[Federal Register Volume 74, Number 98 (Friday, May 22, 2009)]
[Proposed Rules]
[Pages 23962-23964]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-12020]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 1 and 30

RIN 3038-AC79


Investment of Customer Funds and Funds Held in an Account for 
Foreign Futures and Foreign Options Transactions

AGENCY: Commodity Futures Trading Commission.

ACTION: Advance notice of proposed rulemaking; request for public 
comment.

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SUMMARY: The Commodity Futures Trading Commission (Commission) is 
seeking public comment on possible changes to its regulations regarding 
the investment of customer funds segregated pursuant to Section 4d of 
the Commodity Exchange Act (customer segregated funds) and funds held 
in an account subject to Commission Regulation 30.7 (30.7 funds). 
Commission Regulation 1.25 provides that a derivatives clearing 
organization (DCO) or a futures commission merchant (FCM) holding 
customer segregated funds may invest those funds in certain permitted 
investments subject to specified requirements that are designed to 
minimize exposure to credit, liquidity, and market risks. The 
Commission is considering significantly revising the scope and 
character of these permitted investments and is seeking public comment 
before issuing proposed rule amendments. Additionally, in conjunction 
with its consideration of possible amendments to Regulation 1.25, the 
Commission is considering applying the investment requirements of 
Regulation 1.25, including any prospective amendments, to investments 
of 30.7 funds. The Commission is seeking public comment on this action 
before issuing proposed rule amendments.

DATES: Comments must be received on or before July 21, 2009.

ADDRESSES: Comments may be submitted by any of the following methods:
     Federal eRulemaking Portal: http://www.regulations.gov/http://frwebgate.access.gpo/cgi-bin/leaving. Follow the instructions 
for submitting comments.
     E-mail: [email protected]. Include ``Advance Notice of 
Proposed Rulemaking for Regulations 1.25 and 30.7'' in the subject line 
of the message.
     Fax: 202-418-5521.
     Mail: Send to David A. Stawick, Secretary, Commodity 
Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, 
NW., Washington, DC 20581.
     Courier: Same as mail above.
    All comments received will be posted without change to http://www.CFTC.gov/. Reference should be made to ``Advance Notice of Proposed 
Rulemaking for Regulations 1.25 and 30.7.''

FOR FURTHER INFORMATION CONTACT: Sarah E. Josephson, Special Counsel, 
202-418-5684, [email protected], or Phyllis P. Dietz, Associate 
Director, 202-418-5449, [email protected], Division of Clearing and 
Intermediary Oversight, Commodity Futures Trading Commission, Three 
Lafayette Centre, 1151 21st Street, NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION: 

I. Background

A. Regulation 1.25

    Under Section 4d(a)(2) of the Commodity Exchange Act (Act),\1\ the

[[Page 23963]]

investment of customer segregated funds is limited to obligations of 
the United States and obligations fully guaranteed as to principal and 
interest by the United States (U.S. government securities), and general 
obligations of any State or of any political subdivision thereof 
(municipal securities). Pursuant to authority under section 4(c) of the 
Act,\2\ the Commission substantially expanded the list of permitted 
investments by amending Commission Regulation 1.25 in December 2000 to 
permit investments in general obligations issued by any enterprise 
sponsored by the United States (government sponsored enterprise 
securities), bank certificates of deposit, commercial paper, corporate 
notes, general obligations of a sovereign nation, and interests in 
money market mutual funds.\3\ In connection with that expansion, the 
Commission included several provisions intended to control exposure to 
credit, liquidity, and market risks associated with the additional 
investments, e.g., requirements that the investments satisfy specified 
rating standards and concentration limits, and be readily marketable 
and subject to prompt liquidation.\4\
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    \1\ 7 U.S.C. 6d(a)(2).
    \2\ 7 U.S.C. 6(c).
    \3\ 17 CFR 1.25. See 65 FR 77993 (Dec. 13, 2000) (publishing 
final rules); and 65 FR 82270 (Dec. 28, 2000) (making technical 
corrections and accelerating effective date of final rules from 
February 12, 2001 to December 28, 2000).
    \4\ Id.
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    The Commission further modified Regulation 1.25 in 2004 and 2005. 
In February 2004, the Commission adopted amendments regarding 
repurchase agreements with customer-deposited securities and time-to-
maturity requirements for securities deposited in connection with 
certain collateral management programs of DCOs.\5\ In May 2005, the 
Commission adopted amendments related to standards for investing in 
instruments with embedded derivatives, requirements for adjustable rate 
securities, concentration limits on reverse repurchase agreements, 
transactions by FCMs that are also registered as securities brokers or 
dealers (in-house transactions), rating standards and registration 
requirements for money market mutual funds, an auditability standard 
for investment records, and certain technical changes.\6\
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    \5\ 69 FR 6140 (Feb. 10, 2004).
    \6\ 70 FR 28190 (May 17, 2005).
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    The Commission has been, and continues to be, mindful that customer 
segregated funds must be invested in a manner that minimizes their 
exposure to credit, liquidity, and market risks both to preserve their 
availability to customers upon demand and to enable these assets to be 
quickly converted to cash at a predictable value to minimize systemic 
risk. Toward these ends, Regulation 1.25 establishes a general 
prudential standard by requiring that all permitted investments be 
``consistent with the objectives of preserving principal and 
maintaining liquidity.'' \7\
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    \7\ 17 CFR 1.25(b).
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    In 2007, the Commission's Division of Clearing and Intermediary 
Oversight (Division) launched a review of the nature and extent of 
investments of customer segregated funds and 30.7 funds in order to 
obtain an up-to-date understanding of investment strategies and 
practices and to assess whether any changes to the regulations would be 
appropriate. As part of this review, all Commission-registered DCOs and 
FCMs carrying customer accounts provided responses to a series of 
questions. As the Division was conducting follow-up interviews with 
respondents, the market events of September 2008 occurred and changed 
the financial landscape such that the data previously gathered no 
longer reflected current market conditions. Recent events in the 
economy have underscored the importance of conducting periodic 
reassessments, and through this advance notice of proposed rulemaking 
the Commission is refocusing its review of permitted investments for 
customer segregated funds and 30.7 funds.
    The Commission believes that DCOs and FCMs have managed customer 
segregated funds and 30.7 funds responsibly during this difficult 
economic time. Nonetheless, the market events of the past year, notably 
the failures of certain government sponsored enterprises, difficulties 
encountered by certain money market mutual funds in honoring redemption 
requests, illiquidity of certain adjustable rate securities, and 
turmoil in the credit ratings industry, have challenged many of the 
fundamental assumptions regarding investments. As a result, the 
Commission believes it is an especially appropriate time to review 
permitted investments for customer segregated funds and 30.7 funds.

B. Regulation 30.7

    Regulation 30.7 \8\ governs an FCM's treatment of customer money, 
securities, and property associated with positions in foreign futures 
and foreign options. Regulation 30.7 was issued pursuant to the 
Commission's plenary authority under Section 4(b) of the Act.\9\ 
Because Congress did not expressly apply the limitations of Section 4d 
of the Act to 30.7 funds, the Commission historically has not subjected 
those funds to the investment limitations applicable to customer 
segregated funds.
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    \8\ 17 CFR 30.7.
    \9\ 7 U.S.C. 6(b).
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    The investment guidelines for 30.7 funds are general in nature.\10\ 
Although Regulation 1.25 investments offer a safe harbor, the 
Commission has not limited investments of 30.7 funds to permitted 
investments under Regulation 1.25. The Commission believes that it may 
be appropriate to impose such a limitation because the same prudential 
concerns that arise in the context of customer segregated funds also 
arise in the context of 30.7 funds. Applying the same standards to both 
types of funds would be consistent with the Act and would establish a 
bright line for the industry and the Commission.
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    \10\ See Commission Form 1-FR-FCM Instructions at 12-9 (Mar. 31, 
2007) (``In investing funds required to be maintained in separate 
section 30.7 account(s), FCMs are bound by their fiduciary 
obligations to customers and the requirement that the secured amount 
required to be set aside be at all times liquid and sufficient to 
cover all obligations to such customers. Regulation 1.25 investments 
would be appropriate, as would investments in any other readily 
marketable securities.'').
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II. Public Comment Solicited

    The Commission is considering significantly revising the scope and 
character of permitted investments for customer segregated funds and 
30.7 funds and is seeking public comment before issuing any proposed 
amendments to Regulations 1.25 or 30.7.
    In the interest of gathering as much information as possible before 
reaching any conclusions, the Commission is soliciting comments from 
the public regarding which instruments should continue to be permitted 
investments for customer segregated funds under Regulation 1.25. The 
Commission welcomes comments on which instruments no longer merit 
inclusion as permitted investments, as well as comments in support of 
any new instruments that might qualify as permitted investments. The 
Commission also requests comment on appropriate limitations or 
safeguards that should be applied to permitted investments.
    The Commission is particularly interested in relevant data that 
commenters can provide regarding the credit, liquidity, and market risk 
of various investment choices. The Commission is open both to evidence 
in support of retaining current permitted investments and evidence 
indicating a need to eliminate certain permitted investments. 
Additionally, the Commission urges commenters to analyze the benefits 
and burdens of any

[[Page 23964]]

potential regulatory modifications in light of current market 
realities.
    Given the substantive and practical concerns that may arise from 
altering the current list of permitted investments, the Commission is 
seeking the views of all interested parties before regulatory changes, 
if any, are proposed. The Commission also will conduct its own research 
and analysis. Before any regulatory changes are adopted there will be 
an opportunity for additional public comment.
    The Commission requests comment on all aspects of Regulation 1.25, 
as follows:
    A. Permitted Investments Under the Act. U.S. government securities 
and municipal securities are permitted investments under Section 
4d(a)(2) of the Act and Regulation 1.25(a)(1)(i)-(ii). Please provide 
any comments, information, research, or data regarding appropriate 
regulatory requirements that might be imposed in order to better 
safeguard customer segregated funds.
    B. Other Permitted Investments Under Regulation 1.25. Please 
provide any comments, information, research, or data in support of 
retaining, rescinding, or modifying authorization to invest customer 
segregated funds in the following instruments:
    1. Government sponsored enterprise securities (Regulation 
1.25(a)(1)(iii));
    2. Certificates of deposit issued by a bank as defined in section 
3(a)(6) of the Securities Exchange Act of 1934,\11\ or a domestic 
branch of a foreign bank that carries deposits insured by the Federal 
Deposit Insurance Corporation (Regulation 1.25(a)(1)(iv));
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    \11\ 15 U.S.C. 78c(a)(6).
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    3. Commercial paper (Regulation 1.25(a)(1)(v));
    4. Corporate notes or bonds (Regulation 1.25(a)(1)(vi));
    5. General obligations of a sovereign nation (Regulation 
1.25(a)(1)(vii)); and
    6. Interests in money market mutual funds (Regulation 
1.25(a)(1)(viii)).
    C. Transactions in Permitted Investments. Please provide any 
comments, information, research, or data in support of retaining, 
rescinding, or modifying authorization to enter into the following 
transactions, and please consider the effect that a more limited list 
of permitted investments would have on:
    1. Repurchase and reverse repurchase transactions using customer 
cash or securities purchased with customer cash (Regulation 
1.25(a)(2)(i));
    2. Repurchase transactions using customer-deposited securities 
(Regulation 1.25(a)(2)(ii)); and
    3. In-house transactions by FCMs that are also registered as 
securities brokers or dealers (Regulation 1.25(a)(3)(i)-(iii)).
    D. Limitations and Safeguards. Please provide any comments, 
information, research, or data regarding the general terms and 
conditions of permitted instruments, including:
    1. Marketability/liquidity (Regulation 1.25(b)(1));
    2. Rating requirements (Regulation 1.25(b)(2));
    3. Restrictions on instrument features, such as instruments that 
contain an embedded derivative and adjustable rate securities 
(Regulation 1.25(b)(3));
    4. Issuer concentration limits (Regulation 1.25(b)(4));
    5. Time-to-maturity (for an investment portfolio or individual 
instruments) (Regulation 1.25(b)(5));
    6. Investments in instruments issued by affiliates (Regulation 
1.25(b)(6));
    7. Requirements specific to interests in money market mutual funds 
(Regulation 1.25(c));
    8. Requirements specific to repurchase agreements and reverse 
repurchase agreements (Regulation 1.25(d)); and
    9. Requirements specific to in-house transactions (Regulation 
1.25(e)).
    The Commission requests comment on Regulation 30.7, as follows:
    Please provide comments, information, research, or data on the 
effect of applying the requirements of Regulation 1.25 to investments 
of 30.7 funds. The Commission also requests comments, information, 
research, or data relating to whether there is any basis supporting the 
continued application of two different investment standards.

    Issued in Washington, DC, on May 19, 2009, by the Commission.
David A. Stawick,
Secretary of the Commission.
[FR Doc. E9-12020 Filed 5-21-09; 8:45 am]
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