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[Federal Register: December 28, 2000 (Volume 65, Number 250)]
[Rules and Regulations]
[page 82270-82272]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28de00-15]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 1

RIN 3038-AB56


Investment of Customer Funds

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rules; change of effective date.

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SUMMARY: The Commodity Futures Trading Commission (Commission) is
moving forward the effective date of its recent rule amendments
concerning the investment of customer funds by futures commission
merchants (FCMs) and clearing organizations to permit FCMs and clearing
organizations to engage in the expanded investment activity at an
earlier date. The Commission is also making certain technical
corrections to the rule amendments.

DATES: The revision of Sec. 1.25 published on December 13, 2000 (65 FR
77993) as amended by this rule is effective December 28, 2000. The
revision of Sec. 1.26 and the amendments to Secs. 1.20, 1.27, 1.28 and
1.29 published on December 13, 2000 (65 FR 77993) are effective
December 28, 2000.

FOR FURTHER INFORMATION CONTACT: Lawrence B. Patent, Associate Chief
Counsel, Paul H. Bjarnason, Jr., Special Advisory for Accounting
Policy, or Ky Tran-Trong, Attorney-Advisor, Division of Trading and
Markets, Commodity Futures Trading Commission, Three Lafayette Centre,
1155 21st Street, NW., Washington, DC 20581. Telephone: (202) 418-5450.

SUPPLEMENTARY INFORMATION:

[[page 82271]]

I. Background

    On December 13, 2000, the Commission published final rules and rule
amendments in the Federal Register revising its rules relating to
intermediation of commodity futures and commodity options (commodity
interest) transactions.\1\ As part of the new rules and rule
amendments, the Commission has amended Rule 1.25 to expand the range of
instruments in which FCMs and clearing organizations may invest
customer funds to include such highly liquid and readily marketable
instruments as certain sovereign debt, agency debt, money market mutual
funds, and corporate notes (permitted investments). Additional
provisions to minimize credit, volatility and liquidity risk have also
been adopted. Previously, investments of customer funds had been
limited to U.S. government securities, municipal securities, and
instruments fully guaranteed as to principal and interest by the U.S.
government. When the Commission proposed the amendments to Rule 1.25,
it stated that ``an expanded list of permitted investments could
enhance the yield available to FCMs, clearing organizations and their
customers without compromising the safety of customer funds.'' \2\
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    \1\ 65 FR 77993.
    \2\ 65 FR 39008, 39014 (June 22, 2000).
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    As provided in the adopting release, the new rules and rule
amendments relating to intermediaries, including the changes to Rule
1.25, are to become effective on February 12, 2001.\3\ The Commission
established an effective date 60 days following publication in the
Federal Register for the new rules and rule amendments relating to
intermediaries, as well as for the other elements of regulatory reform
adopted simultaneously by the Commission,\4\ to allow time for entities
affected by the rule changes to make the necessary adjustments to their
operations. The Commission has been apprised by the futures industry,
however, that the implementation of new Rule 1.25 does not require such
a lengthy delay, and that it may be more efficient if FCMs are
permitted to implement the rule revisions relating to Rule 1.25 on an
earlier date.\5\ The Commission agrees with the industry request and
has determined to move forward the effective date for the amendments to
Rule 1.25 to December 28, 2000. The Commission has further determined
to move forward the effective date of related amendments to Rules 1.20
and 1.26-1.29.\6\
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    \3\ 65 FR at 77994.
    \4\ See A New Regulatory Framework for Multilateral Transaction
Execution Facilities, Intermediaries and Clearing Organizations, 65
FR 77962 (Dec. 13, 2000); A New Regulatory Framework for Clearing
Organizations, 65 FR 78020 (Dec. 13, 2000); Exemption for Bilateral
Transactions, 65 FR 78030 (Dec. 13, 2000).
    \5\ The Commission also notes that although publication of the
amended Rule 1.25 appeared in the Federal Register on December 13,
2000, it has been available on the Commission's website since the
Commission adopted it on November 22, 2000.
    \6\ Elsewhere in this edition of the Federal Register, the
Commission is publishing a release announcing the withdrawal of the
other rules and rule amendments that were part of the Commission's
regulatory reform package.
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II. Technical Corrections

    Paragraph (a) of Rule 1.25 sets forth the types of permissible
investments of customer funds, e.g., U.S. Treasury obligations,
commercial paper, corporate notes. Each type of investment must meet
certain quality requirements, including requirements for marketability,
credit ratings, restrictive features and concentration limitations.
Currently, these quality requirements are all contained in separate
provisions of paragraph (b) of the rule, except for the requirements
regarding sovereign debt, which are contained in paragraph (a)(1)(vii).
The Commission believes that this placement could be confusing.
Therefore, in order to clarify Rule 1,25, the requirements for all
types of permitted investments are now placed together, in the same
paragraphs, as follows: (i) the requirement that foreign sovereign debt
be rated in the highest category by at least one nationally recognized
statistical rating organization has been moved from paragraph
(a)(1)(vii) to paragraph (b)(2)(i)(D) and, concurrently, the reference
to permit sovereign debt contained in paragraph (b)(2)(i)(A) is no
longer necessary and, therefore, has been deleted; and (ii) the
requirement that investments in a particular country's sovereign debt
be limited to amounts owed in that currency has been moved from
paragraph (a)(1)(vii) to paragraph (b)(4)(i)(D).

III. Other Matters

    The Commission has determined that there is good cause to move
forward the effective date of the amendments to Rule 1.25, as well as
the amendments to Rules 1.20 and 1.26-1.29, and to make the clarifying
revisions discussed above to Rule 1.25 because it is not contrary to
the public interest to permit FCMs and clearing organizations to invest
customer funds in an expanded range of permissible investments. Such
investments could potentially provide a higher yield to those FCMs and
clearing organizations without compromising the safety of customer
funds. The Commission has further determined that these rules may be
made effective less than 30 days following their date of publication in
the Federal Register because these are substantive rules that relieve a
restriction on those FCMs and clearing organizations seeking to invest
customer funds in a wider range of financial instruments.\7\
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    \7\ 5 U.S.C. 553(d) generally provides that the publication or
service of a substantive rule shall not be made less than 30 days
before its effective date, except for: (1) a substantive rule which
grants or recognizes an exemption or relieves a restriction; (2)
interpretative rules and statements of policy; or (3) as otherwise
provided by the agency for good cause found and published with the
rule.
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List of Subjects in 17 CFR Part 1

    Brokers, Commodity futures, Consumer protection, Reporting and
recordkeeping requirements.

    In consideration of the foregoing, and pursuant to the authority
contained in the Commodity Exchange Act, and in particular, Sections
4(c), 4d(2) and 8a(5) thereof, 7 U.S.C. 6(c), 6d(2) and 12a(5), the
Commission hereby makes the amendments to rules 1.20 and 1.25 through
1.29 that were published on December 13, 2000 at 65 FR 77993, 78009-13
as further amended in this release, effective December 28, 2000.

PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

    1. The authority citation for Part 1 continues to read as follows:

    Authority: 7 U.S.C. 1a, 2, 2a, 4, 4a, 6, 6a, 6b, 6c, 6d, 6e, 6f,
6g, 6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12a,
12c, 13a, 13a-1, 16, 16a, 19, 21, 23 and 24.

    2. Section 1.25 is amended by revising paragraphs (a)(1)(vii),
(b)(2)(i)(A) and (b)(2)(i)(C), by redesignating paragraph (b)(2)(i)(D)
as paragraph (b)(2)(i)(E), by adding a new paragraph (b)(2)(i)(D), by
revising paragraph (b)(4)(i)(A) and by adding a new paragraph
(b)(4)(i)(D). For the convenience of the reader, printed below is
revised paragraph (a)(1)(vii) as well as the complete paragraphs
(b)(2)(i) and (b)(4)(i) as revised:


Sec. 1.25  Investment of customer funds.

    (a) * * *
    (1) * * *
    (vii) General obligations of a sovereign nation; and
* * * * *
    (b) * * *
    (2) Ratings. (i) Initial requirement. Instruments that are required
to be rated by this section must be rated by a nationally recognized
statistical rating

[[page 82272]]

organization (NRSRO), as that term is defined in Sec. 270.2a-7 of this
title. For an investment to qualify as a permitted investment, ratings
are required as follows:
    (A) U.S. government securities need not be rated;
    (B) Municipal securities, government sponsored agency securities,
certificates of deposit, commercial paper, and corporate notes, except
notes that are asset-backed, must have the highest short-term rating of
an NRSRO or one of the two highest long-term ratings of an NRSRO;
    (C) Corporate notes that are asset-backed must have the highest
ratings of an NRSRO;
    (D) Sovereign debt must be rated in the highest category by at
least one NRSRO; and
    (E) Money market mutual funds that are rated by an NRSRO must be
rated at the highest rating of an NRSRO.
* * * * *
    (4) Concentration and other limitations. (i) Direct investments.
(A) U.S. government securities and money market mutual funds shall not
be subject to a concentration limit or other limitation.
    (B) Securities of any single issuer of government sponsored agency
securities held by a futures commission merchant or clearing
organization may not exceed 25 percent of total assets held in
segregation by the futures commission merchant or clearing
organization.
    (C) Securities of any single issuer of municipal securities,
certificates of deposit, commercial paper, or corporate notes held by a
futures commission merchant or clearing organization may not exceed 5
percent of total assets held in segregation by the futures commission
merchant or clearing organization.
    (D) Sovereign debt is subject to the following limits: a futures
commission merchant may invest in the sovereign debt of a country to
the extent it has balances in segregated accounts owed to its customers
denominated in that country's currency; a clearing organization may
invest in the sovereign debt of a country to the extent it has balances
in segregated accounts owed to its clearing member futures commission
merchants denominated in that country's currency.
* * * * *

    Issued in Washington, DC on December 21, 2000 by the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 00-32976 Filed 12-27-00; 8:45 am]
BILLING CODE 6351-01-M
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