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CFTC Staff Provides No-Action Relief to FCMs for SOFR-Linked Investments's picture
Commentary by Nihal Patel

The CFTC Market Participants Division ("MPD") provided temporary no-action relief to permit futures commission merchants ("FCMs") to invest customer funds in certain securities containing an adjustable interest rate that is benchmarked to the Secured Overnight Financing Rate ("SOFR").

The MPD provided relief in response to separate requests from FIA and R.J. O'Brien & Associates LLC. Under CFTC Rule 1.25(b)(2)(iv)(A), permitted investments that contain an adjustable rate of interest must "correlate closely with" or be determined by reference to certain specified rates, which include LIBOR but not SOFR.

The MPD stated that it will not recommend enforcement against an FCM investing customer funds in permitted investments that contain a SOFR-benchmarked adjustable rate of interest. The MPD clarified that the relief extends to both direct investment and repurchase transactions involving such securities. The MPD stated that the relief is contingent upon an FCM complying with all other "relevant terms and conditions" under CFTC Rule 1.25, including the requirements to:

  • manage the investment of customer funds in a manner "consistent with the objectives of preserving principal and maintaining liquidity";

  • establish that the adjustable rate security falls under one of the permitted investments enumerated under CFTC Rule 1.25(a); and

  • ensure that the investment is liquid enough to be converted into cash within one business day without a "material discount" in its value.

Additionally, the CFTC stated that the temporary relief does not relieve FCMs from compliance with CFTC Rule 1.29 ("Gains and Losses Resulting from Investment of Customer Funds") or 1.17(c)(5)(v) ("Minimum Financial Requirements for Futures Commission Merchants and Introducing Brokers").

The relief will expire on December 31, 2022.


Given that references to LIBOR are baked into Rule 1.25, the CFTC should amend the rule. The no-action letter notes that the CFTC staff is currently considering a rulemaking petition submitted by FIA.

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