GMAC TECHNICAL ISSUES SUBCOMMITTEE RECOMMENDATION

Money Market Funds as Eligible Collateral

Issue: Harmonize Money Market Funds (MMFs) as eligible collateral for

non‐cleared margin with other regulatory regimes.

Recommendations: 1) Finalize proposed rule amendment to remove asset transfer

restriction from eligible collateral rules.

2) Encourage the US Prudential Regulators to adopt a

corresponding amendment to their non‐cleared margin rules,

including allowing third country funds.

3) Encourage EU policy makers to remove the third country fund

restriction for eligible collateral from their non‐cleared margin

rules.

Background,  

Supporting

Arguments or

Examples & Data (if

any)

CFTC’s MMF Rule Amendment

The CFTC proposed rule amendmenti  to remove the asset transfer

restriction from MMFs used as eligible collateral for non‐cleared

margin will harmonize the parameters for MMF use with the UK and

resolve one of the impediments to the use of MMFs between the US

and the EU.. Implementing the proposed rule will also allow the CFTC

to self‐align MMFs with its eligible collateral requirements for cleared

margin, per CFTC Regulation 1.25 (which governs the investment of

customer money by futures commission merchants (“FCMs”) without

similar asset transfer restrictions).

The proposed rule amends aspects of the Margin Requirements for

Uncleared Swaps for Swap Dealers and Major Swap Participants

(“Margin Rules”) based on the Recommendations to Improve Scoping

and Implementation of Initial Margin Requirements for Non‐Cleared

Swaps (“GMAC Report”) adopted by the CFTC’s Global Markets

Advisory Committee (“GMAC”) on July 22, 2020.  The efforts of the

Commission to take further steps to adopt the recommendations in

the report are greatly appreciated by the industry.  The CFTC should

finalize the proposed amendment, and the industry will then begin

to implement such changes once they become effective.

Rationale for finalizing rule amendment

The use of MMFs as eligible collateral is not as a direct pledge (or

asset transfer) to meet margin obligations. MMFs are traditionally
used when a pledgor meets a margin requirement with cash and then

the custodian transforms, or sweeps, the cash into a MMF.

Therefore, without the ability to use MMFs widely, cash is not able to

be used for Initial Margin (IM).  

In the ISDA Margin Survey Year‐End 2022, it was reported by 32 firms

that cash was used for 73.8% of Regulatory VM, 68.4% of

Discretionary VM, 37% of Independent Amount, and 2% of

Regulatory IM.

The inability to post cash as IM and then transform to MMFs is a

significant challenge for legal entities and funds that do not have

ready‐access to other types of eligible collateral because of their

investment strategies, and therefore trading, operational, and

settlement costs impact end‐user performance. This results in

increased transactional risks if a legal entity or fund has to transform

cash into another type of eligible collateral before the collateral

settlement cut‐off time or maintain excess collateral within an asset

type that is not part of the fund’s primary investment strategy.

Although MMFs are allowed as eligible collateral under CFTC and

other regulatory regimes’ uncleared margin rules, there are key

differences that do not allow a US entity to post a MMF that would

also meet the regulatory requirements for an EU or UK entity.  These

differences are with the use of funds (i) issued in another jurisdiction

(referred to as “third country funds”) and (ii) which allow asset

transfers (e.g. use of repurchase agreements, reverse repurchase

agreements and securities lending (“repo”).

CFTC Margin Rules currently allow for third country funds to be

posted, but do not allow for asset transfers. Because EU UCITS, for

example, are allowed to execute asset transfers, US entities that face

EU counterparties cannot use EU UCITs as eligible collateral. Cross‐

border harmonization on MMF eligibility will enable greater use of

MMFs, resulting in reduced operational risk and investment

performance drag to end‐users.

But this is not just a cross border issue; US entities facing US

counterparties have limited availability of MMFs because most funds

allow repo.  In addition, funds that do not allow repo have stricter

reinvestment cut‐off times which can negatively impact operational

workflows and settlement processing.

Due to advocacy efforts from the industry, the UK now allows for

third country funds to be usedii

.   As the UK rules do not restrict

MMFs that allow asset transfers to be used as eligible collateral, the
CFTC’s amendment will enable use of MMFs between non‐

prudentially regulated swap dealers (SDs) and UK entities.  Because

the SEC allows SDs to follow CFTC requirements for eligible collateral,

the CFTC’s amendment also facilitates the use of MMFs for margining

security‐based swaps transacted between non‐prudentially regulated

SDs and UK counterparties.

Next step: Domestic and EU harmonization

The CFTC has taken the lead in the US to address the

recommendations in the GMAC Report; these efforts now include

eliminating the asset transfer restrictions on MMFs.  However,

without domestic alignment, the benefit will only be available to non‐

prudentially regulated SDs and their counterparties.  CFTC can

further assist by encouraging US Prudential Regulators to make

corresponding amendments to their non‐cleared margin rules,

including allowing third country funds.

Unlike the CFTC and the UK, the EU does not currently allow for third

country funds to be used as eligible collateral.  Despite the CFTC’s

effort to remove the asset transfer restriction, unless substituted

compliance is available to the parties, MMFs will still not be eligible

collateral between its SDs and EU entities. Having taken important

steps themselves to resolve half of the cross‐border issue, we

recommend that the CFTC encourage EU policymakers to remove

the third country fund restriction as the UK has done.

i 88 FR 53409 ii PS11/22 – Margin requirements for non‐centrally cleared derivatives: Amendments to BTS 2016/2251 | Bank of

England