CFTC Finalizes Rule on Investment of Customer Funds

The CFTC adopted amendments to rules governing the safeguarding and investment of customer funds by futures commission merchants and derivatives clearing organizations.

The CFTC stated that the changes update the list of permitted investments and make other modifications to improve flexibility and efficiency while preserving the safety of customer funds. Specifically, the CFTC made the following amendments to CFTC Rule 1.25 ("Investment of customer funds"):

Permissible Investment of Customer Funds. The CFTC (i) added certain foreign sovereign debt and short-term US Treasury ETFs to the list of permitted investments; (ii) limited permissible market funds ("MMFs") to government MMFs that do not choose to rely on the ability to impose discretionary liquidity fees; and (iii) eliminated certificates of deposit issued by a bank, corporate notes and commercial paper from the list of permitted investments.

1. Foreign Sovereign Debt. The CFTC amended Rule 1.25 to permit FCMs and DCOs to invest customer funds in debt securities issued by Canada, France, Germany, Japan and the United Kingdom subject to the following conditions: (i) the FCM or DCO may invest in the sovereign debt of one of the specified countries to the extent the FCM or DCO has balances owed to its customers denominated in the relevant country's currency; (ii) the two-year credit default spread of the country issuing the debt is 45 basis points or less; (iii) the dollar-weighted average time-to-maturity of the portfolio of investments in permitted foreign sovereign debt does not exceed 60 calendar days; and (iv) the remaining time-to-maturity of any permitted foreign sovereign debt security does not exceed 180 calendar days.
2. Repos on Foreign Sovereign Debt. In a related amendment, the CFTC amended the counterparty and depository requirements of CFTC Rule 1.25 to permit FCMs and DCOs to purchase and sell permitted sovereign debt securities pursuant to repurchase and reverse repurchase agreements. 
3. Short-Term US Treasury ETFs. The CFTC amended Rule 1.25 to permit FCMs and DCOs to invest customer funds in a short-term US Treasury ETF if (i) the EFT is registered as an investment company under the Investment Company Act and holds itself out as an ETF under ICA Rule 6c-11 ("Exchange traded funds"); (ii) the ETF is passively managed and seeks to replicate the performance of a published short-term US Treasury security index composed of bonds, notes and bills with a remaining maturity of up to 12 months, issued or guaranteed by the US Treasury Department; (iii) the ETF invests at least 95 percent of its assets in securities comprising the US Treasury securities index whose performance the ETF seeks to replicate; (iv) in the case of primary market transactions, the FCM or DCO purchases or redeems interests in the ETF on a delivery versus payment basis at the ETF's net asset value and can convert ETF interests into cash within one business day of a redemption request; and (v) in the case of secondary market transactions, the FCM, or DCO purchases or sells interests in the ETF on a US national securities exchange.
4. Permitted Government MMFs. The CFTC limited the scope of MMFs that qualify as permitted investments to "government MMFs," as defined in ICA Rule 2a-7 ("Money Market Funds") that do not choose to rely on the ability to impose discretionary liquidity fees under ICA Rule 2a-7. For this purpose, a "government MMF" is an SEC-registered investment company that invests at least 99.5 percent of the fund's total assets in cash, "government securities" (i.e. US Treasury securities, securities guaranteed by the US Government and US agency obligations), or repurchase transactions that are fully collateralized by government securities.
5. Elimination of Corporate Notes, Corporate Bonds and Commercial Paper. The CFTC eliminated of corporate notes, corporate bonds and commercial paper under CFTC Rule 1.25. The rule had permitted FCMs and DCOs to invest customer funds in commercial paper and corporate notes and bonds that were guaranteed by the United States under the Temporary Liquidity Guarantee Program ("TLGP"). The TLGP expired in 2012, and securities guaranteed under the TLGP have not been available to FCMs and DCOs since 2012.

SOFR. The CFTC replaced the London Interbank Offered Rate ("LIBOR") with the Secured Overnight Financing Rate ("SOFR") as the benchmark for variable and floating interest rates for permitted investments.

Electronic Access to Accounts. The CFTC eliminated the requirement for FCMs to deposit customer funds solely with depositories that agree to provide the CFTC with direct, read-only electronic access to accounts holding customer funds. The CFTC will instead rely on the automated daily segregation confirmation system developed by CME and NFA and the CFTC's authority to obtain customer account balances and related information from permitted depositories.

Related Amendments. In connection with updating the list of permitted investments, the CFTC (i) specified the capital charges applicable to the new categories of permitted investments; (ii) revised concentration limits for permitted investments; (iii) updated the required contents of the Segregation Investment Detail Reports ("SIDR") that FCMs file on a bi-monthly basis with the CFTC and the FCM's designated SRO, to reflect the changes to the list of permitted investments; (iv) revised the contents of the template acknowledgement letters to be signed by depositories holding customer funds to reflect the elimination of the read-only electronic access provisions and the revised scope of permitted MMFs; and (v) revised the contents of the customer risk disclosure statement under CFTC 1.55 to reflect the changes to the list of permitted investments.

The compliance date for the revised rules is 30 days after publication in the Federal Register, except for revisions to the SIDR and customer risk disclosure statement, which have a compliance date of March 31, 2025.