Investment of Customer Funds by Futures Commission Merchants and Derivatives Clearing Organizations

As announced at the beginning of November 2023 (EventID 23782), the U.S. Commodity Futures Trading Commission (CFTC) has now published in the Federal Register its consultation on proposed revisions to the regulations governing the safeguarding and investment of client funds by futures commission merchants (FCMs) and derivatives clearing organizations (DCOs). To recall, the CFTC seeks to expand the scope of permissible investments by FCMs and DCOs, replace the London InterBank Offered Rate (LIBOR) with SOFR, the Secured Overnight Financing Rate, as a benchmark for certain adjustable rate securities that qualify as permissible investments, and remove the obligation of depositories holding customer funds to grant the Commission read-only electronic access to transaction and account balance information.
As the key provisions of the proposed modifications were already described in above noted event and to avoid redundancies, we refrain from providing detailed information in this context at this point. However, in brief, the CFTC proposes
– to add sovereign debt of Canada, France, Germany, Japan, and the United Kingdom to the list of permissible instruments that FCMs and DCOs may invest customer funds in subject to the certain conditions and limitations;
– to expand the list of permissible counterparties which are currently subject to stringent insurance and registration requirements to include, for instance, certain Central Banks and foreign banks and brokers provided that they meet certain capital requirements;
– to permit ETF investments subject to various conditions;
– to remove corporate notes, corporate bonds, and commercial paper from the list of permissible investments;
– to replace the LIBOR benchmark in adjustable rate securities with SOFR; and
– to narrow the qualification of money market funds (MMFs) in which DCOs and FCMs may invest in following the SEC’s recent redefinition of MMFs to include funds that invest predominantly in cash, government securities, and fully collateralized repurchase transactions.