CFTC Allows Certain Treasury ETFs for Use as Swaps Collateral

The CFTC Market Participants Division ("Division") clarified that certain US Treasury exchange-traded funds ("UST ETFs") may be used as eligible initial and variation margin for uncleared swap transactions.

In the CFTC Staffer Interpretation, Letter No. 25-11, Division Staff confirmed that UST ETFs—provided they are registered with the SEC as open-end investment companies under the Investment Company Act of 1940 and meet specified conditions—qualify as "redeemable securities in a pooled investment fund." As such, the Division said, they are eligible collateral for initial margin under CFTC Rule 23.156 ("Forms of Margin"), specifically, Rule 23.156(a)(1)(ix) ("Securities in the form of redeemable securities in a pooled investment funds"). 

The Division further clarified that such UST ETFs may also be posted or collected as variation margin when transacting with financial end users, consistent with CFTC Regulation 23.156(b)(1)(ii) ("Variation margin - Swaps with a swap entity").

To qualify, the UST ETF must:

• issue and redeem shares based solely on the daily NAV following an investment or redemption request;

• limit holdings to US Treasury securities and immediately-available US dollar cash; and

• refrain from securities lending, borrowing, repurchase agreements, or similar arrangements.

CFTC Staff said that covered swap entities may apply haircuts to UST ETFs based either on the weighted average of the underlying assets or the haircut applicable to the longest maturity security held by the fund, as provided in CFTC Rule 23.156(a)(3) and Rule 23.156(b)(2).

The Division noted that this interpretation is consistent with recommendations from the CFTC's Global Markets Advisory Committee Subcommittee on Global Market Structure, which found that UST ETFs enhance collateral efficiency and liquidity and may reduce systemic risk during periods of market volatility.