TELEPHONE 

(202) 223-4418 

PICKARD AND DJINIS LLP 

ATTORNEYS AT LAW 

1990 M STREET, N. W. 

WASHINGTON, D. C. 20036 

TELECOPIER 

(202) 331-3813 

~ 0 July 1 0, 2009 c::::> 

Mr. David A. Stawick 

Secretary 

~ 

~ 

Cc:: 

r-

~ 

..... 

..... 

C"> 

rTJ 

0 

..... 

-10 

Commodity Futures Trading Commission 

Three Lafayette Centre 

..r: X . 

m:-'1 

-o <n=-' 

::3 mo 

o· 

:::0 1155 21st Street, NW 

Washington, DC 20581 .J; ~ 

0 > ::::0 

Re: Advance Notice of Proposed Rulemaking -.&.l'l· > for Regulations 1.25 

and 30.7 (the Eligibility of Money Market Funds) 

-;1 

Dear Mr. Stawick: 

We submit these comments on behalf of Federated Investors, Inc. ("Federated") 

regarding the Commodity Futures Trading Commission's ("CFTC") advance notice of 

proposed rulemaking and request for public comment concerning the scope and character 

of permitted investments for customer segregated funds (the "Advance Notice"). 1 The 

CFTC is considering significantly revising the scope and character of permitted 

investments for customer segregated funds and Regulation 30.7 funds. Specificaliy, the 

CFTC has requested comment regarding which instruments should continue to be 

"permitted investments" for customer segregated funds under Regulation 1.25. Under 

Regulation 1.25 money market funds are permitted investments for customer money. 

Federated is a major sponsor of money market funds regulated under Rule 2a-7 of 

the Investment Company Act of 1940, and therefore we focus our comments on the 

important role money market funds have performed as permitted investments under 

CFTC regulations and their role in protecting customer segregated funds. 

Federated Investors, Inc. 

Federated is a Pittsburgh-based financial services holding company and the 

sponsor of money market funds having aggregate assets in excess of $350 billion. 

Federated's money market funds are designed for use by regulated entities where a 

statute, rule or instrument limits an investment to high-quality, liquid short-term 

investments. Federated money market funds meet the requirements of CFTC Regulation 

1.25 and are used by Futures Commission Merchants ("FCMs") as investments on behalf 

of their customers. We estimate that at any given time FCMs invest approximately three 

1 See CFTC, Investment of Customer Funds and Funds Held in an Account for Foreign Futures and Foreign 

Options Transactions, Advance Notice of Proposed Rulemaking, 74 Fed. Reg. 23962 (May, 22, 2009). 

·'} 
July 10, 2009 

Page 2 of 13 

billion dollars into Federated money market funds, which successfully serve the needs of 

FCMs in meeting their customer segregated fund requirement under CFTC Regulations. 

For the reasons set forth below, money market funds as described in Regulation 

1.25(c) continue to merit inclusion as permitted investments and should not be, and do 

not need to be, the subject of any CFTC proposal to amend Regulation 1.25. FCMs have 

found money market funds to be superior to many of the other alternative permitted 

investments under Regulation 1.25 in that they involve significantly less concentration, 

credit and operatio11al risk, i.e., obviating the need tp assemble a portfolio of individual 

securities, while at the same time benefiting from the diversification requirements of SEC 

Rule 2a-7 discussed below. As short-term investment vehicles, they contribute liquidity 

and safety to their users. In addition, money market funds are being further strengthened 

by the SEC with the strong endorsement of the U.S. Treasury. 

I. Money market funds merit continued inclusion as "permitted investments" 

because they are subject to a comprehensive regulatory scheme under the 

Investment Company Act of 1940, SEC Rule 2a-7 and CFTC Regulation 

1.25, which collectively provides liquidity and safety to customer money. 

Money market funds holding customer money under Regulation 1.25 are subject 

to all four of the major federal securities laws administered by the Securities and 

Exchange Commission, including the Securities Act of 1933, the Securities Exchange 

Act of 1934, the Investment Advisers Act of 1940 and, most importantly, the Investment 

Company Act of 1940. Beyond the broad general protections of the Investment 

Company Act, money market funds must meet the exacting requirements of Rule 2a-7. 

Moreover, the requirements of CFTC Regulation 1.25 provide further protections to 

customer money committed to money market funds. 

This multi-layered, comprehensive regulatory framework has been an overall 

success in permitting FCMs to use money market funds to meet their regulatory 

requirements concerning customer money. 

A. Overview of regulatory regime money market funds are subject to under 

the Investment Company Act of 1940. 

Investment companies are one of America's primary savings and investment 

vehicles. The Investment Company Act of 1940, the principal statute that regulates 

investment companies, specifically addresses virtually every aspect of investment 

companies' operations. The Investment Company Act places substantive requirements or 

restrictions on a fund's governance and structure; its issuance of debt and senior 

securities; its investments, sales and redemptions of its shares; and its dealings with 

service providers and other affiliates.2 The following summarizes some ofthe important 

2 See Paul Roye, Director, Division oflnvestment Management, Speech by SEC Staff: The Genius of the 

Investment Company Act- A Framework for Adaptation to Change, June 15, 2005. 
July 10, 2009 

Page 3 of 13 

attributes of the Investment Company Act's comprehensive regulatort program and puts 

into context their importance in connection with money market funds. 

Oversight, Accountability and Controls - A fund's operations are subject to both 

internal and external oversight. Internal oversight includes independent boards of 

directors and written compliance programs overseen by chief compliance officers 

(CCOs), both at the fund and adviser levels. External oversight includes the SEC, the 

Financial Industry Regulatory Association (FINRA), and external service providers, such 

as certified public accounting firms and custodians. At least 40 percent of directors on a 

fund's board are required under the Investment Company Act to be independent from 

fund management, and most investment companies (including all of Federated's money 

market funds) have boards comprised of at least 75% independent directors so as to 

qualify for safe harbors under the Investment Company Act.4 Fund directors provide an 

independent check on the management of funds and in recent years the board's oversight 

has increased to include the annual review for adequacy and effectiveness of fund and 

adviser written compliance programs to prevent, detect, and correct violations of the 

federal securities laws. This internal oversight is supplemented by examinations by and 

reports to the SEC and self-regulatory organizations. Thus, the functionality and 

behavior of the money market fund, including its financial condition, is subject to 

multiple layers of oversight and control. 

Prospectus and Other Disclosure - All important aspects of funds are required to be 

disclosed to investors and the market place. Funds are required to maintain a current 

prospectus, which discloses material information about the fund and its operations, 

investment objectives, investment strategies, risks, fees and expenses, and performance. 

In addition, detailed disclosure is provided through the fund's statement of additional 

information (SAl). These documents are updated at least once each year. Funds also 

provide shareholders with unaudited semi-annual and audited annual reports. These 

reports contain updated financial statements, a list of the fund's portfolio securities, and 

other current information. These disclosures mean that the investor in a money market 

fund is in a position to have more information to make investment decisions than is 

available for other types of investments. 

Custody of Fund Assets - Funds are required to maintain strict custody of fund assets 

with a regulated bank or broker-dealer, separate from the assets of the adviser. The strict 

rules on the custody of fund assets serve to protect fund investors from the types of fraudbased losses that from time to time occur in less regulated investment products. 

3 The Report ofthe Money Market Working Group submitted to the Board of Governors of the Investment 

Company Institute, March 17, 2009 (the "ICI Report"), discusses six core objectives ofthe Investment 

Company Act. 

4 Section 15(t)(l) permits an investment adviser to receive compensation for the sale of its advisory 

business if its funds maintain a 75% independent board of directors for at least three years after the 

transactions. Most advisers require their investment companies to continuously maintain a 75% 

independent board so they always comply with this provision. 
July 10, 2009 

Page 4 of 13 

Prohibitions on Affiliated Transactions - The Investment Company Act contains a 

number of prohibitions on transactions between a fund and fund insiders or affiliated 

organizations. These prohibitions restrain over-reaching and self-dealing by investment 

company insiders with respect to, among other things, the purchase and sale of portfolio 

securities and other investments. The underlying portfolio assets of the money market 

fund may not be abused by the fund or its adviser. 

Capital Structure - The Investment Company Act imposes various requirements on a 

fund's capital structure, including prohibiting the issuance of any "senior securities" and 

limiting the amount of any borrowings. These capital requirements limit the amount of 

leverage a fund may employ and simplifies the fund's capital structure. During the 2008 

financial crisis and today, over-leveraging has been a serious financial problem. This is 

not the case with money market funds, nor can it occur with money market funds. 

Liquidity of Fund Shares - Fund shares are highly liquid investments as investors may 

redeem fund shares each business day. Rule 2a-7, further discussed below, permits 

money market funds to determine their NA V using valuation methods that facilitate the 

maintenance of a stable value price of $1.00. These valuation methods contain strict risklimiting provisions designed to minimize the deviation between a money market fund's 

stated share price and the actual value of its portfolio. A redeeming shareholder must be 

paid promptly. The Investment Company Act prohibits funds from suspending 

redemptions of their shares (subject to certain extremely limited exceptions) or delaying 

payments of redemption proceeds for more than seven days. To facilitate compliance 

with these prohibitions, money market funds are subject to a 10 percent illiquid 

investment limit. These requirements seek to ensure the important liquidity features of 

money market funds. 

B. Money market funds are subject to the protections afforded by SEC Rule 

2a-7. 

As a second layer of protection, the SEC established a specific regulatory 

program for money market funds under Rule 2a-7 of the Investment Company Act, to 

further enhance the usefulness and safety of money market funds. Rule 2a-7, adopted in 

1983, has been an unqualified success, and has been revised and strengthened 

periodically in light of money market funds' response to economic conditions. 5 

An initial objective of every money market fund is to attempt to maintain a stable 

value per share. Rule 2a-7(c)(7)(i) requires "the money market fund's board of directors, 

as a particular responsibility within the overall duty of care owed to its shareholders, [to] 

establish written procedures reasonably designed, taking into account current market 

conditions and the money market fund's investment objectives, to stabilize the money 

market fund's net asset value per share, ... , at a single value." Rule 2a-7(c)(7)(ii) requires 

the board of directors to track the deviation between the fund's stable net asset value and 

5 See Release No. IC-I3380 (July II, I983), 48 Fed. Reg. 32555 (July I8, I983); Release No. IC-2I837 

(Mar. 2I, I996), 6I Fed. Reg. I3956 (Mar. 28, I996). 
July 10, 2009 

Page 5 of 13 

its actual market net asset value, and to take appropriate action, if any, if the deviation 

exceeds 0.50%. 

In order to achieve this objective, a money market fund's exposure to credit risk 

(the risk that the fund will not receive timely payment on an investment) and market risk 

(the risk of significant changes in value due to changes in prevailing interest rates) must 

be limited. Rule 2a-7 sets forth provisions specifically designed to reduce such risks by 

limiting the composition of a money market fund's portfolio. 

Portfolio Maturity - Rule 2a-7 requires that money market funds hold portfolio 

securities with relatively short maturities. Rule 2a-7( c )(2) provides that a money market 

fund must not acquire any instrument with a remaining maturity of greater than 397 

calendar days and may not maintain a dollar-weighted average portfolio maturity of more 

than 90 days. By constraining the average weighted portfolio maturity to 90 days or less, 

Rule 2a-7 assures that even an instantaneous 2% change in interest rates will not cause 

the fund's market net asset value to deviate by 0.50%. Moreover, most money market 

funds operate well within the 90 day limit, providing even greater protection against 

sudden interest rate changes. Further, the overall 397-day maturity limit and rating 

requirements prevent funds from taking undue credit risks, forcing money market funds 

out of companies with deteriorating credit well before insolvency. 

Portfolio Quality - Rule 2a-7 requires money market funds to invest in high quality 

portfolio securities. Money market funds may purchase only securities that are highly 

rated and that pose "minimal credit risks" to the fund. Rule 2a-7 ( c )(3) requires that a 

money market fund have at least 95% of its portfolio investments qualifying for the top 

rating ("first tier") and the remainder may be in the second highest rating category 

("second tier"). In addition, fund boards are required to make an independent assessment 

of the securities based on factors affecting the credit quality of the issuer. In other words, 

Rule 2a-7 has always prohibited money market funds from simply relying on ratings to 

protect against credit risks. 

Portfolio Diversification - Rule 2a-7 provides that a money market fund "shall not have 

invested more than five percent of its total assets in securities issued" by the same entity, 

except for government securities. Historically, money market funds have only been 

affected by sudden, unexpected credit developments. The diversification requirements 

limit the impact of these credit events to, at most, 5% of the portfolio. As with the 

average weighted maturity limit, most funds operate well within the diversification 

requirements, rarely investing close to the 5% limit except through fully collateralized 

repurchase agreements. 

These requirements effectively limit credit and market risk and enhance liquidity, 

providing a strong investor protection foundation for the continued use of money market 

funds under Regulation 1.25 for customer money. Coupled with the comprehensive 

protections of the Investment Company Act, Rule 2a-7 has contributed to the success of 

money market funds. Since the SEC adopted Rule 2a-7 in 1983, money market fund 

assets have grown from $180 billion to $3.9 trillion as of January 2009. The public's 
July 10, 2009 

Page 6 of 13 

faith in money market funds is also evident. As a result of overall market volatility, retail 

and institutional investors have kept a greater proportion of their short-term investments 

in safe and liquid vehicles, including money market funds. Indeed, investors have added 

over $1.2 trillion to money market funds from the end of June 2007 to January 2009. 

We believe that under this comprehensive regulatory regime, money market funds 

continue to merit inclusion as permitted investments and should not be (and do not need 

to be) the subject of any CFTC proposal to amend Regulation 1.25. 

C. The SEC has just proposed amendments to Rule 2a-7 designed to further 

enhance the safety and liquidity of money market funds. 

On June 30, 2009, the SEC released for comment proposed comprehensive money 

market reforms to further tighten the risk-limiting conditions of Rule 2a-7 and other 

potential changes in the regulation of money market funds. 6 The reforms include the 

following proposed changes to Rule 2a-7: 

• Money market funds investments would be limited to the highest short-term 

rating category or unrated securities of equivalent quality. 

• The weighted average maturity of a money market fund's portfolio would be 

reduced from 90 to 60 days. The portfolios of money market funds would also 

be subject to a 120 day limit with the weighted average maturity determined 

without regard to any scheduled interest rate adjustments. 

• Money market funds could not acquire any illiquid securities. 

• Money market funds would have to maintain 5% to 10% of their portfolio in 

cash, direct U.S. government obligations and instruments with overnight 

maturities, and 15% to 30% of their portfolio in instruments with maturities of 

five business days or less. 

• Boards of directors would have to adopt procedures for periodic stress testing 

of money market funds, the results of which would be reported to the 

directors. 

• Money market funds would have to disclose their investment portfolios on a 

monthly basis. 

These reforms would increase the safety of money market funds by further 

constraining the maturity and credit quality of their portfolios. They would also 

safeguard the liquidity of money market funds by requiring investment of a substantial 

portion of the portfolio in the most liquid or shortest-term securities. In addition, the 

reforms would increase oversight through stress testing and more frequent disclosures. 

Given the SEC's reform efforts, it would be reasonable for the CFTC to anticipate that 

the safety and liquidity of money market funds will increase in the near future, making 

them even more appropriate investments for customer segregated funds. 

6 Investment Company Act Release No. IC-28807. 
July 10, 2009 

Page 7 of 13 

D. CFTC Regulation 1.25 places additional requirements on FCM's use of 

money market funds which are designed to limit risk and protect 

customer funds. 

Beyond the comprehensive regulatory regime of the Investment Company Act 

and the SEC's enforcement of Rule 2a-7 thereunder, the CFTC's risk-limiting standards 

provide an additional layer of customer protection. 

The CFTC first allowed FCMs to use money market funds for purposes of 

"permitted investments" for customer segregated funds in 2000. 7 In its release, the CFTC 

stated that it was allowing FCMs to invest customer funds in money market funds based 

upon, in part, its conclusion that "an expanded list of permitted investments could 

enhance the yield available to FCMs, clearinf organizations and their customers without 

compromising the safety of customer funds." At that time, the CFTC also noted that the 

expansion of Rule 1.25 and the safeguards therein, would become a part of the broad set 

of protections built into the system intended to guard against financial risk at FCMs. 

After several years of favorable experience, the CFTC amended its rule and 

allowed FCMs to use any money market fund. 9 In consideration of, among other things, 

(1) the risk-limiting standards imposed by Regulation 1.25(c) (to be discussed below), (2) 

the existence of extensive investor protections of SEC Rule 2a-7 that imposes strict 

portfolio quality, diversification, and maturity standards, which greatly limit the 

possibility of significant deviation between the share price of a fund and its per share net 

asset value, and (3) the board oversight imposed on money market funds regarding credit 

quality requirements and investment procedures, the CFTC eliminated the requirement 

that money market funds be rated by an NRSR0. 10 

As stated in Regulation 1.25( c), for a money market fund to be a "permitted 

investment," the fund must be an investment company that is registered under the 

Investment Company Act of 1940 with the Securities and Exchange Commission and that 

holds itself out to investors as a money market fund, in accordance with Rule 2a-7. In 

addition, the fund must be sponsored by a federally-regulated financial institution, a bank 

as defined in section 3(a)(6) of the Securities Exchange Act of 1934, an investment 

adviser registered under the Investment Advisers Act of 1940, or a domestic branch of a 

foreign bank insured by the Federal Deposit Insurance Corporation. 

7 The rule initially limited FCMs to using money market funds that received the highest rating from a 

nationally recognized statistical rating agency, if rated. 

8 65 Fed. Reg. 39008, 39014 (June 22, 2000) (rule proposal); 65 Fed. Reg. 77993 (Dec. 13, 2000) (rule 

adoption). 

9 See 68 Fed. Reg. 38654 (June 30, 2003); 70 Fed. Reg. 28190,28194-95 (May 17, 2005). 

10 See 70 Fed. Reg. 28190,28195 (May 17, 2005). 
July 10, 2009 

Page 8 of 13 

Further, among other things, the net asset value of the fund must be computed by 

9 a.m. of the business day following each business day and made available to the FCM or 

derivatives clearing organization by that time. Importantly, with noted exceptions, the 

fund must be legally obligated to redeem an interest and to make payment in satisfaction 

thereof by the business day following a redemption request, and the FCM or derivatives 

clearing organization must retain documentation demonstrating compliance with this 

requirement. 

E. Additional level of safety and liquidity provided by money market funds 

over direct investments by FCMs in "permitted investments." 

FCMs derive an additional level of safety and liquidity when investing customer 

funds in a money market fund which has as its portfolio "permitted investments" (e.g., 

governments, commercial paper, corporate notes, etc.) instead of investing directly in the 

CFTC "permitted investments." The investment in money market funds conveys to the 

FCM not only the indirect benefits derived from the fund's portfolio of "permitted 

investments" but also the additional benefit of diversification and liquidity at a stable 

pnce. 

The limitations found in Rule 2a-7 and CFTC's Regulation 1.25, coupled with 

oversight by a board comprised primarily of independent directors, serve to enhance, and 

in no way impair, the safety of money market funds as compared to direct investments in 

the underlying portfolio securities. Individual FCMs would find it difficult and expensive 

to replicate a money market fund's portfolio directly themselves, or to perform the 

independent credit analysis that Rule 2a-7 requires of money market fund advisers. 

Money market funds can also trade the securities more efficiently and with better 

execution, because they deal in these securities on a daily basis. As noted above, the 

Investment Company Act prohibits money market funds from issuing any securities 

senior to their common shares, which eliminates the risk of competing claims for the 

portfolio securities, and the 1 0% limitation on illiquid securities assures that funds have 

adequate resources to meet redemptions in normal market conditions. Extreme market 

conditions, such as aftermath of the Lehman Brothers bankruptcy, affect all market 

participants, so FCMs are likely to find it more difficult to liquidate direct holdings than a 

money market fund would be to find it difficult to liquidate portfolio securities. 

II. Money market funds merit continued inclusion as "permitted investments" 

because the financial industry's use of money market funds confirms their 

safety and usefulness. 

A. The asset growth and use of money market funds. 

Unsurprisingly, under the broad protections of the Investment Company Act of 

1940, institutional investors began to use money market funds during the 1970s. Their 

confidence in money market funds grew after the SEC adopted Rule 2a-7 in 1983. Since 

Rule 2a-7 was adopted approximately $325 trillion has successfully moved through 

money market funds. In the last ten years, money market funds' assets under 
July 10, 2009 

Page 9 of 13 

management have increased significantly. In 1998, $1.4 trillion was invested in money 

market funds and by the end of 2008, approximately $3.8 trillion was invested in money 

market funds.ll Federal and state regulators have also helped expand the use of money 

market funds. For example money market funds have been approved as investments for 

national banks by the Office of the Comptroller of the Currency; for state-chartered banks 

by the Board of Governors of the Federal Reserve System and the Federal Deposit 

Insurance Corporation; for federal credit unions by the National Credit Union 

Administration; and for state and municipal entities. 12 Further, in addition to having been 

approved by the CFTC as an investment vehicle for customer funds held in custody by 

FCMs, money market funds have been approved for margin collateral by the Clearing 

Corporation, the New York Mercantile Exchange, the Chicago Mercantile Exchange, and 

the Options Clearing Corporation. 

Moreover, institutional investors are attracted to money market funds as they are 

deemed to be cash equivalents for financial reporting purposes and have a simple, clearcut accounting treatment allowing companies to not have to track realized or unrealized 

capital gains and losses. Thus, money market funds avoid the detailed recordkeeping 

required when there are any changes in the balances of these investments. 

Due to the regulatory regime and useful benefits of money market funds, 

institutional investors increasingly have made use of them for cash investment. As of 

January 2008, an estimated 80 percent of U.S. companies used money market funds to 

help them manage their cash balances. 13 

B. Money market funds compared to other investment options. 

Federated agrees with the CFTC's declaration in its Advance Notice that FCMs 

have managed well their customer segregated funds. Money market funds are 

creditworthy instruments and highly regulated with full disclosure and reporting of their 

operations and risks. As a practical matter, these disclosures and reporting requirements 

provide FCMs and other users with a clear mechanism to evaluate their appropriate use of 

money market funds in terms of credit, liquidity and other factors in contrast with the 

investment products with which money market funds compete. 

To further demonstrate the creditworthiness of money market funds, we submit 

the charts below which compare asset categories held by a money market fund (i.e., the 

Federated Prime Obligations Fund), which would meet the requirements of Regulation 

1.25 with those held by U.S. commercial banks, the unsecured obligations of which 

11 See Statements by Chairman Shapiro and Commissioners Walter and Aguilar, Money Market Fund 

Reform, Securities and Exchange Commission Open Meeting, June 24,2009. 

12 See Appendix D of the Report of the ICI Report for a review of state regulation specifying that money 

market funds and other stable NA V investments are permissible investments. 

13 See Statements by Chairman Shapiro and Commissioner Aguilar, Money Market Fund Reform, 

Securities and Exchange Commission Open Meeting, June 24,2009. 
July 10, 2009 

Page 10 of 13 

would also qualify under Regulation 1.25. As shown, the Federated Prime Obligations 

Fund has 100% of its assets in low-risk, high-credit quality securities. Conversely, U.S. 

commercial banks hold only 13% oftheir assets in Treasury and Agency securities. They 

hold their remaining assets in other securities, real estate, commercial and consumer 

loans. 

Assets 

Federated Prime Obli ations Fund 

Highly Rated Assets: 

Treasury/ Agency /Repo 

A-1 + Securities 

A-1 Securities 

Subtotal Highly Rated 

Assets: 

Non-Prime Assets: 

Total 

9% 

72% 

19% 

100% 

100% 

Source: Federated Prime Obligations Fund 

Assets 

U.S. Commercial Banks 

Highly Rated Assets: 

Treasury and Agency 

securities 

Other Securities 

Interbank Loans 

Cash 

Subtotal Highly Rated 

Assets: 

13% 

11% 

3% 

3°/o 

30% 

Real Estate Loans 33% 

Commercial/Industrial Loans 12% 

Other Loans and Leases 9% 

Consumer Loans 8% 

Other Assets 8% 

Non-Prime Assets: 

Total 

Sources: U.S. Federal Reserve 

Bulletin; 

Treasury Strategies, Inc. 

70% 

100% 

The underlying strong asset base of the Federated Prime Obligations Fund and 

money market funds in general, as compared with the asset base of U.S. Commercial 

banks, is a reflection of the comparative financial strength of money market funds. 

In addition, as noted above, money market funds contribute operational efficiency 

and liquidity to institutional investors. Because of their size and structure, money market 

funds offer economies of scale to FCMs and other investors. Transaction costs are 

reduced to the benefit of investors. Further, money market funds offer enhanced liquidity 

to investors without withdrawal penalties or other dealer costs. Investors in money 

market funds may redeem their shares at $1.00 on any business day. Of importance, their 

stability of $1.00 minimizes tax, accounting and recordkeeping issues. 

III. The Reserve Primary Fund was an isolated incident resulting from a unique 

set of circumstances and should not guide the CFTC's policies regarding the 

inclusion of money market funds as "permitted investments" under 

Regulation 1.25. 

On September 16, 2008, the Reserve Primary Fund announced that it would no 

longer maintain a stable net asset value of $1 per share due to the bankruptcy of Lehman 

Brothers Holdings, Inc. ("Lehman Brothers"). Lehman Brothers had filed for bankruptcy 

on the morning of September 15, and the Primary Fund held $785 million of Lehman 
July 10, 2009 

Page II of 13 

Brothers obligations. Although the trustees of the Primary Fund initially valued the 

Lehman Brothers obligations at 80 cents on the dollar, they reduced the value to zero on 

the afternoon of September 16. This revaluation, coupled with large redemptions by the 

Primary Fund's shareholders, and the advisor's failure to provide any support to the fund, 

caused the net asset value ("NAV") to fall to approximately 97 cents per share and forced 

the Primary Fund to price its shares below a dollar. 

Lehman Brothers' bankruptcy coincided with other market shaking events, such 

as the federal bailout of insurance giant AIG and the acquisition of Merrill Lynch by 

Bank of America. The ensuing market tumult included a broad sell off in equities, an 

increase in bank deposit insurance from $100,000 to $250,000, and a "flight to quality" 

with wholesale investment in short-term U.S. Treasury obligations. This period also 

witnessed major redemptions from non-government money market funds. According to 

the ICI, "Despite these difficulties, all money market funds other than the Primary Fund 

were able to maintain a stable $1.00 NAV, although a number of sponsors of money 

market funds did take actions to protect their shareholders." 14 

During this period of financial instability, the money market funds were able to 

absorb this unprecedented waive of redemptions, but by the end of the week it was clear 

that liquidity was in short supply and the resulting loss of capital was having severe 

economic consequences. The Treasury Department offered a limited guarantee of money 

market fund balances as of September 19, 2008 (the "Treasury Guarantee Program"). 

Almost all money market funds signed up for the Treasury Guarantee Program, and 

redemptions quickly returned to normal levels. Money market funds or their advisers 

paid an estimated $813 million in premiums, with no claims made under the program. 

By year-end, assets in prime money market funds had returned to the same level as the 

beginning of the 2008. 15 Notably, assets added to the money market funds after 

September 19, 2008 were not covered by the Treasury Guarantee Program, so the growth 

in assets clearly reflected a return of investor confidence in the funds. · 

We observe that, notwithstanding the unprecedented redemption pressures to 

which money market funds were subject, only one of the approximately 800 money 

market funds 16 actually broke a dollar, and only two other funds placed constraints on 

redemptions. Of these later two, one was merged into another fund on September 24, at 

which time liquidity was fully restored to the shareholders. The other returned to normal 

operations after participating in the Treasury Guarantee Program. None of the 

shareholders in these funds lost any money. For the overwhelming majority of 

shareholders, money market funds proved a better source of liquidity than direct holdings 

in commercial paper, short-term corporate or municipal notes, certificates of deposit or 

other non-government obligations, none of which could have been sold without a 

substantial loss during the week of September 15, 2008. 

14 ICI Report at 61 [footnote omitted]. 

15 See 2009 Investment Company Fact Book at Table 38. 

16 See 2009 Investment Company Fact Book at Table 5. 
July I 0, 2009 

Page 12 of 13 

As a result of the action taken during this stressful period the losses to investors 

were confined to one money market fund and as to that fund relatively little loss to the 

investors occurred. The U.S. government program of the Treasury Department, coupled 

with assistance from the Federal Reserve, which announced a series of broad initiatives 

designed to stabilize the market, were highly successful steps in maintaining confidence 

in money market funds. Since the demise of the Reserve Primary Fund, money market 

funds' overall value has increased by approximately 20 percent. Accordingly, the 

Reserve Primary Fund incident may be properly viewed as an isolated event and the 

result of a unique set of circumstances. We do not think that the extraordinary events of 

the week of September 15, 2008 should guide the CFTC's policies regarding the 

inclusion of money market funds as permitted investments under Regulation 1.25. 

IV. Conclusion. 

As the CFTC noted in its request for public comment concerning "permitted 

investments," FCMs have managed well their customer segregated funds under 

Regulation 1.25. Federated Investors, Inc., with an estimated three billion dollars of 

customer money pursuant to CFTC's Regulation 1.25 program, concurs with this 

assessment and submits that money market funds have made a substantial contribution to 

the success ofthe CFTC program for customer segregated funds under Regulation 1.25. 

The foundation of the creditworthiness of money market funds is the exacting 

requirements of SEC Rule 2a-7, the comprehensive disclosures required to be made of 

their business, and the extensive oversight of their financial and operational conditions, 

both internally by their directors and externally by the SEC, self-regulatory organizations, 

accountants and custodians. The CFTC's Regulation 1.25 also reinforces the SEC's 

liquidity requirements of money market funds by requiring redemptions by the next 

business day. 

Further, money market fund shares offer other operational advantages to FCMs. 

As compared with alternative investments, money market funds have significantly less 

concentration and operational risks. Many FCMs would find it difficult and costly to 

replicate a money market fund's portfolio directly or to promptly liquidate such 

instruments if the need arose. Money market funds offer yield advantages as well as the 

avoidance of transaction costs. We submit that these costs and operational considerations 

are important in assessing the adequacy of money market funds as "permitted 

investments" for customer segregation purposes. 

Moreover, the CFTC's designation of money market funds as a "permitted 

investment" under Regulation 1.25 is not unique. Numerous federal and state regulatory 

programs have approved the use of money market funds as appropriate investments for 

cash. Indeed, clearing corporations and municipal entities use money market funds to 

meet their respective customer segregation requirements. This wide acceptance of money 

market funds for regulatory and financial purposes is attributable to their safety, liquidity 

and usefulness. 
. .. 

July 10, 2009 

Page 13 of 13 

Finally, money market funds have a track record of strength, durability, and 

resilience to market conditions, with some 800 money market funds having weathered the 

financial storm of 2008 well. Importantly, only one fund has experienced customer 

losses, such losses being proportionately small. Further, money market funds provide 

unique liquidity to investors as contrasted with other short-term investment options. 

For all of the reasons noted above, we submit that money market funds continue 

to merit inclusion as "permitted investments" and do not need to be the subject of any 

CFTC proposal to amend Regulation 1.25. 

* * * * * 

If you have any questions, please call Lee A. Pickard or Peter McLeod at 202-

223-4418. On behalf of Federated Investors, Inc., we appreciate your consideration of 

our comments. 

cc: Mr. Eugene F. Maloney, Executive Vice President, 

Federated Investors, Inc.