved a 
Prime MMF that held privately issued debt in its portfolio, which will 
no longer be a Permitted Investment under the Final Rule.\574\ Other 
commenters pointed out other practical challenges with regard to the 5 
percent limit relating to the requirement that FCMs and DCOs monitor 
for compliance with concentration limits across a greater number of 
funds.\575\ Regarding the potential for cyber-attacks, the Commission 
acknowledges comments highlighting that both Permitted Government MMFs 
and Qualified ETFs are subject to comprehensive SEC regulatory 
requirements, which include cyber safeguards.\576\ After considering 
these comments, the Commission has determined that concentration limits 
of 10 percent for any individual Permitted Government MMF or Qualified 
ETF, along with the adoption of the Proposal's 25 percent limit for any 
signed family of Permitted Government MMFs or Qualified ETFs, should 
address the Commission's concerns regarding risk to Customer Funds and 
cybersecurity risks.
---------------------------------------------------------------------------

    \573\ Id.
    \574\ ICI at p. 9.
    \575\ SIFMA AMG at p. 10.
    \576\ Id.
---------------------------------------------------------------------------

    The concentration limits set forth in this Final Rule, including 
increasing the limit for any individual Permitted Government MMF or 
Qualified ETF from 5 percent to 10 percent (but not 25 percent, as some 
commenters recommended as discussed above), should promote both the 
preservation of principal and maintenance of liquidity of Customer 
Funds through sound diversification standards, while ensuring that the 
limit is not set so low that the application of the requirement might 
not be practical. Even with the higher threshold of 10 percent for 
individual Permitted Government MMFs and Qualified ETFs, this 
restriction should mitigate the potential risk that FCMs and DCOs may 
be unable to access a large portion of Customer Funds due to 
cybersecurity or operational incidents, among other events.
    Although commenters generally criticized any issuer-based 
concentration limit for Permitted Government MMFs and Qualified ETFs as 
arbitrary,\577\ the Commission has chosen to maintain the existing 10 
percent limitation on any individual fund based on its prior experience 
with this standard. In the Commission's experience, this limit has not 
proven to be a problem as it applies to current Permitted Investments, 
and this will not change for Permitted Government MMFs and Qualified 
ETFs.
---------------------------------------------------------------------------

    \577\ Federated Hermes at p. 2; ICI at pp. 7-8; SIFMA AMG at p. 
11.

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

[[Page 7850]]

    Although the foregoing discussion is applicable to both Permitted 
Government MMFs and Qualified ETFs, a few issues are of particular 
relevance to Qualified ETFs. As discussed above, for Qualified ETFs, 
the asset-based and issuer-based concentration limits will be the same 
as those for Permitted Government MMFs. In addition to raising similar 
objections to the issuer-based concentration limits for Qualified ETFs 
as for Permitted Government MMFs, commenters specifically noted that 
few families of ETFs offer more than two eligible funds, making the 
proposed 5 percent per fund concentration limit overly 
restrictive.\578\ The Commission recognizes that the small number of 
funds may limit the ability of FCMs and DCOs to fully utilize the 
Qualified ETFs allocation, but prior to this Final Rule, ETFs were not 
Permitted Investments at all. Moreover, even if there is only a small 
number of Qualified ETFs currently, more such ETFs may be created to 
meet the interest of FCMs and DCOs following the Commission's inclusion 
of Qualified ETFs in Commission regulation 1.25. Even if additional 
Qualified ETFs are not created in response to industry demand, however, 
because there is a relatively high 50 percent asset-based concentration 
limit on Permitted Government MMFs that are economically similar to 
Qualified ETFs, an FCM or DCO should have sufficient flexibility to 
invest Customer Funds in a combination of Permitted Government MMFs and 
Qualified ETFs to gain their desired exposure, provided the FCM or DCO 
determines that such investments are appropriate.
---------------------------------------------------------------------------

    \578\ AIMA at p. 3. FIA/CME Joint Letter at p. 18.
---------------------------------------------------------------------------

C. Futures Commission Merchant Capital Charges on Permitted Investments

    The Commission discussed in the Proposal that Commission 
regulations 1.29, 22.2(e)(1), and 30.7(i) provide that FCMs and DCOs, 
as applicable, are financially responsible for any losses resulting 
from the investment of futures customer funds, Cleared Swaps Customer 
Collateral, and 30.7 customer funds, respectively.\579\ To reserve 
liquidity for potential losses resulting from the investments of 
Customer Funds, Commission regulation 1.17(c)(5)(v) requires an FCM to 
take prescribed capital charges (or ``haircuts'') on such investments 
in computing the firm's regulatory capital.\580\ The capital charges 
are designed to address potential market risk associated with the FCM's 
holding of Permitted Investments, and to ensure that the firm has 
sufficient liquid financial resources to cover potential realized and 
unrealized losses associated with the Permitted Investments, while also 
retaining sufficient funds in segregation to fully meet its financial 
obligation to customers. Commission regulation 1.17(c)(5)(v) further 
provides that an FCM must apply the prescribed capital charges 
specified in Rule 15c3-1 \581\ under the Securities Exchange Act (``SEC 
Rule 15c3-1'') \582\ and appendix A to SEC Rule 15c3-1 \583\ to the 
Permitted Investments.
---------------------------------------------------------------------------

    \579\ Proposal at 81259-81260. Specifically, the Commission 
stated that: (i) Commission regulation 1.29, 17 CFR 1.29(b), 
provides that FCMs or DCOs, as applicable, bear sole responsibility 
for any losses resulting from the investment of futures customer 
funds and further provides that no investment losses shall be borne 
or otherwise allocated to FCM customers or to FCMs clearing customer 
accounts at DCOs; (ii) Commission regulation 22.2(e)(1), 17 CFR 
22.2(e)(1), provides that FCMs shall bear sole responsibility for 
any losses resulting from the investment of Cleared Swaps Customer 
Collateral and may not allocate investment losses to Cleared Swaps 
Customers of the FCM; and Commission regulation 30.7(i), 17 CFR 
30.7(i), provides that FCMs shall bear sole financial responsibility 
for any losses resulting from the investment of 30.7 customer funds, 
and further provides that no investment losses may be allocated to 
the 30.7 customers of the FCM.
    \580\ 17 CFR 1.17(c)(5)(v). Although capital charges do not also 
apply to DCOs, a DCO is required under Commission regulation 
39.11(a)(2) to maintain financial resources sufficient to enable it 
to cover its operating costs for a period of at least one year, 
calculated on a rolling basis. Potential investment losses would be 
included in the DCO's operating costs.
    \581\ Commission regulation 1.17(c)(5)(v) provides that an FCM 
that invests Customer Funds in Permitted Investments must take a 
charge (or deduction) in the amount specified in SEC Rule 15c3-
1(c)(2)(vi) or (vii). 17 CFR 240.15c3-1(c)(2)(vi) and (vii).
    \582\ SEC Rule 15c3-1 sets forth minimum capital requirements 
for broker-dealers and specifies standardized haircuts to be applied 
on the market value of assets held by the broker-dealer for purposes 
of calculating the minimum capital requirements. SEC Rule 15c3-
1(c)(2)(vi) details market risk capital charges for securities, 
including U.S. Treasury securities, municipal securities, and equity 
securities. SEC Rule 15c3-1(c)(2)(vii) imposes a capital charge of 
100 percent of the carrying value of any securities that are not 
readily marketable.
    \583\ 17 CFR 240.15c3-1a. SEC Rule 15c3-1a provides standardized 
haircuts for equity options and related positions.
---------------------------------------------------------------------------

    As discussed in section IV.A.2. of this preamble, the Commission is 
amending the Permitted Investments under Commission regulation 1.25 to 
include Specified Foreign Sovereign Debt instruments (i.e., the 
sovereign debt of Canada, France, Germany, Japan, and the United 
Kingdom).\584\ Under the Final Rule, the total dollar-weighted average 
time-to-maturity of each of the portfolios of Canadian, French, German, 
Japanese, and United Kingdom debt may not exceed 60 calendar days, and 
the total remaining time-to-maturity for any individual debt instrument 
may not exceed 180 calendar days.\585\
---------------------------------------------------------------------------

    \584\ Final Commission regulation 1.25(a)(1)(vi).
    \585\ Final Commission regulation 1.25(f)(1) and (2).
---------------------------------------------------------------------------

    Pursuant to SEC Rule 15c3-1(c)(2)(vi), an FCM investing Customer 
Funds in qualifying sovereign debt of Canada would have no capital 
charge for debt instruments with a remaining time-to-maturity of less 
than 3 months, and a capital charge of 0.5 percent of the market value 
for debt instruments with a remaining time-to-maturity of 3 to 6 
months.\586\ The capital charges for the sovereign debt of France, 
Germany, Japan, and the United Kingdom are determined under SEC rules 
by reference to nonconvertible debt securities with a fixed interest 
rate, fixed maturity date, and minimal credit risk.\587\ Nonconvertible 
debt securities with a remaining time-to-maturity of one year or less 
are subject to a capital charge of 2 percent of the market value of the 
security under SEC Rule 15c3-1(c)(2)(F)(1).\588\ The Commission, 
therefore, proposed capital charges consistent with the above 
percentages for FCM investments in Specified Foreign Sovereign Debt 
instruments.\589\
---------------------------------------------------------------------------

    \586\ SEC Rule 15c3-1(c)(2)(vi)(C) provides that the capital 
charges on the sovereign debt of Canada is the same as the capital 
charges set forth in SEC Rule 15c3-1(c)(2)(vi)(A) for debt 
obligations of the U.S., debt obligations fully guaranteed as to 
principal and interest by the U.S., or debt obligations of U.S. 
agencies. SEC Rule 15c3-1(c)(2)(vi)(A) provides that a broker or 
dealer must take a 0.5 percent capital charge on U.S. Treasury and 
U.S. agency debt instruments that have a remaining time-to-maturity 
of between 3 months and 6 months, and no capital charge on U.S. 
Treasury and U.S. agency debt instruments having a remaining time-
to-maturity of less than 3 months.
    \587\ SEC Rule 15c3-1(c)(2)(F)(1) specifies the capital charges 
for nonconvertible debt securities with a fixed interest rate, fixed 
maturity date, and minimal credit risk, which includes the sovereign 
debt of France, Germany, Japan, and the United Kingdom.
    \588\ Id.
    \589\ Proposal at 81259-81260.
---------------------------------------------------------------------------

    As discussed in section IV.A.3. of this preamble, the Commission is 
also amending the Permitted Investments under Commission regulation 
1.25 to include interests in Qualified ETFs.\590\ Neither SEC Rule 
15c3-1 nor appendix A to SEC Rule 15c3-1 explicitly address capital 
charges for Qualified ETFs. SEC Rule 15c3-1(c)(2)(vi)(D)(1) does, 
however, specify a 2 percent capital charge for a broker-dealer's net 
position in redeemable securities of a Prime MMF or a Permitted 
Government MMF. SEC staff has also provided guidance to registered 
securities brokers or dealers stating that staff would not recommend an 
enforcement action to its

[[Page 7851]]

Commission if a broker or dealer applied a capital charge of 2 percent 
of the market value of a creation unit of ETF shares, and a capital 
charge of 6 percent of the market value of ETF shares that do not 
comprise a full creation unit.\591\
---------------------------------------------------------------------------

    \590\ Final Commission regulation 1.25(a)(1)(v).
    \591\ See generally SEC ETF Letter, available at the SEC's 
website: https://www.sec.gov/divisions/marketreg/mr-noaction/2022/finra-060222-15c3-1.pdf.
---------------------------------------------------------------------------

    The SEC staff's guidance is applicable to a U.S. Treasury ETF that: 
(i) is an open-end investment company registered with the SEC under the 
Investment Company Act of 1940 that issues securities redeemable at the 
fund's NAV; and (ii) invests solely in cash and government securities 
that are eligible securities under paragraph (a)(11) of SEC Rule 2a-7, 
which are limited to U.S. Treasury floating and fixed rate bills, 
notes, and bonds with a remaining term to final maturity of 12 months 
or less, government money market funds as defined in SEC Rule 2a-7, 
and/or Repurchase Transactions with a remaining term to final maturity 
of 12 months or less collateralized by U.S. Treasury securities or 
other government securities with a remaining term to final maturity of 
12 months or less. The SEC staff position is subject to the following 
conditions: (i) the broker or dealer is not aware of any substantial 
operational problem that the U.S. Treasury ETF may be experiencing; 
(ii) the U.S. Treasury ETF shares can be redeemed by a broker or dealer 
through an authorized participant, the redemption of the U.S. Treasury 
ETF's shares can be settled in exchange for a basket of the ETF's 
underlying securities and/or cash by T + 1, and the U.S. Treasury ETF 
has committed in its registration statement to permit shareholders, 
except in extraordinary circumstances, to settle transactions within 
that timeframe; and (iii) the U.S. Treasury ETF's shares are listed for 
trading on a national securities exchange and trades of such shares are 
settled in accordance with the standard cycle prescribed by SEC Rule 
15c6-1 \592\ under the Securities Exchange Act of 1934. Based on the 
SEC's guidance regarding the capital charges for U.S. Treasury ETFs, 
and the Commission's general incorporation of the SEC capital charges 
for Permitted Investments as set forth in Commission regulation 
1.25(c)(5)(v), the Commission proposed that FCMs investing Customer 
Funds in redeemable shares (i.e., creation units) of a Qualified ETF 
must apply a capital charge equal to 2 percent of the fair market value 
of the shares in computing the firm's regulatory capital.\593\
---------------------------------------------------------------------------

    \592\ 17 CFR 240.15c6-1.
    \593\ Proposal at 81260. The Commission proposed to permit 
Qualified ETFs as a Permitted Investment provided the FCM or DCO 
transacted with the Qualified ETF for the purchase or sale of full 
creation or redemption units (i.e., redeemable securities). As the 
Proposal did not permit the investment of Customer Funds in 
Qualified ETFs in non-creation unit sizes, the Commission did not 
explicitly address the 6 percent capital requirement specified in 
the SEC ETF Letter.
---------------------------------------------------------------------------

    The Commission received two comments on the capital charges for 
Specified Foreign Sovereign Debt and Qualified ETFs. BlackRock 
expressed support for the 2 percent FCM capital charge on the shares of 
Qualified ETFs held as Permitted Investments.\594\ FIA and CME 
requested that the Commission simplify and clarify the definition of a 
Qualified ETF to better align the eligibility conditions for Qualified 
ETFs with the SEC's guidance on capital charges.\595\ The Commission is 
adopting the FCM capital charges for Specified Foreign Sovereign Debt 
and Qualified ETF shares held as Permitted Investments shares as 
proposed. In addition, in a modification from the Proposal, the 
Commission is not restricting FCMs and DCOs from buying and selling 
Qualified ETF shares through secondary market transactions, provided 
that such transactions otherwise comply with the Commission's 
segregation regulations and liquidity requirements. Therefore, 
consistent with the capital charge specified in the SEC ETF Letter, the 
applicable capital charge for Qualified ETF shares that do not comprise 
a full creation unit is 6 percent.\596\ The Commission intends to keep 
these capital charges consistent with the SEC to ensure that FCMs, many 
of whom are also broker-dealers, will only have to comply with a single 
set of capital charges. Consistency in requirements between the SEC and 
the Commission, which has long been a defining characteristic of the 
Commission's regulatory approach to FCM capital, should foster a more 
level playing field, ultimately promoting trust and integrity within 
the market.
---------------------------------------------------------------------------

    \594\ BlackRock at pp. 2, 6-7.
    \595\ FIA/CME Joint Letter at p. 11.
    \596\ See generally SEC ETF Letter.
---------------------------------------------------------------------------

D. Segregation Investment Detail Report

    Commission regulations 1.32(f), 22.2(g)(5), and 30.7(l)(5) require 
each FCM to submit a SIDR Report twice each month to the Commission and 
the firm's DSRO listing the names of all banks, trust companies, FCMs, 
DCOs, and other depositories or custodians holding futures customer 
funds, Cleared Swaps Customer Collateral, and 30.7 customer funds, 
respectively.\597\ The SIDR Report also identifies the amount of 
futures customer funds, Cleared Swaps Customer Collateral, or 30.7 
customer funds invested in each category of Permitted Investments: (i) 
U.S. Treasury securities; (ii) municipal securities; (iii) government 
sponsored enterprise securities (i.e., U.S. agency obligations); (iv) 
bank CDs; (v) commercial paper; (vi) corporate notes or bonds; and 
(vii) interests in MMFs.
---------------------------------------------------------------------------

    \597\ Proposal at 81260-81261.
---------------------------------------------------------------------------

    The Commission proposed to amend the content of the SIDR Report to 
reflect the proposed amendments to the list of Permitted Investments 
detailed in the Proposal. Specifically, the Commission proposed to 
amend the content of the SIDR Report by: (i) limiting the reporting of 
MMFs to Permitted Government MMFs; (ii) deleting the reporting of 
balances invested in commercial paper, corporate notes and bonds, and 
bank CDs; \598\ (iii) adding the reporting of balances invested in the 
Specified Foreign Sovereign Debt of each particular foreign 
jurisdiction (i.e., individual reporting for Canada, France, Germany, 
Japan, and the United Kingdom); and, (iv) adding balances invested in 
Qualified ETFs.\599\
---------------------------------------------------------------------------

    \598\ In the Proposal, the Commission stated that if the 
Commission eliminated bank CDs as a Permitted Investment in the 
final rulemaking, the Commission would also amend Commission 
regulations 1.32(f), 22.2(g)(5), and 30.7(l)(5) to remove references 
to bank CDs from the SIDR Report template. Proposal at 81261 (n. 
264).
    \599\ Proposal at 81260-81261.
---------------------------------------------------------------------------

    The Commission did not receive any comments on the proposed 
amendments to the SIDR Report. Therefore, the Commission is amending 
the content of the SIDR Report specified in Commission regulations 
1.32(f), 22.2(g)(5), and 30.7(l)(5) as proposed, to reflect the 
amendments to the list of Permitted Investments adopted in this Final 
Rule and reflected in Final Commission regulation 1.25(a)(1).

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

    Commission regulations currently provide that an FCM may deposit 
Customer Funds only with depositories and custodians that agree to 
provide the Commission with direct, read-only electronic access to the 
Customer Fund accounts (``Read-only Access Provisions'').\600\ The 
Commission

[[Page 7852]]

adopted the Read-only Access Provisions in 2013 as part of its 
regulatory reforms to enhance the Commission's customer protection 
regime in response to the failure of two FCMs that violated customer 
fund segregation statutory and regulatory requirements, which resulted 
in shortfalls in Customer Funds balances.\601\ Along with other 
regulatory measures, the Read-only Access Provisions were designed to 
address concerns regarding the efficacy of the Commission's oversight 
program to monitor FCM activities, verify Customer Funds balances, and 
detect fraud.\602\
---------------------------------------------------------------------------

    \600\ The Read-only Access Provisions are set forth in 
Commission regulation 1.20, appendix A to Commission regulation 
1.20, and appendix A to Commission regulation 1.26, for futures 
customer funds; Commission regulation 22.5 for Cleared Swaps 
Customer Collateral; and Commission regulation 30.7 and appendices E 
and F to part 30 of the Commission's regulations for 30.7 customer 
funds.
    \601\ 2013 Protections of Customer Funds Release at 68509.
    \602\ Id. at 68510.
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    By adopting the Read-only Access Provisions, the Commission 
established a mechanism to enable Commission staff to review and 
identify discrepancies between an FCM's daily segregation reports \603\ 
and customer fund balances on deposit at various depositories.\604\ The 
Commission also adopted template acknowledgment letters in appendix A 
to Commission regulation 1.20 and appendix E to part 30 of the 
Commission's regulations requiring, among other things,\605\ that a 
depository acknowledge and agree, pursuant to authorization granted by 
the FCM, to provide the appropriate Commission staff with the 
technological connectivity, which may include provision of hardware, 
software, and related technology and protocol support, to facilitate 
direct, read-only electronic access to transaction and account balance 
information.\606\ The template acknowledgment letters in appendix A to 
Commission regulation 1.26 and appendix F to part 30 contain similar 
provisions with respect to MMF accounts in which FCMs hold customer 
segregated funds.\607\
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    \603\ Commission regulations 1.32 (for futures customer funds), 
22.2(g) (for Cleared Swaps Customer Collateral), and 30.7(l) (for 
30.7 customer funds) require an FCM to prepare, among other records, 
a daily record as of the close of each business detailing the total 
amount of funds on deposit in customer segregated accounts and the 
total amount of funds owed to customers. The purpose of the daily 
record is to demonstrate the FCM's compliance with its obligation to 
hold a sufficient amount of funds in segregated accounts to pay the 
full account balance of each customer.
    \604\ 2013 Protections of Customer Funds Release at 68537 and 
68580.
    \605\ These appendices are intended to be used by depositories 
that accept Customer Funds from FCMs to acknowledge that the funds 
belong to the FCM customer and cannot be used to offset obligations 
of the FCM.
    \606\ 17 CFR 1.20, appendix A; 17 CFR part 30, appendix E.
    \607\ 17 CFR 1.26, appendix A; 17 CFR part 30, appendix F.
---------------------------------------------------------------------------

    When adopting the Read-only Access Provisions, the Commission did 
not anticipate that staff would access FCM accounts on a regular basis 
to monitor account activity, but, rather, that staff would make use of 
the Read-only Access Provisions only to obtain account balances and 
other information that staff could not obtain via the CME and NFA 
automated daily segregation confirmation system, or otherwise directly 
from the depositories.\608\ The Commission explained that CME and NFA 
had adopted rules requiring FCMs to instruct each depository holding 
Customer Funds to report balances on a daily basis to CME or NFA, 
respectively.\609\
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    \608\ 2013 Protections of Customer Funds Release at 68537 and 
68592 (noting in footnote 662 that the Commission generally expected 
that it would seek to obtain account information from the CME and 
NFA automated daily segregation confirmation system and/or from 
depositories directly prior to requesting a depository to activate 
electronic access).
    \609\ Id. at 68512. CME Rule 971.C. provides that in order for 
an FCM clearing member's account held at a depository to qualify as 
a segregated account for Customer Funds, the FCM clearing member 
must provide CME with access to account information, in a form and 
manner prescribed by CME, and the depository must allow the FCM 
clearing member to provide CME with access to the account 
information, in a form and manner prescribed by CME. NFA Financial 
Requirements section 4, paragraph (b), provides that each member FCM 
must instruct each depository, as required by NFA, holding 
segregated Customer Funds to report balances in the FCM's customer 
segregated accounts to NFA or a third party designated by NFA in the 
form and manner prescribed by NFA. CME and NFA Rules are available 
at the following websites: https://www.cmegroup.com, and https://www.nfa.futures.org.
---------------------------------------------------------------------------

    In practice, CME and NFA receive account information from all 
depositories holding Customer Funds on a daily basis pursuant to CME 
Rule 971.C. and NFA Financial Requirements section 4. CME and NFA have 
developed programs that compare the daily balances reported by each of 
the depositories with balances reported by the FCMs in their daily 
segregation reports that are filed with CME and/or NFA.\610\ These 
programs generate alerts for discrepancies that exceed defined 
thresholds. When such alerts occur, CME/NFA staff conduct analysis and 
follow-up actions, which include engaging with an FCM to clarify or 
remedy the situation and documenting the outcome.
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    \610\ At the time the Commission issued the 2013 Protections of 
Customer Funds Release, CME and NFA had just recently launched their 
programs. 2013 Protections of Customer Funds Release at 68512. The 
verification programs have developed further in the years that 
followed. FCMs report on the daily segregation records total funds 
held in segregation with banks, clearing organizations, and net 
equities with other FCMs in addition to other balances.
---------------------------------------------------------------------------

    The Commission's experience with overseeing the administration of 
the CME and NFA daily segregation confirmation and verification 
processes for several years has demonstrated that the system provides 
adequate access to relevant information and is capable of detecting 
discrepancies in account balances in a timely manner. Moreover, the 
establishment of an efficient method for obtaining and verifying FCM 
balances of Customer Funds at each depository supports the Commission's 
initial expectation that the direct, read-only electronic access would 
not be the Commission's principal tool for obtaining account 
information at depositories.\611\ The Commission is retaining the 
current requirement that FCMs deposit Customer Funds only with 
depositories that agree that accounts may be examined by Commission or 
DRSO staff at any reasonable time, and that further agree to reply 
promptly and directly to any request from Commission or DSRO staff for 
confirmation of account balances or for provision of any other 
information regarding or related to an account, to ensure that staff 
have timely access to information concerning Customer Funds from 
depositories.\612\
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    \611\ 2013 Protections of Customer Funds Release at 68537 (the 
Commission anticipated that the combination of receipt of daily 
account balances reported by depositories to CME and NFA and the 
Commission's ability to confirm account balances and transactions 
directly with depositories via direct communications would reduce 
the need to rely upon direct electronic access to account 
information at depositories).
    \612\ Commission regulations 1.20(d)(5) and (6), 1.26(b), 
22.5(a) and (b), and 30.7(d)(5) and (6). 17 CFR 1.20(d), 1.26(b), 
22.5, and 30.7(d). For example, Commission regulation 1.20(d)(5) 
provides that an FCM must deposit futures customer funds only with a 
depository that agrees that accounts may be examined at any 
reasonable time by specified Commission or DSRO staff. Commission 
regulation 1.20(d)(6) provides that an FCM must deposit futures 
customer funds only with a depository that agrees to reply promptly 
and directly to any request from specified Commission staff or DSRO 
staff for confirmation of account balances or provision of any other 
information regarding or related to the FCM's account. Commission 
regulation 1.20(d)(5) and (6) further provide that the written 
acknowledgment required from the depository must contain the FCM's 
authorization to the depository to reply promptly and directly to 
the Commission or DSRO without further notice to or consent from the 
FCM. Commission regulation 22.5 provides that an FCM must obtain a 
written acknowledgment letter in accordance with Commission 
regulation 1.20 and Commission regulation 1.26 from each depository 
holding Cleared Swaps Customer Collateral, except an acknowledgment 
letter is not required of a DCO that has adopted rules providing for 
the segregation of Cleared Swaps Customer Collateral.
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    The Commission has encountered various practical challenges in 
implementing the Read-only Access Provisions. Due to the number of 
depositories utilized by FCMs, as well

[[Page 7853]]

as the total number of accounts that FCMs maintain with various 
depository institutions, the Commission must obtain and keep a current 
log of credentials, and, in some instances, must obtain and store 
physical devices required as part of a multi-factor authentication 
process, for thousands of different depository accounts.\613\ 
Frequently, Commission staff must be trained to navigate the various 
account access systems and work regularly with depositories' technology 
staff to ensure that the systems' security features do not prevent the 
Commission's access to the accounts.\614\ Furthermore, due to lack of 
infrastructure, some foreign depository institutions are unable to 
provide direct electronic access to the customer segregated accounts, 
offering instead to provide end-of-day account statements by email. 
These operational challenges put an undue burden on the Commission's 
resources, particularly considering that the Commission contemplated 
that the use of real-time access would be limited, and prevent 
Commission staff from using the Read-only Access Provisions as 
intended.\615\ Thus, in light of the practical challenges of 
maintaining direct read-only access to depository accounts and the 
availability of efficient alternative methods for verifying customer 
segregated account balances, the Commission proposed to eliminate the 
Read-only Access Provisions in Commission regulations 1.20 and 30.7, 
and appendix A to Commission regulation 1.20, appendix A to Commission 
regulation 1.26, and appendices E and F to part 30 of the Commission's 
regulations.
---------------------------------------------------------------------------

    \613\ Based on information provided by CME, as of March 7, 2023, 
FCM registrants maintained over 3,600 active accounts with 
approximately 200 banks, other registered FCMs, foreign broker-
dealers, foreign exchanges, and DCOs.
    \614\ Depositories often require Commission staff to update 
user-IDs and passwords on a regular basis; otherwise, the access is 
interrupted and must be reset by the depositories. Some depositories 
also require the use of additional security devices beyond user-IDs 
and passwords, including key fobs or other forms of multi-factor 
authentication.
    \615\ Commission staff has not had a regulatory need to attempt 
to use read-only access for any FCM's depository accounts since it 
was implemented over 10 years ago.
---------------------------------------------------------------------------

    The Commission received two comments regarding the proposed 
elimination of the Read-only Access Provisions.\616\ NFA supported the 
Commission's Proposal, stating that NFA and CME, collectively, receive 
account balance information each business day directly from all 
depositories holding Customer Funds for FCMs.\617\ Furthermore, NFA 
stated that it and CME have programs that compare daily balances 
reported by depositories holding Customer Funds to balances reported by 
FCMs in their daily segregation schedules.\618\ NFA also stated that 
when there is a discrepancy in reported balances that exceed defined 
thresholds, alerts are generated and staff conduct appropriate analysis 
and prompt follow up with an impacted FCM to clarify and remedy the 
situation, if necessary, and document this work.\619\ In light of its 
program, NFA stated that it does not believe that the Commission's 
Read-only Access Provisions provide any meaningful additional customer 
protection.\620\
---------------------------------------------------------------------------

    \616\ Eurex at p. 3; NFA at p. 2.
    \617\ NFA at p. 2.
    \618\ Id.
    \619\ Id.
    \620\ Id.
---------------------------------------------------------------------------

    Eurex also supported the Commission's proposal to eliminate the 
Read-only Access Provisions, stating that it fully agrees with the 
Proposal's rationale regarding the effectiveness of the CME and NFA 
daily segregation confirmation and verification process.\621\ Eurex 
further stated that the Read-only Access Provisions posed substantial 
challenges, which Eurex believes do not bring any corresponding 
benefits given the existing CME and NFA confirmation and verification 
processes.\622\
---------------------------------------------------------------------------

    \621\ Eurex at p. 3.
    \622\ Id.
---------------------------------------------------------------------------

    The Commission has considered the comments and is eliminating the 
Read-only Access Provisions as proposed for the reasons stated in the 
Proposal. Therefore, the Commission is eliminating the Read-only Access 
Provisions in Commission regulations 1.20(d)(3) and 30.7(d)(3), and 
appendix A to Commission regulation 1.20 (redesignated as appendix C to 
part 1), appendix A to Commission regulation 1.26 (redesignated as 
appendix F to part 1), and appendices E and F to part 30 of the 
Commission's regulations.\623\
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    \623\ These amendments also apply to Commission regulation 22.5, 
which requires FCMs to obtain an acknowledgment letter from 
depositories before depositing Cleared Swaps Customer Collateral 
with a depository, in accordance with Commission regulations 1.20 
and 1.26. 17 CFR 22.5(a). Commission regulation 22.5(b) further 
requires FCMs to adhere to all requirements specified in Commission 
regulations 1.20 and 1.26 regarding retaining, permitting access to 
filing, or amending the written acknowledgment letters. 17 CFR 22.5.
    Separately, the Commission is redesignating appendices A and B 
to Commission regulation 1.20 as appendices C and D to part 1, and 
appendices A and B to Commission regulation 1.26 as appendices F and 
G to part 1, to address a change in the rules of the Office of the 
Federal Register regarding the structure of regulatory text to be 
codified in the Code of Federal Regulations.
---------------------------------------------------------------------------

    Consistent with the position stated in the Proposal, FCMs will not 
need to obtain new acknowledgment letters for existing accounts at 
depositories holding Customer Funds reflecting the elimination of the 
Read-only Access Provisions.\624\ Instead, revised acknowledgment 
letters must be obtained only for accounts opened following the 
effective date of the rule amendments, or in the event that the FCM is 
required to obtain a new acknowledgment letter for reasons unrelated to 
the elimination of the Read-only Access Provisions after the effective 
date of the rule amendments.
---------------------------------------------------------------------------

    \624\ Proposal at 81262.
---------------------------------------------------------------------------

F. Revisions to the Customer Risk Disclosure Statement

    Commission regulation 1.55(a) currently requires an FCM, or an 
introducing broker (``IB'') in the case of an introduced account, to 
provide each customer that is not an ``eligible contract participant'' 
a written risk disclosure statement prior to opening the customer's 
account (``Risk Disclosure Statement'').\625\ Commission regulation 
1.55(a) further requires the FCM or IB to receive a signed and dated 
statement from the customer acknowledging the receipt and understanding 
of the Risk Disclosure Statement.\626\ The Commission has specified 
standardized language for the disclosures that are required to be 
included in the Risk Disclosure Statement. The disclosures address 
risks associated with transaction in cleared derivatives, customer 
segregation, and bankruptcy. Furthermore, Commission regulation 
1.55(b)(6) requires the Risk Disclosure Statement to include the 
following disclosure: The funds you deposit with a futures commission 
merchant may be invested by the futures commission merchant in certain 
types of financial instruments that have been approved by the 
Commission for the purpose of such investments. Permitted investments 
are listed in Commission regulation 1.25 and include: U.S. government 
securities; municipal securities; money market mutual funds; and 
certain corporate notes and bonds. The futures commission merchant may

[[Page 7854]]

retain the interest and other earnings realized from its investment of 
customer funds. You should be familiar with the types of financial 
instruments that a futures commission may invest customer funds in.
---------------------------------------------------------------------------

    \625\ 17 CFR 1.55(a). The term ``eligible contract participant'' 
is defined in section 1a(18) of the CEA and Commission regulation 
1.3. 7 U.S.C. 1a(18) and 17 CFR 1.3. The definition covers various 
CFTC-regulated entities meeting specified conditions, including swap 
dealers, FCMs, and commodity pools with over $5 million in assets 
under management, as well as various types of other federally-
regulated financial institutions such as certain banks, broker-
dealers, insurance companies, pension plans, as well as corporations 
and other forms of corporate entities with over $10 million in 
assets, and individuals with $10 million invested on a discretionary 
basis or $5 million invested on a hedging basis. Certain other 
exclusions and conditions apply with respect to these various types 
of designated entities and individuals.
    \626\ Id.
---------------------------------------------------------------------------

    Although certain conforming amendments to Commission regulation 
1.55 are necessary to reflect the changes to the list of Permitted 
Investments in Commission regulation 1.25, the Commission omitted to 
include a discussion of potential amendments to Commission regulation 
1.55(b)(6) in the Proposal. The Commission is now adopting technical, 
conforming amendments to Commission regulation 1.55(b)(6) to: (i) 
delete the reference in the Risk Disclosure Statement to investments in 
corporate notes and bonds; (ii) clarify that only certain MMFs may be 
Permitted Investments, and (iii) add investments in Specified Foreign 
Sovereign Debt and Qualified ETFs, which reflect the revised list of 
Permitted Investments that are being adopted under this Final Rule. As 
amended, the disclosure will state: The funds you deposit with a 
futures commission merchant may be invested by the futures commission 
merchant in certain types of financial instruments that have been 
approved by the Commission for the purpose of such investments. 
Permitted investments are listed in Commission regulation 1.25 and 
include: U.S. government securities; municipal securities; certain 
money market funds; certain foreign sovereign debt, and U.S. Treasury 
exchange-traded funds. The futures commission merchant may retain the 
interest and other earnings realized from its investment of customer 
funds. You should be familiar with the types of financial instruments 
that a futures commission merchant may invest customer funds in.\627\
---------------------------------------------------------------------------

    \627\ Final Commission regulation 1.55(b)(6).
---------------------------------------------------------------------------

    The Commission is not requiring FCMs and IBs to obtain 
acknowledgment of revised Risk Disclosure Statements from existing 
customers due to the technical amendment. FCMs and IBs are required to 
use the amended Risk Disclosure Statement for any customers onboarded 
on or after the compliance date of March 31, 2025. The Commission is 
setting an extended compliance date to provide FCMs and IBs with 
sufficient time to make any necessary system changes to reflect the 
revised Risk Disclosure Statement, which is generally prepared as an 
electronic document. The extended compliance period also addresses the 
fact that the Proposal did not include a discussion of proposed 
conforming amendments to Commission regulation 1.55.

V. Section 4(c) of the Act

    With respect to an FCM's or DCO's investment of futures customer 
funds, the amendments to Commission regulation 1.25 are being 
promulgated under section 4d(a)(2) of the Act.\628\ Section 4d(a)(2) 
provides that an FCM or DCO may invest futures customer funds in U.S. 
government securities and municipal securities. Section 4d(a)(2) 
further provides that such investments must be made in accordance with 
such rules and regulations and subject to such conditions as the 
Commission may prescribe.
---------------------------------------------------------------------------

    \628\ 7 U.S.C. 6d(a)(2).
---------------------------------------------------------------------------

    Pursuant to its authority under section 4(c) \629\ of the Act, the 
Commission proposed to expand the range of instruments in which FCMs 
and DCOs may invest futures customer funds beyond those listed in 
section 4d(a)(2) of the Act to enhance the yield available to FCMs, 
DCOs, and their customers, without compromising the safety of futures 
customer funds. Section 4(c)(1) of the Act empowers the Commission to 
``promote responsible economic or financial innovation and fair 
competition'' by exempting any transaction or class of transactions 
(including any person or class of persons offering, entering into, 
rendering advice, or rendering other services with respect to, the 
agreement, contract, or transaction), from any of the provisions of the 
Act, subject to certain exceptions.\630\ The Commission's authority 
under section 4(c) extends to transactions covered by section 4d(a)(2) 
and to FCMs and DCOs that offer, enter into, render advice, or render 
other services with respect to such transactions. In enacting section 
4(c), Congress' goal was to give the Commission a means of providing 
certainty and stability to existing and emerging markets so that 
financial innovation and market development can proceed in an effective 
and competitive manner.\631\ The Commission may grant such an exemption 
by rule, regulation, or order, after notice and opportunity for 
hearing, and may do so on application of any person or on its own 
initiative.\632\
---------------------------------------------------------------------------

    \629\ 7 U.S.C. 6(c). With respect to investments of Cleared 
Swaps Customer Collateral and 30.7 customer funds, the Commission 
would be acting pursuant to its plenary authority under sections 
4d(f) and 4(b) of the Act, respectively, rather than section 4(c). 7 
U.S.C. 6d(f)(4) (providing that Cleared Swaps Customer Collateral 
may be invested in certain specified investments and in any other 
investment that the Commission may by rule or regulation prescribe, 
and such investments shall be made in accordance with such rules and 
regulations and subject to such conditions as the Commission may 
prescribe.) and 7 U.S.C. 6(b)(2)(A) (providing that the Commission 
may adopt rules and regulations requiring, among other things, the 
safeguarding of customer's funds, by any person located in the U.S. 
who engages in foreign futures trading).
    \630\ 7 U.S.C. 6(c)(1).
    \631\ House Conf. Report No. 102-978, 1992 U.S.C.C.A.N. 3179, 
3213.
    \632\ 7 U.S.C. 6(c)(1).
---------------------------------------------------------------------------

    Section 4(c)(2) of the Act provides that the Commission may grant 
exemptions under section 4(c)(1) only when it determines that the 
requirements for which an exemption is being provided should not be 
applied to the agreements, contracts, or transactions at issue; that 
the exemption is consistent with the public interest and the purposes 
of the Act; that the agreements, contracts, or transactions will be 
entered into solely between appropriate persons; and that the exemption 
will not have a material adverse effect on the ability of the 
Commission or any contract market to discharge its regulatory or 
self®ulatory responsibilities under the Act.\633\ When section 4(c) 
was enacted, the Conference Report accompanying the Futures Trading 
Practices Act of 1992 stated that the ``public interest'' in this 
context would ``include the national public interests noted in the Act, 
the prevention of fraud and the preservation of the financial integrity 
of the markets, as well as the promotion of responsible economic or 
financial innovation and fair competition.'' \634\ The definition of 
``public interest'' in this context is consistent with the purposes of 
the Act as described in section 3(b) of the Act.\635\
---------------------------------------------------------------------------

    \633\ 7 U.S.C. 6(c)(2).
    \634\ Public Law 102-546, 106 Stat. 3590 (1992) and H.R. Conf. 
Rep. No. 102-978 (1992). The Conference Report also states that the 
reference in section 4(c) to the ``purposes of the Act'' is intended 
to ``underscore [the Conferees'] expectation that the Commission 
will assess the impact of a proposed exemption on the maintenance of 
the integrity and soundness of markets and market participants.''
    \635\ 7 U.S.C. 5(b) (providing that it is further the purpose of 
the Act to deter and prevent price manipulation or any other 
disruptions to market integrity; to ensure the financial integrity 
of all transactions subject to the Act and the avoidance of systemic 
risk; to protect all market participants from fraudulent or other 
abusive sales practices and misuses of customer assets; and to 
promote responsible innovation and fair competition among boards of 
trade, other markets and market participants.)
---------------------------------------------------------------------------

    In the Proposal, the Commission detailed its preliminary analysis 
on how the proposed expansion of the list of Permitted Investments 
meets the conditions in section 4(c)(2)(A) as they apply to an 
exemption with respect to an FCM or DCO. The discussion in the Proposal 
focused on how the proposed

[[Page 7855]]

expansion is, in the Commission's view, consistent with the public 
interest and the purposes of the Act.\636\
---------------------------------------------------------------------------

    \636\ Proposal at 81264. The analysis did not include a 
discussion of section 4(c)(2)(B)'s conditions because the exemption 
in this instance does not implicate or affect a futures agreement, 
contract, or transaction.
---------------------------------------------------------------------------

    The Commission solicited public comment on whether the Proposal 
satisfies the requirements for exemption under section 4(c) of the Act. 
Commenters criticizing the expansion of Permitted Investments to 
Specified Foreign Sovereign Debt asserted that this expansion could put 
customers at undue financial risk \637\ and ``might compromise the 
protection of customer funds in favor of expanding the financial 
industry's quest for wider investment options.'' \638\ Better Markets 
further stated that the Commission has not provided an adequate public 
benefit-oriented justification for adding this new type of investment 
to Commission regulation 1.25.\639\ The Investor Advocacy Group also 
argued that the Commission should not ``embed'' the goal of profits 
into the ``fabric'' of its definition of the public interest by 
including potential revenue and profits for FCMs as a public interest 
purpose.\640\ Better Markets also asserted that higher profits ``do not 
inherently guarantee reduced customer charges.'' \641\ Finally, the 
Investor Advocacy Group argued that the public interest language in the 
Act is not intended to promote the financial interests of the exchanges 
or dealers, but to protect the public and markets from fraud.\642\
---------------------------------------------------------------------------

    \637\ Investor Advocacy Group Joint Letter at p. 1; Better 
Markets at p. 3.
    \638\ Better Markets at p. 3.
    \639\ Id.
    \640\ Investor Advocacy Group Joint Letter at pp. 1-2.
    \641\ Better Markets at 4.
    \642\ Investor Advocacy Groups Joint Letter at p. 2.
---------------------------------------------------------------------------

    The Commission acknowledges the concerns raised by commenters but 
after consideration it maintains that the expansion to the list of 
Permitted Investments adopted in the Final Rule is consistent with the 
conditions in section 4(c) of the Act as they apply to an exemption 
with respect to an FCM or DCO. The discussion below describes why the 
Commission has determined that the exemption granted and the expansion 
adopted in the Final Rule is consistent with the public interest and 
the purposes of the Act as required pursuant to section 4(c)(2)(A) of 
the Act.\643\ The amendments to the Permitted Investments adopted in 
this Final Rule should provide FCMs and DCOs with an opportunity to 
diversify their investments of futures customer funds, mitigating the 
risks that can arise from concentrating futures customer funds in a 
smaller set of Permitted Investments, without compromising the safety 
of such investments. To qualify as Permitted Investments, the 
instruments subject to this Final Rule must meet strict conditions to 
ensure that investments of futures customer funds are consistent with 
the objective of preserving principal and maintaining liquidity, as 
required by Commission regulation 1.25. The additional Permitted 
Investments that the Commission is adding to Commission regulation 1.25 
present credit and volatility characteristics that are comparable to 
instruments that already qualify as Permitted Investments.
---------------------------------------------------------------------------

    \643\ Consistent with the Proposal, the analysis does not 
include a discussion of section 4(c)(2)(B)'s conditions (i.e., that 
the agreement, contract, or transaction will be entered solely 
between ``appropriate persons'' and will not have a material adverse 
effect on the ability of the Commission or any contract market or 
derivatives transaction execution facility to discharge its 
regulatory or self-regulatory duties under the Act) because the 
exemption in this instance does not implicate or affect a futures 
agreement, contract, or transaction.
---------------------------------------------------------------------------

    The Final Rule permits FCMs and DCOs to invest futures customer 
funds only in the sovereign debt of Canada, France, Germany, Japan, and 
the United Kingdom and only to the extent that the FCMs' and DCOs' hold 
balances owed to customers denominated in the applicable currency. As 
noted in section IV.2.b. of this preamble, FCMs held collectively a 
U.S. dollar equivalent of $64 billion of Customer Funds denominated in 
CAD, EUR, JPY, and GBP in August 2024. The ability for FCMs and DCOs to 
invest such Customer Funds in the applicable Specified Foreign 
Sovereign Debt instruments reduces potential currency risk that DCOs, 
FCMs, and customers would otherwise be exposed to as a result of 
investing such foreign currencies in U.S.-dollar denominated assets.
    The Final Rule further conditions an FCM's or DCO's investment in 
Specified Foreign Sovereign Debt to mitigate potential credit and 
liquidity risk. The Final Rule provides that an FCM's or DCO's 
portfolio of investments must have a dollar-weighted average time-to-
maturity of 60 calendar days or less, which will mitigate price risk 
and liquidity risk of the debt securities by providing an FCM with an 
option of holding the securities to maturity and not liquidating the 
securities at a loss. The Final Rule also mitigates credit risk by 
prohibiting an FCM or DCO from purchasing new debt securities if the 
two-year credit default spread of the applicable foreign sovereign 
exceeds 45 BPS.
    In addition, permitting investments in Qualified ETFs, subject to 
the adopted conditions, including that the ETF is passively managed 
with the investment objective of replicating the performance of a 
published short-term U.S. Treasury security index composed of U.S. 
Treasury bonds, notes, and bills with a remaining maturity of 12 months 
or less, provides an opportunity for greater diversification of the 
types of investment options that FCMs and DCOs may use to manage the 
risk of holding futures customer funds. Qualified ETFs also provide 
potential benefits to FCMs, particularly smaller FCMs, that may lack 
the internal operations and resources to effectively manage direct 
investments in other Permitted Investments, such as U.S. government 
securities, U.S. agency obligations, and municipal securities. Both 
Specified Foreign Sovereign Debt and Qualified ETFs have the potential 
to reduce costs to FCMs, DCOs, and customers, while remaining 
consistent with the requirement in Commission regulation 1.25 for the 
preservation of principal and liquidity of Permitted Investments.
    Although higher profits for FCMs do not ``guarantee'' lower costs 
to customers,\644\ one can reasonably infer that if FCMs and DCOs 
obtain an additional source of income, they may be less likely to 
increase the cost of their services, even if such a result cannot be 
guaranteed. In turn, lower costs for customers may lead to greater 
market participation and increased market liquidity.
---------------------------------------------------------------------------

    \644\ Better Markets at p. 4.
---------------------------------------------------------------------------

    An expanded list of Permitted Investments should thus increase the 
likelihood that FCMs and DCOs will continue as viable businesses and 
remain available for customers at a time when the overall number of 
FCMs continues to decrease. Without the ability to generate revenue and 
operate at a profit sufficient to remain a going concern, FCMs, which 
are central to a well-functioning commodity interest market, may 
continue to exit the business, which would disrupt the ability of 
farmers, financial service providers, and other commercial enterprises 
to effectively manage the commodity risk associated with their 
businesses. A smaller number of FCMs would also concentrate risk 
associated with Customer Funds in fewer firms, increasing the potential 
for systemic risk due to the potential for significant disruption 
should one of the remaining FCMs fail. This is particularly an issue

[[Page 7856]]

in situations where an FCM is required to liquidate under a bankruptcy 
proceeding and port Customer Funds and positions to other FCMs. To 
efficiently and effectively manage such a process, the market needs 
other financially sound FCMs that are willing to receive the positions 
and funds of the customers of the failing FCM. Without the available 
capacity, customers may be required to liquidate positions that hedge 
cash market or other exposures. Therefore, promoting the continued 
participation of FCMs and DCOs in the market is a public benefit to 
customers, the efficient operation of the commodity interest markets, 
and the public in general.
    Moreover, additional investment options may also motivate FCMs or 
DCOs to increase their presence in the commodity interest markets, or 
encourage new entrants to the industry, thereby increasing competition, 
which could result in reduced costs to customers and an increase in 
trading activity and liquidity, which supports efficient price 
discovery.
    Based on the considerations discussed above, the Commission finds 
that the amendments to the list of Permitted Investments promote 
responsible economic and financial innovation and fair competition. By 
providing opportunities for investment diversification and risk 
management, promoting the continued participation of FCMs and DCOs in 
the market, and encouraging new entrants to the industry, the expansion 
of the list of Permitted Investments is consistent with the ``public 
interest'' and the purposes of the Act. Thus, the Commission has 
determined that the Final Rule meets the conditions in section 4(c) of 
the Act.

VI. Compliance Dates

    The compliance date for the Final Rule is the effective date of 
this release, except for the amendments to the SIDR Report, which are 
specified in Commission regulations 1.32, 22.2(g)(5), and 30.7(l)(5), 
and the amendments to the customer Risk Disclosure Statement required 
under Commission regulation 1.55.
    As discussed in section IV.D. of this preamble, the Commission is 
amending the SIDR Report required under Commission regulations 1.32, 
22.2(g)(5), and 30.7(l)(5) to align with the revisions to the list of 
Permitted Investments adopted herein. Specifically, the Commission is 
amending the content of the SIDR Report by: (i) revising the reporting 
of MMFs to include balances invested only in Permitted Government MMFs; 
(ii) deleting the reporting of balances invested in commercial paper, 
corporate notes and bonds, and bank CDs; (iii) adding the reporting of 
balances invested in the Specified Foreign Sovereign Debt of each 
particular foreign jurisdiction (i.e., individual reporting for Canada, 
France, Germany, Japan, and the United Kingdom); and, (iv) adding 
balances invested in Qualified ETFs.
    In addition, as discussed in section IV.F. of this preamble, the 
Commission is revising the Risk Disclosure Statement that an FCM or IB 
is required to provide to a customer prior to the opening of an 
account. The Final Rule amends Commission regulation 1.55(b)(6) by 
removing corporate notes and bonds from, and by adding Specified 
Foreign Sovereign Debt and Qualified ETFs to, the list of Permitted 
Investments that an FCM is authorized to enter into with Customer 
Funds.
    The Commission is setting a compliance date of March 31, 2025 for 
the amendments to the SIDR Report and Risk Disclosure Statement. The 
compliance period is intended to provide FCMs with an opportunity to 
make any necessary updates to their policies, procedures, systems, and 
practices resulting from the amendment to the SIDR Report. The 
compliance period will also allow the Commission, NFA, and CME to make 
necessary updates to the electronic filing systems that are currently 
used to receive and process the SIDR Reports submitted by FCMs. The 
compliance period also provides FCMs and IBs with time to update their 
Risk Disclosure Statements and to make necessary revisions to any 
electronic account opening documents and processes.

VII. Administrative Compliance

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') requires Federal agencies 
to consider whether the rules they propose will have a significant 
economic impact on a substantial number of small entities and, if so, 
provide a regulatory flexibility analysis respecting the impact.\645\ 
Whenever an agency publishes a general notice of proposed rulemaking 
for any rule, pursuant to the notice-and-comment provisions of the 
Administrative Procedure Act,\646\ a regulatory flexibility analysis or 
certification typically is required.\647\ As discussed in the Proposal, 
the amendments being adopted herein affect FCMs and DCOs. The 
Commission has previously determined that registered FCMs and DCOs are 
not small entities for purposes of the RFA.\648\ Accordingly, the 
Chairman, on behalf of the Commission, hereby certifies pursuant to 5 
U.S.C. 605(b) that the Proposal will not have a significant economic 
impact on a substantial number of small entities.
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    \645\ 5 U.S.C. 601 et seq.
    \646\ 5 U.S.C. 553. The Administrative Procedure Act is found at 
5 U.S.C. 500 et seq.
    \647\ See 5 U.S.C. 601(2), 603, 604, and 605.
    \648\ See 47 FR 18618, 18619 (Apr. 30, 1982) and 66 FR 45604, 
45609 (Aug. 29, 2001).
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B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \649\ 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. Under the PRA, an agency may not 
conduct or sponsor, and a person is not required to respond to, a 
collection of information unless it displays a currently valid control 
number from the Office of Management and Budget (``OMB'').\650\ The PRA 
is intended, in part, to minimize the paperwork burden created for 
individuals, businesses, and other persons as a result of the 
collection of information by Federal agencies, and to ensure the 
greatest possible benefit and utility of information created, 
collected, maintained, used, shared, and disseminated by or for the 
Federal Government.\651\ The PRA applies to all information, regardless 
of form or format, whenever the Federal Government is obtaining, 
causing to be obtained, or soliciting information, and includes 
required disclosure to third parties or the public, of facts or 
opinions, when the information collection calls for answers to 
identical questions posed to, or identical reporting or recordkeeping 
requirements imposed on, ten or more persons.\652\
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    \649\ 44 U.S.C. 3501 et seq.
    \650\ See 44 U.S.C. 3507(a)(3); 5 CFR 1320.5(a)(3).
    \651\ See 44 U.S.C. 3501.
    \652\ See 44 U.S.C. 3502(3).
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    This final rulemaking amends regulations that contain collections 
of information for which the Commission has previously received control 
numbers from OMB. The titles for these collections of information are 
OMB Control No. 3038-0024, Regulations and Forms Pertaining to 
Financial Integrity of the Market Place; Margin Requirements for SDs/
MSPs and OMB Control No. 3038-0091, Disclosure and Retention of Certain 
Information Relating to Cleared Swaps Customer Collateral.\653\
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    \653\ For the previously approved PRA estimates under OMB 
Control No. 3038-0024, see ICR Reference No. 202101-3038-001, at 
https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=202207-3038-001. For previously approved PRA estimated under OMB Control No. 
3038-0091, see ICR Reference No. 202009-3038-007, at https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=202009-3038-007.

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[[Page 7857]]

    The Commission requested public comment on all aspects of its 
burden analysis under the PRA in the Proposal. No comments were 
received addressing the PRA analysis. As further discussed below, 
however, based on public comments received and conversations with 
industry representatives, the Commission has concluded that it is not 
necessary to provide a new template acknowledgement letter for 
investments in Qualified ETFs. Accordingly, as described below, the 
Commission has concluded that the amendments introduced by this Final 
Rule do not contain any new collections of information and will not 
increase the burden associated with the information collections 
contained in the affected regulations.
    As discussed in section IV.D. of this preamble, among other 
reporting items, FCMs are required to report in the SIDR Reports the 
amount of futures customer funds, Cleared Swaps Customer Collateral, 
and 30.7 customer funds invested in each of the current categories of 
Permitted Investments. The Commission is amending Commission 
regulations 1.32(f), 22.2(g)(5), and 30.7(l)(5), which define the 
content of the SIDR Report, by: (i) deleting the requirement for an FCM 
to report the balances invested in commercial paper, corporate notes 
and bonds, and bank CDs as such investments would no longer be 
Permitted Investments under the Final Rule; (ii) requiring each FCM to 
report the total amount of futures customer funds, Cleared Swaps 
Customer Collateral, and 30.7 customer funds invested in Specified 
Foreign Sovereign Debt of each country that is included within the 
Specified Foreign Sovereign Debt; and (iii) requiring an FCM to include 
in the SIDR Report the total amount of futures customer funds, Cleared 
Swaps Customer Collateral, and 30.7 customer funds invested in 
Qualified ETFs as such investments are now Permitted Investments. As 
such, the changes to the content of the SIDR Reports would reflect the 
revisions to the list of Permitted Investments discussed in section 
IV.A. of this preamble. The Commission does not expect these changes to 
result in an increase in the number of burden hours required for the 
completion of the reports. Accordingly, the Commission is retaining its 
existing burden estimates associated with this collection of 
information.\654\
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    \654\ The Commission has previously estimated that compliance 
with the requirements under Commission regulations 1.32(f) and 
1.32(g) to file SIDR reports requires 59 covered FCMs to expend 
2,832 burden hours annually. The Commission has estimated that each 
FCM will file 24 reports per year requiring approximately 48 burden 
hours per respondent. This yields a total of 2,832 burden hours 
annually (59 FCM respondents x 48 burden hours annually = 2,832 
hours).
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    In addition, the Commission is revising Commission regulation 1.26, 
which requires each FCM or DCO investing futures customer funds in MMFs 
that are Permitted Investments to obtain and retain in its files a 
written acknowledgment from the depository holding the funds stating 
that the depository was informed that the funds belong to customers and 
are being held in accordance with the provisions of the Act and 
Commission regulations. Commission regulation 1.26 also specifies the 
form of the written acknowledgment letter that each FCM or DCO must 
obtain from an MMF, in the event futures customer funds are held 
directly with the MMF. Commission regulations 22.5 and 30.7(d) set 
forth similar requirements with respect to Cleared Swaps Customer 
Collateral and 30.7 customer funds. The amendments to Commission 
regulation 1.26 require FCMs and DCOs investing Customer Funds in a 
Permitted Government MMF to obtain and maintain in their files an 
acknowledgment letter from the fund in which Customer Funds are held 
and to file such acknowledgment letter electronically with the 
Commission. The Commission is adopting an analogous amendment to 
Commission regulation 30.7(d)(2) with respect to investments of 30.7 
customer funds by FCMs.\655\ The revisions to Commission regulations 
1.26 and 30.7(d) should reduce the number of MMFs from which FCMs and 
DCOs, as applicable, will be required to obtain an acknowledgment 
letter by limiting the requirement to Permitted Government MMFs, a 
smaller set of MMFs. The addition of Qualified ETFs to the list of 
Permitted Investments is not expected to create a new acknowledgment 
letter requirement, as Qualified ETF shares will be held in the 
customer segregated accounts maintained by the FCM's or DCO's 
custodian, from which the FCM or DCO had to obtain an acknowledgement 
letter pursuant to Commission regulations 1.20, 22.5, and 30.7(d).\656\ 
This is consistent with the Commission's understanding of current 
practices.\657\
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    \655\ An amendment to Commission regulation 22.5 is not 
necessary because Commission regulation 22.5 cross-references 
Commission regulation 1.26.
    \656\ For any Permitted Investment, other than investment in 
Permitted Government MMFs, FCMs and DCOs are required to obtain an 
acknowledgement letter pursuant to Commission regulations 1.20, 
22.5, and 30.7(d). 17 CFR 1.20, 22.5, and 30.7(d).
    \657\ The Commission had proposed to add new template 
acknowledgment letters modeled on the acknowledgment letter under 
Commission regulation 1.26 for MMFs but addressing investments in 
Qualified ETFs (proposed appendices H and I to part 1 and proposed 
appendix G to part 30). Based on public comments received and 
communications with industry representatives, the Commission has 
concluded that it is not necessary to provide such new template 
acknowledgment letters. Instead, FCMs and DCOs will be able to 
follow the process for Permitted Investments other than Permitted 
Government MMFs and obtain an acknowledgment letter pursuant to 
Commission regulations 1.20, 22.5, and 30.7(d), using the template 
under Commission regulation 1.20 (redesignated as appendix C to part 
1).
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    As discussed in section IV.F. of this preamble, FCMs and IBs are 
required to provide each customer that is not an ``eligible contract 
participant'' a Risk Disclosure Statement prior to opening the 
customer's account.\658\ The Commission is adopting technical 
amendments to Commission regulation 1.55(b) to account for changes in 
the list of Permitted Investments in Commission regulation 1.25 by: (i) 
deleting the reference in the Risk Disclosure Statement to investments 
in corporate notes and bonds; (ii) clarifying that only certain MMFs 
may be Permitted Investments, and (iii) adding investments in Specified 
Foreign Sovereign Debt and Qualified ETFs. The Commission is not 
requiring FCMs and IBs to obtain acknowledgment of revised Risk 
Disclosure Statements from existing customers due to the technical 
amendments. FCMs and IBs are required to use the amended Risk 
Disclosure Statement for any customers onboarded on or after the 
compliance date of March 31, 2025. Accordingly, the Commission is 
retaining its existing burden estimates associated with this collection 
of information.\659\ Additionally, the Commission does not expect the 
technical, conforming amendments to result in an increase in the number 
of burden hours required for customers to review and acknowledge the 
amended Risk Disclosure Statement.
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    \658\ For the definition of ``eligible contract participant,'' 
see supra note 625.
    \659\ The Commission has previously estimated that 59 
respondents will incur an annual burden of 20 hours per statement. 
Supporting Statement for Revised Information Collections for 
Regulations and Forms Pertaining to Financial Integrity of the 
Market Place; Margin Requirements for SDs/MSPs (OMB Control 3038-
0024) and Disclosure and Retention of Certain Information Relating 
to Cleared Swaps Customer Collateral (OMB Control Number 3038-0091).
---------------------------------------------------------------------------

    Also, in connection with the revisions related to the elimination 
of the Read-

[[Page 7858]]

only Access Provisions, an FCM will need to obtain the revised 
acknowledgment letter only for accounts opened following the effective 
date of the revisions, or if the FCM is required to obtain a new 
acknowledgment letter for reasons unrelated to the elimination of the 
Read-only Access Provisions. The opening of a new depository account 
triggers a requirement to obtain an acknowledgment letter in all 
circumstances, regardless of the revisions related to the elimination 
of the Read-only Access Provisions. For these reasons, the Commission 
is retaining its existing estimate of the burden that covered FCMs and 
DCOs incur to obtain, maintain, and electronically file the 
acknowledgment letters with the Commission, as currently provided in 
the approved collection of information.\660\
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    \660\ The Commission has estimated that 36 covered FCMs incur an 
estimated 216 burden hours annually to file required acknowledgment 
letters pursuant to Commission regulation 1.20(d). The Commission 
has estimated that each respondent will file 3 reports per year 
requiring an estimated 2 burden hours per report, for a total of 6 
burden hours per respondent. This yields a total of 216 burden hours 
annually (36 respondents x 6 burden hours annually = 216 burden 
hours). Under Commission regulation 1.26, the Commission has 
estimated that 74 covered respondents incur an estimated 111 burden 
hours annually to obtain and maintain required acknowledgement forms 
(74 respondents x 1.5 hours annually = 111 burden hours). Under 
Commission regulation 30.7, the Commission has estimated that 42 
covered respondents incur an estimated 252 burden hours annually (42 
respondents x 6 burden hours annually = 252 burden hours) and under 
Commission regulation 22.5, the Commission has estimated that 78 
covered respondents incur an estimated 390 burden hours annually (78 
respondents x 5 burden hours annually = 390 burden hours) to obtain 
and maintain the required acknowledgment letters.
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C. Cost-Benefit Considerations

    Section 15(a) of the Act requires the Commission to consider the 
costs and benefits of its actions before promulgating a regulation 
under the Act.\661\ Section 15(a) further specifies that the costs and 
benefits shall be evaluated in light of the following five broad areas 
of market and public concern: (i) protection of market participants and 
the public; (ii) efficiency, competitiveness and financial integrity of 
futures markets; (iii) price discovery; (iv) sound risk management 
practices; and (v) other public interest considerations. The Commission 
considers the costs and benefits resulting from its discretionary 
determinations with respect to the section 15(a) considerations.
---------------------------------------------------------------------------

    \661\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------

    As described in more detail in section IV.A. of this preamble, the 
Commission is revising the list of Permitted Investments in Commission 
regulation 1.25(a) to: (i) add Specified Foreign Sovereign Debt and 
interests in Qualified ETFs; (ii) limit the scope of MMFs whose 
interests qualify as Permitted Investments to Permitted Government 
MMFs; and (iii) eliminate commercial paper, corporate notes or bonds, 
and bank CDs. The Commission is amending the Risk Disclosure Statement 
specified in Commission regulation 1.55 that FCMs are required to 
provide to certain customers to reflect the revisions to the list of 
Permitted Investments. The Commission is further amending the asset-
based and issuer-based concentration limits for Permitted Investments 
to reflect the revisions to the investments that FCMs and DCOs may make 
with Customer Funds. The Commission is further specifying the capital 
charges that FCMs, in computing their regulatory capital, are required 
to take on investments of Customer Funds in Specified Foreign Sovereign 
Debt and Qualified ETFs. The Commission is also amending Commission 
regulation 1.25(b)(2)(iv)(A)(1) and (2) by replacing LIBOR with SOFR as 
a permitted benchmark for Permitted Investments with an adjustable 
interest rate. The Commission is also revising relevant provisions in 
parts 1 and 30 of the Commission's regulations to eliminate the 
requirement for FCMs to ensure that each depository that it uses to 
hold Customer Funds provides the Commission with read-only electronic 
access to the account. Finally, the Commission is adopting certain 
conforming and technical revisions to its regulations to reflect or 
incorporate the amendments above.
    The Commission recognizes that the Final Rule may impose costs. The 
consideration of costs and benefits below is based on the understanding 
that the markets function internationally, with many transactions 
involving U.S. firms taking place across international boundaries; with 
some Commission registrants being organized outside of the United 
States; with leading industry members typically conducting operations 
both within and outside the United States; and with industry members 
commonly following substantially similar business practices wherever 
located. Where the Commission does not specifically refer to matters of 
location, the below discussion of costs and benefits refers to the 
effects of the amendments on all activity subject to the amended 
regulations, whether by virtue of the activity's physical location in 
the United States or by virtue of the activity's connection with 
activities in, or its effect on, U.S. commerce under section 2(i) of 
the Act.\662\
---------------------------------------------------------------------------

    \662\ 7 U.S.C. 2(i).
---------------------------------------------------------------------------

    The Commission has endeavored to assess the expected costs and 
benefits of the Final Rule in quantitative terms, including PRA-related 
costs, where possible. In situations where the Commission is unable to 
quantify the costs and benefits, the Commission identifies and 
considers the costs and benefits of the applicable rules in qualitative 
terms. The lack of data and information to estimate those costs is 
attributable in part to the nature of the Final Rule. Additionally, any 
initial and recurring compliance costs for any particular FCM or DCO 
will depend on its size, existing infrastructure, practices, and cost 
structure.
    To further inform the Commission's consideration of the costs and 
benefits imposed by the Proposal, the Commission invited comments from 
the public on all aspects of its cost-benefit considerations, including 
the identification and assessment of any costs and benefits not 
discussed by the Commission; data and any other information to assist 
or otherwise inform the Commission's ability to quantify or 
qualitatively describe the costs and benefits of the proposed 
amendments; and any other information to support positions posited by 
commenters with respect to the Commission's discussion. The Commission 
did not receive comments specific to the benefits and costs of the 
Proposal. To the extent that the Commission received comments that 
indirectly address the costs and benefits of the Proposal, those 
comments are discussed below.
    The baseline for the Commission's consideration of the costs and 
benefits associated with this Final Rule are the costs and benefits 
that FCMs, DCOs, and the public would realize if the Commission did not 
proceed with the proposed amendments, or in other words, the status 
quo.
    The Commission requested comment on any such incremental costs, 
especially by DCOs and FCMs, who may be better able to provide 
quantitative costs data or estimates, based on their respective 
experiences relating to Commissions regulations governing the 
investment of Customer Funds and related requirements. Commenters 
generally supported the proposed amendments to Commission regulation 
1.25, with two commenters opposed to the proposed addition of Specified 
Foreign Sovereign Debt to the list of Permitted Investments. The 
commenters

[[Page 7859]]

supporting the Proposal also recommended or requested revisions to 
several proposed amendments and proposed conditions specified in the 
Proposal; however, no specific costs were identified by these 
commenters that would affect DCOs and FCMs as a result of the changes.
1. Specified Foreign Sovereign Debt, Interests in Qualified Exchange-
Traded Funds, and Associated Capital Charges
    The Final Rule expands the list of Permitted Investments that an 
FCM and DCO may enter into with Customer Funds by adding Specified 
Foreign Sovereign Debt (i.e., the sovereign debt of Canada, France, 
Germany, Japan, and the United Kingdom).\663\ The Final Rule provides 
that an FCM or DCO may invest Customer Funds in Specified Foreign 
Sovereign Debt subject to the following conditions: (i) the investment 
by an FCM or DCO in the debt securities of Canada, France, Germany, 
Japan, and the United Kingdom is limited to balances owed to customers 
denominated in CAD, EUR, JPY, and GBP, respectively; (ii) the dollar-
weighted average of the remaining time-to-maturity of the portfolio of 
investments in Specified Foreign Sovereign Debt, computed on a country-
by-country basis, may not exceed 60 calendar days; (iii) the remaining 
time-to-maturity in any Specified Foreign Sovereign Debt security may 
not exceed 180 calendar days; and (iv) the FCM or DCO does not make any 
new investments, and discontinues investing Customer Funds through 
Repurchase Transactions as soon as possible, if the two-year credit 
default spread of the relevant foreign sovereign exceeds 45 BPS.\664\
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    \663\ Final Commission regulation 1.25(a)(1)(vi).
    \664\ Final Commission regulation 1.25(a)(1)(vi)(A) and (B), and 
final Commission regulation 1.25(f).
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    The Final Rule also permits FCMs and DCOs to engage in Repurchase 
Transactions involving Specified Foreign Sovereign Debt with a broader 
group of counterparties than otherwise permitted \665\ by authorizing 
transactions with: (i) a foreign bank that maintains in excess of $1 
billion in regulatory capital and is located in a money center country 
\666\ or in a jurisdiction that has adopted the currency in which the 
Specified Foreign Sovereign Debt is denominated as its currency; (ii) a 
securities broker or dealer located in a money center country and 
regulated by a national financial regulator (or a provincial financial 
regulator with respect to a Canadian securities broker or dealer), and 
(iii) the Bank of England, the Banque de France, the Bank of Japan, the 
Deutsche Bundesbank, or the European Central Bank.\667\
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    \665\ Commission regulation 1.25(d)(2) currently permits an FCM 
and DCO to engage in Repurchase Transactions involving Customer 
Funds with counterparties that are: (i) section 3(a)(6) banks; (ii) 
a domestic branch of a foreign bank insured by the FDIC; or (iii) a 
securities broker or dealer, or a government securities broker or 
government securities dealer that is registered with the SEC or that 
has filed a notice pursuant to section 15C(a) of the Government 
Securities Act of 1986.
    \666\ Commission regulation 1.49(a)(1) defines ``money center 
country'' as Canada, France, Italy, Germany, Japan, or the United 
Kingdom.
    \667\ Final Commission regulation 1.25(d)(2).
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    The Final Rule also expands the type and number of custodians that 
FCMs and DCOs may use to hold securities received under Repurchase 
Transactions. In addition to current permitted custodians,\668\ Final 
Commission regulation 1.25(d)(7) provides that an FCM or DCO may hold 
Specified Foreign Sovereign Debt securities received under an agreement 
to resell the securities in a safekeeping account at a foreign bank 
that maintains regulatory capital in excess of $1 billion and is 
located in a money center country.\669\ The Final Rule also adds the 
Bank of England, the Banque de France, the Bank of Japan, the Deutsche 
Bundesbank, and the European Central Bank as permitted custodians for 
securities received under agreements to resell the securities.\670\
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    \668\ Commission regulation 1.25(d)(7) currently permits an FCM 
or DCO to hold securities received under Repurchase Transactions in 
safekeeping accounts with a section 3(a)(6) bank, a domestic branch 
of a foreign bank insured by the Federal Deposit Insurance 
Corporation, a Federal Reserve Bank, a DCO, or the Depository Trust 
Company in account that complies with Commission regulation 1.26.
    \669\ Final Commission regulation 1.25(d)(7).
    \670\ Id.
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    The Final Rule also expands the list of Permitted Investments by 
adding Qualified ETFs.\671\ To be eligible as a Permitted Investment, a 
Qualified ETF must be an investment company that is registered under 
the Investment Company Act of 1940, and must hold itself out to 
investors as an exchange-traded fund in accordance with SEC Rule 
270.2a-7.\672\ A Qualified ETF also must engage in an investment 
program that seeks to replicate the performance of a published short-
term U.S. Treasury security index composed of bonds, notes, and bills 
with a remaining time-to-maturity of 12 months or less, issued by, or 
unconditionally guaranteed as to timely payment of principal and 
interest by, the U.S. Department of the Treasury.\673\ Specifically, 
the Qualified ETF must invest at least 95 percent of its assets in 
securities comprising the short-term U.S. Treasury index whose 
performance the fund seeks to replicate, and cash. In addition, the FCM 
or DCO must be able to redeem or liquidate, as applicable depending on 
whether the transaction is intermediated by a third-party authorized 
participant, the Qualified ETF interests in cash within one business 
day of a redemption request.\674\ As discussed in section IV.A.3. of 
this preamble, the Commission understands that an FCM or DCO should be 
able to arrange for the timely redemption or liquidation of Qualified 
ETF interests in cash either through an agreement with an authorized 
participant or by being an authorized participant itself with the 
necessary arrangements in place to convert U.S. Treasury securities 
into cash within one business day of the redemption request. Under the 
Final Rule, however, Qualified ETFs will be able to rely on Commission 
regulation 1.25(c)(5)(ii), as applicable, and provide for the 
postponement of redemption and payment due to certain enumerated 
emergency situations.\675\ The Commission also specified the capital 
charges that an FCM is required to take on any investment of Customer 
Funds in Specified Foreign Sovereign Debt and Qualified ETFs in 
computing its regulatory capital to meet its minimum requirement under 
Commission regulation 1.17. Specifically, the Final Rule provides that 
there is no capital charge for Canadian sovereign debt instruments with 
a remaining time-to-maturity of less than 3 months, and a capital 
charge of 0.5 percent of the market value of Canadian sovereign debt 
instruments with a remaining time-to-maturity of 3 to 6 months. Under 
the Final Rule, the capital charge for the sovereign debt of France, 
Germany, Japan, and the United Kingdom is 2 percent of the market value 
of the debt security.\676\ The Final Rule further requires an FCM to 
take a 2 percent capital charge on the market value of Qualified ETF 
shares that comprise a full creation or redemption unit, and a 6 
percent capital charge on Qualified ETF shares that do not comprise a 
full creation or redemption unit. The capital charges adopted herein 
are consistent with market risk capital charges imposed by the SEC on 
brokers and

[[Page 7860]]

dealers holding proprietary positions in Specified Foreign Sovereign 
Debt instruments and Qualified ETF shares.\677\ The FCM capital charges 
are intended to ensure that the firm's calculation of its adjusted net 
capital reflects that the firm's obligation to internalize financial 
losses associated with the investment of Customer Funds in Specified 
Foreign Sovereign Debt and Qualified ETFs.\678\
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    \671\ Final Commission regulation 1.25(a)(1)(v).
    \672\ Final Commission regulation 1.25(c)(1).
    \673\ Final Commission regulation 1.25(a)(1)(v).
    \674\ Final Commission regulation 1.25(c)(8).
    \675\ 17 CFR 1.25(c)(5)(ii). The Commission has determined not 
to adopt the proposed revision to Commission regulation 
1.25(c)(5)(ii), which would have limited the ability to provide for 
the postponement of redemption and payment due to any of the 
circumstances listed in that subsection to Government MMFs.
    \676\ Id.
    \677\ SEC ETF Letter.
    \678\ See generally section IV.C. of this preamble for a 
discussion of the capital charges on Specified Foreign Sovereign 
Debt securities and shares of Qualified ETFs.
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    The Final Rule also imposes the same asset-based and issuer-based 
concentration limits to Qualified ETFs as it imposes on Permitted 
Government MMFs previously described in the preamble and further 
discussed below. A 50 percent concentration limit will apply to 
Qualified ETFs with at least $1 billion in assets and whose management 
companies have more than $25 billion in assets under management. The 
Final Rule further allows for a 10 percent concentration limit for 
Qualified ETFs with less than $1 billion in assets or which have a 
management company managing less than $25 billion in assets. The 
Commission is limiting investments of Customer Funds in any single 
family of Qualified ETFs to 25 percent and investments of Customer 
Funds in interests in an individual Qualified ETF to 10 percent of the 
total assets held in each of the segregated account classes of futures 
customer funds, Cleared Swaps Customer Collateral, and 30.7 customer 
funds.
a. Benefits
    Expanding the list of Permitted Investments to include Specified 
Foreign Sovereign Debt should benefit FCMs, DCOs, and market 
participants (including customers) by facilitating the management of 
risk associated with the acceptance of certain foreign currency 
deposits from customers to margin their trades, and should enable FCMs 
and DCOs to avoid certain risks and practical challenges in the 
handling of foreign currencies. Specifically, permitting FCMs and DCOs 
to invest foreign currencies deposited or owed to customers in 
identically denominated sovereign debt securities mitigates the risk 
that FCMs and DCOs face when converting foreign currencies to U.S. 
dollars to invest in Permitted Investments. The foreign currency risk 
arises from the FCMs' and DCOs' obligation to convert the Customer 
Funds from U.S. dollars back to the applicable foreign currencies when 
the margin deposits are returned to the customers.
    The investment of non-U.S. dollar-denominated Customer Funds in 
Specified Foreign Sovereign Debt further benefits FCMs, DCOs, and 
market participants by providing an option that may assist with the 
mitigation of potential risks associated with FCMs and DCOs holding 
Customer Funds in unsecured deposit accounts with domestic or foreign 
commercial banks. If the depository or custodian becomes insolvent, 
claims related to uninsured cash balances are at greater risk of being 
treated as unsecured claims against the depository estate as compared 
to claims to specific securities held in custody. As a result, FCMs and 
DCOs may face less counterparty exposure by maintaining Customer Funds 
in the form of securities as opposed to cash, which would benefit 
market participants (including customers) by providing greater security 
to the timely, full payment of Customer Funds held by an insolvent 
depository or custodian.
    Also, for reasons such as capital requirements and balance sheet 
management, banks may not accept foreign currencies at all or may place 
limits on the accepted amount. Banks may also charge higher rates for 
holding foreign currencies. As such, FCM customers depositing foreign 
currencies might potentially absorb those costs.
    Permitting investments in Specified Foreign Sovereign Debt also 
benefits FCMs that post customer margin collateral with non-U.S. 
clearing organizations that impose strict cut-off times for cash 
withdrawals and more lenient cut-off times for non-cash collateral 
withdrawals.\679\ In such situations, FCMs have broader access to the 
deposits of Customer Funds held in the form of Specified Foreign 
Sovereign Debt securities than they do when such deposits are in the 
form of cash.
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    \679\ Joint Petition at p. 3 (citing, as an example of 
regulatory requirements, Article 45 of the regulatory technical 
standards on requirements for central counterparties (Commission 
Delegated Regulation (EU) No. 153/2013) (``CCP RTS''), which 
supplements provisions in the EU Market Infrastructure Regulation 
(Regulation (EU) No 648/2012) (``EMIR'') governing the investment 
policies of EU central counterparties. Per Article 45(2) of the CCP 
RTS, not less than 95 percent of cash deposited other than with a 
central bank and maintained overnight must be deposited through 
arrangements that ensure its collateralization with highly liquid 
financial instruments).
---------------------------------------------------------------------------

    Further, expanding Permitted Investments to include Qualified ETFs 
should also benefit FCMs, DCOs, and market participants. As discussed 
in section IV.A.3. of this preamble, Qualified ETFs are passively 
managed funds that seek to replicate the performance of published 
short-term U.S. Treasury security indices. Qualified ETFs provide FCMs 
and DCOs with the ability to invest Customer Funds in funds that are 
primarily comprised of U.S. Treasury securities and avoid the costs 
associated with direct investments, which involves managing interest 
payments and the maturity of securities.
    The ability to invest in Specified Foreign Sovereign Debt and 
interests in Qualified ETFs will provide FCMs and DCOs with a wider 
range of alternatives in which to invest Customer Funds. As a result, 
FCMs and DCOs will have more investment options, some of which may be 
more economical than the existing Permitted Investments, such that FCMs 
and DCOs may be able to generate higher returns. In addition to 
allowing FCMs and DCOs to continue as viable businesses, this may 
motivate FCMs and DCOs to increase their presence in the commodity 
interest markets, thereby increasing competition, which might lead to a 
reduction in charges to customers and an increase trading activity and 
liquidity.
    Expanding the list of Permitted Investments to instruments that 
meet the overall regulatory goals of preserving principal and 
maintaining liquidity, while also providing the potential for greater 
diversification or higher returns for FCMs, DCOs and customers, will 
give FCMs and DCOs more flexibility in the management of Customer 
Funds. This might be particularly important given the more limited 
categories of assets that currently qualify as Permitted Investments 
under Commission regulation 1.25.
    Revising the Risk Disclosure Statement required by Commission 
regulation 1.55 to be provided to non-institutional or non-eligible 
contract participants customers to accurately reflect the types of 
instruments approved as Permitted Investments should benefit customers 
and potential customers. The final amendments to the Risk Disclosure 
Statement alert potential customers that, among other things, an FCM is 
permitted to invest Customer Funds in Permitted Investments detailed in 
Commission regulation 1.25, an FCM may retain earnings on such 
investments, and customers may obtain further detail regarding the 
FCM's policies for the investment of Customer Funds from the firm if 
needed.
    Also, requiring an FCM to apply capital charges on investments of 
Customer Funds in Specified Foreign Sovereign Debt and Qualified ETFs

[[Page 7861]]

should help to ensure that the FCM maintains a sufficient level of 
readily available liquid funds that could be transferred into the FCM's 
futures customer accounts, Cleared Swaps Customer Accounts, and/or 30.7 
customer accounts to cover decreases in value of the investments, which 
would support the FCM's continued compliance with Customer Funds 
segregation requirements.\680\ Requiring an FCM to maintain regulatory 
capital to cover potential decreases in the value of the Permitted 
Investments benefits the FCM by helping to ensure that the firm has 
sufficient, liquid financial resources to meet 100 percent of its 
obligations to futures customers, Cleared Swaps Customers, and 30.7 
customers at all times as required by Commission regulations 1.20, 
22.2, and 30.7. Capital charges on Permitted Investments also benefit 
FCM customers as the charges help ensure an FCM maintains capital in an 
amount sufficient to cover investment losses and to prevent such losses 
from being passed on to customers in violation of Commission 
regulations 1.29(b), 22.2(e)(1), and 30.7(i).
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    \680\ The terms ``futures account,'' ``Cleared Swaps Customer 
Account,'' and ``30.7 account'' are defined in Commission 
Regulations 1.3, 22.1, and 30.1, respectively. 17 CFR 1.3, 17 CFR 
22.1, and 17 CFR 30.1.
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    The Commission is also adopting new concentration limits for 
Qualified ETFs. The new concentration limits adopted by this Final Rule 
promote investments of Customer Funds in Qualified ETFs of different 
sizes subject to different concentration limits, leading to 
diversification in FCMs' and DCOs' portfolios, while encouraging 
investments in larger, presumably safer Qualified ETFs. The Commission 
is adopting different concentration limits depending on the size of the 
fund because larger Qualified ETFs may be more resilient during times 
of significant financial stress and better equipped to manage high 
levels of redemptions. The Final Rule's concentration limits may also 
reduce the potential concentration in certain Qualified ETFs, in turn 
fostering competition across the funds, which may lead to better terms 
and reduced costs for FCMs and DCOs.
    Finally, the amendment to Commission regulation 22.3(d), clarifying 
that DCOs are responsible for losses resulting from their investments 
of Customer Funds, provides legal certainty with respect to the 
Commission's customer protection regulations. Specifically, in 
situations where an investment made by either an FCM or DCO experiences 
a realized or unrealized loss in market value, the amended regulations 
make clear that the FCM or DCO, not the customer, is responsible for 
bearing the loss.
b. Costs
    Although the Final Rule increases the range of permissible 
investments in which DCOs and FCMs may invest Customers Funds, 
facilitating their management of investments and capital, the Final 
Rule may result in Customer Funds being invested in instruments that 
may be less liquid and have increased exposure to credit and market 
risks than those currently permitted under Commission regulation 1.25. 
Such risks could result in an increased exposure for FCMs and DCOs, 
who, pursuant to Commission regulations 1.29(b), 22.2(e)(1), 22.3(d), 
and 30.7(i), as applicable, are responsible for losses resulting from 
investments of Customer Funds. A heightened risk exposure may also 
indirectly impact customers if the losses compromise the FCM's or DCO's 
ability to return Customer Funds.
    To account for these potential risks and ensure that the new 
Permitted Investments are consistent with the general objectives of 
Commission regulation 1.25 of preserving principal and maintaining 
liquidity, the Commission is adopting several conditions for foreign 
sovereign debt and interests in U.S. Treasury ETFs to qualify as 
Permitted Investments. Specifically, for Specified Foreign Sovereign 
Debt, the conditions include: (i) investments may be made only in the 
sovereign debt of Canada, France, Germany, Japan, and the United 
Kingdom, which are members of the G7and represent the world's largest 
industrial democracies; (ii) investments may only be made in the 
sovereign debt of a particular country to the extent an FCM or DCO 
holds balances owed to customers denominated in the currency of the 
particular country; (iii) the credit default spread of the two-year 
debt instruments of the relevant foreign sovereign jurisdiction may not 
exceeds 45 BPS; (iv) the dollar-weighted average of the time-to-
maturity of the FCM's or DCO's portfolio of investments in each type of 
Specified Foreign Sovereign Debt may not exceed 60 calendar days; and 
(v) the remaining time-to-maturity of any individual Specified Foreign 
Sovereign Debt instrument may not exceed 180 calendar days.\681\ For 
interests in Qualified ETFs to be deemed Permitted Investments, the 
Commission is requiring, among other conditions, that the ETF is 
passively managed and seeks to replicate the performance of a published 
short-term U.S. Treasury security index composed of bonds, notes, and 
bills with a remaining time-to-maturity of 12 months or less, issued 
by, or unconditionally guaranteed as to timely payment of principal and 
interest by, the U.S. Department of the Treasury.\682\ The eligible 
securities and cash must also represent at least 95 percent of the 
Qualified ETF's investment portfolio.\683\ Moreover, as discussed 
above, the Final Rule would require FCMs to take capital charges based 
on the current market value of the Specified Foreign Sovereign Debt and 
Qualified ETFs to address the potential market risk of such 
investments. The capital charges are intended to ensure that an FCM has 
sufficient financial resources in the form of cash and other readily 
marketable collateral to adequately cover potential market risk of the 
investments, consistent with the FCM's obligation to bear any losses 
resulting from such investments.
---------------------------------------------------------------------------

    \681\ Final Commission regulation 1.25(f).
    \682\ Final Commission regulation 1.25(a)(1)(v).
    \683\ Final Commission regulation 1.25(c)(8)(ii).
---------------------------------------------------------------------------

    Requiring an FCM to apply capital charges in connection with the 
new categories of Permitted Investments will result in costs associated 
with reserving capital. The FCM may not be able to use funds reserved 
for capital to otherwise support its business operations, thus 
potentially making the operation of the FCM less economical. Capital 
requirements are nevertheless an essential risk-management feature of 
the FCM's regulatory regime, and the amounts reserved as capital are 
necessary and expected costs associated with operating an FCM.
    In addition, the clarifying amendment to Commission regulation 
22.3(d) should not result in increased costs for DCOs. The amendment 
expressly states a regulatory obligation that is consistent with the 
Commission's original intent to permit DCOs to invest Cleared Swaps 
Customer Collateral within the parameters applicable to investments of 
futures customer funds.\684\ DCOs already reserve or otherwise take 
into consideration financial resources to account for their 
responsibility to absorb losses for such investments.
---------------------------------------------------------------------------

    \684\ See supra note 43.
---------------------------------------------------------------------------

    Finally, as discussed earlier in this preamble, the Commission has 
retained its existing burden estimates associated with the approved 
collection of information for the reasons explained in section VII.B. 
of this preamble. FCMs and DCOs should not incur material costs 
relating to the collection of information as a result of the Final 
Rule.

[[Page 7862]]

c. Section 15(a) Factors
    In addition to the discussion above, the Commission has evaluated 
the costs and benefits of the Final Rule pursuant to the five 
considerations identified in section 15(a) of the Act as follows: (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 Final Rule should have a beneficial effect 
on sound risk management practices and on the protection of market 
participants and the public.
i. Protection of Market Participants and the Public
    The expansion of Permitted Investments to include Specified Foreign 
Sovereign Debt securities should enhance the protection of market 
participants and the public by providing FCMs and DCOs with the ability 
to manage risks associated with the receipt and holding of foreign 
currencies deposited as margin by customers. As discussed in section 
IV.2. of this preamble, FCMs hold approximately $64 billion of Customer 
Funds denominated in non-U.S. dollars, which represents approximately 
12 percent of the total $511 billion of Customer Funds held by FCMs. 
Investing these foreign currencies in foreign sovereign debt 
instruments meeting specified conditions provides FCMs and DCOs with a 
risk management tool to mitigate foreign currency exchange rate 
fluctuation risk that they would otherwise be exposed to if the foreign 
currency deposits had to be converted to U.S. dollars and then invested 
in U.S. dollar-denominated Permitted Investments. This risk mitigation 
protects market participants and the public by reducing exposures that 
FCMs and DCOs would otherwise face from investing foreign currency in 
U.S. dollar-denominated assets, and by reducing risk to customers of 
FCMs that would share pro rata in any shortfall in Customer Funds in 
the event of an insolvency. Providing FCMs and DCOs with efficient risk 
management tools also protects market participants and the public by 
supporting FCMs' and DCOs' ongoing ability to continue to provide 
access to the commodity interest markets.
    As discussed in section IV.2. of this preamble, to limit the 
potential risks associated with investing in foreign sovereign debt, 
the Commission is adding to the list of Permitted Investments only 
certain foreign sovereign debt instruments that meet strict conditions 
designed to ensure the instruments' liquidity. The Commission's 
analysis indicates that instruments meeting the specified conditions 
present credit and volatility characteristics that are comparable to 
those of instruments that already qualify as Permitted 
Investments.\685\ Thus, the current level of protection provided to 
Customer Funds will be maintained under the terms of this Final Rule.
---------------------------------------------------------------------------

    \685\ See supra note 238 (using one-year sovereign debt 
instruments yield data to demonstrate that the price risk of the 
Specified Foreign Sovereign Debt instruments is comparable to that 
of U.S. government securities), section IV.A.2 (using credit default 
swap data to demonstrate that the Specified Foreign Sovereign Debt 
instruments have a risk profile comparable to that of U.S. 
government securities) and Proposal at 81250 (using yield data to 
demonstrate that five ETFs currently available on the market, which 
invest in short-term U.S. Treasury securities, are at least as 
stable as one-year U.S. Treasury securities).
---------------------------------------------------------------------------

ii. Efficiency, Competitiveness, and Financial Integrity of Markets
    As discussed in the Proposal and in section IV.A. of this preamble, 
expanding the list of Permitted Investments may provide FCMs and DCOs 
with the ability to generate additional income for themselves and their 
customers from their investment of Customer Funds. This may motivate 
FCMs or DCOs to increase their presence in the futures and cleared 
swaps markets increasing competition, which might lead to lower 
commission charges and fees for customers. The increase in revenue for 
FCMs and DCOs may also increase earnings to customers as DCOs and FCMs 
often pay a return on customer deposited funds, and FCMs may otherwise 
share some or all of the income with customers.
    The increased range of Permitted Investments should provide 
investment flexibility to FCMs and DCOs and an opportunity to realize 
cost savings. More specifically, by being able to invest in Specified 
Foreign Sovereign Debt, FCMs and DCOs may be able to avoid practical 
challenges, such as having to meet clearing organizations' strict cut-
off times for cash withdrawal, or the additional fees for holding 
foreign currencies, imposed by some institutions. In addition, 
investing in Specified Foreign Sovereign Debt could be a safer 
alternative than holding cash at a commercial bank. It may also help 
avoid the foreign currency risk to which FCMs and DCOs may be exposed 
absent the ability to invest customer foreign currencies in identically 
denominated assets.
    In addition, Qualified ETFs may provide a simpler and cost-
efficient way of investing in U.S. Treasury securities, saving the 
resources that would otherwise be required to roll over such securities 
at their maturity.
iii. Price Discovery
    The Final Rule expands upon the types of investments that FCMs and 
DCOs may make with Customer Funds by including Specified Foreign 
Sovereign Debt securities and Qualified ETFs. The ability of FCMs and 
DCOs to invest Customer Funds in additional investments may generate 
additional income for FCMs and DCOs, which may lead to an increased 
participation in the commodity interest markets and thus enhance price 
discovery. Specifically, FCMs' main sources of revenue from engaging in 
the futures markets are commission income and income from the 
investment of Customer Funds. Therefore, an increase in income from the 
investment of Customer Funds may benefit market participants by 
indirectly offsetting or reducing commissions charged to customers. In 
addition, FCMs, pursuant to customer agreements, may provide customers 
with interest on their margin deposits, and therefore, an increase in 
revenue from the investment of Customer Funds may directly benefit 
customers via increased interest income on their deposits. DCOs also 
pay interest to FCMs on deposits held at the DCO, and greater interest 
income from such deposits may benefit an FCM and its customers. 
Increases in revenue may also encourage greater participation in the 
commodity interest markets by customers and by firms willing to take on 
the responsibilities of an FCM. Such greater participation in the 
commodity interest markets may increase liquidity in the market and 
enhance the process of price discovery.
iv. Sound Risk Management
    Increasing the range of Permitted Investments provides FCMs and 
DCOs with a broader selection of investment options to invest Customer 
Funds, enabling FCMs and DCOs to have more diversified portfolios and 
reduce the potential concentration in a few instruments. Providing safe 
alternative investment options may be particularly beneficial for FCMs 
and DCOs considering the limited range of instruments that meet the 
eligibility criteria of current Commission regulation 1.25 and the 
competing demand for high quality forms of collateral driven by the 
regulatory reforms implementing the Dodd-Frank Wall Street Reform and 
Consumer Protection Act of 2010.

[[Page 7863]]

    By making available Specified Foreign Sovereign Debt as a Permitted 
Investment, the Commission is providing FCMs and DCOs with an 
opportunity to better manage risks associated with holding foreign 
currencies deposited by customers. As noted above, investing Customer 
Funds in Specified Foreign Sovereign Debt provides an alternative to 
taking on the exposure of holding cash at a commercial bank. Also, 
absent the ability to invest Customer Funds in identically denominated 
sovereign debt securities, an FCM or DCO seeking to invest customer 
foreign currency deposits would need to convert the currencies to a 
U.S. dollar-denominated asset, which would increase the potential 
foreign currency risk. In addition, by limiting the investment of 
foreign currency to foreign sovereign debt that meets certain 
requirements, the Final Rule should further promote sound risk 
management. Lastly, requiring an FCM to reserve capital to cover 
potential decreases in the value of the Specified Foreign Sovereign 
Debt and Qualified ETFs helps ensure that an FCM has the financial 
resources to meet its regulatory obligations of bearing 100 percent of 
the losses on the investment of Customer Funds.
v. Other Public Interest Considerations
    Although the four factors mentioned above are the primary cost-
benefit considerations, other public interest considerations may also 
be relevant. For instance, in addition to the potential benefits that 
may accrue to FCMs, DCOs, and customers, benefits associated with the 
addition of Qualified ETFs to the list of Permitted Investments may 
also accrue to the general public, in that allowing FCMs and DCOs to 
invest Customer Funds in such instruments may contribute to a more 
robust market for U.S. Treasury ETFs. In addition, the expansion of 
Permitted Investments to include Specified Foreign Sovereign Debt may 
ease access to futures and cleared swaps markets for entities domiciled 
in non-U.S. jurisdictions that can now more easily transact in foreign 
currency with potentially lower costs and risk. This may provide 
additional hedging opportunities for entities and enhance market 
liquidity.
2. Government Money Market Funds, Commercial Paper and Corporate Notes 
or Bonds, and Certificates of Deposit Issued by Banks
    The Final Rule limits the scope of MMFs whose interests qualify as 
Permitted Investments to certain Government MMFs as defined by SEC Rule 
2a-7, revises the asset-based concentration limits applicable to 
Government MMFs, and adds issuer-based concentration limits for such 
funds.\686\ The Final Rule also removes from the list of Permitted 
Investments commercial paper and corporate notes or bonds guaranteed as 
to principal and interest by the United States under the TLGP. Finally, 
bank CDs are removed from the list of Permitted Investments due to a 
lack of use by FCMs and DCOs.\687\
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    \686\ Separately, as discussed in section VII.C.1. of this 
preamble, the Final Rule adds Qualified ETFs to the list of 
Permitted Investments and adopts concentration limits for such 
Qualified ETFs.
    \687\ Although commenters did not provide a specific reason for 
the lack of use of bank CDs, the Commission understands that few, if 
any, bank CDs meet the requirements in Commission regulation 
1.25(b)(v) that the CD is 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. 17 CFR 
1.25(b)(v). Thus, eliminating this investment option also aligns 
with the decision to eliminate certain government MMFs that elect to 
impose liquidity fees to stem redemptions.
---------------------------------------------------------------------------

a. Benefits
    The Final Rule removes interests in Prime MMFs and Electing 
Government MMFs from the list of Permitted Investments currently set 
forth in Commission regulation 1.25. Pursuant to the Final Rule, FCMs 
and DCOs are permitted to invest Customer Funds in interests of 
Permitted Government MMFs. As discussed in section IV.A.1. of this 
preamble, interests in Prime MMFs and Electing Government MMFs should 
not be Permitted Investments under Commission regulation 1.25 because 
such MMFs are subject to the SEC MMF Reforms, which include the ability 
of the fund to impose liquidity fees to stem redemptions, which could 
hinder the liquidity of the MMFs and adversely impact customers' access 
to their funds, which may be needed to meet margin calls on open 
positions or cash market transactions. The Final Rule, therefore, 
prevents investments of Customer Funds in MMFs that may pose 
unacceptable levels of liquidity risk.
    The Final Rule imposes asset-based concentration limits 
corresponding to the size of the Permitted Government MMFs and their 
management companies. A 50 percent concentration limit will apply to 
Government MMFs with at least $1 billion in assets and whose management 
companies have more than $25 billion in assets under management. The 
Final Rule retains the current 10 percent concentration limit for MMFs 
with less than $1 billion in assets or which have a management company 
managing less than $25 billion in assets.\688\ These concentration 
limits recognize that larger Government MMFs may be more resilient 
during times of significant financial stress and better equipped to 
manage high levels of redemptions. As such, these concentration limits 
should help to ensure that FCMs' and DCOs' investments in Permitted 
Government MMFs account for the level of liquidity, market, and credit 
risk posed by a fund in light of its capital base, portfolio holdings, 
and capacity to handle market stress.
---------------------------------------------------------------------------

    \688\ As discussed in section IV.B. of this preamble, the 
Commission is deleting the conjunction ``and'' in Commission 
regulation 1.25(b)(3)(i)(G), redesignated as Commission regulation 
1.25(b)(3)(i)(E) and revised to reflect other amendments adopted in 
this Final Rule, to clarify that the fund size threshold and the 
management company size threshold are to be construed as alternative 
prongs triggering the 10 percent limit.
---------------------------------------------------------------------------

    The new concentration limits adopted by this Final Rule promote 
investments of Customer Funds in Permitted Government MMFs of different 
sizes subject to different concentration limits, leading to 
diversification in FCMs' and DCOs' portfolios, while encouraging 
investments in larger, presumably safer Government MMFs. The Final 
Rule's concentration limits may also reduce the potential concentration 
in certain Permitted Government MMFs, in turn fostering competition 
across the funds, which may lead to better terms and reduced costs for 
FCMs and DCOs. In addition, the Commission is adopting issuer-based 
limits with the goal of mitigating potential risks associated with 
concentrating investments of Customer Funds in any single fund or 
family of Government MMFs such as the risk that access to Customer 
Funds may become restricted due to a cybersecurity or other operational 
incident affecting the fund. Specifically, the Commission is limiting 
investments of Customer Funds in any single family of Government MMFs 
to 25 percent and investments of Customer Funds in interests in an 
individual Government MMF to 10 percent of the total assets held in 
each of the segregated account classes of futures customer funds, 
Cleared Swaps Customer Collateral, and 30.7 customer funds. There are 
no precise concentration limits that can guarantee absolute protection 
against market volatility. The Commission's assessment is, however, 
that these limits represent a practical approach that takes the need to 
support the viability of FCMs' and DCOs' business model into account, 
while safeguarding the principal and liquidity of the Customer Funds.

[[Page 7864]]

    The Final Rule also revises the list of Permitted Investments in 
Commission regulation 1.25 to remove commercial paper and corporate 
notes or bonds guaranteed under the TLGP, to reflect that the TLGP 
expired in 2012 and, therefore, FCMs and DCOs have not been permitted 
to invest in such instruments since 2012. This amendment streamlines 
the Commission's rules, facilitating their implementation and 
administration, and is consistent with the Commission's earlier 
determination that commercial paper and corporate notes or bonds are 
rarely used and pose unacceptable levels of credit, liquidity, and 
market risk.\689\
---------------------------------------------------------------------------

    \689\ 2010 Proposed Permitted Investments Amendment at 67644.
---------------------------------------------------------------------------

    The Final Rule also removes bank CDs from the list of Permitted 
Investments. The Commission's experience administering Commission 
regulation 1.25 indicates that FCMs and DCOs have not invested Customer 
Funds in bank CDs. The Commission requested comment on the proposed 
elimination of bank CDs from the list of Permitted Investments. One 
commenter generally opposed the removal of bank CDs from the list of 
Permitted Investments, stating that the removal ``would not be 
beneficial,'' but other commenters supported the removal, including the 
FIA which stated that its member FCMs did not foresee investing 
Customer Funds in bank CDs.\690\ The Commission is removing bank CDs 
from the list of Permitted Investments in the Final Rule. Similar to 
the removal of commercial paper and corporate notes and bonds, the 
amendment will streamline the Commission's regulations and avoid 
potential confusion regarding the eligibility of bank CDs as Permitted 
Investments.
---------------------------------------------------------------------------

    \690\ ICE at p. 4; FIA/CME Joint Letter at pp. 20; Nodal at pp. 
3-4. In addition to the Commission's general experience in 
overseeing DCOs and FCMs, Commission staff also reviewed how FCMs 
invested customer funds as reported in the SIDR Report for the 
period September 15, 2022 to February 15, 2023 and observed that no 
FCMs reported investing customer funds in bank CDs.
---------------------------------------------------------------------------

b. Costs
    This Final Rule limits the scope of MMFs whose interests qualify as 
Permitted Investments to Permitted Government MMFs and could lead to 
less diversification in the investment of Customer Funds by FCMs and 
DCOs. FCMs' and DCOs' portfolios may be concentrated in the Permitted 
Government MMFs, increasing exposure to risks associated with the 
funds, which might heighten the risk of loss of Customer Funds. Also, 
because fewer MMFs would be available as Permitted Investments, FCMs 
and DCOs might have less flexibility in investing Customer Funds. FCMs 
and DCOs might thus generate lower returns and could pass on additional 
operational costs to customers by increasing their fees.
    The potential risk of concentration of investments in Permitted 
Government MMFs is nonetheless mitigated by the asset-based and issuer-
based concentration limits, which are designed to promote 
diversification among different categories of Permitted Investments and 
among different individual Permitted Government MMFs. Additionally, the 
potential risk of concentration of investments is mitigated by the 
addition of Qualified ETFs to the list of Permitted Investments, a 
viable alternative to Permitted Government MMFs allowing FCMs and DCOs 
to diversify their investment holdings.
    To meet the concentration limits adopted herein, FCMs and DCOs may 
be required to liquidate Government MMFs held in their portfolios and 
might incur losses. The risk of loss is likely to be mitigated because 
the Government MMFs permitted under Staff Letter 16-68 and Staff Letter 
16-69 are presumably highly liquid.\691\
---------------------------------------------------------------------------

    \691\ See 17 CFR 1.25(b)(1).
---------------------------------------------------------------------------

    The elimination of commercial paper and corporate notes or bonds 
guaranteed under the TLGP does not result in any costs as the 
instruments have not been available as Permitted Investments since 2012 
when the TLGP expired. Similarly, removing bank CDs does not result in 
an immediate potential cost because, in the Commission's experience, 
FCMs and DCOs do not currently invest Customer Funds in this type of 
instrument. Eliminating this investment option, however, may lead to 
potential long-term costs should this option become more economical for 
FCMs and DCOs.
c. Section 15(a) Considerations
    In light of the foregoing, the Commission has evaluated the costs 
and benefits of this Final Rule pursuant to the five considerations 
identified in section 15(a) of the Act as follows:
i. Protection of Market Participants and the Public
    The Final Rule removes interests in MMFs whose redemptions may be 
subject to liquidity fees, including Prime MMFs and Electing Government 
MMFs, from the list of Permitted Investments. The imposition of a 
liquidity fee conflicts with provisions in Commission regulation 1.25 
that are designed to reduce Customer Funds' exposure to liquidity risk 
and to preserve the principal of investments purchased with Customer 
Funds. As a result, by preventing investments in instruments that pose 
unacceptable levels of liquidity risk, the Final Rule provides greater 
protection to Customer Funds and promotes the efficient and safe 
investment of Customer Funds by FCMs and DCOs.
    The Final Rule also limits the scope of MMFs whose interests 
qualify as Permitted Investments to Government MMFs as defined by SEC 
Rule 2a-7. These types of funds are less susceptible to runs and have 
seen inflows during periods of market instability.\692\ Thus, limiting 
the scope of eligible MMFs to Government MMFs should reduce the 
possibility that funds in which Customer Funds are invested may be 
adversely affected by run risk and other associated risks. However, 
because there will be fewer MMFs that will qualify as Permitted 
Investments under the Final Rule, FCMs' and DCOs' investments may be 
concentrated in fewer MMFs and the investments may be more susceptible 
to concentration risk.
---------------------------------------------------------------------------

    \692\ SEC 2023 MMF Reforms at 51417 (investors typically view 
government MMFs, in contrast to Prime MMFs, as a relatively safe 
investment during times of market turmoil). See also Money Market 
Fund Reforms, 87 FR 7248 (Feb. 8, 2022) (``SEC 2023 MMF Reforms 
Proposing Release'') at 7250. During the 2008 financial crisis there 
was a run primarily on institutional Prime MMFs after an MMF ``broke 
the buck'' and suspended redemptions, which motivated many fund 
sponsors to step in and provide financial support to their funds. 
The events led to general turbulence in the financial markets and 
contributed to severe dislocations in short-term credit markets. Id.
---------------------------------------------------------------------------

    The asset-based concentration limits for Government MMFs and 
Qualified ETFs assign limits according to the size of the funds, with 
larger funds being subject to a 50 percent limit and smaller funds to a 
10 percent limit. These limits reflect that larger funds have capital 
bases better capable of handling a high volume of redemptions in times 
of stress. Accordingly, the concentration limits promote investments in 
larger funds, which by virtue of their size tend to be more resilient, 
while providing for diversification by permitting investments in 
smaller Government MMFs and Qualified ETFs subject to concentration 
limits intended to ensure the safety of Customer Funds. In addition, 
the issuer-based concentration limits promote diversification among 
different individual Government MMFs and Qualified ETFs, thus 
mitigating the potential risks associated with concentrating 
investments of Customer Funds with a single fund or family of funds.
    The implementation of these newly adopted concentration limits may

[[Page 7865]]

require FCMs and DCOs to liquidate their fund holdings, which could 
lead to losses. The potential for losses would be mitigated because 
since the issuance of Staff Letter 16-68 and Staff Letter 16-69 in 
2016, FCMs and DCOs have been allowed to invest only in Government MMFs 
meeting the liquidity standards of Commission regulation 1.25.
    By removing commercial paper and corporate notes or bonds 
guaranteed under the TLGP from the list of Permitted Investments under 
Commission regulation 1.25, the Final Rule eliminates instruments that 
are no longer available as a result of the expiration of the TLGP in 
2012. Deleting these investments from the list streamlines the 
Commission's rules and removes a potential source of confusion for the 
public and market participants. Because they are no longer Permitted 
Investments, maintaining these instruments in the list of Permitted 
Investments could cause misunderstanding among the public and market 
participants about the eligibility of these instruments as permissible 
investments of Customer Funds. By removing bank CDs, a type of 
instrument that is not used by FCMs and DCOs as an investment 
instrument, the Commission is also contributing to the ongoing effort 
to streamline the Commission's regulations and reduce the possibility 
of confusion.
ii. Efficiency, Competitiveness, and Financial Integrity of Markets
    By eliminating interests in Prime MMFs and Electing Government MMFs 
from the list of Permitted Investments, the Final Rule prevents 
investments of Customer Funds in instruments that may be less liquid 
due to the SEC MMF Reforms. The changes imposed by the SEC MMF Reforms 
may not allow FCMs and DCOs to redeem interests in Prime MMFs and 
Electing Government MMFs without a material discount in value. The 
exclusion of these types of investments will improve efficiency in the 
markets, especially at times of stress when liquidity fees may be 
imposed, and ensure that Permitted Investments are always consistent 
with Commission regulation 1.25's objectives of preserving principal 
and maintaining liquidity.
    As discussed above, the deletion of commercial paper and corporate 
notes or bonds guaranteed under the TLGP and bank CDs from the list of 
Permitted Investments removes investment instruments that are either no 
longer available or not used as an investment of Customer Funds, 
streamlining the Commission's regulations and contributing to their 
efficient implementation by market participants.
iii. Price Discovery
    The Final Rule, by reducing the range of products that qualify as 
Permitted Investments, results in fewer investment options available to 
FCMs and DCOs. This could cause FCMs and DCOs to generate less income 
from their investment of Customer Funds and pass the costs of 
operations onto customers by increasing commissions and other fees. 
Facing increased costs, customers may reduce trading, thereby reducing 
liquidity, which may hinder price discovery.
    The elimination of commercial paper and corporate notes or bonds 
guaranteed under the TLGP and bank CDs as Permitted Investments will 
not have an impact of this factor, because FCMs and DCOs have not 
invested Customer Funds in these instruments for several years.
iv. Sound Risk Management
    By deleting interests in Prime MMFs and Electing Government MMFs 
from the list of Permitted Investments, the Final Rule prohibits 
investment of Customers Funds in such MMFs, which should reduce 
liquidity risk in light of the SEC MMF Reforms, thus promoting sound 
risk management. Also, the concentration limits that will apply to the 
Permitted Government MMFs and Qualified ETFs should foster 
diversification in FCMs' and DCOs' portfolios by encouraging 
investments of Customer Funds in larger funds that the Commission 
anticipates would have the capacity to withstand significant market 
stress and increasing redemptions, while making available smaller funds 
subject to specified concentration limits.
    The elimination of commercial paper and corporate notes or bonds 
guaranteed under the TLGP and bank CDs as Permitted Investments will 
not have an impact of this factor.
v. Other Public Interest Considerations
    The relevant cost-benefit considerations are captured in the four 
factors above.
3. SOFR as a Permitted Benchmark
    In March 2021, the U.K. FCA announced that LIBOR would be 
effectively discontinued.\693\ As a result of the transition from LIBOR 
to SOFR, the Commission is replacing LIBOR with SOFR as a permitted 
benchmark for variable and floating rate securities that qualify as 
Permitted Investments under Commission regulation 1.25. Under the terms 
of the Final Rule, adjustable rate securities would qualify as a 
Permitted Investment if, among other conditions, they reference a SOFR 
Rate published by the FRBNY or a CME Term SOFR Rate published by the 
CME Group Benchmark Administration Limited.
---------------------------------------------------------------------------

    \693\ Staff Letter 21-26 at p. 1.
---------------------------------------------------------------------------

a. Benefits
    Currently under Commission regulation 1.25(b)(2)(iv)(A), Permitted 
Investments may have a variable or floating rate of interest, provided 
that the interest rate correlates to specified benchmarks, including 
LIBOR.\694\ As discussed in section IV.A.5. of this preamble, a number 
of enforcement actions concerning attempts to manipulate the LIBOR 
benchmark led to a loss of confidence in the reliability and robustness 
of LIBOR and to the benchmark's discontinuation. The Commission 
therefore is amending Commission regulation 1.25 to remove LIBOR as a 
permitted benchmark and to replace it with SOFR. Accordingly, the 
replacement of LIBOR with SOFR, which has been identified as a 
preferred benchmark alternative by the ARRC,\695\ should help to ensure 
that Customer Funds invested in Permitted Investments with adjustable 
rates of interest reference a reliable and robust benchmark providing 
greater protection to Customer Funds.
---------------------------------------------------------------------------

    \694\ 17 CFR 1.25(b)(2)(iv)(A).
    \695\ See Staff Letter 21-26 at p. 3.
---------------------------------------------------------------------------

b. Costs
    Given the widespread use of LIBOR as a benchmark, FCMs and DCOs 
that invest Customer Funds in Permitted Investments with variable and 
fixed rate securities might incur costs associated with the transition 
to SOFR. To the extent that FCMs and DCOs already invest in Permitted 
Investments with variable and fixed rate securities benchmarked to 
LIBOR, they would need to amend the terms of their agreements to 
incorporate the new benchmark. If they have not done so already, FCMs 
and DCOs may also need to adjust their systems and processes to 
implement and recognize SOFR as a benchmark.
c. Section 15(a) Considerations
    In light of the foregoing, the Commission has evaluated the costs 
and benefits of the Final Rule pursuant to the five considerations 
identified in section 15(a) of the Act as follows:

[[Page 7866]]

i. Protection of Market Participants and the Public
    LIBOR is no longer a reliable and robust benchmark. By eliminating 
LIBOR as a permitted benchmark, the Final Rule prevents investments of 
Customer Funds in securities referencing an unreliable benchmark and 
promotes the use of a safer, more accurate benchmark alternative.
ii. Efficiency, Competitiveness, and Financial Integrity of Markets
    By codifying the use of SOFR as a permitted benchmark for Permitted 
Investments in which Customer Funds may be invested, the Final Rule 
conforms to current market developments, facilitates the transition to 
SOFR and reflects the phasing out of LIBOR, which is no longer 
published and deemed unreliable, removing a potential source of risk to 
the financial system.\696\
---------------------------------------------------------------------------

    \696\ The replacement of LIBOR as a benchmark for Permitted 
Investments represents another step in the Commission's efforts to 
facilitate the transition away from LIBOR, as illustrated by a 
recent amendment to the clearing requirements. See generally 
Clearing Requirement Determination Under Section 2(h) of the 
Commodity Exchange Act for Interest Rate Swaps to Account for the 
Transition from LIBOR and Other IBORs to Alternative Reference 
Rates, 87 FR 52182 (Aug. 24, 2022) (replacing the requirement to 
clear interest rate swaps referencing LIBOR and certain other 
interbank offered rates with the requirement to clear interest rate 
swaps referencing overnight, nearly risk-free reference rates).
---------------------------------------------------------------------------

    In addition, SOFR is now an essential benchmark that helps to 
ensure the stability and integrity of financial markets. Thus, 
codifying SOFR as a permitted benchmark for permitted investments may 
enhance the financial integrity of markets.
iii. Price Discovery
    The replacement of LIBOR with SOFR as a permitted benchmark may 
have a positive impact on price discovery. By replacing an obsolete 
benchmark, LIBOR, with the now widely accepted benchmark, SOFR, FCMs 
and DCOs should have a greater opportunity to invest in variable or 
floating rate instruments that reference SOFR. The opportunity to 
invest in instruments referencing SOFR may encourage greater 
participation in the commodity interest markets, thereby increasing 
liquidity in the markets and enhancing the process of price discovery.
iv. Sound Risk Management
    By eliminating LIBOR as a permitted benchmark and replacing it with 
SOFR, the Final Rule ensures that to the extent FCMs and DCOs select 
variable and floating rate securities as Permitted Investments to 
invest Customer Funds, these instruments reference benchmarks that are, 
in the Commission's view, sound and reliable, thus fostering sound risk 
management.
v. Other Public Interest Considerations
    The relevant cost-benefit considerations are captured in the four 
factors above.
4. Revision of the Read-Only Access Provisions
    The Final Rule eliminates the Read-only Access Provisions in parts 
1 and 30 of the Commission's regulations,\697\ which currently require 
FCMs to ensure that depositories holding Customer Funds provide the 
Commission with direct, read-only electronic access to such accounts.
---------------------------------------------------------------------------

    \697\ The relevant provisions appear in Commission regulation 
1.20, appendix A to Commission regulation 1.20, appendix A to 
Commission regulation 1.26, Commission regulation 30.7 and 
appendices E and F to part 30 of CFTC's regulations. The amendments 
also extend to Commission regulation 22.5, which requires FCMs and 
DCOs, before depositing Cleared Swaps Customer Collateral with a 
depository, to obtain an acknowledgment letter from each depository 
in accordance with Commission regulations 1.20 and 1.26. 17 CFR 
22.5(a). Commission regulation 22.5 further requires FCMs and DCOs 
to adhere to all requirements specified in Commission regulation 
1.20 and 1.26 regarding retaining, permitting access to filing, or 
amending the written acknowledgment letters. 17 CFR 22.5(a).
---------------------------------------------------------------------------

a. Benefits
    Eliminating the Read-only Access Provisions streamlines the CFTC 
rules, facilitating their implementation and administration, and is 
consistent with the Commission's expectation that the existence of 
alternative methods for obtaining and verifying account balance 
information will diminish the need to rely on the direct read-only 
access to accounts. By relying on CME's and NFA's daily segregation 
confirmation and verification process, the Commission can allocate 
resources to more immediate regulatory concerns within its 
jurisdictional purview. As discussed in section IV.E. of this preamble, 
the Commission has encountered numerous practical challenges in the 
administration of direct access to depository accounts. These 
challenges unduly burden the Commission's resources, particularly when 
one considers that the Commission contemplated that the use of real-
time access would be limited. That is, the practical challenges prevent 
Commission staff from using the Read-only Access Provisions as 
intended.
    In addition, eliminating the requirement to provide the Commission 
with direct, read-only access to accounts maintained by FCMs, reduces 
costs for depositories, which may motivate these institutions to more 
readily take FCM Customer Funds on deposit, thereby lowering the bar to 
entry for new FCMs. The Final Rule may thus foster competition in the 
futures market and ultimately reduce costs for FCMs and their 
customers.
    Furthermore, the deletion of the Read-only Access Provisions 
eliminates the need for the Commission to keep a log of access 
credentials and physical authentication devices, thereby reducing the 
potential cybersecurity risk associated with the maintenance of such 
credentials and devices.
b. Costs
    Withdrawing the requirement that depositories provide the 
Commission with direct, read-only electronic access to depository 
accounts holding Customer Funds deprives the Commission from ongoing, 
instantaneous access to the accounts for purposes of identifying 
potential discrepancies between the account balance information 
reported by the FCMs and the account balance information available 
directly from the depositories.
    More efficient means for identifying discrepancies in the account 
balance information exist: obtaining account balance and transaction 
information through CME's and NFA's automated daily segregation 
confirmation system or by requesting the information directly from the 
depositories.
c. Section 15(a) Considerations
    In light of the foregoing, the Commission has evaluated the costs 
and benefits of the Final Rule pursuant to the five considerations 
identified in section 15(a) of the Act as follows:
i. Protection of Market Participants and the Public
    The Final Rule removes the requirement to provide the Commission 
with direct, read-only access to depository accounts. This change 
eliminates the potential cybersecurity risk associated with the 
maintenance of access credentials and authentication devices, thus 
limiting risk for market participants and the public.
    CME's and NFA's automated daily segregation confirmation system 
provides an efficient and effective method for verifying customer 
account balances, which, in conjunction with the Commission's right to 
request information from the depositories, protects market participants 
and the public.

[[Page 7867]]

ii. Efficiency, Competitiveness, and Financial Integrity of Markets
    By eliminating the Read-only Access Provisions, the Commission has 
dispensed with a method for verifying account balance information that 
imposes technological challenges in its implementation and 
administration, permitting Commission staff to direct its efforts to 
more effective alternative means for verifying the information.
    In addition, depositories holding Customer Funds will no longer 
have to provide and continuously update the login information necessary 
for Commission staff's access to the accounts or to train Commission 
staff on how to access their systems. This will reduce the burden on 
depository service providers and make the Commission's surveillance of 
accounts more efficient. Streamlining these processes may motivate 
depositories to more readily hold FCM Customer Funds, potentially 
fostering competition with respect to depository services provided to 
FCMs and ultimately reducing costs for such FCMs.
iii. Price Discovery
    The Final Rule, by eliminating the requirement for depositories to 
provide the Commission with read-only access to accounts maintained by 
FCMs, may reduce operational costs for depositories, which may 
ultimately lead to cost reductions that benefit both depositories and 
FCMs. The FCMs may, in turn, pass those benefits to customers via 
reduced charges.
iv. Sound Risk Management
    As previously noted, CME and NFA have developed a sophisticated 
system--the automated daily segregation confirmation system--which 
provides DSROs and the Commission with an efficient tool for detection 
of potential discrepancies between FCMs' daily segregation statements 
and the balances reported by the various depositories holding Customer 
Funds. Although the Commission is eliminating the Read-only Access 
Provisions, the Commission will continue to rely on CME's and NFA's 
automated system for oversight purposes. Thus, the amendment should not 
be detrimental to sound risk management practices.
    Furthermore, as noted above, the deletion of the Read-only Access 
Provisions eliminates a potential cybersecurity risk associated with 
the maintenance by the Commission of periodically updated access 
credentials and physical authentication devices, thus promoting sound 
risk management.
v. Other Public Interest Considerations
    The relevant cost-benefit considerations are captured in the four 
factors above.
    The Commission requested public comment on its cost-benefit 
considerations, including the section 15(a) factors described above. 
The Commission received no specific comments on this part of the 
Proposal in response to this request.

D. Antitrust Considerations

    Section 15(b) of the Act requires the Commission to take into 
consideration the public interest to be protected by the antitrust laws 
and endeavor to take the least anticompetitive means of achieving the 
purposes of the Act, in issuing any order or adopting any Commission 
rule or regulation (including any exemption under section 4(c) or 
4c(b)), or in requiring or approving any bylaw, rule or regulation of a 
contract market or registered futures association established pursuant 
to section 17 of the Act.\698\
---------------------------------------------------------------------------

    \698\ 7 U.S.C. 19(b).
---------------------------------------------------------------------------

    The Commission believes that the public interest to be protected by 
the antitrust laws is generally to protect competition. In the 
Proposal, the Commission requested comment on whether: (i) the Proposal 
implicates any other specific public interest to be protected by the 
antitrust laws; (ii) the Proposal is anticompetitive and, if it is, 
what the anticompetitive effects are; (iii) whether there are less 
anticompetitive means of achieving the relevant purposes of the Act 
that would otherwise be served by adopting the Proposal.\699\ The 
Commission did not receive comments on the anticompetitive effects of 
the Proposal.
---------------------------------------------------------------------------

    \699\ Proposal at 81273.
---------------------------------------------------------------------------

    The Commission has considered the Final Rule to determine whether 
it is anticompetitive and has identified no anticompetitive effects. 
Because the Commission has determined that the Final Rule is not 
anticompetitive and has no anticompetitive effects, the Commission has 
not identified any less anticompetitive means of achieving the purposes 
of the Act.

List of Subjects

17 CFR Part 1

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

17 CFR Part 22

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

17 CFR Part 30

    Consumer protection.

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

PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

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

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


Sec.  1.20  [Amended]

0
2. Amend Sec.  1.20 by:
0
a. Removing the cross-reference to ``Appendix A to Sec.  1.20'' and 
adding in its place ``appendix C to this part'' in paragraph (d)(2);
0
b. Removing and reserving paragraph (d)(3); and
0
c. Removing the cross-reference to ``Appendix B to Sec.  1.20'' and 
adding in its place ``appendix D to this part'' in paragraph 
(g)(4)(ii);

Appendices C and D to Part 1

0
3. Further amend Sec.  1.20 by redesignating appendices A and B to 
Sec.  1.20 as appendices C and D to part 1, respectively.

0
4. Amend Sec.  1.25 by:
0
a. Revising and republishing the paragraph (a) heading and paragraph 
(a)(1) introductory text;
0
b. Removing paragraphs (a)(1)(iv) through (vi);
0
c. Redesignating paragraph (a)(1)(vii) as new paragraph (a)(1)(iv) and 
revising it;
0
d. Adding new paragraphs (a)(1)(v) and (a)(1)(vi);
0
e. Revising and republishing paragraph (b) introductory text and the 
paragraph (b)(2) heading;
0
f. Revising paragraph (b)(2)(i) introductory text;
0
g. Revising and republishing paragraph (b)(2)(iv)(A) introductory text;
0
h. Revising paragraphs (b)(2)(iv)(A)(1) and (2);
0
i. Removing paragraphs (b)(2)(v) and (vi);
0
j. Republishing the paragraph (b)(3) heading;
0
k. Removing paragraph (b)(3)(i)(C);
0
l. Redesignating paragraphs (b)(3)(i)(D) and (E) as paragraphs 
(b)(3)(i)(C) and (D);
0
m. Revising newly redesignated paragraph (b)(3)(i)(D);
0
n. Removing paragraph (b)(3)(i)(F);

[[Page 7868]]

0
o. Redesignating paragraph (b)(3)(i)(G) as (b)(3)(i)(E);
0
p. Revising newly redesignated paragraph (b)(3)(i)(E) and paragraphs 
(b)(3)(ii)(B) through (E), (b)(4)(i), (c) introductory text, and 
(c)(1);
0
q. Removing ``The appendix to this section'' and adding in its place 
``Appendix E to this part'' in paragraph (c)(7);
0
r. Adding paragraph (c)(8);
0
s. Republishing paragraph (d) introductory text;
0
t. Revising paragraphs (d)(2) and (7); and
0
u. Adding paragraph (f).
    The republications, revisions, and additions read as follows:


Sec.  1.25  Investment of customer funds.

    (a) Permitted investments. (1) Subject to the terms and conditions 
set forth in this section, a futures commission merchant or a 
derivatives clearing organization may invest customer money in the 
following instruments (permitted investments):
* * * * *
    (iv) Interests in government money market funds as defined in Sec.  
270.2a-7 of this title, provided that the government money market funds 
do not choose to rely on the ability to impose discretionary liquidity 
fees consistent with the requirements of 17 CFR 270.2a-
7(c)(2)(i)(government money market fund);
    (v) Interests in exchange-traded funds, as defined in 17 CFR 
270.6c-11, which seek to replicate the performance of a published 
short-term U.S. Treasury security index composed of bonds, notes, and 
bills with a remaining maturity of 12 months or less, issued by, or 
unconditionally guaranteed as to the timely payment of principal and 
interest by, the U.S. Department of the Treasury (U.S. Treasury 
exchange-traded fund); and
    (vi) General obligations of Canada, France, Germany, Japan, and the 
United Kingdom (permitted foreign sovereign debt), subject to the 
following:
    (A) A futures commission merchant may invest in the permitted 
foreign sovereign debt of a country to the extent the futures 
commission merchant has balances in segregated accounts owed to its 
customers denominated in that country's currency; and
    (B) A derivatives clearing organization may invest in the permitted 
foreign sovereign debt of a country to the extent the derivatives 
clearing organization has balances in segregated accounts owed to its 
clearing members that are futures commission merchants denominated in 
that country's currency.
* * * * *
    (b) General terms and conditions. A futures commission merchant or 
a derivatives clearing organization is required to manage the permitted 
investments consistent with the objectives of preserving principal and 
maintaining liquidity and according to the following specific 
requirements:
* * * * *
    (2) Restrictions on instrument features. (i) With the exception of 
government money market funds and U.S. Treasury exchange-traded funds, 
no permitted investment may contain an embedded derivative of any kind, 
except as follows:
* * * * *
    (iv)(A) Adjustable rate securities are permitted, subject to the 
following requirements:
    (1) The interest payments on variable rate securities must 
correlate closely and on an unleveraged basis to a benchmark of either 
the Federal Funds target or effective rate, the prime rate, the three-
month Treasury Bill rate, a Secured Overnight Financing Rate published 
by the Federal Reserve Bank of New York or a CME Term SOFR Rate 
published by the CME Group Benchmark Administration Limited, or the 
interest rate of any fixed rate instrument that is a permitted 
investment listed in paragraph (a)(1) of this section;
    (2) The interest payment, in any period, on floating rate 
securities must be determined solely by reference, on an unleveraged 
basis, to a benchmark of either the Federal Funds target or effective 
rate, the prime rate, the three-month Treasury Bill rate, a Secured 
Overnight Financing Rate published by the Federal Reserve Bank of New 
York or a CME Term SOFR Rate published by the CME Group Benchmark 
Administration Limited, or the interest rate of any fixed rate 
instrument that is a permitted investment listed in paragraph (a)(1) of 
this section;
* * * * *
    (3) Concentration--
    (i) * * *
    (D) Investments in government money market funds or U.S. Treasury 
exchange-traded funds with $1 billion or more in assets and whose 
management company manages $25 billion or more in assets may not exceed 
50 percent of the total assets held in segregation by the futures 
commission merchant or derivatives clearing organization.
    (E) Investments in government money market funds or U.S. Treasury 
exchange-traded funds with less than $1 billion in assets or which have 
a management company managing less than $25 billion in assets, may not 
exceed 10 percent of the total assets held in segregation by the 
futures commission merchant or derivatives clearing organization.
    (ii) * * *
    (B) Securities of any single issuer of municipal securities held by 
a futures commission merchant or derivatives clearing organization may 
not exceed 5 percent of the total assets held in segregation by the 
futures commission merchant or derivatives clearing organization.
    (C) Interests in any single family of government money market funds 
or U.S. Treasury exchange-traded funds may not exceed 25 percent of the 
total assets held in segregation by the futures commission merchant or 
derivatives clearing organization.
    (D) Interests in any individual government money market fund or 
U.S. Treasury exchange-traded fund may not exceed 10 percent of the 
total assets held in segregation by the futures commission merchant or 
derivatives clearing organization.
    (E) For purposes of determining compliance with the issuer-based 
concentration limits set forth in this section, securities issued by 
entities that are affiliated, as defined in paragraph (b)(5) of this 
section, shall be aggregated and deemed the securities of a single 
issuer. An interest in a permitted government money market fund or U.S. 
Treasury exchange-traded fund is not deemed to be a security issued by 
its sponsoring entity.
* * * * *
    (4) Time-to-maturity. (i) Except for investments in government 
money market funds, U.S. Treasury exchange-traded funds, and permitted 
foreign sovereign debt subject to the requirements of paragraph (f) of 
this section, the dollar-weighted average of the time-to-maturity of 
the portfolio, as that average is computed pursuant to 17 CFR 270.2a-7, 
may not exceed 24 months.
* * * * *
    (c) Government money market funds and U.S. Treasury exchange-traded 
funds. The following provisions will apply to the investment of 
customer funds in government money market funds or U.S. Treasury 
exchange-traded funds (the fund).
    (1) The fund must be an investment company that is registered under 
the Investment Company Act of 1940 with the Securities and Exchange 
Commission and that holds itself out to investors as a government money 
market fund, in accordance with 17 CFR

[[Page 7869]]

270.2a-7, or an exchange-traded fund, in accordance with 17 CFR 270.6c-
11.
* * * * *
    (8) A futures commission merchant or derivatives clearing 
organization may invest in interests in U.S. Treasury exchange-traded 
funds if:
    (i) The U.S. Treasury exchange-traded fund invests at least 95 
percent of its assets in securities comprising the short-term U.S. 
Treasury index whose performance the fund seeks to replicate and cash; 
and
    (ii) The purchase and liquidation of interests in the fund conform 
to the following requirements:
    (A) Primary market transactions. The futures commission merchant or 
derivatives clearing organization purchases or redeems interests in the 
fund on a delivery versus payment basis at a price based on the net 
asset value computed in accordance with the Investment Company Act of 
1940 and regulations thereunder. A futures commission merchant or 
derivatives clearing organization that is an authorized participant of 
the fund may redeem interests in the fund in kind, provided that the 
futures commission merchant or derivatives clearing organization is 
able to convert the securities received pursuant to the in-kind 
redemption into cash within one business day of the redemption request. 
A futures commission merchant or derivatives clearing organization that 
transacts with the fund through an authorized participant acting as an 
agent for the futures commission merchant or derivatives clearing 
organization must have a contractual agreement obligating the 
authorized participant to pay the futures commission merchant's or 
derivatives clearing organization's redemption of interests in the fund 
in cash within one business day of the redemption request.
    (B) Secondary market transactions. The futures commission merchant 
or derivatives clearing organization acquires or sells interests in the 
fund on a national securities exchange registered with the Securities 
and Exchange Commission under section 6 of the Securities Exchange Act 
of 1934.
    (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:
* * * * *
    (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 
dealer registered with the Securities and Exchange Commission or which 
has filed notice pursuant to section 15C(a) of the Government 
Securities Act of 1986. In addition, with respect to agreements to 
repurchase or resell permitted foreign sovereign debt, the following 
entities are also permitted counterparties: a foreign bank that 
qualifies as a depository under Sec.  1.49(d)(3) and that is located in 
a money center country as the term is defined in Sec.  1.49(a)(1) or in 
another jurisdiction that has adopted the currency in which the 
permitted foreign sovereign debt is denominated as its currency; a 
securities broker or dealer located in a money center country as the 
term is defined in Sec.  1.49(a)(1) and that is regulated by a national 
financial regulator or a provincial financial regulator with respect to 
a Canadian securities broker or dealer; and the Bank of Canada, the 
Bank of England, the Banque de France, the Bank of Japan, the Deutsche 
Bundesbank, or the European Central Bank.
* * * * *
    (7) Securities transferred to the futures commission merchant or 
derivatives clearing organization under the agreement are held in a 
safekeeping account with a bank as referred to in paragraph (d)(2) of 
this section, a Federal Reserve Bank, a derivatives clearing 
organization, or the Depository Trust Company in an account that 
complies with the requirements of Sec.  1.26. Securities transferred to 
the futures commission merchant or derivatives clearing organization 
under an agreement related to permitted foreign sovereign debt may also 
be held in a safekeeping account that complies with the requirements of 
Sec.  1.26 at a foreign bank that meets the location and qualification 
requirements in Sec.  1.49(c) and (d), or with the Bank of Canada, the 
Bank of England, the Banque de France, the Bank of Japan, the Deutsche 
Bundesbank, or the European Central Bank.
* * * * *
    (f) Permitted foreign sovereign debt. The following provisions will 
apply to investments of customer funds in permitted foreign sovereign 
debt.
    (1) The dollar-weighted average of the remaining time-to-maturity 
of the portfolio of investments in permitted foreign sovereign debt, as 
that average is computed pursuant to 17 CFR 270.2a-7 on a country-by-
country basis, may not exceed 60 calendar days. Permitted foreign 
sovereign debt instruments acquired under an agreement to resell shall 
be deemed to have a maturity equal to the period remaining until the 
date on which the resale of the underlying instruments is scheduled to 
occur, or, where the agreement is subject to demand, the notice period 
applicable to a demand for the resale of the securities. Permitted 
foreign sovereign debt instruments sold under an agreement to 
repurchase shall be included in the calculation of the dollar-weighted 
average based on the remaining time-to-maturity of each instrument 
sold.
    (2) A futures commission merchant or a derivatives clearing 
organization may not invest customer funds in any permitted foreign 
sovereign debt that has a remaining maturity greater than 180 calendar 
days.
    (3) If the two-year credit default spread, computed as the average 
of the bid and ask prices between willing buyers and sellers, of an 
issuing sovereign of permitted foreign sovereign debt is greater than 
45 basis points:
    (i) The futures commission merchant or derivatives clearing 
organization shall not make any new investments in that sovereign's 
debt using customer funds.
    (ii) The futures commission merchant or derivatives clearing 
organization must discontinue investing customer funds in that 
sovereign's debt through agreements to resell as soon as practicable 
under the circumstances.

Appendix E to Part 1

0
5. Section 1.25 is further amended by redesignating the appendix to 
Sec.  1.25 as appendix E to part 1.


Sec.  1.26  [Amended]

0
6. Amend Sec.  1.26 in the paragraphs designated in the left column of 
the following table by removing the words indicated in the middle 
column from wherever they appear in the paragraph and adding in their 
place the words indicated in the right column.

[[Page 7870]]



------------------------------------------------------------------------
            Paragraph                   Remove                Add
------------------------------------------------------------------------
(a).............................  ``money market      ``government money
                                   mutual funds''.     market funds.''
(b).............................  ``money market      ``government money
                                   mutual fund''.      market fund.''
(b).............................  ``appendix A or B   ``appendix F or G
                                   to this section''.  to this part.''
(b).............................  ``appendix A or B   ``appendix C or D
                                   to Sec.   1.20''.   to this part.''
------------------------------------------------------------------------

Appendices F and G to Part 1

0
7. Section 1.26 is further amended by redesignating appendix A to Sec.  
1.26 as appendix F to part 1 and appendix B to Sec.  1.26 as appendix G 
to part 1.

0
8. Amend Sec.  1.32 by:
0
a. Removing paragraph (f)(3)(iv);
0
b. Redesignating paragraphs (f)(3)(v) through (vii) as paragraphs 
(f)(3)(iv) through (vi); and
0
c. Revising newly redesignated paragraphs (f)(3)(iv) through (vi).
    The revisions read as follows:


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

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

0
9. Amend Sec.  1.55 by revising paragraph (b)(6) to read as follows:


Sec.  1.55  Public disclosures by futures commission merchants.

* * * * *
    (b) * * *
    (6) The funds you deposit with a futures commission merchant may be 
invested by the futures commission merchant in certain types of 
financial instruments that have been approved by the Commission for the 
purpose of such investments. Permitted investments are listed in 
Commission Regulation 1.25 (17 CFR 1.25) and include: U.S. government 
securities; municipal securities; certain money market funds; certain 
foreign sovereign debt; and U.S. Treasury exchange-traded funds. The 
futures commission merchant may retain the interest and other earnings 
realized from its investment of customer funds. You should be familiar 
with the types of financial instruments that a futures commission 
merchant may invest customer funds in.
* * * * *

0
10. Revise newly redesignated appendix C to part 1 to read as follows:

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

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

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

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

    You acknowledge that we have opened or will open the above-
referenced Account(s) for the purpose of depositing, as applicable, 
money, securities and other property (collectively the ``Funds'') of 
customers who trade commodities, options, swaps, and other products, 
as required by Commodity Futures Trading Commission (``CFTC'') 
Regulations, including Regulation 1.20, as amended; that the Funds 
held by you, hereafter deposited in the Account(s) or accruing to 
the credit of the Account(s), will be separately accounted for and 
segregated on your books from our own funds and from any other funds 
or accounts held by us in accordance with the provisions of the 
Commodity Exchange Act, as amended (the ``Act''), and part 1 of the 
CFTC's regulations, as amended; and that the Funds must otherwise be 
treated in accordance with the provisions of section 4d of the Act 
and CFTC regulations thereunder.
    Furthermore, you acknowledge and agree that such Funds may not 
be used by you or by us to secure or guarantee any obligations that 
we might owe to you, and they may not be used by us to secure or 
obtain credit from you. You further acknowledge and agree that the 
Funds in the Account(s) shall not be subject to any right of offset 
or lien for or on account of any indebtedness, obligations or 
liabilities we may now or in the future have owing to you. This 
prohibition does not affect your right to recover funds advanced in 
the form of cash transfers, lines of credit, repurchase agreements 
or other similar liquidity arrangements you make in lieu of 
liquidating non-cash assets held in the Account(s) or in lieu of 
converting cash held in the Account(s) to cash in a different 
currency.
    In addition, you agree that the Account(s) may be examined at 
any reasonable time by the Director of the Market Participants 
Division of the CFTC or the Director of the Division of Clearing and 
Risk of the CFTC, or any successor divisions, or such Directors' 
designees, or an appropriate officer, agent or employee of our 
designated self-regulatory organization (``DSRO''), [Name of DSRO], 
and this letter constitutes the authorization and direction of the 
undersigned on our behalf to permit any such examination to take 
place without further notice to or consent from us.
    You agree to reply promptly and directly to any request for 
confirmation of account balances or provision of any other 
information regarding or related to the Account(s) from the Director 
of the Market Participants Division of the CFTC or the Director of 
the Division of Clearing and Risk of the CFTC, or any successor 
divisions, or such Directors' designees, or an appropriate officer, 
agent, or employee of [Name of DSRO], acting in its capacity as our 
DSRO, and this letter constitutes the authorization and direction of 
the undersigned on our behalf to release the requested information 
without further notice to or consent from us.
    The parties agree that all actions on your part to respond to 
the above information request will be made in accordance with, and 
subject to, such usual and customary authorization verification and 
authentication policies and procedures as may be employed by you to 
verify the authority of, and authenticate the identity of, the 
individual making any such information request, in order to provide 
for the secure transmission and delivery of the requested 
information to the appropriate recipient(s). We will not hold you 
responsible for acting pursuant to any information request from the 
Director of the Market Participants Division of the CFTC or the 
Director of the Division of Clearing and Risk of the CFTC, or any 
successor divisions, or such Directors' designees, or an appropriate 
officer, agent, or employee of [Name of DSRO], acting in its 
capacity as our DSRO, upon which you have relied after having taken 
measures in accordance with your applicable policies and procedures 
to assure that such request was provided to you by an individual 
authorized to make such a request.
    In the event that we become subject to either a voluntary or 
involuntary petition for relief under the U.S. Bankruptcy Code, we 
acknowledge that you will have no obligation to release the Funds 
held in the Account(s), except upon instruction of the Trustee in 
Bankruptcy or pursuant to the Order of the respective U.S. 
Bankruptcy Court.
    Notwithstanding anything in the foregoing to the contrary, 
nothing contained herein

[[Page 7871]]

shall be construed as limiting your right to assert any right of 
offset or lien on assets that are not Funds maintained in the 
Account(s), or to impose such charges against us or any proprietary 
account maintained by us with you. Further, it is understood that 
amounts represented by checks, drafts or other items shall not be 
considered to be part of the Account(s) until finally collected. 
Accordingly, checks, drafts and other items credited to the 
Account(s) and subsequently dishonored or otherwise returned to you 
or reversed, for any reason, and any claims relating thereto, 
including but not limited to claims of alteration or forgery, may be 
charged back to the Account(s), and we shall be responsible to you 
as a general endorser of all such items whether or not actually so 
endorsed.
    You may conclusively presume that any withdrawal from the 
Account(s) and the balances maintained therein are in conformity 
with the Act and CFTC regulations without any further inquiry, 
provided that, in the ordinary course of your business as a 
depository, you have no notice of or actual knowledge of a potential 
violation by us of any provision of the Act or the CFTC regulations 
that relates to the segregation of customer funds; and you shall not 
in any manner not expressly agreed to herein be responsible to us 
for ensuring compliance by us with such provisions of the Act and 
CFTC regulations; however, the aforementioned presumption does not 
affect any obligation you may otherwise have under the Act or CFTC 
regulations.
    You may, and are hereby authorized to, obey the order, judgment, 
decree or levy of any court of competent jurisdiction or any 
governmental agency with jurisdiction, which order, judgment, decree 
or levy relates in whole or in part to the Account(s). In any event, 
you shall not be liable by reason of any action or omission to act 
pursuant to any such order, judgment, decree or levy, to us or to 
any other person, firm, association or corporation even if 
thereafter any such order, decree, judgment or levy shall be 
reversed, modified, set aside or vacated.
    The terms of this letter agreement shall remain binding upon the 
parties, their successors and assigns and, for the avoidance of 
doubt, regardless of a change in the name of either party. This 
letter agreement supersedes and replaces any prior agreement between 
the parties in connection with the Account(s), including but not 
limited to any prior acknowledgment letter agreement, to the extent 
that such prior agreement is inconsistent with the terms hereof. In 
the event of any conflict between this letter agreement and any 
other agreement between the parties in connection with the 
Account(s), this letter agreement shall govern with respect to 
matters specific to section 4d of the Act and the CFTC's regulations 
thereunder, as amended.
    This letter agreement shall be governed by and construed in 
accordance with the laws of [Insert governing law] without regard to 
the principles of choice of law.
    Please acknowledge that you agree to abide by the requirements 
and conditions set forth above by signing and returning to us the 
enclosed copy of this letter agreement, and that you further agree 
to provide a copy of this fully executed letter agreement directly 
to the CFTC (via electronic means in a format and manner determined 
by the CFTC) and to [Name of DSRO], acting in its capacity as our 
DSRO. We hereby authorize and direct you to provide such copies 
without further notice to or consent from us, no later than three 
business days after opening the Account(s) or revising this letter 
agreement, as applicable.

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

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

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

* * * * *

0
12. Revise newly redesignated appendix F to part 1 to read as follows:

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

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

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

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

    You acknowledge that we are holding these funds, including any 
shares issued and amounts accruing in connection therewith 
(collectively, the ``Shares''), for the benefit of customers who 
trade commodities, options, swaps and other products (``Commodity 
Customers''), as required by Commodity Futures Trading Commission 
(``CFTC'') Regulation 1.26, as amended; that the Shares held by you, 
hereafter deposited in the Account(s) or accruing to the credit of 
the Account(s), will be separately accounted for and segregated on 
your books from our own funds and from any other funds or accounts 
held by us in accordance with the provisions of the Commodity 
Exchange Act, as amended (the ``Act''), and part 1 of the CFTC's 
regulations, as amended; and that the Shares must otherwise be 
treated in accordance with the provisions of section 4d of the Act 
and CFTC regulations thereunder.
    Furthermore, you acknowledge and agree that the Shares are in a 
fund that holds itself out to investors as a government money market 
fund, in accordance with 17 CFR 270.2a-7. In addition, you 
acknowledge and agree that the Shares are in a fund that does not 
choose to rely on the ability to impose discretionary liquidity fees 
consistent with the requirements of 17 CFR 270.2a-7(c)(2)(i).
    Furthermore, you acknowledge and agree that such Shares may not 
be used by you or by us to secure or guarantee any obligations that 
we might owe to you, and they may not be used by us to secure or 
obtain credit from you. You further acknowledge and agree that the 
Shares in the Account(s) shall not be subject to any right of offset 
or lien for or on account of any indebtedness, obligations or 
liabilities we may now or in the future have owing to you.
    In addition, you agree that the Account(s) may be examined at 
any reasonable time by the Director of the Market Participants 
Division of the CFTC or the Director of the Division of Clearing and 
Risk of the CFTC, or any successor divisions, or such Directors' 
designees, or an appropriate officer, agent or employee of our 
designated self-regulatory organization (``DSRO''), [Name of DSRO], 
and this letter constitutes the authorization and direction of the 
undersigned on our behalf to permit any such examination to take 
place without further notice to or consent from us.
    You agree to reply promptly and directly to any request for 
confirmation of account balances or provision of any other account 
information regarding or related to the Account(s) from the Director 
of the Market Participants Division of the CFTC or the Director of 
the Division of Clearing and Risk of the CFTC, or any successor 
divisions, or such Directors' designees, or an appropriate officer, 
agent, or employee of [Name of DSRO], acting in its capacity as our 
DSRO, and this letter constitutes the authorization and direction of 
the undersigned on our behalf to release the requested information 
without further notice to or consent from us.
    The parties agree that all actions on your part to respond to 
the above information request will be made in accordance with, and 
subject to, such usual and customary authorization verification and 
authentication policies and procedures as may be employed by you to 
verify the authority of, and authenticate the identity of, the 
individual making any such information request, in order to provide 
for the secure transmission and delivery of the requested 
information to the appropriate recipient(s).
    We will not hold you responsible for acting pursuant to any 
information request from the Director of the Market Participants 
Division of the CFTC or the Director of the Division of Clearing and 
Risk of the CFTC, or any successor divisions, or such Directors'

[[Page 7872]]

designees, or an appropriate officer, agent, or employee of [Name of 
DSRO], acting in its capacity as our DSRO, upon which you have 
relied after having taken measures in accordance with your 
applicable policies and procedures to assure that such request was 
provided to you by an individual authorized to make such a request.
    In the event we become subject to either a voluntary or 
involuntary petition for relief under the U.S. Bankruptcy Code, we 
acknowledge that you will have no obligation to release the Shares 
held in the Account(s), except upon instruction of the Trustee in 
Bankruptcy or pursuant to the Order of the respective U.S. 
Bankruptcy Court.
    Notwithstanding anything in the foregoing to the contrary, 
nothing contained herein shall be construed as limiting your right 
to assert any right of offset or lien on assets that are not Shares 
maintained in the Account(s), or to impose such charges against us 
or any proprietary account maintained by us with you. Further, it is 
understood that amounts represented by checks, drafts or other items 
shall not be considered to be part of the Account(s) until finally 
collected. Accordingly, checks, drafts and other items credited to 
the Account(s) and subsequently dishonored or otherwise returned to 
you or reversed, for any reason and any claims relating thereto, 
including but not limited to claims of alteration or forgery, may be 
charged back to the Account(s), and we shall be responsible to you 
as a general endorser of all such items whether or not actually so 
endorsed.
    You may conclusively presume that any withdrawal from the 
Account(s) and the balances maintained therein are in conformity 
with the Act and CFTC regulations without any further inquiry, 
provided that, in the ordinary course of your business as a 
depository, you have no notice of or actual knowledge of a potential 
violation by us of any provision of the Act or the CFTC regulations 
that relates to the segregation of customer funds; and you shall not 
in any manner not expressly agreed to herein be responsible to us 
for ensuring compliance by us with such provisions of the Act and 
CFTC regulations; however, the aforementioned presumption does not 
affect any obligation you may otherwise have under the Act or CFTC 
regulations.
    You may, and are hereby authorized to, obey the order, judgment, 
decree or levy of any court of competent jurisdiction or any 
governmental agency with jurisdiction, which order, judgment, decree 
or levy relates in whole or in part to the Account(s). In any event, 
you shall not be liable by reason of any action or omission to act 
pursuant to such order, judgment, decree or levy, to us or to any 
other person, firm, association or corporation even if thereafter 
any such order, decree, judgment or levy shall be reversed, 
modified, set aside or vacated.
    We are permitted to invest customers' funds in government money 
market funds pursuant to CFTC Regulation 1.25. That rule sets forth 
the following conditions, among others, with respect to any 
investment in a government money market fund:
    (1) The net asset value of the fund must be computed by 9 a.m. 
of the business day following each business day and be made 
available to us by that time;
    (2) The fund must be legally obligated to redeem an interest in 
the fund and make payment in satisfaction thereof by the close of 
the business day following the day on which we make a redemption 
request except as otherwise specified in CFTC Regulation 
1.25(c)(5)(ii); and,
    (3) The agreement under which we invest customers' funds must 
not contain any provision that would prevent us from pledging or 
transferring fund shares.
    The terms of this letter agreement shall remain binding upon the 
parties, their successors and assigns, and for the avoidance of 
doubt, regardless of a change in the name of either party. This 
letter agreement supersedes and replaces any prior agreement between 
the parties in connection with the Account(s), including but not 
limited to any prior acknowledgment letter agreement, to the extent 
that such prior agreement is inconsistent with the terms hereof. In 
the event of any conflict between this letter agreement and any 
other agreement between the parties in connection with the 
Account(s), this letter agreement shall govern with respect to 
matters specific to section 4d of the Act and the CFTC's regulations 
thereunder, as amended.
    This letter agreement shall be governed by and construed in 
accordance with the laws of [Insert governing law] without regard to 
the principles of choice of law.
    Please acknowledge that you agree to abide by the requirements 
and conditions set forth above by signing and returning to us the 
enclosed copy of this letter agreement, and that you further agree 
to provide a copy of this fully executed letter agreement directly 
to the CFTC (via electronic means in a format and manner determined 
by the CFTC) and to [Name of DSRO], acting in its capacity as our 
DSRO, in accordance with CFTC Regulation 1.20. We hereby authorize 
and direct you to provide such copies without further notice to or 
consent from us, no later than three business days after opening the 
Account(s) or revising this letter agreement, as applicable.

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

0
13. Revise newly redesignated appendix G to part 1 to read as follows:

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

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

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

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

    You acknowledge that we are holding these funds, including any 
shares issued and amounts accruing in connection therewith 
(collectively, the ``Shares''), for the benefit of customers who 
trade commodities, options, swaps and other products, as required by 
Commodity Futures Trading Commission (``CFTC'') Regulation 1.26, as 
amended; that the Shares held by you, hereafter deposited in the 
Account(s) or accruing to the credit of the Account(s), will be 
separately accounted for and segregated on your books from our own 
funds and from any other funds or accounts held by us in accordance 
with the provisions of the Commodity Exchange Act, as amended (the 
``Act''), and part 1 of the CFTC's regulations, as amended; and that 
the Shares must otherwise be treated in accordance with the 
provisions of section 4d of the Act and CFTC regulations thereunder.
    Furthermore, you acknowledge and agree that the Shares are in a 
fund that holds itself out to investors as a government money market 
fund, in accordance with 17 CFR 270.2a-7. In addition, you 
acknowledge and agree that the Shares are in a fund that does not 
choose to rely on the ability to impose discretionary liquidity fees 
consistent with the requirements of 17 CFR 270.2a-7(c)(2)(i).
    Furthermore, you acknowledge and agree that such Shares may not 
be used by you or by us to secure or guarantee any obligations that 
we might owe to you, and they may not be used by us to secure or 
obtain credit from you. You further acknowledge and agree that the 
Shares in the Account(s) shall not be subject to any right of offset 
or lien for or on account of any indebtedness, obligations or 
liabilities we may now or in the future have owing to you.
    You agree to reply promptly and directly to any request for 
confirmation of account balances or provision of any other 
information regarding or related to the Account(s) from the Director 
of the Division of Clearing and Risk of the CFTC or the Director of 
the Market Participants Division of the CFTC, or any successor 
divisions, or such Directors' designees, and this letter constitutes 
the authorization and direction of the undersigned on our behalf to 
release the requested information without further notice to or 
consent from us.
    The parties agree that all actions on your part to respond to 
the above information requests will be made in accordance with, and 
subject to, such usual and customary authorization verification and 
authentication policies and procedures as may be employed

[[Page 7873]]

by you to verify the authority of, and authenticate the identity of, 
the individual making any such information request, in order to 
provide for the secure transmission and delivery of the requested 
information to the appropriate recipient(s).
    We will not hold you responsible for acting pursuant to any 
information request from the Director of the Division of Clearing 
and Risk of the CFTC or the Director of the Market Participants 
Division of the CFTC, or any successor divisions, or such Directors' 
designees, upon which you have relied after having taken measures in 
accordance with your applicable policies and procedures to assure 
that such request was provided to you by an individual authorized to 
make such a request.
    In the event that we become subject to either a voluntary or 
involuntary petition for relief under the U.S. Bankruptcy Code, we 
acknowledge that you will have no obligation to release the Shares 
held in the Account(s), except upon instruction of the Trustee in 
Bankruptcy or pursuant to the Order of the respective U.S. 
Bankruptcy Court.
    Notwithstanding anything in the foregoing to the contrary, 
nothing contained herein shall be construed as limiting your right 
to assert any right of offset or lien on assets that are not Shares 
maintained in the Account(s), or to impose such charges against us 
or any proprietary account maintained by us with you. Further, it is 
understood that amounts represented by checks, drafts or other items 
shall not be considered to be part of the Account(s) until finally 
collected. Accordingly, checks, drafts and other items credited to 
the Account(s) and subsequently dishonored or otherwise returned to 
you or reversed, for any reason, and any claims relating thereto, 
including but not limited to claims of alteration or forgery, may be 
charged back to the Account(s), and we shall be responsible to you 
as a general endorser of all such items whether or not actually so 
endorsed.
    You may conclusively presume that any withdrawal from the 
Account(s) and the balances maintained therein are in conformity 
with the Act and CFTC regulations without any further inquiry, 
provided that, in the ordinary course of your business as a 
depository, you have no notice of or actual knowledge of a potential 
violation by us of any provision of the Act or the CFTC regulations 
that relates to the segregation of customer funds; and you shall not 
in any manner not expressly agreed to herein be responsible to us 
for ensuring compliance by us with such provisions of the Act and 
CFTC regulations; however, the aforementioned presumption does not 
affect any obligation you may otherwise have under the Act or CFTC 
regulations.
    You may, and are hereby authorized to, obey the order, judgment, 
decree or levy of any court of competent jurisdiction or any 
governmental agency with jurisdiction, which order, judgment, decree 
or levy relates in whole or in part to the Account(s). In any event, 
you shall not be liable by reason of any action or omission to act 
pursuant to any such order, judgment, decree or levy, to us or to 
any other person, firm, association or corporation even if 
thereafter any such order, decree, judgment or levy shall be 
reversed, modified, set aside or vacated.
    We are permitted to invest customers' funds in government money 
market funds pursuant to CFTC Regulation 1.25. That rule sets forth 
the following conditions, among others, with respect to any 
investment in a government money market fund:
    (1) The net asset value of the fund must be computed by 9 a.m. 
of the business day following each business day and be made 
available to us by that time;
    (2) The fund must be legally obligated to redeem an interest in 
the fund and make payment in satisfaction thereof by the close of 
the business day following the day on which we make a redemption 
request except as otherwise specified in CFTC Regulation 
1.25(c)(5)(ii); and,
    (3) The agreement under which we invest customers' funds must 
not contain any provision that would prevent us from pledging or 
transferring fund shares.
    The terms of this letter agreement shall remain binding upon the 
parties, their successors and assigns and, for the avoidance of 
doubt, regardless of a change in the name of either party. This 
letter agreement supersedes and replaces any prior agreement between 
the parties in connection with the Account(s), including but not 
limited to any prior acknowledgment letter agreement, to the extent 
that such prior agreement is inconsistent with the terms hereof. In 
the event of any conflict between this letter agreement and any 
other agreement between the parties in connection with the 
Account(s), this letter agreement shall govern with respect to 
matters specific to section 4d of the Act and the CFTC's regulations 
thereunder, as amended.
    This letter agreement shall be governed by and construed in 
accordance with the laws of [Insert governing law] without regard to 
the principles of choice of law.
    Please acknowledge that you agree to abide by the requirements 
and conditions set forth above by signing and returning to us the 
enclosed copy of this letter agreement, and that you further agree 
to provide a copy of this fully executed letter agreement directly 
to the CFTC (via electronic means in a format and manner determined 
by the CFTC) in accordance with CFTC Regulation 1.20. We hereby 
authorize and direct you to provide such copy without further notice 
to or consent from us, no later than three business days after 
opening the Account(s) or revising this letter agreement, as 
applicable.

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

PART 22--CLEARED SWAPS

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

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

0
15. Amend Sec.  22.2 by:
0
a. Removing paragraph (g)(5)(iii)(D);
0
b. Redesignating paragraphs (g)(5)(iii)(E) through (G) as paragraphs 
(g)(5)(iii)(D) through (F); and
0
c. Revising newly redesignated paragraphs (g)(5)(iii)(D) through (F) to 
read as follows:


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

* * * * *
    (g) * * *
    (5) * * *
    (iii) * * *
    (D) Permitted foreign sovereign debt by country:
    (1) Canada;
    (2) France;
    (3) Germany;
    (4) Japan;
    (5) United Kingdom;
    (E) Interests in U.S. Treasury exchange-traded funds; and
    (F) Interests in government money market funds.
* * * * *

0
16. Amend Sec.  22.3 by revising paragraph (d) to read as follows:


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

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

PART 30--FOREIGN FUTURES AND FOREIGN OPTIONS TRANSACTIONS

0
17. The authority citation for part 30 continues to read as follows:

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

0
18. Amend Sec.  30.7 by:
0
a. Revising paragraphs (d)(2) and (3);
0
b. Removing paragraph (l)(5)(iii)(D);
0
c. Redesignating paragraphs (l)(5)(iii)(E) through (G) as paragraphs 
(l)(5)(iii)(D) through (F); and
0
d. Revising newly redesignated paragraphs (l)(5)(iii)(D) through (F).

[[Page 7874]]

    The revisions read as follows:


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

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

0
19. Revise appendix E to part 30 to read as follows:

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

[Date]
[Name and Address of Depository]

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

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

    You acknowledge that we have opened or will open the above-
referenced Account(s) for the purpose of depositing, as applicable, 
money, securities and other property (collectively ``Funds'') of 
customers who trade foreign futures and/or foreign options (as such 
terms are defined in U.S. Commodity Futures Trading Commission 
(``CFTC'') Regulation 30.1, as amended; that the Funds held by you, 
hereafter deposited in the Account(s) or accruing to the credit of 
the Account(s), will be kept separate and apart and separately 
accounted for on your books from our own funds and from any other 
funds or accounts held by us, in accordance with the provisions of 
the Commodity Exchange Act, as amended (the ``Act''), and part 30 of 
the CFTC's regulations, as amended; that the Funds may not be 
commingled with our own funds in any proprietary account we maintain 
with you; and that the Funds must otherwise be treated in accordance 
with the provisions of section 4(b) of the Act and CFTC Regulation 
30.7.
    Furthermore, you acknowledge and agree that such Funds may not 
be used by you or by us to secure or guarantee any obligations that 
we might owe to you, and they may not be used by us to secure or 
obtain credit from you. You further acknowledge and agree that the 
Funds in the Account(s) shall not be subject to any right of offset 
or lien for or on account of any indebtedness, obligations or 
liabilities we may now or in the future have owing to you. This 
prohibition does not affect your right to recover funds advanced in 
the form of cash transfers, lines of credit, repurchase agreements 
or other similar liquidity arrangements you make in lieu of 
liquidating non-cash assets held in the Account(s) or in lieu of 
converting cash held in the Account(s) to cash in a different 
currency.
    In addition, you agree that the Account(s) may be examined at 
any reasonable time by the Director of the Market Participants 
Division of the CFTC or the Director of the Division of Clearing and 
Risk of the CFTC, or any successor divisions, or such Directors' 
designees, or an appropriate officer, agent or employee of our 
designated self-regulatory organization (``DSRO''), [Name of DSRO], 
and this letter constitutes the authorization and direction of the 
undersigned on our behalf to permit any such examination to take 
place without further notice or consent from us.
    You agree to reply promptly and directly to any request for 
confirmation of account balances or provision of any other 
information regarding or related to the Account(s) from the Director 
of the Market Participants Division of the CFTC or the Director of 
the Division of Clearing and Risk of the CFTC, or any successor 
divisions, or such Directors' designees, or an appropriate officer, 
agent, or employee of [Name of DSRO], acting in its capacity as our 
DSRO, and this letter constitutes the authorization and direction of 
the undersigned on our behalf to release the requested information 
without further notice to or consent from us.
    The parties agree that all actions on your part to respond to 
the above information request will be made in accordance with, and 
subject to, such usual and customary authorization verification and 
authentication policies and procedures as may be employed by you to 
verify the authority of, and authenticate the identity of, the 
individual making any such information request, in order to provide 
for the secure transmission and delivery of the requested 
information to the appropriate recipient(s).
    We will not hold you responsible for acting pursuant to any 
information request from the Director of the Market Participants 
Division of the CFTC or the Director of the Division of Clearing and 
Risk of the CFTC, or any successor divisions, or such Directors' 
designees, or an appropriate officer, agent, or employee of [Name of 
DSRO], acting in its capacity as our DSRO, upon which you have 
relied after having taken measures in accordance with your 
applicable policies and procedures to assure that such request was 
provided to you by an individual authorized to make such a request.
    In the event we become subject to either a voluntary or 
involuntary petition for relief under the U.S. Bankruptcy Code, we 
acknowledge that you will have no obligation to release the Funds 
held in the Account(s), except upon instruction of the Trustee in 
Bankruptcy or pursuant to the Order of the respective U.S. 
Bankruptcy Court.
    Notwithstanding anything in the foregoing to the contrary, 
nothing contained herein shall be construed as limiting your right 
to assert any right of offset or lien on assets that are not 30.7 
customer funds maintained in the Account(s), or to impose such 
charges against us or any proprietary account maintained by us with 
you. Further, it is understood that amounts represented by checks, 
drafts or other items shall not be considered to be part of the 
Account(s) until finally collected. Accordingly, checks, drafts and 
other items credited to the Account(s) and subsequently dishonored 
or otherwise returned to you or reversed, for any reason, and any 
claims relating thereto, including but not limited to claims of 
alteration or forgery, may be charged back to the Account(s), and we 
shall be responsible to you as a general endorser of all such items 
whether or not actually so endorsed.
    You may conclusively presume that any withdrawal from the 
Account(s) and the balances maintained therein are in conformity 
with the Act and CFTC regulations without any further inquiry, 
provided that, in the ordinary course of your business as a 
depository, you have no notice of or actual knowledge of a potential 
violation by us of any provision of the Act or part 30 of the CFTC 
regulations that relates to the holding of customer funds; and you 
shall not in any manner not expressly agreed to herein be 
responsible to us for ensuring compliance by us with such provisions 
of the Act and CFTC regulations; however, the aforementioned 
presumption does not affect any obligation you may otherwise have 
under the Act or CFTC regulations.

[[Page 7875]]

    You may, and are hereby authorized to, obey the order, judgment, 
decree or levy of any court of competent jurisdiction or any 
governmental agency with jurisdiction, which order, judgment, decree 
or levy relates in whole or in part to the Account(s). In any event, 
you shall not be liable by reason of any action or omission to act 
pursuant to any such order, judgment, decree or levy, to us or to 
any other person, firm, association or corporation even if 
thereafter any such order, decree, judgment or levy shall be 
reversed, modified, set aside or vacated.
    The terms of this letter agreement shall remain binding upon the 
parties, their successors and assigns and, for the avoidance of 
doubt, regardless of a change in the name of either party. This 
letter agreement supersedes and replaces any prior agreement between 
the parties in connection with the Account(s), including but not 
limited to any prior acknowledgment letter agreement, to the extent 
that such prior agreement is inconsistent with the terms hereof. In 
the event of any conflict between this letter agreement and any 
other agreement between the parties in connection with the 
Account(s), this letter agreement shall govern with respect to 
matters specific to section 4(b) of the Act and the CFTC's 
regulations thereunder, as amended.
    This letter agreement shall be governed by and construed in 
accordance with the laws of [Insert governing law] without regard to 
the principles of choice of law.
    Please acknowledge that you agree to abide by the requirements 
and conditions set forth above by signing and returning to us the 
enclosed copy of this letter agreement, and that you further agree 
to provide a copy of this fully executed letter agreement directly 
to the CFTC (via electronic means in a format and manner determined 
by the CFTC) and to [Name of DSRO], acting in its capacity as our 
DSRO. We hereby authorize and direct you to provide such copies 
without further notice to or consent from us, no later than three 
business days after opening the Account(s) or revising this letter 
agreement, as applicable.

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

0
20. Revise appendix F to part 30 to read as follows:

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

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

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

Account Number(s): [ ]
(collectively, the ``Account(s)'').
    You acknowledge that we are holding these funds, including any 
shares issued and amounts accruing in connection therewith 
(collectively, the ``Shares''), for the benefit of customers who 
trade foreign futures and/or foreign options (as such terms are 
defined in U.S. Commodity Futures Trading Commission (``CFTC'') 
Regulation 30.1, as amended); that the Shares held by you, hereafter 
deposited in the Account(s) or accruing to the credit of the 
Account(s), will be kept separate and apart and separately accounted 
for on your books from our own funds and from any other funds or 
accounts held by us in accordance with the provisions of the 
Commodity Exchange Act, as amended (the ``Act''), and this part, as 
amended; and that the Shares must otherwise be treated in accordance 
with the provisions of section 4(b) of the Act and CFTC Regulations 
1.25 and 30.7.
    Furthermore, you acknowledge and agree that the Shares are in a 
fund that holds itself out to investors as a government money market 
fund, in accordance with 17 CFR 270.2a-7. In addition, you 
acknowledge and agree that the Shares are in a fund that does not 
choose to rely on the ability to impose discretionary liquidity fees 
consistent with the requirements of 17 CFR 270.2a-7(c)(2)(i).
    Furthermore, you acknowledge and agree that such Shares may not 
be used by you or by us to secure or guarantee any obligations that 
we might owe to you, and they may not be used by us to secure or 
obtain credit from you. You further acknowledge and agree that the 
Shares in the Account(s) shall not be subject to any right of offset 
or lien for or on account of any indebtedness, obligations or 
liabilities we may now or in the future have owing to you.
    In addition, you agree that the Account(s) may be examined at 
any reasonable time by the Director of the Market Participants 
Division of the CFTC or the Director of the Division of Clearing and 
Risk of the CFTC, or any successor divisions, or such Directors' 
designees, or an appropriate officer, agent or employee of our 
designated self-regulatory organization (``DSRO''), [Name of DSRO], 
and this letter constitutes the authorization and direction of the 
undersigned on our behalf to permit any such examination to take 
place without further notice to or consent from us.
    You agree to reply promptly and directly to any request for 
confirmation of account balances or provision of any other 
information regarding or related to the Account(s) from the Director 
of the Market Participants Division of the CFTC or the Director of 
the Division of Clearing and Risk of the CFTC, or any successor 
divisions, or such Directors' designees, or an appropriate officer, 
agent, or employee of [Name of DSRO], acting in its capacity as our 
DSRO, and this letter constitutes the authorization and direction of 
the undersigned on our behalf to release the requested information, 
without further notice to or consent from us.
    The parties agree that all actions on your part to respond to 
the above information request will be made in accordance with, and 
subject to, such reasonable and customary authorization verification 
and authentication policies and procedures as may be employed by you 
to verify the authority of, and authenticate the identity of, the 
individual making any such information request, in order to provide 
for the secure transmission and delivery of the requested 
information to the appropriate recipient(s).
    We will not hold you responsible for acting pursuant to any 
information request from the Director of the Market Participants 
Division of the CFTC or the Director of the Division of Clearing and 
Risk of the CFTC, or any successor divisions, or such Directors' 
designees, or an appropriate officer, agent, or employee of [Name of 
DSRO], acting in its capacity as our DSRO, upon which you have 
relied after having taken measures in accordance with your 
applicable policies and procedures to assure that such request was 
provided to you by an individual authorized to make such a request.
    In the event we become subject to either a voluntary or 
involuntary petition for relief under the U.S. Bankruptcy Code, we 
acknowledge that you will have no obligation to release the Shares 
held in the Account(s), except upon instruction of the Trustee in 
Bankruptcy or pursuant to the Order of the respective U.S. 
Bankruptcy Court.
    Notwithstanding anything in the foregoing to the contrary, 
nothing contained herein shall be construed as limiting your right 
to assert any right of offset or lien on assets that are not Shares 
maintained in the Account(s), or to impose such charges against us 
or any proprietary account maintained by us with you. Further, it is 
understood that amounts represented by checks, drafts or other items 
shall not be considered to be part of the Account(s) until finally 
collected. Accordingly, checks, drafts and other items credited to 
the Account(s) and subsequently dishonored or otherwise returned to 
you or reversed, for any reason and any claims relating thereto, 
including but not limited to claims of alteration or forgery, may be 
charged back to the Account(s), and we shall be responsible to you 
as a general endorser of all such items whether or not actually so 
endorsed.
    You may conclusively presume that any withdrawal from the 
Account(s) and the balances maintained therein are in conformity 
with the Act and CFTC regulations without any further inquiry, 
provided that, in the ordinary course of your business as a 
depository, you have no notice of or actual knowledge of a potential 
violation by us of any provision of the Act or part 30 of the CFTC 
regulations that relates to the holding of customer funds; and you 
shall not in any manner not expressly agreed to herein be 
responsible to us for ensuring compliance by us with such provisions 
of the Act and CFTC regulations; however, the

[[Page 7876]]

aforementioned presumption does not affect any obligation you may 
otherwise have under the Act or CFTC regulations.
    You may, and are hereby authorized to, obey the order, judgment, 
decree or levy of any court of competent jurisdiction or any 
governmental agency with jurisdiction, which order, judgment, decree 
or levy relates in whole or in part to the Account(s). In any event, 
you shall not be liable by reason of any action or omission to act 
pursuant to any such order, judgment, decree or levy, to us or to 
any other person, firm, association or corporation even if 
thereafter any such order, decree, judgment or levy shall be 
reversed, modified, set aside or vacated.
    We are permitted to invest customers' funds in government money 
market funds pursuant to CFTC Regulation 1.25. That rule sets forth 
the following conditions, among others, with respect to any 
investment in a government money market fund:
    (1) The net asset value of the fund must be computed by 9 a.m. 
of the business day following each business day and be made 
available to us by that time;
    (2) The fund must be legally obligated to redeem an interest in 
the fund and make payment in satisfaction thereof by the close of 
the business day following the day on which we make a redemption 
request except as otherwise specified in CFTC Regulation 
1.25(c)(5)(ii); and,
    (3) The agreement under which we invest customers' funds must 
not contain any provision that would prevent us from pledging or 
transferring fund shares.
    The terms of this letter agreement shall remain binding upon the 
parties, their successors and assigns and, for the avoidance of 
doubt, regardless of a change in the name of either party. This 
letter agreement supersedes and replaces any prior agreement between 
the parties in connection with the Account(s), including but not 
limited to any prior acknowledgment letter agreement, to the extent 
that such prior agreement is inconsistent with the terms hereof. In 
the event of any conflict between this letter agreement and any 
other agreement between the parties in connection with the 
Account(s), this letter agreement shall govern with respect to 
matters specific to section 4(b) of the Act and the CFTC's 
regulations thereunder, as amended.
    This letter agreement shall be governed by and construed in 
accordance with the laws of [Insert governing law] without regard to 
the principles of choice of law.
    Please acknowledge that you agree to abide by the requirements 
and conditions set forth above by signing and returning to us the 
enclosed copy of this letter agreement, and that you further agree 
to provide a copy of this fully executed letter agreement directly 
to the CFTC (via electronic means in a format and manner determined 
by the CFTC) and to [Name of DSRO], acting in its capacity as our 
DSRO. We hereby authorize and direct you to provide such copies 
without further notice to or consent from us, no later than three 
business days after opening the Account(s) or revising this letter 
agreement, as applicable.

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

    Issued in Washington, DC, on December 19, 2024, by the 
Commission.
Christopher Kirkpatrick,
Secretary of the Commission.

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

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

Appendix 1--Commission Voting Summary

    On this matter, Chairman Behnam and Commissioners Mersinger and 
Pham voted in the affirmative. Commissioner Goldsmith Romero voted 
in the negative. Commissioner Johnson abstained.

Appendix 2--Statement of Support of Chairman Rostin Behnam

    This final rule amending Commission regulations addressing the 
investment of Customer Funds (funds deposited by customers to margin 
futures, foreign futures, and cleared swap transactions) by futures 
commission merchants (FCMs) and derivatives clearing organizations 
(DCOs) (the ``Final Rule'') represents responsive and responsible 
government action. It preserves core regulatory objectives through 
practical application of time-tested standards developed over 
decades to promote market resiliency, risk mitigation, and customer 
protections.
    Financial regulation, unlike legislation, is designed to 
transition with and incorporate evolving market realities to 
preserve essential flexibilities in response to emerging market 
conditions, geopolitics, and economic policy. As with any 
principles-based regime, there are always concerns that our hands 
will provide no more than a feathery touch in the sway of prevailing 
winds. The response is, and always should be, that with our 
discretion embedded in statute, any rules or regulations we put 
forth are calibrated appropriately to the risks, embody principles 
and analyses above the highest levels of scrutiny, and incorporate 
prescriptive requirements as appropriate. The Final Rule is no 
departure. It further strengthens the Commission's fundamental 
customer protection framework aimed at preserving principal and 
maintaining liquidity by addressing foreign currency, credit, 
insolvency, and operational risks and incentivizing growth and 
competition, particularly among FCMs, which may reduce concentration 
risk and provide greater and more diverse hedging opportunities for 
customers. On this latter point, the Final Rule addresses a 
longstanding public interest in encouraging FCM growth and 
innovation that can ultimately support competition and customer 
access with the added benefit of reducing concentration, and 
ultimately, systemic risk,\1\ I am especially pleased to support 
this Final Rule.
---------------------------------------------------------------------------

    \1\ As explained in section IV.A.2.c. of the Final Rule 
preamble, over the last two decades, the number of FCMs has dropped 
by almost 64 percent, from 177 to 64. As further demonstrated by 
CFTC data, in 2004, there were 100 FCMs holding Customer Funds, 
whereas in September 2024, there were only 50, a decrease of 50 
percent. This consolidation may be further illustrated by looking at 
the top ten firms, which hold 84 percent of Customer Funds. See 
CFTC, Financial Data for FCMs (last visited Dec. 6, 2024), https://www.cftc.gov/MarketReports/financialfcmdata/index.htm.
---------------------------------------------------------------------------

    Given the Final Rule's detailed and responsive preamble, I see 
no need to further reiterate the way the Final Rule modernizes the 
list of permitted investments of Customer Funds and creates parity 
across CFTC registrants without undermining or weakening any of the 
safeguards the Commission has maintained for the protection of 
Customer Funds for over a decade. To the extent one could confuse 
and conflate the events and bad actors that--to any degree--colored 
the Commission's consideration of prior rulemaking and policymaking, 
I would again suggest that they engage in a more thorough review of 
the Final Rule's surgically directed limitations.
    Here, a periodic reassessment of Commission Regulation 1.25 and 
consideration of information submitted in two industry petitions 
supported the Commission's proposal to amend its rules governing the 
safeguarding and investment of Customer Funds by, among other 
things, revising the list of permitted investments to add two new 
asset classes including certain foreign sovereign debt instruments 
issued by Canada, France, Germany, Japan, and the United Kingdom, 
and certain short-term Treasury exchange-traded funds (ETFs), 
subject to certain restrictions. By finalizing these amendments, our 
regulations will now permit FCMs and DCOs to invest Customer Funds 
in the same narrowly tailored set of foreign sovereign debt to the 
extent that FCMs and DCOs hold balances owed to customers in the 
currency of the issuing sovereign and subject to certain 
eligibility, credit, and time-to-maturity conditions.
    These additions to the list of permitted investments provide an 
efficient and effective means to minimize exposure to foreign 
currency risk fluctuations by eliminating the multi-step process 
exercised by FCMs and DCOs of converting the foreign currencies they 
accept from customers to U.S. dollars before investing in permitted 
investments (and converting them again when returning the margin 
deposits to customers). Permitting Customer Funds to be directly 
invested in foreign sovereign debt also eliminates the potential 
credit risk associated with holding Customer Funds in unsecured 
deposit accounts with commercial banks and the risk that such funds 
would be treated as unsecured claims in the event of a foreign 
depository facing insolvency.
    It would always be easier for a regulator to eschew its duties 
and leave in place policies

[[Page 7877]]

and processes put in place during our most challenging eras under 
the guise that we can never be nimble enough should circumstances 
change abruptly. But, should we not always play to our strengths, 
rather than our weaknesses? Our duty as a financial market regulator 
is to ensure our ruleset effectuates our mission and supports and 
protects the markets and the individuals and entities who use them. 
And our strength is in the discretion we have been granted because 
we have the expertise and experience to be responsive to market 
developments within the larger U.S. and global financial systems, 
while always seeking to minimize risk.
    I appreciate that commenters reminded us that despite 
regulations and an effective enforcement program, there will always 
be bad actors whose conduct runs afoul of our expectations. As 
detailed in the Final Rule, the Commission has been thoughtful in 
evaluating such concerns related to historical events and the market 
and other conditions to which they have been ascribed, rightly or 
wrongly. The Final Rule reflects such consideration by, among other 
things, limiting newly added permitted investments through tightly 
circumscribed risk characteristics. To the extent that conclusions 
could be drawn in a manner that relies heavily on factors unrelated 
to the status of investments permitted under Commission regulations, 
it is critical that we focus on the correlations and causation 
supported by facts and analyses.
    I want to thank Abigail Knauff, and staff in the Market 
Participants Division, Division of Clearing and Risk, Office of the 
General Counsel, and the Office of the Chief Economist for their 
work on the Final Rule.

[FR Doc. 2024-30927 Filed 1-14-25; 4:15 pm]
BILLING CODE 6351-01-P`