[Federal Register Volume 65, Number 250 (Thursday, December 28, 2000)]
[Rules and Regulations]
[Pages 82270-82272]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-32976]


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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