AGENCY: Commodity Futures Trading Commission

ACTION: Amendment of Interpretation 

SUMMARY: Section 4d(a)(2) of the Commodity Exchange Act (“CEA”) and related 

Commission regulations (hereinafter collectively referred to as “segregation requirements”) 

require that all funds received by a futures commission merchant (“FCM”) from a customer to 

margin, guarantee, or secure futures or commodity options transactions and all accruals thereon 

be accounted for separately, and not be commingled with the FCM's own funds or used to 

margin the trades of or to extend credit to any other person.1 Further, Section 4d(a)(2) has been 

construed to require that customer funds, when deposited with any bank, trust company, clearing 

organization or another FCM, be available to the FCM carrying the customer account upon 

demand.2

 

In Financial and Segregation Interpretation No. 10, the Division of Trading and Markets 

(predecessor to the Division of Clearing and Intermediary Oversight (“Division”)) first addressed 

the issue of whether customer funds may be deposited at a bank in a safekeeping or custodial 

account (otherwise known as “safekeeping account” or “third-party custodial account”), in lieu 

of posting such funds directly with an FCM, without being deemed to violate the segregation 

requirements.3

 Because Section 17(f) of the Investment Company Act of 1940,4 at the time, was 

interpreted by Securities and Exchange Commission (“SEC”) staff to generally bar registered 

investment companies (“RICs”) from using FCMs and futures clearinghouses as custodians of 

 

1 See note 7, infra.

2 See note 8, infra. 

3

 Financial and Segregation Interpretation No. 10, Treatment of Funds Deposited in Safekeeping Accounts, Comm. 

Fut. L. Rep. (CCH) ¶ 7120 (May 23, 1984) (“Interpretation No. 10”). While specifically directed to third-party 

accounts of pension plans and registered investment companies, the views expressed in the interpretation applied 

equally to any other customer of an FCM (e.g., an insurance company). 

4 See note 12, infra. 
2

fund assets, it was decided that the use of third-party custodial accounts should not be banned 

altogether and that Section 4d(a)(2) should be interpreted to permit customer funds to be held in 

such accounts, subject to standards designed to ensure the carrying FCM’s right of immediate 

access to customer funds. Since the issuance of Interpretation No. 10, a change in the law 

governing the custody of fund assets now allows RICs, with a limited exception, to post 

customer funds with an FCM.5 Because it is no longer necessary for most RICs to use thirdparty custodial accounts to engage in futures transactions, coupled with evidence of significant 

risks that may impair immediate and unfettered access by FCMs, the use of third-party custodial 

accounts is no longer justified or appropriate, except in the limited case where the FCM is 

precluded from holding RIC assets.6

 Accordingly, Interpretation No. 10 is being amended and 

FCMs will not be viewed as being in compliance with the requirements of Section 4d(a)(2) if 

they deposit, hold, or maintain margin funds for customer accounts in third-party custodial 

accounts, except that those FCMs not eligible to hold the assets of their RIC customers (i.e., due 

to their affiliation with the RIC or its adviser) may use such accounts under conditions specified 

herein. 

EFFECTIVE DATE: [Insert date nine months from the date of publication in the Federal 

Register.] 

 

5

 SEC Rule 17f-6, adopted 1996, permits RICs to deposit customer margin directly with FCMs and futures clearing 

houses. See Rule 17f-6, 17 CFR 270.17f-6, under the Investment Company Act, 15 U.S.C. 80a. 

6

 In February 2005, a notice was published in the Federal Register soliciting comments on a withdrawal of 

Interpretation No. 10 (“Notice of Proposed Withdrawal”). See 70 Fed. Reg. 5417 (February 2, 2005). In response 

thereto, the Commission received comments from the following entities: Investment Company Institute (“ICI”); 

National Futures Association (“NFA”); The Joint Audit Committee (“JAC”); Futures Industry Association 

(“FIA”); and AIG Series Trust (“AIG”). ICI and AIG opposed a withdrawal of Interpretation No. 10; NFA, JAC, 

and FIA supported a withdrawal of Interpretation No. 10 and an outright prohibition of third-party custodial 

accounts. The comment letters are available on the Internet at http://www.cftc.gov/files/foia/comments05. 
3

FOR FURTHER INFORMATION CONTACT: Carlene S. Kim, Senior Special Counsel, 

Division of Clearing and Intermediary Oversight, Commodity Futures Trading Commission, 

1155 21st Street, NW, Washington, DC 20581, telephone: (202) 418-5613. 

SUPPLEMENTAL INFORMATION: 

I. Background: Section 4d and Interpretation No. 10 

Section 4d(a)(2) of the CEA and related Commission regulations require that all funds 

received by an FCM from a customer to margin, guarantee, or secure futures or commodity 

options transactions and all accruals thereon be accounted for separately, and not be commingled 

with the FCM's own funds or used to margin the trades of or to extend credit to any other 

person.7

 Further, Section 4d(a)(2) has been generally construed to require that customer funds, 

when deposited at a bank or other depository (i.e., trust company, clearing organization, another 

FCM), be placed in an account subject to withdrawal upon demand by the FCM carrying the 

customer account. 8 Thus, any impediments or restrictions on the FCM’s ability to obtain 

immediate and unfettered access to customer funds are not permitted. The immediate and 

unfettered access requirement is intended to prevent potential delay or interruption in securing 

required margin payments that, in times of significant market disruption, could magnify the 

impact of such market disruption and impair the liquidity of other FCMs and clearinghouses.9 

 

7

 7 U.S.C. 6d(a)(2). The Commission segregation requirements are set forth in Regulations 1.20-1.30, 1.32 and 

1.36, 17 CFR 1.20-1.30, 1.32 and 1.36. 

8 E.g., Administrative Determination No. 29 of the Commodity Exchange Authority (Sept. 28, 1937) (deposit of 

customers’ funds “under conditions whereby such funds would not be subject to withdrawal upon demand would 

be repugnant to the spirit and purpose of the Commodity Exchange Act”); Financial and Segregation 

Interpretation No. 9 – Money Market Deposit Accounts and NOW Accounts,” 1 Comm. Fut. L. Rep. (CCH) 

¶7119 (November 23, 1983) (at 7091-3) (“it has always been the Division’s [Division of Trading and Markets] 

position that customer funds deposited in a bank cannot be restricted in any way, that such funds must be held for 

the benefit of customers and must be available to the customer and the FCM immediately upon demand”). 

9

 See, e.g., Interpretation No. 10, Comm. Fut. L. Rep. (CCH) ¶ 7120, at 7133 (“[t]he free flow of required margin 

payments and the required deposits is absolutely essential to the proper functioning of the commodity exchanges. 

No customer, especially one who may maintain relatively large positions, can be permitted to interrupt that flow, 
4

Interpretation No. 10 addressed the issue of whether customer funds may be deposited at 

a bank in a third-party safekeeping account, in lieu of posting such funds directly with an FCM, 

without being deemed in violation of Section 4d(a)(2).10 As was stated in Interpretation No. 10, 

the segregated customer funds account system, whereby customer funds are posted directly with 

the carrying FCM and held by the FCM on behalf of its customers, satisfies the essential 

requirements of Section 4d(a)(2) and is “administratively the most efficient way to treat such 

funds.”11 At the time, however, RICs were generally precluded from using FCMs and futures 

clearinghouses as custodians of fund assets and third-party custodial accounts were the only 

permissible means available to RICs to participate in the futures market.12 In view of this legal 

restriction on RICs’ custodial arrangements, the decision was made to permit the use of thirdparty custodial accounts to hold margin funds, without being deemed to violate Section 4d(a)(2), 

subject to standards designed to ensure FCMs’ immediate and unfettered access to the funds in 

such accounts.13 

II. Basis for Amended Interpretation 

Developments since the issuance of Interpretation No. 10 require reconsideration of the 

permissibility of third-party accounts by FCMs to deposit or hold margin funds for customer 

accounts. First, in 1996, the SEC adopted Rule 17f-6, which permitted RICs, with limited 

 or there will be the potential for serious adverse consequences to other market participants and the marketplace 

itself”). 

10 See Interpretation No. 10, Comm. Fut. L. Rep. (CCH) ¶ 7120. 

11 See Interpretation No. 10, Comm. Fut. L. Rep. (CCH) ¶ 7120, at 7135. 

12 See Section 17(f) of the Investment Company Act, 15 U.S.C. 80a-17(f). At that time (but no longer), under 

Section 17(f) and related rules RICs were generally permitted to maintain their assets only in the custody of a 

bank, a member of a national securities exchange, or a national securities depository. FCMs and futures 

clearinghouses did not come within one of these categories. 

13 Specifically, it was explained that “[i]n view of the embryonic state of the law and regulatory requirements which 

may affect the ability of other institutions to participate in the commodity markets, [it] does not now wish to ban 

altogether the use of safekeeping accounts.” See Interpretation No. 10, Comm. Fut. L. Rep. (CCH) ¶ 7120, at 

7131. 
5

exception, to deposit, hold, and maintain their assets with FCMs and certain other entities in 

connection with futures transactions effected on U.S. and foreign exchanges.14 With the 

elimination of the requirement that fund assets be held in a bank custodial account, the new rule 

allowed RICs to participate in futures trading generally in the same manner as other futures 

customers by depositing margin funds with FCMs and clearing organizations. 

Second, the practical and operational factors that may impair the carrying FCM’s right of 

immediate and unfettered access to customer funds, notwithstanding any terms and conditions 

stipulated in a third-party custodial agreement, have come to light. According to the comment 

letter of the FIA, under the tripartite agreements, customers rather than FCMs have the client 

relationship with custodian banks. As a result, customer funds held in third-party accounts are 

not as readily accessible to FCMs as they would be in a segregated customer account context and 

in fact, these agreements have failed to prevent the release of customer funds held in third-party 

accounts, without the knowledge or awareness of the carrying FCMs.15

Regulatory examinations also have found instances of releases of customer funds from 

third-party custodial accounts. Specifically, Commission audit staff have discovered instances of 

significant amounts being released from third-party custodial accounts without the knowledge or 

permission of the FCMs. The Joint Audit Committee, which includes the key self-regulatory 

organizations that perform front-line supervision of the FCMs, has reported similar instances of 

 

14 Investment Company Act Rule 17f-6(b)(3), 17 CFR 270.17f-6(b)(3). Under the rule, a RIC is not permitted to 

deposit fund assets with an FCM that is an affiliate of the RIC or its adviser. Other conditions in the rule provide 

that the manner in which the FCM maintains fund assets must be governed by a written contract and any gains on 

fund transactions must be maintained with the FCM only in de minimis amounts. 

15 FIA states that “[d]ue to the tripartite nature of these arrangements, commodity customer funds held in third-party 

accounts are not accessible to the FCMs in the same manner as commodity customer funds deposited in ordinary 

segregated bank accounts...In this regard, a third party account typically is maintained at the registered investment 

company’s regular custodian, so that the registered investment company rather than the FCM has the client 

relationship with the custodian bank. Similarly, the FCM’s back office personnel do not have the same regular, 

ongoing communications and interface with custodian bank personnel, as they do with bank personnel ...” See 

Comment Letter of FIA (April 4, 2005), supra, note 6. 
6

unauthorized withdrawals, noting that in such cases, the FCMs may not become aware of the 

asset release until reconciliation is performed.16 These findings demonstrate a real and 

significant risk associated with third-party safekeeping arrangements that are at odds with the 

immediate and unfettered access standards of Section 4d(a)(2). 

Third, third-party custodial accounts pose potential systemic liquidity risks by diverting 

FCM capital to cover customer margin obligations which would otherwise be available to 

prevent defaults from affecting the broader marketplace. These risks may be heightened in times 

of significant market volatility when liquidity is most critical.17 

Finally, there remains concern over the parity of treatment between customers with 

segregated accounts or Regulation 30.7 accounts18 and customers using third-party custodial 

accounts in the context of an FCM bankruptcy proceeding.19 The Division’s position is that 

third-party custodial accounts are subject to the U.S. Bankruptcy Code and applicable provisions 

in the CEA, which provide that customer assets relating to futures transactions are subject to 

distribution based on each customer’s pro rata share of the available customer property.20 

Nevertheless, the Division is aware that third-party custodial account arrangements may create 

unnecessary confusion on the part of the customer and create the potential risk that third-party 

 

16 See Comment Letter of JAC (April 4, 2005), supra, note 6. As a result, FCMs may be unaware of market 

exposure assumed on the undermargined customers’ positions. Similarly, FIA noted that the release of customer 

funds without the knowledge of the FCM could lead to erroneous daily computation of the total amount of 

customer funds on deposit in segregated accounts, which could then lead to errors in financial reporting statements 

filed by the FCM with the Commission and self-regulatory organizations (“SROs”). See Id. 

17 In addition, initial margin requirements typically rise during such periods, creating additional stress on FCM 

resources. FIA states that the amount of funds in third-party accounts is substantial and that these accounts are 

heavily concentrated in a small number of FCMs and banks, which factors further exacerbate the systemic 

liquidity risks. See Comment Letter of FIA, note 6, supra. 

18 17 CFR 30.7. 

19 In Interpretation No. 10, the Division voiced the same concern regarding FCM bankruptcy but concluded that the 

interest of facilitating institutional participation in the futures market supported the use of third-party custodial 

accounts. See Interpretation No. 10, Comm. Fut. L. Rep. (CCH) ¶ 7120, at 7134. 

20 11 U.S.C. 766; Commission Regulation 190.18, 17 CFR 190.08. However, this issue has not been judicially 

determined. 
7

custodial accounts might receive priority or preference over other customers in an FCM’s 

bankruptcy proceeding, or at least cause additional administrative expenses to be incurred, in a 

manner inconsistent with the Commission regulations and regulatory objectives.21 

Under Interpretation No. 10, FCMs were permitted to hold margin funds in third-party 

custodial accounts in order to avoid precluding participation by RICs in the futures market. The 

conflicting restriction concerning the custody of fund assets no longer exists, with a minor 

exception. Together with concerns regarding the risks to the general marketplace and market 

users, this is persuasive that third-party custodial accounts are no longer necessary or 

appropriate, except in the limited case where an FCM is precluded from holding RIC assets due 

to affiliation with a RIC or its adviser. Findings by both Commission audit staff and the SROs of 

actual releases of customer funds, without the required knowledge or approval of the FCMs, 

further demonstrate that the risks associated with third-party custodial accounts are real and 

material, not merely theoretical, and that the public policy benefits of ensuring the financial 

integrity of the clearing system outweigh any costs or inconvenience to users of third-party 

custodial accounts.22 Accordingly, Interpretation No. 10 is being amended to provide that, with 

the exception noted below, FCMs may not deposit, hold, or maintain customer margin in a thirdparty account, without being deemed to violate Section 4d(a)(2) of the CEA.23 

 

21 See Interpretation No. 10, Comm. Fut. L. Rep. (CCH) ¶ 7120, at 7134. 

22 Both ICI and AIG noted the operational efficiencies stemming from the use of a single bank custodian to manage 

fund assets. Further, ICI stated that the disruption and financial cost associated with restructuring of existing 

custodial relationships would outweigh any “theoretical” benefits. See Comment Letter of ICI (April 4, 2005) and 

Comment Letter of AIG (April 12, 2005), supra, note 6. 

23 Interpretation No. 10 is hereby withdrawn. Further, the views relating to third-party custodial accounts, set forth 

in related publications are also hereby withdrawn, except that an FCM that is not eligible to rely on SEC rule 17f6 may rely on them to the extent applicable and relevant. See CFTC Advisory No. 37-96 (Responsibilities of 

Futures Commission Merchants and Relevant Depositories with Respect to Third Party Custodial Accounts), 

Comm. Fut. L. Rep. (CCH) ¶ 26,765 (July 25, 1996) and Interpretive Letters, specifically, CFTC Interpretive 

Letters No. 85-6 (Comm. Fut. L. Rep. (CCH) ¶ 22, 579), No. 89-1(Comm. Fut. L. Rep. (CCH) ¶ 24, 404), and No. 

90-1 (Comm. Fut. L. Rep. (CCH) ¶ 24, 579). 
8

 The limited case where the use of third-party custodial accounts will be permitted, 

described at Section III below, encompasses an FCM that is affiliated with a RIC or its adviser. 

This exception is appropriate because the relief provided by SEC rule 17f-6 from the restriction 

against using FCMs as the direct custodians of fund assets is not available to RICs that use 

affiliate FCMs to clear their futures transactions. For these RICs, and without SEC action to 

remedy the situation, the inability to use third-party custodial accounts would result in potentially 

undue disruption and cost. In addition, it appears that the overwhelming majority of the 

instances of the current use of third-party custodial accounts would not encompass this situation. 

It should be noted that this amended interpretation regarding the use of third-party 

custodial accounts for purposes of Section 4d(a)(2) extends equally to secured amount funds held 

for foreign futures and foreign options customers in third-party accounts pursuant to Regulation 

30.7. As a result, FCMs may not deposit, hold, or maintain secured amount funds held for 

foreign futures and foreign options customers in third-party accounts under Regulation 30.7. 

III. Conditional Exception for FCMs Not Eligible for SEC Rule 17f-6 

An FCM that is not eligible to rely on SEC Rule 17f-6 due to an affiliation with a RIC or 

its advisor may use a third-party custodial account for purposes of holding margin funds for such 

a customer, without being deemed to be in violation of Section 4d(a)(2) or Regulation 30.7, if the 

following conditions are and continue to be met:24

First, the account must be maintained in the name of the FCM, for the benefit of the 

customer. Examples of acceptable titles are “[Name of FCM] Customer Funds for the Benefit of 

 

24 These conditions are generally consistent with those set forth in Interpretation No. 10. 
9

X Investment Company.” On the other hand, a third-party custodial account may not be 

maintained in the name of the RIC customer or its adviser.25 

Second, the FCM must have the ability to liquidate open positions in an account which 

goes into deficit or becomes undermargined without getting clearance from any third-party 

custodian of the account or the customer. 

Third, the FCM must have the right to withdraw funds from the third-party custodial 

account with no right of the customer (or its fiduciary) to stop, interrupt or otherwise interfere 

with such withdrawal. An FCM which is forced to await pre-clearance for margin withdrawals 

has neither possession nor control of the funds which may be needed for margin purposes. Also, 

the customer (and its fiduciary) may not withdraw or otherwise have access to the funds in the 

account except through the FCM. Although a provision in a third-party custodial account 

agreement for a notice to the customer (or to its fiduciary) would not necessarily be inconsistent 

with the FCM’s right of access, a requirement that a customer pre-approve margin withdrawals 

by the FCM would be deemed inconsistent with the FCM’s right of access.26 Finally, third-party 

custodial accounts will be considered subject to the customary provision in a commodity 

customer account agreement to the effect that all money, securities or property in the customer’s 

account, or held for the customer by the FCM or by any clearing organization for a contract 

market upon which trades of the customer are executed, are pledged with the FCM and are 

 

25 The FCM also must comply with all applicable requirements in Section 4d(a)(2) and related Commission 

regulations, including Regulation 1.20(a) which provides that an FCM must obtain and retain an 

acknowledgement from the depository that it was informed that the customer funds deposited therein are those of 

FCM customers and are being held on accordance with the provisions of the CEA and Commission regulations.

See 17 CFR 1.20(a). 

26 Similarly, the FCM could agree in a third-party custodial agreement that before it directs the custodian of a thirdparty custodial account to dispose of customer funds held therein, the FCM will state that all conditions precedent 

to its right to direct disposition of customer funds in the account have been met, provided that the only condition 

which an FCM must satisfy in order to have access to the funds in the account is to state that there has been a 

default by the customer in making a margin payment or any other required deposit. 
10

subject to a security interest in the FCM’s favor to secure any indebtedness at any time owed by 

the customer to the FCM. 

Fourth, a third-party custodial account may not be located at an affiliate of the customer 

or a fiduciary thereof. Thus, for example, a fund may not maintain a third-party custodial 

account at a bank with which the fund has other relationships that make the bank an affiliate or 

fiduciary of the fund. 

These conditions are designed to ensure, among other things, that the FCM has free and 

ready access to margin funds held in a third-party custodial account, with the customer restricted 

from access to such funds except through the FCM. If the conditions are met, and only in the 

case of an affiliate FCM for so long as SEC prohibitions exist, a third-party custodial account for 

a RIC will be deemed to be a segregated account of the FCM within the meaning of Section 

4d(a)(2) of the CEA or permissible under Regulation 30.7, as the case may be, and the FCM may 

include the funds in such account in the calculation of the total amount of customer funds on 

deposit in segregated accounts or Regulation 30.7 accounts, as the case may be. 

IV. Transition Period 

In order to ensure that impacted parties, including the FCMs and RICs, are provided with 

adequate time to make necessary adjustments to their existing custodial arrangements, the 
11

amendment to Interpretation No. 10 will not be made effective until nine months following 

publication in the Federal Register.

27

Issued in Washington, D.C. on May 5, 2005, by the Division of Clearing and Intermediary 

Oversight. 

 /s/ 

 James L. Carley 

 Director 

 

27 ICI requested that in the event that Interpretation No. 10 is withdrawn, such withdrawal should be made effective 

no less than nine months following the publication of a final notice. See Comment Letter of ICI, note 6, supra.