The CFTC has approved a final rule on investment of customer funds in the wake of the MF Global bankruptcy. Interestingly, the CFTC repeatedly cites the MF Global comment letter on the proposed rulemaking.
The Commodity Exchange Act in section 4d(a)(2) prescribes that customer funds can only be placed in a set list of permitted investments. From 2000 to 2005, the Commission granted exemptions to this list, loosening the rules for the investment of customer funds. These exemptions allowed futures commission merchants, or FCMs, to invest customer funds in AAA-rated sovereign debt, as well as to lend customer money to another side of the firm through repurchase agreements.
The new regulations seek to simplify Regulation 1.25 and impose requirements that can better mitigate credit, liquidity and market risk and ensure the preservation of principal and maintenance of liquidity. The CFTC has:
- narrowed the scope of investment choices;
- raised certain standards imposed on permitted investments individually and on a portfolio basis; and
- increased safety by promoting diversification.
More specifically, the new rule:
- eliminates foreign sovereign debt as a permitted investment;
- eliminates in-house transactions and repurchase agreements with affiliates. Repurchase agreements with third-parties are still allowed, subject to a 25% counterparty concentration limit; and
- fulfills a Dodd-Frank requirement that the CFTC remove all reliance on credit ratings from its regulations.
Check dodd-frank.com frequently for updates on the Dodd-Frank Act and other important securities law matters.