CFTC Proposes Revising Permitted Investments by FCMs and DCOs
The CFTC proposed changing the types of investments that futures commission merchants ("FCMs") and derivatives clearing organizations ("DCOs") can make using customer funds. The proposed rule-making addressed petitions for review submitted by Invesco, FIA and CME.
The CFTC stated that the proposed rule would provide an "appropriate degree of investment flexibility" for capital efficiencies for FCMs and DCOs without compromising the safety of customer funds. The CFTC said that the rulemaking would amend CFTC Rule 1.25 ("Investment of customer funds") to (i) allow investment in two new asset types: (a) foreign sovereign debt of Canada, France, Germany, Japan and the United Kingdom and (b) certain short-term Treasury exchange-traded funds ("ETFs"), subject to certain conditions; (ii) limit the scope of money market funds (MMFs) eligible for investment under Rule 1.25; and (iii) prohibit investment in corporate notes, corporate bonds and commercial paper.
The CFTC proposal also (i) specified the market risk capital charges that an FCM would be required to take on the revised permitted investments when determining a firm's adjusted net capital, (ii) included requirements that each FCM must report to the CFTC the name, location and amount of customer funds held by each depository and (iii) eliminated requirements that a depository holding customer funds must provide the CFTC with read-only electronic access to accounts for the FCM to treat funds as customer segregated fund accounts.
The CFTC said that the proposed rule would allow for the replacement of the London Interbank Offered Rate ("LIBOR") with the Secured Overnight Financing Rate ("SOFR") as a permitted benchmark for the interest rate of adjustable rate securities that qualify as permitted investments. This aspect of the proposal would largely codify relief provided in CFTC Letter 22-21.
Comments on the Proposed amendments must be submitted by January 17, 2024.
Statements
CFTC Chair Rostin Behnam said that the proposal would make the derivatives markets "more resilient and less concentrated." He added that the proposal would "not undermine or weaken any of the safeguards that the [CFTC] has had in place since 2011" regarding the safety of sovereign debt issuances.
CFTC Commissioner Kristin N. Johnson called the proposal "only part of [the CFTC's] broader framework to preserve customer assets." Ms. Johnson supported the proposal and suggested that the CFTC further consider (i) rules parallel to the proposal to protect retail customer assets, (ii) a "regulatory metric" that takes into account the challenges of using a credit default swap and (iii) forthcoming rules regarding U.S. treasuries clearing.
CFTC Commissioner Christy Goldsmith Romero supported the prohibitions on customer fund investment types and advocated for further analysis of the proposed exemptions for ETFs and sovereign debt.
CFTC Commissioner Caroline D. Pham commended the "regulatory clarity" the proposal provided by codifying outstanding no-action relief and replacing LIBOR with SOFR as a permitted benchmark for adjustable rate securities.