[Federal Register: May 22, 2009 (Volume 74, Number 98)]
[Proposed Rules]
[Page 23962-23964]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr22my09-11]
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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: secretary@cftc.gov. 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, sjosephson@cftc.gov, or Phyllis P. Dietz, Associate
Director, 202-418-5449, pdietz@cftc.gov, 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
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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]