[Code of Federal Regulations]
[Title 17, Volume 1]
[Revised as of April 1, 2003]
From the U.S. Government Printing Office via GPO Access
[CITE: 17CFR1.25]

[Page 63-68]
 
              TITLE 17--COMMODITY AND SECURITIES EXCHANGES
 
             CHAPTER I--COMMODITY FUTURES TRADING COMMISSION
 
PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT--Table of Contents
 
Sec. 1.25  Investment of customer funds.

    (a) Permitted investments. (1) Subject to the terms and conditions 
set forth in this section, a futures commission merchant or a clearing 
organization may invest customer funds in the following instruments 
(permitted investments):
    (i) Obligations of the United States and obligations fully 
guaranteed as to principal and interest by the United States (U.S. 
government securities);
    (ii) General obligations of any State or of any political 
subdivision thereof (municipal securities);
    (iii) General obligations issued by any agency sponsored by the 
United States (government sponsored agency securities);
    (iv) Certificates of deposit issued by a bank (certificates of 
deposit) as defined in section 3(a)(6) of the Securities Exchange Act of 
1934, or a domestic branch of a foreign bank that carries deposits 
insured by the Federal Deposit Insurance Corporation;
    (v) Commercial paper;
    (vi) Corporate notes;
    (vii) General obligations of a sovereign nation; and
    (viii) Interests in money market mutual funds.
    (2) In addition, a futures commission merchant or a clearing 
organization may buy and sell the permitted investments listed in 
paragraphs (a)(1)(i) through (viii) of this section pursuant to 
agreements for resale or repurchase of the instruments, in accordance 
with the provisions of paragraph (d) of this section.
    (b) General terms and conditions. A futures commission merchant or a 
clearing organization is required to manage the permitted investments 
consistent

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with the objectives of preserving principal and maintaining liquidity 
and according to the following specific requirements.
    (1) Marketability. Except for interests in money market mutual 
funds, investments must be ``readily marketable'' as defined in 
Sec. 240.15c3-1 of this title.
    (2) Ratings. (i) Initial requirement. Instruments that are required 
to be rated by this section must be rated by an NRSRO. 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 the NRSRO.
    (ii) Effect of downgrade. If an NRSRO lowers the rating of an 
instrument that was previously a permitted investment on the basis of 
that rating to below the minimum rating required under this section, the 
value of the instrument recognized for segregation purposes will be the 
lesser of:
    (A) The current market value of the instrument; or
    (B) The market value of the instrument on the business day preceding 
the downgrade, reduced by 20 percent of that value for each business day 
that has elapsed since the downgrade.
    (3) Restrictions on instrument features. (i) With the exception of 
money market mutual funds, no permitted investment may contain an 
embedded derivative of any kind, including but not limited to a call 
option, put option, or collar, cap, or floor on interest paid.
    (ii) No instrument may contain interest-only payment features.
    (iii) No instrument may provide payments linked to a commodity, 
currency, reference instrument, index, or benchmark except as provided 
in paragraph (b)(3)(iv) of this section.
    (iv) Variable-rate securities are permitted, provided the interest 
rates paid correlate closely and on an unleveraged basis to a benchmark 
of either the Federal Funds target or effective rate, the prime rate, 
the three-month Treasury Bill rate, or the one-month or three-month 
LIBOR rate.
    (v) Certificates of deposit, if negotiable, must be able to be 
liquidated within one business day or, if not negotiable, must be 
redeemable at the issuing bank within one business day, with any penalty 
for early withdrawal limited to any accrued interest earned according to 
its written terms.
    (4) Concentration. (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.
    (ii) Repurchase agreements. For purposes of determining compliance 
with the concentration limits set forth in this section, securities sold 
by a futures commission merchant or clearing organization subject to 
agreements to

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repurchase shall be combined with securities held by the futures 
commission merchant or clearing organization as direct investments.
    (iii) Reverse repurchase agreements. The concentration limit 
applicable to securities of each issuer that are held by a futures 
commission merchant or clearing organization subject to agreements to 
resell to a particular counterparty shall be as follows:
    (A) For a portfolio of securities held that are subject to resale to 
a counterparty that has been rated single A or higher by two or more 
NRSROs, or whose obligation under an agreement is guaranteed by a parent 
or affiliate company that has been rated single A or higher by two or 
more NRSROs:
    (1) Government sponsored agency debt, issued by the same issuer and 
supplied by the counterparty, may not exceed 50 percent of the total 
amount of securities supplied by such counterparty; and
    (2) Municipal securities, certificates of deposit, commercial paper, 
and corporate notes, issued by the same issuer and supplied by the 
counterparty, may not exceed 10 percent of the total amount of 
securities supplied by such counterparty; and
    (B) For a portfolio of securities held that are subject to resale to 
a counterparty that does not have a rating or guarantee as specified in 
paragraph (b)(4)(iii)(A) of this section:
    (1) Government sponsored agency debt, issued by the same issuer and 
supplied by the counterparty, may not exceed 25 percent of the total 
amount of securities supplied by such counterparty; and
    (2) Municipal securities, certificates of deposit, commercial paper, 
and corporate notes, issued by the same issuer and supplied by the 
counterparty, may not exceed 5 percent of the total amount of securities 
supplied by such counterparty.
    (iv) Treatment of securities issued by affiliates. For purposes of 
determining compliance with the concentration limits set forth in this 
section, securities issued by entities that are affiliated, as defined 
in paragraph (b)(6) of this section, shall be aggregated and deemed the 
securities of a single issuer. An interest in a permitted money market 
mutual fund is not deemed to be a security issued by its sponsoring 
entity.
    (v) Treatment of customer-owned securities. For purposes of 
determining compliance with the concentration limits set forth in this 
section, securities owned by the customers of a futures commission 
merchant and posted as margin collateral are not included in total 
assets held in segregation by the futures commission merchant, and 
securities posted by a futures commission merchant with a clearing 
organization are not included in total assets held in segregation by the 
clearing organization.
    (5) Time-to-maturity. Except for investments in money market mutual 
funds, the dollar-weighted average of the time-to-maturity of the 
portfolio, as that average is computed pursuant to Sec. 270.2a-7 of this 
title, may not exceed 24 months.
    (6) Investments in instruments issued by affiliates. (i) A futures 
commission merchant shall not invest customer funds in obligations of an 
entity affiliated with the futures commission merchant, and a clearing 
organization shall not invest customer funds in obligations of an entity 
affiliated with the clearing organization. An affiliate includes parent 
companies, including all entities through the ultimate holding company, 
subsidiaries to the lowest level, and companies under common ownership 
of such parent company or affiliates.
    (ii) A futures commission merchant or clearing organization may 
invest customer funds in a fund affiliated with that futures commission 
merchant or clearing organization.
    (7) Recordkeeping. A futures commission merchant and a clearing 
organization shall prepare and maintain a record that will show for each 
business day with respect to each type of investment made pursuant to 
this section, the following information:
    (i) The type of instruments in which customer funds have been 
invested;
    (ii) The original cost of the instruments; and
    (iii) The current market value of the instruments.
    (c) Money market mutual funds. The following provisions will apply 
to the

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investment of customer funds in money market mutual funds (the fund).
    (1) Generally, 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 Sec. 270.2a-7 of this title. A 
fund sponsor, however, may petition the Commission for an exemption from 
this requirement. The Commission may grant such an exemption provided 
that the fund can demonstrate that it will operate in a manner designed 
to preserve principal and to maintain liquidity. The application for 
exemption must describe how the fund's structure, operations and 
financial reporting are expected to differ from the requirements 
contained in Sec. 270.2a-7 of this title and the risk-limiting 
provisions for direct investments contained in this section. The fund 
must also specify the information that the fund would make available to 
the Commission on an ongoing basis.
    (2) 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, except for a fund 
exempted in accordance with paragraph (c)(1) of this section.
    (3) A futures commission merchant or clearing organization shall 
maintain the confirmation relating to the purchase in its records in 
accordance with Sec. 1.31 and note the ownership of fund shares (by 
book-entry or otherwise) in a custody account of the FCM or clearing 
organization in accordance with Sec. 1.26(a). If the futures commission 
merchant or the clearing organization holds its shares of the fund with 
the fund's shareholder servicing agent, the sponsor of the fund and the 
fund itself are required to provide the acknowledgment letter required 
by Sec. 1.26.
    (4) 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 
futures commission merchant or clearing organization by that time.
    (5) A fund must be able to redeem an interest by the business day 
following a redemption request by the futures commission merchant or 
clearing organization. Demonstration that this requirement has been met 
may include either an appropriate provision in the offering memorandum 
of the fund or a separate side agreement between the fund and a futures 
commission merchant or clearing organization.
    (6) The agreement pursuant to which the futures commission merchant 
or clearing organization has acquired and is holding its interest in a 
fund must contain no provision that would prevent the pledging or 
transferring of shares.
    (d) Repurchase and reverse repurchase agreements. A futures 
commission merchant or clearing organization may buy and sell the 
permitted investments listed in paragraphs (a)(1)(i) through (viii) of 
this section pursuant to agreements for resale or repurchase of the 
securities (agreements to repurchase or resell), provided the agreements 
to repurchase or resell conform to the following requirements:
    (1) The securities are specifically identified by coupon rate, par 
amount, market value, maturity date, and CUSIP or ISIN number.
    (2) Counterparties are limited to a bank as defined in section 
3(a)(6) of the Securities Exchange Act of 1934, a domestic branch of a 
foreign bank insured by the Federal Deposit Insurance Corporation, a 
securities broker or dealer, or a government securities broker or 
government securities dealer registered with the Securities and Exchange 
Commission or which has filed notice pursuant to section 15C(a) of the 
Government Securities Act of 1986.
    (3) The transaction is executed in compliance with the concentration 
limit requirements applicable to the securities held in connection with 
the agreements to repurchase referred to in paragraphs (b)(4)(ii) and 
(iii) of this section.
    (4) The transaction is made pursuant to a written agreement signed 
by the parties to the agreement, which is consistent with the conditions 
set forth in paragraphs (d)(1) through (d)(12) of this section and which 
states that the parties thereto intend the transaction to

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be treated as a purchase and sale of securities.
    (5) The term of the agreement is no more than one business day, or 
reversal of the transaction is possible on demand.
    (6) The securities transferred under the agreement are held in a 
safekeeping account with a bank as referred to in paragraph (d)(2) of 
this section, a clearing organization, or the Depository Trust Company 
in an account that complies with the requirements of Sec. 1.26.
    (7) The futures commission merchant or the clearing organization may 
not use securities received under the agreement in another similar 
transaction and may not otherwise hypothecate or pledge such securities, 
except securities may be pledged on behalf of customers at another 
futures commission merchant or clearing organization. Substitution of 
securities is allowed, provided, however, that:
    (i) The qualifying securities being substituted and original 
securities are specifically identified by date of substitution, market 
values substituted, coupon rates, par amounts, maturity dates and CUSIP 
or ISIN numbers;
    (ii) Substitution is made on a ``delivery versus delivery'' basis; 
and
    (iii) The market value of the substituted securities is at least 
equal to that of the original securities.
    (8) The transfer of securities is made on a delivery versus payment 
basis in immediately available funds. The transfer is not recognized as 
accomplished until the funds and/or securities are actually received by 
the custodian of the futures commission merchant's or clearing 
organization's customer funds or securities purchased on behalf of 
customers. The transfer or credit of securities covered by the agreement 
to the futures commission merchant's or clearing organization's customer 
segregated custodial account is made simultaneously with the 
disbursement of funds from the futures commission merchant's or clearing 
organization's customer segregated cash account at the custodian bank. 
On the sale or resale of securities, the futures commission merchant's 
or clearing organization's customer segregated cash account at the 
custodian bank must receive same-day funds credited to such segregated 
account simultaneously with the delivery or transfer of securities from 
the customer segregated custodial account.
    (9) A written confirmation to the futures commission merchant or 
clearing organization specifying the terms of the agreement and a 
safekeeping receipt are issued immediately upon entering into the 
transaction and a confirmation to the futures commission merchant or 
clearing organization is issued once the transaction is reversed.
    (10) The transactions effecting the agreement are recorded in the 
record required to be maintained under Sec. 1.27 of investments of 
customer funds, and the securities subject to such transactions are 
specifically identified in such record as described in paragraph (d)(1) 
of this section and further identified in such record as being subject 
to repurchase and reverse repurchase agreements.
    (11) An actual transfer of securities by book entry is made 
consistent with Federal or State commercial law, as applicable. At all 
times, securities received subject to an agreement are reflected as 
``customer property.''
    (12) The agreement makes clear that, in the event of the bankruptcy 
of the futures commission merchant or clearing organization, any 
securities purchased with customer funds that are subject to an 
agreement may be immediately transferred. The agreement also makes clear 
that, in the event of a futures commission merchant or clearing 
organization bankruptcy, the counterparty has no right to compel 
liquidation of securities subject to an agreement or to make a priority 
claim for the difference between current market value of the securities 
and the price agreed upon for resale of the securities to the 
counterparty, if the former exceeds the latter.
    (e) Deposit of firm-owned securities into segregation. A futures 
commission merchant shall not be prohibited from directly depositing 
unencumbered securities of the type specified in this section, which it 
owns for its own account, into a segregated safekeeping account or from 
transferring any such securities from a segregated account to its

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own account, up to the extent of its residual financial interest in 
customers' segregated funds; provided, however, that such investments, 
transfers of securities, and disposition of proceeds from the sale or 
maturity of such securities are recorded in the record of investments 
required to be maintained by Sec. 1.27. All such securities may be 
segregated in safekeeping only with a bank, trust company, clearing 
organization, or other registered futures commission merchant. 
Furthermore, for purposes of Secs. 1.25, 1.26, 1.27, 1.28 and 1.29, 
investments permitted by Sec. 1.25 that are owned by the futures 
commission merchant and deposited into such a segregated account shall 
be considered customer funds until such investments are withdrawn from 
segregation.

[65 FR 78010, Dec. 13, 2000, as amended at 65 FR 82271, Dec. 28, 2000]