2024-30927. Investment of Customer Funds by Futures Commission Merchants and Derivatives Clearing Organizations

Instrument	Size	Current concentration limits		New concentration limits
		Asset-based	Issuer-based	Asset-based	Issuer-based
U.S. government securities	N/A	No limit	No limit	No limit	No limit.
Municipal Securities	N/A	10%	5%	10%	5%.
U.S. agency obligations	N/A	50%	25%	50%	25%.
Bank CDs	N/A	25%	5%	N/A	N/A.
Government MMFs investing solely in U.S. government securities ( i.e., securities issued or fully guaranteed by the U.S. government)	>$1B assets and management company with >25B in assets	No limit	No limit	50%	25% per family 10% per fund.
	<$1B assets or management company with <$25B in assets	10%	10% ( de facto limit based on asset-based limit)	10%
( print page 7848)
Government MMFs as defined in SEC Rule 2a-7 (including MMFs whose portfolio includes U.S. agency obligations and other instruments)	>$1B assets and management company with >25B in assets	50%	25% per family 10% per fund.	50%
	<$1B assets or management company with <$25B in assets	10%		10%
Qualified ETFs	>$1B assets and management company with >25B in assets	N/A	N/A	50%	25% per family 10% per fund
	<$1B assets or management company with <$25B in assets	N/A	N/A	10%

As in the Proposal, Specified Foreign Sovereign Debt will be excluded from the concentration limits.^[562] This is consistent with the current exclusion of U.S. government securities from the asset-based and issuer-based concentration limits. The Commission reiterates that the relative strength of the economies and limited default risk of Canada, France, Germany, Japan, and the United Kingdom are demonstrated by such countries being ranked among the seven largest economies in the International Monetary Fund's classification of advanced economies,^[563] and by the countries being members of the G7, which represents the world's largest industrial democracies. In addition, the Commission has determined that the two-year debt instruments that would qualify as Specified Foreign Sovereign Debt have credit, liquidity, and volatility characteristics that are consistent with two-year U.S. Treasury securities.

Furthermore, the new condition that would permit an FCM or DCO to invest Customer Funds in Specified Foreign Sovereign Debt only to the extent that the FCM or DCO has balances owed to customers denominated in the currency of the applicable country should limit the amount of Customer Funds that an FCM or DCO may invest in the Specified Foreign Sovereign debt.^[564] Additionally, the condition that an FCM or DCO must stop making direct investments, or engaging in reverse repurchase agreements, involving the Specified Foreign Sovereign Debt of a country whose credit default spread on two-year debt instruments exceeds 45 BPS would further preserve the principal of customers' foreign currency deposits held by FCMs and DCOs.^[565] Lastly, not imposing asset-based or issuer-based concentration limits on an FCM's or DCO's investments in Specified Foreign Sovereign Debt is consistent with the Commission's 2018 Order, which did not impose concentration limits on a DCO's investment of futures customer funds or Cleared Swaps Customer Collateral in the sovereign debt of France or Germany. Accordingly, the Commission will not adopt asset-based and issuer-based concentration limits for investments in Specified Foreign Sovereign Debt.

As discussed above, the Commission received a substantial number of comments with respect to the issue of asset-based and issuer-based concentration limits pertaining to the proposed limits for Permitted Government MMFs and Qualified ETFs.^[566] These include the comments previously discussed from FIA, CME, and BlackRock that advocated for no asset-based concentration limit for Permitted Government MMFs and Qualified ETFs, emphasizing the greater diversification and resiliency such funds provide in times of market stress.^[567]

The Commission has considered these comments but continues to believe that the asset-based concentration limits set forth in the Proposal are an effective tool in ensuring that Customer Funds are invested in a manner that limits risks arising from a high concentration in any particular Permitted Investment asset class. Based on its experience administering its customer protection rules, the Commission declines to allow FCMs and DCOs to invest up to 100 percent of segregated Customer Funds in any category of Permitted Government MMFs and Qualified ETFs.

That the new Permitted Government MMF category is broader in scope than MMFs investing solely in U.S. government securities is particularly relevant here. This new Permitted Government MMF category is defined by reference to SEC Rule 2a-7 as an MMF that invests at least 99.5 percent or more of its total assets in cash, government securities, and/or Repurchase Transactions that are collateralized fully.^[568] The scope of underlying instruments in which a Permitted Government MMF would be allowed to invest is therefore broader than that of the MMFs currently excluded from the concentration limits of Commission regulation 1.25(c) ( i.e., MMFs investing solely in U.S. government securities). To account for the potential increase in risk associated with such broader scope, and in the ( print page 7849) interest of imposing a simple and consistent approach to concentration limits, the Commission proposed, and the Commission is now adopting, a single concentration limit of 50 percent for all Permitted Government MMFs of a certain size, without distinguishing between funds investing solely in U.S. government securities and those whose portfolio may also include U.S. agency obligations and/or other instruments within the limits of SEC Rule 2a-7. More precisely, under the Proposal, an FCM's or DCO's investment of Customer Funds in interests in Permitted Government MMFs with at least $1 billion in assets and whose management company manages at least $25 billion in assets would be limited to no more than 50 percent of the total Customer Funds computed separately for each of the segregated account classes of futures customer funds, Cleared Swaps Customer Collateral, and 30.7 customer funds.^[569] This asset-based concentration limit that the Commission is adopting is consistent with the concentration limits applicable to U.S. agency obligations, which, along with U.S. Treasury securities, are a permitted underlying instrument for Permitted Government MMFs.

The new Permitted Investment category of Qualified ETFs provides additional flexibility to FCMs and DCOs with respect to the investment of Customer Funds, as FCMs and DCOs could invest 50 percent in Permitted Government MMFs, and the other 50 percent in Qualified ETFs under the Final Rule, which lessens any practical impact of an overall asset-based concentration limit of 50 percent for each type of fund.

Moreover, Commission staff reviewed SIDR Reports filed by FCMs for the period between January 16, 2024 and June 28, 2024. The available data from the reports indicate that FCMs are investing a relatively low proportion of the Customer Funds they hold in MMFs in comparison to direct purchases of U.S. Government Securities, and that such firms' investments in MMFs are sufficiently small that they are unlikely to rise to levels that would breach the asset-based concentration limits that the Commission is adopting in this Final Rule.^[570]

With respect to issuer-based concentration limits for Permitted Government MMFs and Qualified ETFs, as discussed above, no commenter on this issue supported the proposed 5 percent limit on any individual Permitted Government MMF or Qualified ETF. The commenters differed, however, as to whether the applicable limit for any individual Permitted Government MMF or Qualified ETF should be the 10 percent limit that is the existing limit for certain MMFs, or a higher limit of 25 percent that is applicable to fund families.^[571]

In light of these comments, the Commission is adopting issuer-based concentration limits for MMFs and ETFs that differ from those in the Proposal. With respect to the issuer-based concentration limits on Permitted Government MMFs, the Commission proposed to limit investments of Customer Funds in any single family of Government MMFs to 25 percent, consistent with the existing requirements applicable to MMFs, but to reduce the existing 10 percent limit for investments of Customer Funds in any individual Government MMF, to just 5 percent. The Commission proposed the same limits for Qualified ETFs. In proposing stricter concentration limits, the Commission intended to facilitate the preservation of principal and maintenance of liquidity of Customer Funds through sound diversification standards and to mitigate the potential risk that a large portion of Customer Funds could become inaccessible due to cybersecurity or operational incidents, among other events.^[572]

In light of comments received, however, the Commission has determined to raise the proposed 5 percent individual fund concentration limit for both Permitted Government MMFs and Qualified ETFs to 10 percent. In proposing to reduce the individual fund threshold to just 5 percent, the Commission's concerns with respect to the risk to principal and potential lack of sufficient liquidity for both Permitted Government MMFs and Qualified ETFs were illustrated by the 2008 “breaking the buck” by the Reserve Primary Fund as described in the Proposal.^[573] But as ICI pointed out, this example involved a Prime MMF that held privately issued debt in its portfolio, which will no longer be a Permitted Investment under the Final Rule.^[574] Other commenters pointed out other practical challenges with regard to the 5 percent limit relating to the requirement that FCMs and DCOs monitor for compliance with concentration limits across a greater number of funds.^[575] Regarding the potential for cyber-attacks, the Commission acknowledges comments highlighting that both Permitted Government MMFs and Qualified ETFs are subject to comprehensive SEC regulatory requirements, which include cyber safeguards.^[576] After considering these comments, the Commission has determined that concentration limits of 10 percent for any individual Permitted Government MMF or Qualified ETF, along with the adoption of the Proposal's 25 percent limit for any signed family of Permitted Government MMFs or Qualified ETFs, should address the Commission's concerns regarding risk to Customer Funds and cybersecurity risks.

The concentration limits set forth in this Final Rule, including increasing the limit for any individual Permitted Government MMF or Qualified ETF from 5 percent to 10 percent (but not 25 percent, as some commenters recommended as discussed above), should promote both the preservation of principal and maintenance of liquidity of Customer Funds through sound diversification standards, while ensuring that the limit is not set so low that the application of the requirement might not be practical. Even with the higher threshold of 10 percent for individual Permitted Government MMFs and Qualified ETFs, this restriction should mitigate the potential risk that FCMs and DCOs may be unable to access a large portion of Customer Funds due to cybersecurity or operational incidents, among other events.

Although commenters generally criticized any issuer-based concentration limit for Permitted Government MMFs and Qualified ETFs as arbitrary,^[577] the Commission has chosen to maintain the existing 10 percent limitation on any individual fund based on its prior experience with this standard. In the Commission's experience, this limit has not proven to be a problem as it applies to current Permitted Investments, and this will not change for Permitted Government MMFs and Qualified ETFs.

( print page 7850)

Although the foregoing discussion is applicable to both Permitted Government MMFs and Qualified ETFs, a few issues are of particular relevance to Qualified ETFs. As discussed above, for Qualified ETFs, the asset-based and issuer-based concentration limits will be the same as those for Permitted Government MMFs. In addition to raising similar objections to the issuer-based concentration limits for Qualified ETFs as for Permitted Government MMFs, commenters specifically noted that few families of ETFs offer more than two eligible funds, making the proposed 5 percent per fund concentration limit overly restrictive.^[578] The Commission recognizes that the small number of funds may limit the ability of FCMs and DCOs to fully utilize the Qualified ETFs allocation, but prior to this Final Rule, ETFs were not Permitted Investments at all. Moreover, even if there is only a small number of Qualified ETFs currently, more such ETFs may be created to meet the interest of FCMs and DCOs following the Commission's inclusion of Qualified ETFs in Commission regulation 1.25. Even if additional Qualified ETFs are not created in response to industry demand, however, because there is a relatively high 50 percent asset-based concentration limit on Permitted Government MMFs that are economically similar to Qualified ETFs, an FCM or DCO should have sufficient flexibility to invest Customer Funds in a combination of Permitted Government MMFs and Qualified ETFs to gain their desired exposure, provided the FCM or DCO determines that such investments are appropriate.

C. Futures Commission Merchant Capital Charges on Permitted Investments

The Commission discussed in the Proposal that Commission regulations 1.29, 22.2(e)(1), and 30.7(i) provide that FCMs and DCOs, as applicable, are financially responsible for any losses resulting from the investment of futures customer funds, Cleared Swaps Customer Collateral, and 30.7 customer funds, respectively.^[579] To reserve liquidity for potential losses resulting from the investments of Customer Funds, Commission regulation 1.17(c)(5)(v) requires an FCM to take prescribed capital charges (or “haircuts”) on such investments in computing the firm's regulatory capital.^[580] The capital charges are designed to address potential market risk associated with the FCM's holding of Permitted Investments, and to ensure that the firm has sufficient liquid financial resources to cover potential realized and unrealized losses associated with the Permitted Investments, while also retaining sufficient funds in segregation to fully meet its financial obligation to customers. Commission regulation 1.17(c)(5)(v) further provides that an FCM must apply the prescribed capital charges specified in Rule 15c3-1 ^[581] under the Securities Exchange Act (“SEC Rule 15c3-1”) ^[582] and appendix A to SEC Rule 15c3-1 ^[583] to the Permitted Investments.

As discussed in section IV.A.2. of this preamble, the Commission is amending the Permitted Investments under Commission regulation 1.25 to include Specified Foreign Sovereign Debt instruments ( i.e., the sovereign debt of Canada, France, Germany, Japan, and the United Kingdom).^[584] Under the Final Rule, the total dollar-weighted average time-to-maturity of each of the portfolios of Canadian, French, German, Japanese, and United Kingdom debt may not exceed 60 calendar days, and the total remaining time-to-maturity for any individual debt instrument may not exceed 180 calendar days.^[585]

Pursuant to SEC Rule 15c3-1(c)(2)(vi), an FCM investing Customer Funds in qualifying sovereign debt of Canada would have no capital charge for debt instruments with a remaining time-to-maturity of less than 3 months, and a capital charge of 0.5 percent of the market value for debt instruments with a remaining time-to-maturity of 3 to 6 months.^[586] The capital charges for the sovereign debt of France, Germany, Japan, and the United Kingdom are determined under SEC rules by reference to nonconvertible debt securities with a fixed interest rate, fixed maturity date, and minimal credit risk.^[587] Nonconvertible debt securities with a remaining time-to-maturity of one year or less are subject to a capital charge of 2 percent of the market value of the security under SEC Rule 15c3-1(c)(2)(F)(1).^[588] The Commission, therefore, proposed capital charges consistent with the above percentages for FCM investments in Specified Foreign Sovereign Debt instruments.^[589]

As discussed in section IV.A.3. of this preamble, the Commission is also amending the Permitted Investments under Commission regulation 1.25 to include interests in Qualified ETFs.^[590] Neither SEC Rule 15c3-1 nor appendix A to SEC Rule 15c3-1 explicitly address capital charges for Qualified ETFs. SEC Rule 15c3-1(c)(2)(vi)(D)(1) does, however, specify a 2 percent capital charge for a broker-dealer's net position in redeemable securities of a Prime MMF or a Permitted Government MMF. SEC staff has also provided guidance to registered securities brokers or dealers stating that staff would not recommend an enforcement action to its ( print page 7851) Commission if a broker or dealer applied a capital charge of 2 percent of the market value of a creation unit of ETF shares, and a capital charge of 6 percent of the market value of ETF shares that do not comprise a full creation unit.^[591]

The SEC staff's guidance is applicable to a U.S. Treasury ETF that: (i) is an open-end investment company registered with the SEC under the Investment Company Act of 1940 that issues securities redeemable at the fund's NAV; and (ii) invests solely in cash and government securities that are eligible securities under paragraph (a)(11) of SEC Rule 2a-7, which are limited to U.S. Treasury floating and fixed rate bills, notes, and bonds with a remaining term to final maturity of 12 months or less, government money market funds as defined in SEC Rule 2a-7, and/or Repurchase Transactions with a remaining term to final maturity of 12 months or less collateralized by U.S. Treasury securities or other government securities with a remaining term to final maturity of 12 months or less. The SEC staff position is subject to the following conditions: (i) the broker or dealer is not aware of any substantial operational problem that the U.S. Treasury ETF may be experiencing; (ii) the U.S. Treasury ETF shares can be redeemed by a broker or dealer through an authorized participant, the redemption of the U.S. Treasury ETF's shares can be settled in exchange for a basket of the ETF's underlying securities and/or cash by T + 1, and the U.S. Treasury ETF has committed in its registration statement to permit shareholders, except in extraordinary circumstances, to settle transactions within that timeframe; and (iii) the U.S. Treasury ETF's shares are listed for trading on a national securities exchange and trades of such shares are settled in accordance with the standard cycle prescribed by SEC Rule 15c6-1 ^[592] under the Securities Exchange Act of 1934. Based on the SEC's guidance regarding the capital charges for U.S. Treasury ETFs, and the Commission's general incorporation of the SEC capital charges for Permitted Investments as set forth in Commission regulation 1.25(c)(5)(v), the Commission proposed that FCMs investing Customer Funds in redeemable shares ( i.e., creation units) of a Qualified ETF must apply a capital charge equal to 2 percent of the fair market value of the shares in computing the firm's regulatory capital.^[593]

The Commission received two comments on the capital charges for Specified Foreign Sovereign Debt and Qualified ETFs. BlackRock expressed support for the 2 percent FCM capital charge on the shares of Qualified ETFs held as Permitted Investments.^[594] FIA and CME requested that the Commission simplify and clarify the definition of a Qualified ETF to better align the eligibility conditions for Qualified ETFs with the SEC's guidance on capital charges.^[595] The Commission is adopting the FCM capital charges for Specified Foreign Sovereign Debt and Qualified ETF shares held as Permitted Investments shares as proposed. In addition, in a modification from the Proposal, the Commission is not restricting FCMs and DCOs from buying and selling Qualified ETF shares through secondary market transactions, provided that such transactions otherwise comply with the Commission's segregation regulations and liquidity requirements. Therefore, consistent with the capital charge specified in the SEC ETF Letter, the applicable capital charge for Qualified ETF shares that do not comprise a full creation unit is 6 percent.^[596] The Commission intends to keep these capital charges consistent with the SEC to ensure that FCMs, many of whom are also broker-dealers, will only have to comply with a single set of capital charges. Consistency in requirements between the SEC and the Commission, which has long been a defining characteristic of the Commission's regulatory approach to FCM capital, should foster a more level playing field, ultimately promoting trust and integrity within the market.

D. Segregation Investment Detail Report

Commission regulations 1.32(f), 22.2(g)(5), and 30.7(l)(5) require each FCM to submit a SIDR Report twice each month to the Commission and the firm's DSRO listing the names of all banks, trust companies, FCMs, DCOs, and other depositories or custodians holding futures customer funds, Cleared Swaps Customer Collateral, and 30.7 customer funds, respectively.^[597] The SIDR Report also identifies the amount of futures customer funds, Cleared Swaps Customer Collateral, or 30.7 customer funds invested in each category of Permitted Investments: (i) U.S. Treasury securities; (ii) municipal securities; (iii) government sponsored enterprise securities ( i.e., U.S. agency obligations); (iv) bank CDs; (v) commercial paper; (vi) corporate notes or bonds; and (vii) interests in MMFs.

The Commission proposed to amend the content of the SIDR Report to reflect the proposed amendments to the list of Permitted Investments detailed in the Proposal. Specifically, the Commission proposed to amend the content of the SIDR Report by: (i) limiting the reporting of MMFs to Permitted Government MMFs; (ii) deleting the reporting of balances invested in commercial paper, corporate notes and bonds, and bank CDs; ^[598] (iii) adding the reporting of balances invested in the Specified Foreign Sovereign Debt of each particular foreign jurisdiction ( i.e., individual reporting for Canada, France, Germany, Japan, and the United Kingdom); and, (iv) adding balances invested in Qualified ETFs.^[599]

The Commission did not receive any comments on the proposed amendments to the SIDR Report. Therefore, the Commission is amending the content of the SIDR Report specified in Commission regulations 1.32(f), 22.2(g)(5), and 30.7(l)(5) as proposed, to reflect the amendments to the list of Permitted Investments adopted in this Final Rule and reflected in Final Commission regulation 1.25(a)(1).

E. Read-Only Electronic Access to Customer Funds Accounts Maintained by Futures Commission Merchants

Commission regulations currently provide that an FCM may deposit Customer Funds only with depositories and custodians that agree to provide the Commission with direct, read-only electronic access to the Customer Fund accounts (“Read-only Access Provisions”).^[600] The Commission ( print page 7852) adopted the Read-only Access Provisions in 2013 as part of its regulatory reforms to enhance the Commission's customer protection regime in response to the failure of two FCMs that violated customer fund segregation statutory and regulatory requirements, which resulted in shortfalls in Customer Funds balances.^[601] Along with other regulatory measures, the Read-only Access Provisions were designed to address concerns regarding the efficacy of the Commission's oversight program to monitor FCM activities, verify Customer Funds balances, and detect fraud.^[602]

By adopting the Read-only Access Provisions, the Commission established a mechanism to enable Commission staff to review and identify discrepancies between an FCM's daily segregation reports ^[603] and customer fund balances on deposit at various depositories.^[604] The Commission also adopted template acknowledgment letters in appendix A to Commission regulation 1.20 and appendix E to part 30 of the Commission's regulations requiring, among other things,^[605] that a depository acknowledge and agree, pursuant to authorization granted by the FCM, to provide the appropriate Commission staff with the technological connectivity, which may include provision of hardware, software, and related technology and protocol support, to facilitate direct, read-only electronic access to transaction and account balance information.^[606] The template acknowledgment letters in appendix A to Commission regulation 1.26 and appendix F to part 30 contain similar provisions with respect to MMF accounts in which FCMs hold customer segregated funds.^[607]

When adopting the Read-only Access Provisions, the Commission did not anticipate that staff would access FCM accounts on a regular basis to monitor account activity, but, rather, that staff would make use of the Read-only Access Provisions only to obtain account balances and other information that staff could not obtain via the CME and NFA automated daily segregation confirmation system, or otherwise directly from the depositories.^[608] The Commission explained that CME and NFA had adopted rules requiring FCMs to instruct each depository holding Customer Funds to report balances on a daily basis to CME or NFA, respectively.^[609]

In practice, CME and NFA receive account information from all depositories holding Customer Funds on a daily basis pursuant to CME Rule 971.C. and NFA Financial Requirements section 4. CME and NFA have developed programs that compare the daily balances reported by each of the depositories with balances reported by the FCMs in their daily segregation reports that are filed with CME and/or NFA.^[610] These programs generate alerts for discrepancies that exceed defined thresholds. When such alerts occur, CME/NFA staff conduct analysis and follow-up actions, which include engaging with an FCM to clarify or remedy the situation and documenting the outcome.

The Commission's experience with overseeing the administration of the CME and NFA daily segregation confirmation and verification processes for several years has demonstrated that the system provides adequate access to relevant information and is capable of detecting discrepancies in account balances in a timely manner. Moreover, the establishment of an efficient method for obtaining and verifying FCM balances of Customer Funds at each depository supports the Commission's initial expectation that the direct, read-only electronic access would not be the Commission's principal tool for obtaining account information at depositories.^[611] The Commission is retaining the current requirement that FCMs deposit Customer Funds only with depositories that agree that accounts may be examined by Commission or DRSO staff at any reasonable time, and that further agree to reply promptly and directly to any request from Commission or DSRO staff for confirmation of account balances or for provision of any other information regarding or related to an account, to ensure that staff have timely access to information concerning Customer Funds from depositories.^[612]

The Commission has encountered various practical challenges in implementing the Read-only Access Provisions. Due to the number of depositories utilized by FCMs, as well ( print page 7853) as the total number of accounts that FCMs maintain with various depository institutions, the Commission must obtain and keep a current log of credentials, and, in some instances, must obtain and store physical devices required as part of a multi-factor authentication process, for thousands of different depository accounts.^[613] Frequently, Commission staff must be trained to navigate the various account access systems and work regularly with depositories' technology staff to ensure that the systems' security features do not prevent the Commission's access to the accounts.^[614] Furthermore, due to lack of infrastructure, some foreign depository institutions are unable to provide direct electronic access to the customer segregated accounts, offering instead to provide end-of-day account statements by email. These operational challenges put an undue burden on the Commission's resources, particularly considering that the Commission contemplated that the use of real-time access would be limited, and prevent Commission staff from using the Read-only Access Provisions as intended.^[615] Thus, in light of the practical challenges of maintaining direct read-only access to depository accounts and the availability of efficient alternative methods for verifying customer segregated account balances, the Commission proposed to eliminate the Read-only Access Provisions in Commission regulations 1.20 and 30.7, and appendix A to Commission regulation 1.20, appendix A to Commission regulation 1.26, and appendices E and F to part 30 of the Commission's regulations.

The Commission received two comments regarding the proposed elimination of the Read-only Access Provisions.^[616] NFA supported the Commission's Proposal, stating that NFA and CME, collectively, receive account balance information each business day directly from all depositories holding Customer Funds for FCMs.^[617] Furthermore, NFA stated that it and CME have programs that compare daily balances reported by depositories holding Customer Funds to balances reported by FCMs in their daily segregation schedules.^[618] NFA also stated that when there is a discrepancy in reported balances that exceed defined thresholds, alerts are generated and staff conduct appropriate analysis and prompt follow up with an impacted FCM to clarify and remedy the situation, if necessary, and document this work.^[619] In light of its program, NFA stated that it does not believe that the Commission's Read-only Access Provisions provide any meaningful additional customer protection.^[620]

Eurex also supported the Commission's proposal to eliminate the Read-only Access Provisions, stating that it fully agrees with the Proposal's rationale regarding the effectiveness of the CME and NFA daily segregation confirmation and verification process.^[621] Eurex further stated that the Read-only Access Provisions posed substantial challenges, which Eurex believes do not bring any corresponding benefits given the existing CME and NFA confirmation and verification processes.^[622]

The Commission has considered the comments and is eliminating the Read-only Access Provisions as proposed for the reasons stated in the Proposal. Therefore, the Commission is eliminating the Read-only Access Provisions in Commission regulations 1.20(d)(3) and 30.7(d)(3), and appendix A to Commission regulation 1.20 (redesignated as appendix C to part 1), appendix A to Commission regulation 1.26 (redesignated as appendix F to part 1), and appendices E and F to part 30 of the Commission's regulations.^[623]

Consistent with the position stated in the Proposal, FCMs will not need to obtain new acknowledgment letters for existing accounts at depositories holding Customer Funds reflecting the elimination of the Read-only Access Provisions.^[624] Instead, revised acknowledgment letters must be obtained only for accounts opened following the effective date of the rule amendments, or in the event that the FCM is required to obtain a new acknowledgment letter for reasons unrelated to the elimination of the Read-only Access Provisions after the effective date of the rule amendments.

F. Revisions to the Customer Risk Disclosure Statement

Commission regulation 1.55(a) currently requires an FCM, or an introducing broker (“IB”) in the case of an introduced account, to provide each customer that is not an “eligible contract participant” a written risk disclosure statement prior to opening the customer's account (“Risk Disclosure Statement”).^[625] Commission regulation 1.55(a) further requires the FCM or IB to receive a signed and dated statement from the customer acknowledging the receipt and understanding of the Risk Disclosure Statement.^[626] The Commission has specified standardized language for the disclosures that are required to be included in the Risk Disclosure Statement. The disclosures address risks associated with transaction in cleared derivatives, customer segregation, and bankruptcy. Furthermore, Commission regulation 1.55(b)(6) requires the Risk Disclosure Statement to include the following disclosure: The funds you deposit with a futures commission merchant may be invested by the futures commission merchant in certain types of financial instruments that have been approved by the Commission for the purpose of such investments. Permitted investments are listed in Commission regulation 1.25 and include: U.S. government securities; municipal securities; money market mutual funds; and certain corporate notes and bonds. The futures commission merchant may ( print page 7854) retain the interest and other earnings realized from its investment of customer funds. You should be familiar with the types of financial instruments that a futures commission may invest customer funds in.

Although certain conforming amendments to Commission regulation 1.55 are necessary to reflect the changes to the list of Permitted Investments in Commission regulation 1.25, the Commission omitted to include a discussion of potential amendments to Commission regulation 1.55(b)(6) in the Proposal. The Commission is now adopting technical, conforming amendments to Commission regulation 1.55(b)(6) to: (i) delete the reference in the Risk Disclosure Statement to investments in corporate notes and bonds; (ii) clarify that only certain MMFs may be Permitted Investments, and (iii) add investments in Specified Foreign Sovereign Debt and Qualified ETFs, which reflect the revised list of Permitted Investments that are being adopted under this Final Rule. As amended, the disclosure will state: The funds you deposit with a futures commission merchant may be invested by the futures commission merchant in certain types of financial instruments that have been approved by the Commission for the purpose of such investments. Permitted investments are listed in Commission regulation 1.25 and include: U.S. government securities; municipal securities; certain money market funds; certain foreign sovereign debt, and U.S. Treasury exchange-traded funds. The futures commission merchant may retain the interest and other earnings realized from its investment of customer funds. You should be familiar with the types of financial instruments that a futures commission merchant may invest customer funds in.^[627]

The Commission is not requiring FCMs and IBs to obtain acknowledgment of revised Risk Disclosure Statements from existing customers due to the technical amendment. FCMs and IBs are required to use the amended Risk Disclosure Statement for any customers onboarded on or after the compliance date of March 31, 2025. The Commission is setting an extended compliance date to provide FCMs and IBs with sufficient time to make any necessary system changes to reflect the revised Risk Disclosure Statement, which is generally prepared as an electronic document. The extended compliance period also addresses the fact that the Proposal did not include a discussion of proposed conforming amendments to Commission regulation 1.55.

V. Section 4(c) of the Act

With respect to an FCM's or DCO's investment of futures customer funds, the amendments to Commission regulation 1.25 are being promulgated under section 4d(a)(2) of the Act.^[628] Section 4d(a)(2) provides that an FCM or DCO may invest futures customer funds in U.S. government securities and municipal securities. Section 4d(a)(2) further provides that such investments must be made in accordance with such rules and regulations and subject to such conditions as the Commission may prescribe.

Pursuant to its authority under section 4(c) ^[629] of the Act, the Commission proposed to expand the range of instruments in which FCMs and DCOs may invest futures customer funds beyond those listed in section 4d(a)(2) of the Act to enhance the yield available to FCMs, DCOs, and their customers, without compromising the safety of futures customer funds. Section 4(c)(1) of the Act empowers the Commission to “promote responsible economic or financial innovation and fair competition” by exempting any transaction or class of transactions (including any person or class of persons offering, entering into, rendering advice, or rendering other services with respect to, the agreement, contract, or transaction), from any of the provisions of the Act, subject to certain exceptions.^[630] The Commission's authority under section 4(c) extends to transactions covered by section 4d(a)(2) and to FCMs and DCOs that offer, enter into, render advice, or render other services with respect to such transactions. In enacting section 4(c), Congress' goal was to give the Commission a means of providing certainty and stability to existing and emerging markets so that financial innovation and market development can proceed in an effective and competitive manner.^[631] The Commission may grant such an exemption by rule, regulation, or order, after notice and opportunity for hearing, and may do so on application of any person or on its own initiative.^[632]

Section 4(c)(2) of the Act provides that the Commission may grant exemptions under section 4(c)(1) only when it determines that the requirements for which an exemption is being provided should not be applied to the agreements, contracts, or transactions at issue; that the exemption is consistent with the public interest and the purposes of the Act; that the agreements, contracts, or transactions will be entered into solely between appropriate persons; and that the exemption will not have a material adverse effect on the ability of the Commission or any contract market to discharge its regulatory or self&regulatory responsibilities under the Act.^[633] When section 4(c) was enacted, the Conference Report accompanying the Futures Trading Practices Act of 1992 stated that the “public interest” in this context would “include the national public interests noted in the Act, the prevention of fraud and the preservation of the financial integrity of the markets, as well as the promotion of responsible economic or financial innovation and fair competition.” ^[634] The definition of “public interest” in this context is consistent with the purposes of the Act as described in section 3(b) of the Act.^[635]

In the Proposal, the Commission detailed its preliminary analysis on how the proposed expansion of the list of Permitted Investments meets the conditions in section 4(c)(2)(A) as they apply to an exemption with respect to an FCM or DCO. The discussion in the Proposal focused on how the proposed ( print page 7855) expansion is, in the Commission's view, consistent with the public interest and the purposes of the Act.^[636]

The Commission solicited public comment on whether the Proposal satisfies the requirements for exemption under section 4(c) of the Act. Commenters criticizing the expansion of Permitted Investments to Specified Foreign Sovereign Debt asserted that this expansion could put customers at undue financial risk ^[637] and “might compromise the protection of customer funds in favor of expanding the financial industry's quest for wider investment options.” ^[638] Better Markets further stated that the Commission has not provided an adequate public benefit-oriented justification for adding this new type of investment to Commission regulation 1.25.^[639] The Investor Advocacy Group also argued that the Commission should not “embed” the goal of profits into the “fabric” of its definition of the public interest by including potential revenue and profits for FCMs as a public interest purpose.^[640] Better Markets also asserted that higher profits “do not inherently guarantee reduced customer charges.” ^[641] Finally, the Investor Advocacy Group argued that the public interest language in the Act is not intended to promote the financial interests of the exchanges or dealers, but to protect the public and markets from fraud.^[642]

The Commission acknowledges the concerns raised by commenters but after consideration it maintains that the expansion to the list of Permitted Investments adopted in the Final Rule is consistent with the conditions in section 4(c) of the Act as they apply to an exemption with respect to an FCM or DCO. The discussion below describes why the Commission has determined that the exemption granted and the expansion adopted in the Final Rule is consistent with the public interest and the purposes of the Act as required pursuant to section 4(c)(2)(A) of the Act.^[643] The amendments to the Permitted Investments adopted in this Final Rule should provide FCMs and DCOs with an opportunity to diversify their investments of futures customer funds, mitigating the risks that can arise from concentrating futures customer funds in a smaller set of Permitted Investments, without compromising the safety of such investments. To qualify as Permitted Investments, the instruments subject to this Final Rule must meet strict conditions to ensure that investments of futures customer funds are consistent with the objective of preserving principal and maintaining liquidity, as required by Commission regulation 1.25. The additional Permitted Investments that the Commission is adding to Commission regulation 1.25 present credit and volatility characteristics that are comparable to instruments that already qualify as Permitted Investments.

The Final Rule permits FCMs and DCOs to invest futures customer funds only in the sovereign debt of Canada, France, Germany, Japan, and the United Kingdom and only to the extent that the FCMs' and DCOs' hold balances owed to customers denominated in the applicable currency. As noted in section IV.2.b. of this preamble, FCMs held collectively a U.S. dollar equivalent of $64 billion of Customer Funds denominated in CAD, EUR, JPY, and GBP in August 2024. The ability for FCMs and DCOs to invest such Customer Funds in the applicable Specified Foreign Sovereign Debt instruments reduces potential currency risk that DCOs, FCMs, and customers would otherwise be exposed to as a result of investing such foreign currencies in U.S.-dollar denominated assets.

The Final Rule further conditions an FCM's or DCO's investment in Specified Foreign Sovereign Debt to mitigate potential credit and liquidity risk. The Final Rule provides that an FCM's or DCO's portfolio of investments must have a dollar-weighted average time-to-maturity of 60 calendar days or less, which will mitigate price risk and liquidity risk of the debt securities by providing an FCM with an option of holding the securities to maturity and not liquidating the securities at a loss. The Final Rule also mitigates credit risk by prohibiting an FCM or DCO from purchasing new debt securities if the two-year credit default spread of the applicable foreign sovereign exceeds 45 BPS.

In addition, permitting investments in Qualified ETFs, subject to the adopted conditions, including that the ETF is passively managed with the investment objective of replicating the performance of a published short-term U.S. Treasury security index composed of U.S. Treasury bonds, notes, and bills with a remaining maturity of 12 months or less, provides an opportunity for greater diversification of the types of investment options that FCMs and DCOs may use to manage the risk of holding futures customer funds. Qualified ETFs also provide potential benefits to FCMs, particularly smaller FCMs, that may lack the internal operations and resources to effectively manage direct investments in other Permitted Investments, such as U.S. government securities, U.S. agency obligations, and municipal securities. Both Specified Foreign Sovereign Debt and Qualified ETFs have the potential to reduce costs to FCMs, DCOs, and customers, while remaining consistent with the requirement in Commission regulation 1.25 for the preservation of principal and liquidity of Permitted Investments.

Although higher profits for FCMs do not “guarantee” lower costs to customers,^[644] one can reasonably infer that if FCMs and DCOs obtain an additional source of income, they may be less likely to increase the cost of their services, even if such a result cannot be guaranteed. In turn, lower costs for customers may lead to greater market participation and increased market liquidity.

An expanded list of Permitted Investments should thus increase the likelihood that FCMs and DCOs will continue as viable businesses and remain available for customers at a time when the overall number of FCMs continues to decrease. Without the ability to generate revenue and operate at a profit sufficient to remain a going concern, FCMs, which are central to a well-functioning commodity interest market, may continue to exit the business, which would disrupt the ability of farmers, financial service providers, and other commercial enterprises to effectively manage the commodity risk associated with their businesses. A smaller number of FCMs would also concentrate risk associated with Customer Funds in fewer firms, increasing the potential for systemic risk due to the potential for significant disruption should one of the remaining FCMs fail. This is particularly an issue ( print page 7856) in situations where an FCM is required to liquidate under a bankruptcy proceeding and port Customer Funds and positions to other FCMs. To efficiently and effectively manage such a process, the market needs other financially sound FCMs that are willing to receive the positions and funds of the customers of the failing FCM. Without the available capacity, customers may be required to liquidate positions that hedge cash market or other exposures. Therefore, promoting the continued participation of FCMs and DCOs in the market is a public benefit to customers, the efficient operation of the commodity interest markets, and the public in general.

Moreover, additional investment options may also motivate FCMs or DCOs to increase their presence in the commodity interest markets, or encourage new entrants to the industry, thereby increasing competition, which could result in reduced costs to customers and an increase in trading activity and liquidity, which supports efficient price discovery.

Based on the considerations discussed above, the Commission finds that the amendments to the list of Permitted Investments promote responsible economic and financial innovation and fair competition. By providing opportunities for investment diversification and risk management, promoting the continued participation of FCMs and DCOs in the market, and encouraging new entrants to the industry, the expansion of the list of Permitted Investments is consistent with the “public interest” and the purposes of the Act. Thus, the Commission has determined that the Final Rule meets the conditions in section 4(c) of the Act.

VI. Compliance Dates

The compliance date for the Final Rule is the effective date of this release, except for the amendments to the SIDR Report, which are specified in Commission regulations 1.32, 22.2(g)(5), and 30.7(l)(5), and the amendments to the customer Risk Disclosure Statement required under Commission regulation 1.55.

As discussed in section IV.D. of this preamble, the Commission is amending the SIDR Report required under Commission regulations 1.32, 22.2(g)(5), and 30.7(l)(5) to align with the revisions to the list of Permitted Investments adopted herein. Specifically, the Commission is amending the content of the SIDR Report by: (i) revising the reporting of MMFs to include balances invested only in Permitted Government MMFs; (ii) deleting the reporting of balances invested in commercial paper, corporate notes and bonds, and bank CDs; (iii) adding the reporting of balances invested in the Specified Foreign Sovereign Debt of each particular foreign jurisdiction ( i.e., individual reporting for Canada, France, Germany, Japan, and the United Kingdom); and, (iv) adding balances invested in Qualified ETFs.

In addition, as discussed in section IV.F. of this preamble, the Commission is revising the Risk Disclosure Statement that an FCM or IB is required to provide to a customer prior to the opening of an account. The Final Rule amends Commission regulation 1.55(b)(6) by removing corporate notes and bonds from, and by adding Specified Foreign Sovereign Debt and Qualified ETFs to, the list of Permitted Investments that an FCM is authorized to enter into with Customer Funds.

The Commission is setting a compliance date of March 31, 2025 for the amendments to the SIDR Report and Risk Disclosure Statement. The compliance period is intended to provide FCMs with an opportunity to make any necessary updates to their policies, procedures, systems, and practices resulting from the amendment to the SIDR Report. The compliance period will also allow the Commission, NFA, and CME to make necessary updates to the electronic filing systems that are currently used to receive and process the SIDR Reports submitted by FCMs. The compliance period also provides FCMs and IBs with time to update their Risk Disclosure Statements and to make necessary revisions to any electronic account opening documents and processes.

VII. Administrative Compliance

A. Regulatory Flexibility Act

The Regulatory Flexibility Act (“RFA”) requires Federal agencies to consider whether the rules they propose will have a significant economic impact on a substantial number of small entities and, if so, provide a regulatory flexibility analysis respecting the impact.^[645] Whenever an agency publishes a general notice of proposed rulemaking for any rule, pursuant to the notice-and-comment provisions of the Administrative Procedure Act,^[646] a regulatory flexibility analysis or certification typically is required.^[647] As discussed in the Proposal, the amendments being adopted herein affect FCMs and DCOs. The Commission has previously determined that registered FCMs and DCOs are not small entities for purposes of the RFA.^[648] Accordingly, the Chairman, on behalf of the Commission, hereby certifies pursuant to 5 U.S.C. 605(b) that the Proposal will not have a significant economic impact on a substantial number of small entities.

B. Paperwork Reduction Act

The Paperwork Reduction Act of 1995 (“PRA”) ^[649] imposes certain requirements on Federal agencies, including the Commission, in connection with their conducting or sponsoring any collection of information as defined by the PRA. Under the PRA, an agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid control number from the Office of Management and Budget (“OMB”).^[650] The PRA is intended, in part, to minimize the paperwork burden created for individuals, businesses, and other persons as a result of the collection of information by Federal agencies, and to ensure the greatest possible benefit and utility of information created, collected, maintained, used, shared, and disseminated by or for the Federal Government.^[651] The PRA applies to all information, regardless of form or format, whenever the Federal Government is obtaining, causing to be obtained, or soliciting information, and includes required disclosure to third parties or the public, of facts or opinions, when the information collection calls for answers to identical questions posed to, or identical reporting or recordkeeping requirements imposed on, ten or more persons.^[652]

This final rulemaking amends regulations that contain collections of information for which the Commission has previously received control numbers from OMB. The titles for these collections of information are OMB Control No. 3038-0024, Regulations and Forms Pertaining to Financial Integrity of the Market Place; Margin Requirements for SDs/MSPs and OMB Control No. 3038-0091, Disclosure and Retention of Certain Information Relating to Cleared Swaps Customer Collateral.^[653]

( print page 7857)

The Commission requested public comment on all aspects of its burden analysis under the PRA in the Proposal. No comments were received addressing the PRA analysis. As further discussed below, however, based on public comments received and conversations with industry representatives, the Commission has concluded that it is not necessary to provide a new template acknowledgement letter for investments in Qualified ETFs. Accordingly, as described below, the Commission has concluded that the amendments introduced by this Final Rule do not contain any new collections of information and will not increase the burden associated with the information collections contained in the affected regulations.

As discussed in section IV.D. of this preamble, among other reporting items, FCMs are required to report in the SIDR Reports the amount of futures customer funds, Cleared Swaps Customer Collateral, and 30.7 customer funds invested in each of the current categories of Permitted Investments. The Commission is amending Commission regulations 1.32(f), 22.2(g)(5), and 30.7(l)(5), which define the content of the SIDR Report, by: (i) deleting the requirement for an FCM to report the balances invested in commercial paper, corporate notes and bonds, and bank CDs as such investments would no longer be Permitted Investments under the Final Rule; (ii) requiring each FCM to report the total amount of futures customer funds, Cleared Swaps Customer Collateral, and 30.7 customer funds invested in Specified Foreign Sovereign Debt of each country that is included within the Specified Foreign Sovereign Debt; and (iii) requiring an FCM to include in the SIDR Report the total amount of futures customer funds, Cleared Swaps Customer Collateral, and 30.7 customer funds invested in Qualified ETFs as such investments are now Permitted Investments. As such, the changes to the content of the SIDR Reports would reflect the revisions to the list of Permitted Investments discussed in section IV.A. of this preamble. The Commission does not expect these changes to result in an increase in the number of burden hours required for the completion of the reports. Accordingly, the Commission is retaining its existing burden estimates associated with this collection of information.^[654]

In addition, the Commission is revising Commission regulation 1.26, which requires each FCM or DCO investing futures customer funds in MMFs that are Permitted Investments to obtain and retain in its files a written acknowledgment from the depository holding the funds stating that the depository was informed that the funds belong to customers and are being held in accordance with the provisions of the Act and Commission regulations. Commission regulation 1.26 also specifies the form of the written acknowledgment letter that each FCM or DCO must obtain from an MMF, in the event futures customer funds are held directly with the MMF. Commission regulations 22.5 and 30.7(d) set forth similar requirements with respect to Cleared Swaps Customer Collateral and 30.7 customer funds. The amendments to Commission regulation 1.26 require FCMs and DCOs investing Customer Funds in a Permitted Government MMF to obtain and maintain in their files an acknowledgment letter from the fund in which Customer Funds are held and to file such acknowledgment letter electronically with the Commission. The Commission is adopting an analogous amendment to Commission regulation 30.7(d)(2) with respect to investments of 30.7 customer funds by FCMs.^[655] The revisions to Commission regulations 1.26 and 30.7(d) should reduce the number of MMFs from which FCMs and DCOs, as applicable, will be required to obtain an acknowledgment letter by limiting the requirement to Permitted Government MMFs, a smaller set of MMFs. The addition of Qualified ETFs to the list of Permitted Investments is not expected to create a new acknowledgment letter requirement, as Qualified ETF shares will be held in the customer segregated accounts maintained by the FCM's or DCO's custodian, from which the FCM or DCO had to obtain an acknowledgement letter pursuant to Commission regulations 1.20, 22.5, and 30.7(d).^[656] This is consistent with the Commission's understanding of current practices.^[657]

As discussed in section IV.F. of this preamble, FCMs and IBs are required to provide each customer that is not an “eligible contract participant” a Risk Disclosure Statement prior to opening the customer's account.^[658] The Commission is adopting technical amendments to Commission regulation 1.55(b) to account for changes in the list of Permitted Investments in Commission regulation 1.25 by: (i) deleting the reference in the Risk Disclosure Statement to investments in corporate notes and bonds; (ii) clarifying that only certain MMFs may be Permitted Investments, and (iii) adding investments in Specified Foreign Sovereign Debt and Qualified ETFs. The Commission is not requiring FCMs and IBs to obtain acknowledgment of revised Risk Disclosure Statements from existing customers due to the technical amendments. FCMs and IBs are required to use the amended Risk Disclosure Statement for any customers onboarded on or after the compliance date of March 31, 2025. Accordingly, the Commission is retaining its existing burden estimates associated with this collection of information.^[659] Additionally, the Commission does not expect the technical, conforming amendments to result in an increase in the number of burden hours required for customers to review and acknowledge the amended Risk Disclosure Statement.

Also, in connection with the revisions related to the elimination of the Read- ( print page 7858) only Access Provisions, an FCM will need to obtain the revised acknowledgment letter only for accounts opened following the effective date of the revisions, or if the FCM is required to obtain a new acknowledgment letter for reasons unrelated to the elimination of the Read-only Access Provisions. The opening of a new depository account triggers a requirement to obtain an acknowledgment letter in all circumstances, regardless of the revisions related to the elimination of the Read-only Access Provisions. For these reasons, the Commission is retaining its existing estimate of the burden that covered FCMs and DCOs incur to obtain, maintain, and electronically file the acknowledgment letters with the Commission, as currently provided in the approved collection of information.^[660]

C. Cost-Benefit Considerations

Section 15(a) of the Act requires the Commission to consider the costs and benefits of its actions before promulgating a regulation under the Act.^[661] Section 15(a) further specifies that the costs and benefits shall be evaluated in light of the following five broad areas of market and public concern: (i) protection of market participants and the public; (ii) efficiency, competitiveness and financial integrity of futures markets; (iii) price discovery; (iv) sound risk management practices; and (v) other public interest considerations. The Commission considers the costs and benefits resulting from its discretionary determinations with respect to the section 15(a) considerations.

As described in more detail in section IV.A. of this preamble, the Commission is revising the list of Permitted Investments in Commission regulation 1.25(a) to: (i) add Specified Foreign Sovereign Debt and interests in Qualified ETFs; (ii) limit the scope of MMFs whose interests qualify as Permitted Investments to Permitted Government MMFs; and (iii) eliminate commercial paper, corporate notes or bonds, and bank CDs. The Commission is amending the Risk Disclosure Statement specified in Commission regulation 1.55 that FCMs are required to provide to certain customers to reflect the revisions to the list of Permitted Investments. The Commission is further amending the asset-based and issuer-based concentration limits for Permitted Investments to reflect the revisions to the investments that FCMs and DCOs may make with Customer Funds. The Commission is further specifying the capital charges that FCMs, in computing their regulatory capital, are required to take on investments of Customer Funds in Specified Foreign Sovereign Debt and Qualified ETFs. The Commission is also amending Commission regulation 1.25(b)(2)(iv)(A)( 1) and ( 2) by replacing LIBOR with SOFR as a permitted benchmark for Permitted Investments with an adjustable interest rate. The Commission is also revising relevant provisions in parts 1 and 30 of the Commission's regulations to eliminate the requirement for FCMs to ensure that each depository that it uses to hold Customer Funds provides the Commission with read-only electronic access to the account. Finally, the Commission is adopting certain conforming and technical revisions to its regulations to reflect or incorporate the amendments above.

The Commission recognizes that the Final Rule may impose costs. The consideration of costs and benefits below is based on the understanding that the markets function internationally, with many transactions involving U.S. firms taking place across international boundaries; with some Commission registrants being organized outside of the United States; with leading industry members typically conducting operations both within and outside the United States; and with industry members commonly following substantially similar business practices wherever located. Where the Commission does not specifically refer to matters of location, the below discussion of costs and benefits refers to the effects of the amendments on all activity subject to the amended regulations, whether by virtue of the activity's physical location in the United States or by virtue of the activity's connection with activities in, or its effect on, U.S. commerce under section 2(i) of the Act.^[662]

The Commission has endeavored to assess the expected costs and benefits of the Final Rule in quantitative terms, including PRA-related costs, where possible. In situations where the Commission is unable to quantify the costs and benefits, the Commission identifies and considers the costs and benefits of the applicable rules in qualitative terms. The lack of data and information to estimate those costs is attributable in part to the nature of the Final Rule. Additionally, any initial and recurring compliance costs for any particular FCM or DCO will depend on its size, existing infrastructure, practices, and cost structure.

To further inform the Commission's consideration of the costs and benefits imposed by the Proposal, the Commission invited comments from the public on all aspects of its cost-benefit considerations, including the identification and assessment of any costs and benefits not discussed by the Commission; data and any other information to assist or otherwise inform the Commission's ability to quantify or qualitatively describe the costs and benefits of the proposed amendments; and any other information to support positions posited by commenters with respect to the Commission's discussion. The Commission did not receive comments specific to the benefits and costs of the Proposal. To the extent that the Commission received comments that indirectly address the costs and benefits of the Proposal, those comments are discussed below.

The baseline for the Commission's consideration of the costs and benefits associated with this Final Rule are the costs and benefits that FCMs, DCOs, and the public would realize if the Commission did not proceed with the proposed amendments, or in other words, the status quo.

The Commission requested comment on any such incremental costs, especially by DCOs and FCMs, who may be better able to provide quantitative costs data or estimates, based on their respective experiences relating to Commissions regulations governing the investment of Customer Funds and related requirements. Commenters generally supported the proposed amendments to Commission regulation 1.25, with two commenters opposed to the proposed addition of Specified Foreign Sovereign Debt to the list of Permitted Investments. The commenters ( print page 7859) supporting the Proposal also recommended or requested revisions to several proposed amendments and proposed conditions specified in the Proposal; however, no specific costs were identified by these commenters that would affect DCOs and FCMs as a result of the changes.

1. Specified Foreign Sovereign Debt, Interests in Qualified Exchange-Traded Funds, and Associated Capital Charges

The Final Rule expands the list of Permitted Investments that an FCM and DCO may enter into with Customer Funds by adding Specified Foreign Sovereign Debt ( i.e., the sovereign debt of Canada, France, Germany, Japan, and the United Kingdom).^[663] The Final Rule provides that an FCM or DCO may invest Customer Funds in Specified Foreign Sovereign Debt subject to the following conditions: (i) the investment by an FCM or DCO in the debt securities of Canada, France, Germany, Japan, and the United Kingdom is limited to balances owed to customers denominated in CAD, EUR, JPY, and GBP, respectively; (ii) the dollar-weighted average of the remaining time-to-maturity of the portfolio of investments in Specified Foreign Sovereign Debt, computed on a country-by-country basis, may not exceed 60 calendar days; (iii) the remaining time-to-maturity in any Specified Foreign Sovereign Debt security may not exceed 180 calendar days; and (iv) the FCM or DCO does not make any new investments, and discontinues investing Customer Funds through Repurchase Transactions as soon as possible, if the two-year credit default spread of the relevant foreign sovereign exceeds 45 BPS.^[664]

The Final Rule also permits FCMs and DCOs to engage in Repurchase Transactions involving Specified Foreign Sovereign Debt with a broader group of counterparties than otherwise permitted ^[665] by authorizing transactions with: (i) a foreign bank that maintains in excess of $1 billion in regulatory capital and is located in a money center country ^[666] or in a jurisdiction that has adopted the currency in which the Specified Foreign Sovereign Debt is denominated as its currency; (ii) a securities broker or dealer located in a money center country and regulated by a national financial regulator (or a provincial financial regulator with respect to a Canadian securities broker or dealer), and (iii) the Bank of England, the Banque de France, the Bank of Japan, the Deutsche Bundesbank, or the European Central Bank.^[667]

The Final Rule also expands the type and number of custodians that FCMs and DCOs may use to hold securities received under Repurchase Transactions. In addition to current permitted custodians,^[668] Final Commission regulation 1.25(d)(7) provides that an FCM or DCO may hold Specified Foreign Sovereign Debt securities received under an agreement to resell the securities in a safekeeping account at a foreign bank that maintains regulatory capital in excess of $1 billion and is located in a money center country.^[669] The Final Rule also adds the Bank of England, the Banque de France, the Bank of Japan, the Deutsche Bundesbank, and the European Central Bank as permitted custodians for securities received under agreements to resell the securities.^[670]

The Final Rule also expands the list of Permitted Investments by adding Qualified ETFs.^[671] To be eligible as a Permitted Investment, a Qualified ETF must be an investment company that is registered under the Investment Company Act of 1940, and must hold itself out to investors as an exchange-traded fund in accordance with SEC Rule 270.2a-7.^[672] A Qualified ETF also must engage in an investment program that seeks to replicate the performance of a published short-term U.S. Treasury security index composed of bonds, notes, and bills with a remaining time-to-maturity of 12 months or less, issued by, or unconditionally guaranteed as to timely payment of principal and interest by, the U.S. Department of the Treasury.^[673] Specifically, the Qualified ETF must invest at least 95 percent of its assets in securities comprising the short-term U.S. Treasury index whose performance the fund seeks to replicate, and cash. In addition, the FCM or DCO must be able to redeem or liquidate, as applicable depending on whether the transaction is intermediated by a third-party authorized participant, the Qualified ETF interests in cash within one business day of a redemption request.^[674] As discussed in section IV.A.3. of this preamble, the Commission understands that an FCM or DCO should be able to arrange for the timely redemption or liquidation of Qualified ETF interests in cash either through an agreement with an authorized participant or by being an authorized participant itself with the necessary arrangements in place to convert U.S. Treasury securities into cash within one business day of the redemption request. Under the Final Rule, however, Qualified ETFs will be able to rely on Commission regulation 1.25(c)(5)(ii), as applicable, and provide for the postponement of redemption and payment due to certain enumerated emergency situations.^[675] The Commission also specified the capital charges that an FCM is required to take on any investment of Customer Funds in Specified Foreign Sovereign Debt and Qualified ETFs in computing its regulatory capital to meet its minimum requirement under Commission regulation 1.17. Specifically, the Final Rule provides that there is no capital charge for Canadian sovereign debt instruments with a remaining time-to-maturity of less than 3 months, and a capital charge of 0.5 percent of the market value of Canadian sovereign debt instruments with a remaining time-to-maturity of 3 to 6 months. Under the Final Rule, the capital charge for the sovereign debt of France, Germany, Japan, and the United Kingdom is 2 percent of the market value of the debt security.^[676] The Final Rule further requires an FCM to take a 2 percent capital charge on the market value of Qualified ETF shares that comprise a full creation or redemption unit, and a 6 percent capital charge on Qualified ETF shares that do not comprise a full creation or redemption unit. The capital charges adopted herein are consistent with market risk capital charges imposed by the SEC on brokers and ( print page 7860) dealers holding proprietary positions in Specified Foreign Sovereign Debt instruments and Qualified ETF shares.^[677] The FCM capital charges are intended to ensure that the firm's calculation of its adjusted net capital reflects that the firm's obligation to internalize financial losses associated with the investment of Customer Funds in Specified Foreign Sovereign Debt and Qualified ETFs.^[678]

The Final Rule also imposes the same asset-based and issuer-based concentration limits to Qualified ETFs as it imposes on Permitted Government MMFs previously described in the preamble and further discussed below. A 50 percent concentration limit will apply to Qualified ETFs with at least $1 billion in assets and whose management companies have more than $25 billion in assets under management. The Final Rule further allows for a 10 percent concentration limit for Qualified ETFs with less than $1 billion in assets or which have a management company managing less than $25 billion in assets. The Commission is limiting investments of Customer Funds in any single family of Qualified ETFs to 25 percent and investments of Customer Funds in interests in an individual Qualified ETF to 10 percent of the total assets held in each of the segregated account classes of futures customer funds, Cleared Swaps Customer Collateral, and 30.7 customer funds.

a. Benefits

Expanding the list of Permitted Investments to include Specified Foreign Sovereign Debt should benefit FCMs, DCOs, and market participants (including customers) by facilitating the management of risk associated with the acceptance of certain foreign currency deposits from customers to margin their trades, and should enable FCMs and DCOs to avoid certain risks and practical challenges in the handling of foreign currencies. Specifically, permitting FCMs and DCOs to invest foreign currencies deposited or owed to customers in identically denominated sovereign debt securities mitigates the risk that FCMs and DCOs face when converting foreign currencies to U.S. dollars to invest in Permitted Investments. The foreign currency risk arises from the FCMs' and DCOs' obligation to convert the Customer Funds from U.S. dollars back to the applicable foreign currencies when the margin deposits are returned to the customers.

The investment of non-U.S. dollar-denominated Customer Funds in Specified Foreign Sovereign Debt further benefits FCMs, DCOs, and market participants by providing an option that may assist with the mitigation of potential risks associated with FCMs and DCOs holding Customer Funds in unsecured deposit accounts with domestic or foreign commercial banks. If the depository or custodian becomes insolvent, claims related to uninsured cash balances are at greater risk of being treated as unsecured claims against the depository estate as compared to claims to specific securities held in custody. As a result, FCMs and DCOs may face less counterparty exposure by maintaining Customer Funds in the form of securities as opposed to cash, which would benefit market participants (including customers) by providing greater security to the timely, full payment of Customer Funds held by an insolvent depository or custodian.

Also, for reasons such as capital requirements and balance sheet management, banks may not accept foreign currencies at all or may place limits on the accepted amount. Banks may also charge higher rates for holding foreign currencies. As such, FCM customers depositing foreign currencies might potentially absorb those costs.

Permitting investments in Specified Foreign Sovereign Debt also benefits FCMs that post customer margin collateral with non-U.S. clearing organizations that impose strict cut-off times for cash withdrawals and more lenient cut-off times for non-cash collateral withdrawals.^[679] In such situations, FCMs have broader access to the deposits of Customer Funds held in the form of Specified Foreign Sovereign Debt securities than they do when such deposits are in the form of cash.

Further, expanding Permitted Investments to include Qualified ETFs should also benefit FCMs, DCOs, and market participants. As discussed in section IV.A.3. of this preamble, Qualified ETFs are passively managed funds that seek to replicate the performance of published short-term U.S. Treasury security indices. Qualified ETFs provide FCMs and DCOs with the ability to invest Customer Funds in funds that are primarily comprised of U.S. Treasury securities and avoid the costs associated with direct investments, which involves managing interest payments and the maturity of securities.

The ability to invest in Specified Foreign Sovereign Debt and interests in Qualified ETFs will provide FCMs and DCOs with a wider range of alternatives in which to invest Customer Funds. As a result, FCMs and DCOs will have more investment options, some of which may be more economical than the existing Permitted Investments, such that FCMs and DCOs may be able to generate higher returns. In addition to allowing FCMs and DCOs to continue as viable businesses, this may motivate FCMs and DCOs to increase their presence in the commodity interest markets, thereby increasing competition, which might lead to a reduction in charges to customers and an increase trading activity and liquidity.

Expanding the list of Permitted Investments to instruments that meet the overall regulatory goals of preserving principal and maintaining liquidity, while also providing the potential for greater diversification or higher returns for FCMs, DCOs and customers, will give FCMs and DCOs more flexibility in the management of Customer Funds. This might be particularly important given the more limited categories of assets that currently qualify as Permitted Investments under Commission regulation 1.25.

Revising the Risk Disclosure Statement required by Commission regulation 1.55 to be provided to non-institutional or non-eligible contract participants customers to accurately reflect the types of instruments approved as Permitted Investments should benefit customers and potential customers. The final amendments to the Risk Disclosure Statement alert potential customers that, among other things, an FCM is permitted to invest Customer Funds in Permitted Investments detailed in Commission regulation 1.25, an FCM may retain earnings on such investments, and customers may obtain further detail regarding the FCM's policies for the investment of Customer Funds from the firm if needed.

Also, requiring an FCM to apply capital charges on investments of Customer Funds in Specified Foreign Sovereign Debt and Qualified ETFs ( print page 7861) should help to ensure that the FCM maintains a sufficient level of readily available liquid funds that could be transferred into the FCM's futures customer accounts, Cleared Swaps Customer Accounts, and/or 30.7 customer accounts to cover decreases in value of the investments, which would support the FCM's continued compliance with Customer Funds segregation requirements.^[680] Requiring an FCM to maintain regulatory capital to cover potential decreases in the value of the Permitted Investments benefits the FCM by helping to ensure that the firm has sufficient, liquid financial resources to meet 100 percent of its obligations to futures customers, Cleared Swaps Customers, and 30.7 customers at all times as required by Commission regulations 1.20, 22.2, and 30.7. Capital charges on Permitted Investments also benefit FCM customers as the charges help ensure an FCM maintains capital in an amount sufficient to cover investment losses and to prevent such losses from being passed on to customers in violation of Commission regulations 1.29(b), 22.2(e)(1), and 30.7(i).

The Commission is also adopting new concentration limits for Qualified ETFs. The new concentration limits adopted by this Final Rule promote investments of Customer Funds in Qualified ETFs of different sizes subject to different concentration limits, leading to diversification in FCMs' and DCOs' portfolios, while encouraging investments in larger, presumably safer Qualified ETFs. The Commission is adopting different concentration limits depending on the size of the fund because larger Qualified ETFs may be more resilient during times of significant financial stress and better equipped to manage high levels of redemptions. The Final Rule's concentration limits may also reduce the potential concentration in certain Qualified ETFs, in turn fostering competition across the funds, which may lead to better terms and reduced costs for FCMs and DCOs.

Finally, the amendment to Commission regulation 22.3(d), clarifying that DCOs are responsible for losses resulting from their investments of Customer Funds, provides legal certainty with respect to the Commission's customer protection regulations. Specifically, in situations where an investment made by either an FCM or DCO experiences a realized or unrealized loss in market value, the amended regulations make clear that the FCM or DCO, not the customer, is responsible for bearing the loss.

b. Costs

Although the Final Rule increases the range of permissible investments in which DCOs and FCMs may invest Customers Funds, facilitating their management of investments and capital, the Final Rule may result in Customer Funds being invested in instruments that may be less liquid and have increased exposure to credit and market risks than those currently permitted under Commission regulation 1.25. Such risks could result in an increased exposure for FCMs and DCOs, who, pursuant to Commission regulations 1.29(b), 22.2(e)(1), 22.3(d), and 30.7(i), as applicable, are responsible for losses resulting from investments of Customer Funds. A heightened risk exposure may also indirectly impact customers if the losses compromise the FCM's or DCO's ability to return Customer Funds.

To account for these potential risks and ensure that the new Permitted Investments are consistent with the general objectives of Commission regulation 1.25 of preserving principal and maintaining liquidity, the Commission is adopting several conditions for foreign sovereign debt and interests in U.S. Treasury ETFs to qualify as Permitted Investments. Specifically, for Specified Foreign Sovereign Debt, the conditions include: (i) investments may be made only in the sovereign debt of Canada, France, Germany, Japan, and the United Kingdom, which are members of the G7and represent the world's largest industrial democracies; (ii) investments may only be made in the sovereign debt of a particular country to the extent an FCM or DCO holds balances owed to customers denominated in the currency of the particular country; (iii) the credit default spread of the two-year debt instruments of the relevant foreign sovereign jurisdiction may not exceeds 45 BPS; (iv) the dollar-weighted average of the time-to-maturity of the FCM's or DCO's portfolio of investments in each type of Specified Foreign Sovereign Debt may not exceed 60 calendar days; and (v) the remaining time-to-maturity of any individual Specified Foreign Sovereign Debt instrument may not exceed 180 calendar days.^[681] For interests in Qualified ETFs to be deemed Permitted Investments, the Commission is requiring, among other conditions, that the ETF is passively managed and seeks to replicate the performance of a published short-term U.S. Treasury security index composed of bonds, notes, and bills with a remaining time-to-maturity of 12 months or less, issued by, or unconditionally guaranteed as to timely payment of principal and interest by, the U.S. Department of the Treasury.^[682] The eligible securities and cash must also represent at least 95 percent of the Qualified ETF's investment portfolio.^[683] Moreover, as discussed above, the Final Rule would require FCMs to take capital charges based on the current market value of the Specified Foreign Sovereign Debt and Qualified ETFs to address the potential market risk of such investments. The capital charges are intended to ensure that an FCM has sufficient financial resources in the form of cash and other readily marketable collateral to adequately cover potential market risk of the investments, consistent with the FCM's obligation to bear any losses resulting from such investments.

Requiring an FCM to apply capital charges in connection with the new categories of Permitted Investments will result in costs associated with reserving capital. The FCM may not be able to use funds reserved for capital to otherwise support its business operations, thus potentially making the operation of the FCM less economical. Capital requirements are nevertheless an essential risk-management feature of the FCM's regulatory regime, and the amounts reserved as capital are necessary and expected costs associated with operating an FCM.

In addition, the clarifying amendment to Commission regulation 22.3(d) should not result in increased costs for DCOs. The amendment expressly states a regulatory obligation that is consistent with the Commission's original intent to permit DCOs to invest Cleared Swaps Customer Collateral within the parameters applicable to investments of futures customer funds.^[684] DCOs already reserve or otherwise take into consideration financial resources to account for their responsibility to absorb losses for such investments.

Finally, as discussed earlier in this preamble, the Commission has retained its existing burden estimates associated with the approved collection of information for the reasons explained in section VII.B. of this preamble. FCMs and DCOs should not incur material costs relating to the collection of information as a result of the Final Rule. ( print page 7862)

c. Section 15(a) Factors

In addition to the discussion above, the Commission has evaluated the costs and benefits of the Final Rule pursuant to the five considerations identified in section 15(a) of the Act as follows: (1) protection of market participants and the public; (2) efficiency, competitiveness, and financial integrity of futures markets; (3) price discovery; (4) sound risk management practices; and (5) other public interest considerations. The Final Rule should have a beneficial effect on sound risk management practices and on the protection of market participants and the public.

i. Protection of Market Participants and the Public

The expansion of Permitted Investments to include Specified Foreign Sovereign Debt securities should enhance the protection of market participants and the public by providing FCMs and DCOs with the ability to manage risks associated with the receipt and holding of foreign currencies deposited as margin by customers. As discussed in section IV.2. of this preamble, FCMs hold approximately $64 billion of Customer Funds denominated in non-U.S. dollars, which represents approximately 12 percent of the total $511 billion of Customer Funds held by FCMs. Investing these foreign currencies in foreign sovereign debt instruments meeting specified conditions provides FCMs and DCOs with a risk management tool to mitigate foreign currency exchange rate fluctuation risk that they would otherwise be exposed to if the foreign currency deposits had to be converted to U.S. dollars and then invested in U.S. dollar-denominated Permitted Investments. This risk mitigation protects market participants and the public by reducing exposures that FCMs and DCOs would otherwise face from investing foreign currency in U.S. dollar-denominated assets, and by reducing risk to customers of FCMs that would share pro rata in any shortfall in Customer Funds in the event of an insolvency. Providing FCMs and DCOs with efficient risk management tools also protects market participants and the public by supporting FCMs' and DCOs' ongoing ability to continue to provide access to the commodity interest markets.

As discussed in section IV.2. of this preamble, to limit the potential risks associated with investing in foreign sovereign debt, the Commission is adding to the list of Permitted Investments only certain foreign sovereign debt instruments that meet strict conditions designed to ensure the instruments' liquidity. The Commission's analysis indicates that instruments meeting the specified conditions present credit and volatility characteristics that are comparable to those of instruments that already qualify as Permitted Investments.^[685] Thus, the current level of protection provided to Customer Funds will be maintained under the terms of this Final Rule.

ii. Efficiency, Competitiveness, and Financial Integrity of Markets

As discussed in the Proposal and in section IV.A. of this preamble, expanding the list of Permitted Investments may provide FCMs and DCOs with the ability to generate additional income for themselves and their customers from their investment of Customer Funds. This may motivate FCMs or DCOs to increase their presence in the futures and cleared swaps markets increasing competition, which might lead to lower commission charges and fees for customers. The increase in revenue for FCMs and DCOs may also increase earnings to customers as DCOs and FCMs often pay a return on customer deposited funds, and FCMs may otherwise share some or all of the income with customers.

The increased range of Permitted Investments should provide investment flexibility to FCMs and DCOs and an opportunity to realize cost savings. More specifically, by being able to invest in Specified Foreign Sovereign Debt, FCMs and DCOs may be able to avoid practical challenges, such as having to meet clearing organizations' strict cut-off times for cash withdrawal, or the additional fees for holding foreign currencies, imposed by some institutions. In addition, investing in Specified Foreign Sovereign Debt could be a safer alternative than holding cash at a commercial bank. It may also help avoid the foreign currency risk to which FCMs and DCOs may be exposed absent the ability to invest customer foreign currencies in identically denominated assets.

In addition, Qualified ETFs may provide a simpler and cost-efficient way of investing in U.S. Treasury securities, saving the resources that would otherwise be required to roll over such securities at their maturity.

iii. Price Discovery

The Final Rule expands upon the types of investments that FCMs and DCOs may make with Customer Funds by including Specified Foreign Sovereign Debt securities and Qualified ETFs. The ability of FCMs and DCOs to invest Customer Funds in additional investments may generate additional income for FCMs and DCOs, which may lead to an increased participation in the commodity interest markets and thus enhance price discovery. Specifically, FCMs' main sources of revenue from engaging in the futures markets are commission income and income from the investment of Customer Funds. Therefore, an increase in income from the investment of Customer Funds may benefit market participants by indirectly offsetting or reducing commissions charged to customers. In addition, FCMs, pursuant to customer agreements, may provide customers with interest on their margin deposits, and therefore, an increase in revenue from the investment of Customer Funds may directly benefit customers via increased interest income on their deposits. DCOs also pay interest to FCMs on deposits held at the DCO, and greater interest income from such deposits may benefit an FCM and its customers. Increases in revenue may also encourage greater participation in the commodity interest markets by customers and by firms willing to take on the responsibilities of an FCM. Such greater participation in the commodity interest markets may increase liquidity in the market and enhance the process of price discovery.

iv. Sound Risk Management

Increasing the range of Permitted Investments provides FCMs and DCOs with a broader selection of investment options to invest Customer Funds, enabling FCMs and DCOs to have more diversified portfolios and reduce the potential concentration in a few instruments. Providing safe alternative investment options may be particularly beneficial for FCMs and DCOs considering the limited range of instruments that meet the eligibility criteria of current Commission regulation 1.25 and the competing demand for high quality forms of collateral driven by the regulatory reforms implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. ( print page 7863)

By making available Specified Foreign Sovereign Debt as a Permitted Investment, the Commission is providing FCMs and DCOs with an opportunity to better manage risks associated with holding foreign currencies deposited by customers. As noted above, investing Customer Funds in Specified Foreign Sovereign Debt provides an alternative to taking on the exposure of holding cash at a commercial bank. Also, absent the ability to invest Customer Funds in identically denominated sovereign debt securities, an FCM or DCO seeking to invest customer foreign currency deposits would need to convert the currencies to a U.S. dollar-denominated asset, which would increase the potential foreign currency risk. In addition, by limiting the investment of foreign currency to foreign sovereign debt that meets certain requirements, the Final Rule should further promote sound risk management. Lastly, requiring an FCM to reserve capital to cover potential decreases in the value of the Specified Foreign Sovereign Debt and Qualified ETFs helps ensure that an FCM has the financial resources to meet its regulatory obligations of bearing 100 percent of the losses on the investment of Customer Funds.

v. Other Public Interest Considerations

Although the four factors mentioned above are the primary cost-benefit considerations, other public interest considerations may also be relevant. For instance, in addition to the potential benefits that may accrue to FCMs, DCOs, and customers, benefits associated with the addition of Qualified ETFs to the list of Permitted Investments may also accrue to the general public, in that allowing FCMs and DCOs to invest Customer Funds in such instruments may contribute to a more robust market for U.S. Treasury ETFs. In addition, the expansion of Permitted Investments to include Specified Foreign Sovereign Debt may ease access to futures and cleared swaps markets for entities domiciled in non-U.S. jurisdictions that can now more easily transact in foreign currency with potentially lower costs and risk. This may provide additional hedging opportunities for entities and enhance market liquidity.

2. Government Money Market Funds, Commercial Paper and Corporate Notes or Bonds, and Certificates of Deposit Issued by Banks

The Final Rule limits the scope of MMFs whose interests qualify as Permitted Investments to certain Government MMFs as defined by SEC Rule 2a-7, revises the asset-based concentration limits applicable to Government MMFs, and adds issuer-based concentration limits for such funds.^[686] The Final Rule also removes from the list of Permitted Investments commercial paper and corporate notes or bonds guaranteed as to principal and interest by the United States under the TLGP. Finally, bank CDs are removed from the list of Permitted Investments due to a lack of use by FCMs and DCOs.^[687]

a. Benefits

The Final Rule removes interests in Prime MMFs and Electing Government MMFs from the list of Permitted Investments currently set forth in Commission regulation 1.25. Pursuant to the Final Rule, FCMs and DCOs are permitted to invest Customer Funds in interests of Permitted Government MMFs. As discussed in section IV.A.1. of this preamble, interests in Prime MMFs and Electing Government MMFs should not be Permitted Investments under Commission regulation 1.25 because such MMFs are subject to the SEC MMF Reforms, which include the ability of the fund to impose liquidity fees to stem redemptions, which could hinder the liquidity of the MMFs and adversely impact customers' access to their funds, which may be needed to meet margin calls on open positions or cash market transactions. The Final Rule, therefore, prevents investments of Customer Funds in MMFs that may pose unacceptable levels of liquidity risk.

The Final Rule imposes asset-based concentration limits corresponding to the size of the Permitted Government MMFs and their management companies. A 50 percent concentration limit will apply to Government MMFs with at least $1 billion in assets and whose management companies have more than $25 billion in assets under management. The Final Rule retains the current 10 percent concentration limit for MMFs with less than $1 billion in assets or which have a management company managing less than $25 billion in assets.^[688] These concentration limits recognize that larger Government MMFs may be more resilient during times of significant financial stress and better equipped to manage high levels of redemptions. As such, these concentration limits should help to ensure that FCMs' and DCOs' investments in Permitted Government MMFs account for the level of liquidity, market, and credit risk posed by a fund in light of its capital base, portfolio holdings, and capacity to handle market stress.

The new concentration limits adopted by this Final Rule promote investments of Customer Funds in Permitted Government MMFs of different sizes subject to different concentration limits, leading to diversification in FCMs' and DCOs' portfolios, while encouraging investments in larger, presumably safer Government MMFs. The Final Rule's concentration limits may also reduce the potential concentration in certain Permitted Government MMFs, in turn fostering competition across the funds, which may lead to better terms and reduced costs for FCMs and DCOs. In addition, the Commission is adopting issuer-based limits with the goal of mitigating potential risks associated with concentrating investments of Customer Funds in any single fund or family of Government MMFs such as the risk that access to Customer Funds may become restricted due to a cybersecurity or other operational incident affecting the fund. Specifically, the Commission is limiting investments of Customer Funds in any single family of Government MMFs to 25 percent and investments of Customer Funds in interests in an individual Government MMF to 10 percent of the total assets held in each of the segregated account classes of futures customer funds, Cleared Swaps Customer Collateral, and 30.7 customer funds. There are no precise concentration limits that can guarantee absolute protection against market volatility. The Commission's assessment is, however, that these limits represent a practical approach that takes the need to support the viability of FCMs' and DCOs' business model into account, while safeguarding the principal and liquidity of the Customer Funds. ( print page 7864)

The Final Rule also revises the list of Permitted Investments in Commission regulation 1.25 to remove commercial paper and corporate notes or bonds guaranteed under the TLGP, to reflect that the TLGP expired in 2012 and, therefore, FCMs and DCOs have not been permitted to invest in such instruments since 2012. This amendment streamlines the Commission's rules, facilitating their implementation and administration, and is consistent with the Commission's earlier determination that commercial paper and corporate notes or bonds are rarely used and pose unacceptable levels of credit, liquidity, and market risk.^[689]

The Final Rule also removes bank CDs from the list of Permitted Investments. The Commission's experience administering Commission regulation 1.25 indicates that FCMs and DCOs have not invested Customer Funds in bank CDs. The Commission requested comment on the proposed elimination of bank CDs from the list of Permitted Investments. One commenter generally opposed the removal of bank CDs from the list of Permitted Investments, stating that the removal “would not be beneficial,” but other commenters supported the removal, including the FIA which stated that its member FCMs did not foresee investing Customer Funds in bank CDs.^[690] The Commission is removing bank CDs from the list of Permitted Investments in the Final Rule. Similar to the removal of commercial paper and corporate notes and bonds, the amendment will streamline the Commission's regulations and avoid potential confusion regarding the eligibility of bank CDs as Permitted Investments.

b. Costs

This Final Rule limits the scope of MMFs whose interests qualify as Permitted Investments to Permitted Government MMFs and could lead to less diversification in the investment of Customer Funds by FCMs and DCOs. FCMs' and DCOs' portfolios may be concentrated in the Permitted Government MMFs, increasing exposure to risks associated with the funds, which might heighten the risk of loss of Customer Funds. Also, because fewer MMFs would be available as Permitted Investments, FCMs and DCOs might have less flexibility in investing Customer Funds. FCMs and DCOs might thus generate lower returns and could pass on additional operational costs to customers by increasing their fees.

The potential risk of concentration of investments in Permitted Government MMFs is nonetheless mitigated by the asset-based and issuer-based concentration limits, which are designed to promote diversification among different categories of Permitted Investments and among different individual Permitted Government MMFs. Additionally, the potential risk of concentration of investments is mitigated by the addition of Qualified ETFs to the list of Permitted Investments, a viable alternative to Permitted Government MMFs allowing FCMs and DCOs to diversify their investment holdings.

To meet the concentration limits adopted herein, FCMs and DCOs may be required to liquidate Government MMFs held in their portfolios and might incur losses. The risk of loss is likely to be mitigated because the Government MMFs permitted under Staff Letter 16-68 and Staff Letter 16-69 are presumably highly liquid.^[691]

The elimination of commercial paper and corporate notes or bonds guaranteed under the TLGP does not result in any costs as the instruments have not been available as Permitted Investments since 2012 when the TLGP expired. Similarly, removing bank CDs does not result in an immediate potential cost because, in the Commission's experience, FCMs and DCOs do not currently invest Customer Funds in this type of instrument. Eliminating this investment option, however, may lead to potential long-term costs should this option become more economical for FCMs and DCOs.

c. Section 15(a) Considerations

In light of the foregoing, the Commission has evaluated the costs and benefits of this Final Rule pursuant to the five considerations identified in section 15(a) of the Act as follows:

i. Protection of Market Participants and the Public

The Final Rule removes interests in MMFs whose redemptions may be subject to liquidity fees, including Prime MMFs and Electing Government MMFs, from the list of Permitted Investments. The imposition of a liquidity fee conflicts with provisions in Commission regulation 1.25 that are designed to reduce Customer Funds' exposure to liquidity risk and to preserve the principal of investments purchased with Customer Funds. As a result, by preventing investments in instruments that pose unacceptable levels of liquidity risk, the Final Rule provides greater protection to Customer Funds and promotes the efficient and safe investment of Customer Funds by FCMs and DCOs.

The Final Rule also limits the scope of MMFs whose interests qualify as Permitted Investments to Government MMFs as defined by SEC Rule 2a-7. These types of funds are less susceptible to runs and have seen inflows during periods of market instability.^[692] Thus, limiting the scope of eligible MMFs to Government MMFs should reduce the possibility that funds in which Customer Funds are invested may be adversely affected by run risk and other associated risks. However, because there will be fewer MMFs that will qualify as Permitted Investments under the Final Rule, FCMs' and DCOs' investments may be concentrated in fewer MMFs and the investments may be more susceptible to concentration risk.

The asset-based concentration limits for Government MMFs and Qualified ETFs assign limits according to the size of the funds, with larger funds being subject to a 50 percent limit and smaller funds to a 10 percent limit. These limits reflect that larger funds have capital bases better capable of handling a high volume of redemptions in times of stress. Accordingly, the concentration limits promote investments in larger funds, which by virtue of their size tend to be more resilient, while providing for diversification by permitting investments in smaller Government MMFs and Qualified ETFs subject to concentration limits intended to ensure the safety of Customer Funds. In addition, the issuer-based concentration limits promote diversification among different individual Government MMFs and Qualified ETFs, thus mitigating the potential risks associated with concentrating investments of Customer Funds with a single fund or family of funds.

The implementation of these newly adopted concentration limits may ( print page 7865) require FCMs and DCOs to liquidate their fund holdings, which could lead to losses. The potential for losses would be mitigated because since the issuance of Staff Letter 16-68 and Staff Letter 16-69 in 2016, FCMs and DCOs have been allowed to invest only in Government MMFs meeting the liquidity standards of Commission regulation 1.25.

By removing commercial paper and corporate notes or bonds guaranteed under the TLGP from the list of Permitted Investments under Commission regulation 1.25, the Final Rule eliminates instruments that are no longer available as a result of the expiration of the TLGP in 2012. Deleting these investments from the list streamlines the Commission's rules and removes a potential source of confusion for the public and market participants. Because they are no longer Permitted Investments, maintaining these instruments in the list of Permitted Investments could cause misunderstanding among the public and market participants about the eligibility of these instruments as permissible investments of Customer Funds. By removing bank CDs, a type of instrument that is not used by FCMs and DCOs as an investment instrument, the Commission is also contributing to the ongoing effort to streamline the Commission's regulations and reduce the possibility of confusion.

ii. Efficiency, Competitiveness, and Financial Integrity of Markets

By eliminating interests in Prime MMFs and Electing Government MMFs from the list of Permitted Investments, the Final Rule prevents investments of Customer Funds in instruments that may be less liquid due to the SEC MMF Reforms. The changes imposed by the SEC MMF Reforms may not allow FCMs and DCOs to redeem interests in Prime MMFs and Electing Government MMFs without a material discount in value. The exclusion of these types of investments will improve efficiency in the markets, especially at times of stress when liquidity fees may be imposed, and ensure that Permitted Investments are always consistent with Commission regulation 1.25's objectives of preserving principal and maintaining liquidity.

As discussed above, the deletion of commercial paper and corporate notes or bonds guaranteed under the TLGP and bank CDs from the list of Permitted Investments removes investment instruments that are either no longer available or not used as an investment of Customer Funds, streamlining the Commission's regulations and contributing to their efficient implementation by market participants.

iii. Price Discovery

The Final Rule, by reducing the range of products that qualify as Permitted Investments, results in fewer investment options available to FCMs and DCOs. This could cause FCMs and DCOs to generate less income from their investment of Customer Funds and pass the costs of operations onto customers by increasing commissions and other fees. Facing increased costs, customers may reduce trading, thereby reducing liquidity, which may hinder price discovery.

The elimination of commercial paper and corporate notes or bonds guaranteed under the TLGP and bank CDs as Permitted Investments will not have an impact of this factor, because FCMs and DCOs have not invested Customer Funds in these instruments for several years.

iv. Sound Risk Management

By deleting interests in Prime MMFs and Electing Government MMFs from the list of Permitted Investments, the Final Rule prohibits investment of Customers Funds in such MMFs, which should reduce liquidity risk in light of the SEC MMF Reforms, thus promoting sound risk management. Also, the concentration limits that will apply to the Permitted Government MMFs and Qualified ETFs should foster diversification in FCMs' and DCOs' portfolios by encouraging investments of Customer Funds in larger funds that the Commission anticipates would have the capacity to withstand significant market stress and increasing redemptions, while making available smaller funds subject to specified concentration limits.

The elimination of commercial paper and corporate notes or bonds guaranteed under the TLGP and bank CDs as Permitted Investments will not have an impact of this factor.

v. Other Public Interest Considerations

The relevant cost-benefit considerations are captured in the four factors above.

3. SOFR as a Permitted Benchmark

In March 2021, the U.K. FCA announced that LIBOR would be effectively discontinued.^[693] As a result of the transition from LIBOR to SOFR, the Commission is replacing LIBOR with SOFR as a permitted benchmark for variable and floating rate securities that qualify as Permitted Investments under Commission regulation 1.25. Under the terms of the Final Rule, adjustable rate securities would qualify as a Permitted Investment if, among other conditions, they reference a SOFR Rate published by the FRBNY or a CME Term SOFR Rate published by the CME Group Benchmark Administration Limited.

a. Benefits

Currently under Commission regulation 1.25(b)(2)(iv)(A), Permitted Investments may have a variable or floating rate of interest, provided that the interest rate correlates to specified benchmarks, including LIBOR.^[694] As discussed in section IV.A.5. of this preamble, a number of enforcement actions concerning attempts to manipulate the LIBOR benchmark led to a loss of confidence in the reliability and robustness of LIBOR and to the benchmark's discontinuation. The Commission therefore is amending Commission regulation 1.25 to remove LIBOR as a permitted benchmark and to replace it with SOFR. Accordingly, the replacement of LIBOR with SOFR, which has been identified as a preferred benchmark alternative by the ARRC,^[695] should help to ensure that Customer Funds invested in Permitted Investments with adjustable rates of interest reference a reliable and robust benchmark providing greater protection to Customer Funds.

b. Costs

Given the widespread use of LIBOR as a benchmark, FCMs and DCOs that invest Customer Funds in Permitted Investments with variable and fixed rate securities might incur costs associated with the transition to SOFR. To the extent that FCMs and DCOs already invest in Permitted Investments with variable and fixed rate securities benchmarked to LIBOR, they would need to amend the terms of their agreements to incorporate the new benchmark. If they have not done so already, FCMs and DCOs may also need to adjust their systems and processes to implement and recognize SOFR as a benchmark.

c. Section 15(a) Considerations

In light of the foregoing, the Commission has evaluated the costs and benefits of the Final Rule pursuant to the five considerations identified in section 15(a) of the Act as follows: ( print page 7866)

i. Protection of Market Participants and the Public

LIBOR is no longer a reliable and robust benchmark. By eliminating LIBOR as a permitted benchmark, the Final Rule prevents investments of Customer Funds in securities referencing an unreliable benchmark and promotes the use of a safer, more accurate benchmark alternative.

ii. Efficiency, Competitiveness, and Financial Integrity of Markets

By codifying the use of SOFR as a permitted benchmark for Permitted Investments in which Customer Funds may be invested, the Final Rule conforms to current market developments, facilitates the transition to SOFR and reflects the phasing out of LIBOR, which is no longer published and deemed unreliable, removing a potential source of risk to the financial system.^[696]

In addition, SOFR is now an essential benchmark that helps to ensure the stability and integrity of financial markets. Thus, codifying SOFR as a permitted benchmark for permitted investments may enhance the financial integrity of markets.

iii. Price Discovery

The replacement of LIBOR with SOFR as a permitted benchmark may have a positive impact on price discovery. By replacing an obsolete benchmark, LIBOR, with the now widely accepted benchmark, SOFR, FCMs and DCOs should have a greater opportunity to invest in variable or floating rate instruments that reference SOFR. The opportunity to invest in instruments referencing SOFR may encourage greater participation in the commodity interest markets, thereby increasing liquidity in the markets and enhancing the process of price discovery.

iv. Sound Risk Management

By eliminating LIBOR as a permitted benchmark and replacing it with SOFR, the Final Rule ensures that to the extent FCMs and DCOs select variable and floating rate securities as Permitted Investments to invest Customer Funds, these instruments reference benchmarks that are, in the Commission's view, sound and reliable, thus fostering sound risk management.

v. Other Public Interest Considerations

The relevant cost-benefit considerations are captured in the four factors above.

4. Revision of the Read-Only Access Provisions

The Final Rule eliminates the Read-only Access Provisions in parts 1 and 30 of the Commission's regulations,^[697] which currently require FCMs to ensure that depositories holding Customer Funds provide the Commission with direct, read-only electronic access to such accounts.

a. Benefits

Eliminating the Read-only Access Provisions streamlines the CFTC rules, facilitating their implementation and administration, and is consistent with the Commission's expectation that the existence of alternative methods for obtaining and verifying account balance information will diminish the need to rely on the direct read-only access to accounts. By relying on CME's and NFA's daily segregation confirmation and verification process, the Commission can allocate resources to more immediate regulatory concerns within its jurisdictional purview. As discussed in section IV.E. of this preamble, the Commission has encountered numerous practical challenges in the administration of direct access to depository accounts. These challenges unduly burden the Commission's resources, particularly when one considers that the Commission contemplated that the use of real-time access would be limited. That is, the practical challenges prevent Commission staff from using the Read-only Access Provisions as intended.

In addition, eliminating the requirement to provide the Commission with direct, read-only access to accounts maintained by FCMs, reduces costs for depositories, which may motivate these institutions to more readily take FCM Customer Funds on deposit, thereby lowering the bar to entry for new FCMs. The Final Rule may thus foster competition in the futures market and ultimately reduce costs for FCMs and their customers.

Furthermore, the deletion of the Read-only Access Provisions eliminates the need for the Commission to keep a log of access credentials and physical authentication devices, thereby reducing the potential cybersecurity risk associated with the maintenance of such credentials and devices.

b. Costs

Withdrawing the requirement that depositories provide the Commission with direct, read-only electronic access to depository accounts holding Customer Funds deprives the Commission from ongoing, instantaneous access to the accounts for purposes of identifying potential discrepancies between the account balance information reported by the FCMs and the account balance information available directly from the depositories.

More efficient means for identifying discrepancies in the account balance information exist: obtaining account balance and transaction information through CME's and NFA's automated daily segregation confirmation system or by requesting the information directly from the depositories.

c. Section 15(a) Considerations

In light of the foregoing, the Commission has evaluated the costs and benefits of the Final Rule pursuant to the five considerations identified in section 15(a) of the Act as follows:

i. Protection of Market Participants and the Public

The Final Rule removes the requirement to provide the Commission with direct, read-only access to depository accounts. This change eliminates the potential cybersecurity risk associated with the maintenance of access credentials and authentication devices, thus limiting risk for market participants and the public.

CME's and NFA's automated daily segregation confirmation system provides an efficient and effective method for verifying customer account balances, which, in conjunction with the Commission's right to request information from the depositories, protects market participants and the public. ( print page 7867)

ii. Efficiency, Competitiveness, and Financial Integrity of Markets

By eliminating the Read-only Access Provisions, the Commission has dispensed with a method for verifying account balance information that imposes technological challenges in its implementation and administration, permitting Commission staff to direct its efforts to more effective alternative means for verifying the information.

In addition, depositories holding Customer Funds will no longer have to provide and continuously update the login information necessary for Commission staff's access to the accounts or to train Commission staff on how to access their systems. This will reduce the burden on depository service providers and make the Commission's surveillance of accounts more efficient. Streamlining these processes may motivate depositories to more readily hold FCM Customer Funds, potentially fostering competition with respect to depository services provided to FCMs and ultimately reducing costs for such FCMs.

iii. Price Discovery

The Final Rule, by eliminating the requirement for depositories to provide the Commission with read-only access to accounts maintained by FCMs, may reduce operational costs for depositories, which may ultimately lead to cost reductions that benefit both depositories and FCMs. The FCMs may, in turn, pass those benefits to customers via reduced charges.

iv. Sound Risk Management

As previously noted, CME and NFA have developed a sophisticated system—the automated daily segregation confirmation system—which provides DSROs and the Commission with an efficient tool for detection of potential discrepancies between FCMs' daily segregation statements and the balances reported by the various depositories holding Customer Funds. Although the Commission is eliminating the Read-only Access Provisions, the Commission will continue to rely on CME's and NFA's automated system for oversight purposes. Thus, the amendment should not be detrimental to sound risk management practices.

Furthermore, as noted above, the deletion of the Read-only Access Provisions eliminates a potential cybersecurity risk associated with the maintenance by the Commission of periodically updated access credentials and physical authentication devices, thus promoting sound risk management.

v. Other Public Interest Considerations

The relevant cost-benefit considerations are captured in the four factors above.

The Commission requested public comment on its cost-benefit considerations, including the section 15(a) factors described above. The Commission received no specific comments on this part of the Proposal in response to this request.

D. Antitrust Considerations

Section 15(b) of the Act requires the Commission to take into consideration the public interest to be protected by the antitrust laws and endeavor to take the least anticompetitive means of achieving the purposes of the Act, in issuing any order or adopting any Commission rule or regulation (including any exemption under section 4(c) or 4c(b)), or in requiring or approving any bylaw, rule or regulation of a contract market or registered futures association established pursuant to section 17 of the Act.^[698]

The Commission believes that the public interest to be protected by the antitrust laws is generally to protect competition. In the Proposal, the Commission requested comment on whether: (i) the Proposal implicates any other specific public interest to be protected by the antitrust laws; (ii) the Proposal is anticompetitive and, if it is, what the anticompetitive effects are; (iii) whether there are less anticompetitive means of achieving the relevant purposes of the Act that would otherwise be served by adopting the Proposal.^[699] The Commission did not receive comments on the anticompetitive effects of the Proposal.

The Commission has considered the Final Rule to determine whether it is anticompetitive and has identified no anticompetitive effects. Because the Commission has determined that the Final Rule is not anticompetitive and has no anticompetitive effects, the Commission has not identified any less anticompetitive means of achieving the purposes of the Act.

List of Subjects

17 CFR Part 1

• Brokers
• Commodity futures
• Consumer protection
• Reporting and recordkeeping requirements

17 CFR Part 22

• Brokers
• Clearing
• Consumer protection
• Reporting and recordkeeping
• Swaps

17 CFR Part 30

• Consumer protection

For the reasons stated in the preamble, the Commodity Futures Trading Commission amends 17 CFR chapter I as follows:

PART 1—GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

1. The authority citation for part 1 continues to read as follows:

Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h, 6i, 6k, 6l, 6m, 6n, 6o, 6p, 6r, 6s, 7, 7a-1, 7a-2, 7b, 7b-3, 8, 9, 10a, 12, 12a, 12c, 13a, 13a-1, 16, 16a, 19, 21, 23 and 24 (2012).

§ 1.20

[Amended]

2. Amend § 1.20 by:

a. Removing the cross-reference to “Appendix A to § 1.20” and adding in its place “appendix C to this part” in paragraph (d)(2);

b. Removing and reserving paragraph (d)(3); and

c. Removing the cross-reference to “Appendix B to § 1.20” and adding in its place “appendix D to this part” in paragraph (g)(4)(ii);

Appendices C and D to Part 1

3. Further amend § 1.20 by redesignating appendices A and B to § 1.20 as appendices C and D to part 1, respectively.

4. Amend § 1.25 by:

a. Revising and republishing the paragraph (a) heading and paragraph (a)(1) introductory text;

b. Removing paragraphs (a)(1)(iv) through (vi);

c. Redesignating paragraph (a)(1)(vii) as new paragraph (a)(1)(iv) and revising it;

d. Adding new paragraphs (a)(1)(v) and (a)(1)(vi);

e. Revising and republishing paragraph (b) introductory text and the paragraph (b)(2) heading;

f. Revising paragraph (b)(2)(i) introductory text;

g. Revising and republishing paragraph (b)(2)(iv)(A) introductory text;

h. Revising paragraphs (b)(2)(iv)(A)( 1) and ( 2);

i. Removing paragraphs (b)(2)(v) and (vi);

j. Republishing the paragraph (b)(3) heading;

k. Removing paragraph (b)(3)(i)(C);

l. Redesignating paragraphs (b)(3)(i)(D) and (E) as paragraphs (b)(3)(i)(C) and (D);

m. Revising newly redesignated paragraph (b)(3)(i)(D);

n. Removing paragraph (b)(3)(i)(F); ( print page 7868)

o. Redesignating paragraph (b)(3)(i)(G) as (b)(3)(i)(E);

p. Revising newly redesignated paragraph (b)(3)(i)(E) and paragraphs (b)(3)(ii)(B) through (E), (b)(4)(i), (c) introductory text, and (c)(1);

q. Removing “The appendix to this section” and adding in its place “Appendix E to this part” in paragraph (c)(7);

r. Adding paragraph (c)(8);

s. Republishing paragraph (d) introductory text;

t. Revising paragraphs (d)(2) and (7); and

u. Adding paragraph (f).

The republications, revisions, and additions read as follows:

§ 1.25

Investment of customer funds.

(a) Permitted investments. (1) Subject to the terms and conditions set forth in this section, a futures commission merchant or a derivatives clearing organization may invest customer money in the following instruments (permitted investments):

* * * * *

(iv) Interests in government money market funds as defined in § 270.2a-7 of this title, provided that the government money market funds do not choose to rely on the ability to impose discretionary liquidity fees consistent with the requirements of 17 CFR 270.2a-7(c)(2)(i)(government money market fund);

(v) Interests in exchange-traded funds, as defined in 17 CFR 270.6c-11, which seek to replicate the performance of a published short-term U.S. Treasury security index composed of bonds, notes, and bills with a remaining maturity of 12 months or less, issued by, or unconditionally guaranteed as to the timely payment of principal and interest by, the U.S. Department of the Treasury (U.S. Treasury exchange-traded fund); and

(vi) General obligations of Canada, France, Germany, Japan, and the United Kingdom (permitted foreign sovereign debt), subject to the following:

(A) A futures commission merchant may invest in the permitted foreign sovereign debt of a country to the extent the futures commission merchant has balances in segregated accounts owed to its customers denominated in that country's currency; and

(B) A derivatives clearing organization may invest in the permitted foreign sovereign debt of a country to the extent the derivatives clearing organization has balances in segregated accounts owed to its clearing members that are futures commission merchants denominated in that country's currency.

* * * * *

(b) General terms and conditions. A futures commission merchant or a derivatives clearing organization is required to manage the permitted investments consistent with the objectives of preserving principal and maintaining liquidity and according to the following specific requirements:

* * * * *

(2) Restrictions on instrument features. (i) With the exception of government money market funds and U.S. Treasury exchange-traded funds, no permitted investment may contain an embedded derivative of any kind, except as follows:

* * * * *

(iv)(A) Adjustable rate securities are permitted, subject to the following requirements:

( 1) The interest payments on variable rate securities must correlate closely and on an unleveraged basis to a benchmark of either the Federal Funds target or effective rate, the prime rate, the three-month Treasury Bill rate, a Secured Overnight Financing Rate published by the Federal Reserve Bank of New York or a CME Term SOFR Rate published by the CME Group Benchmark Administration Limited, or the interest rate of any fixed rate instrument that is a permitted investment listed in paragraph (a)(1) of this section;

( 2) The interest payment, in any period, on floating rate securities must be determined solely by reference, on an unleveraged basis, to a benchmark of either the Federal Funds target or effective rate, the prime rate, the three-month Treasury Bill rate, a Secured Overnight Financing Rate published by the Federal Reserve Bank of New York or a CME Term SOFR Rate published by the CME Group Benchmark Administration Limited, or the interest rate of any fixed rate instrument that is a permitted investment listed in paragraph (a)(1) of this section;

* * * * *

(3) Concentration —

(i) * * *

(D) Investments in government money market funds or U.S. Treasury exchange-traded funds with $1 billion or more in assets and whose management company manages $25 billion or more in assets may not exceed 50 percent of the total assets held in segregation by the futures commission merchant or derivatives clearing organization.

(E) Investments in government money market funds or U.S. Treasury exchange-traded funds with less than $1 billion in assets or which have a management company managing less than $25 billion in assets, may not exceed 10 percent of the total assets held in segregation by the futures commission merchant or derivatives clearing organization.

(ii) * * *

(B) Securities of any single issuer of municipal securities held by a futures commission merchant or derivatives clearing organization may not exceed 5 percent of the total assets held in segregation by the futures commission merchant or derivatives clearing organization.

(C) Interests in any single family of government money market funds or U.S. Treasury exchange-traded funds may not exceed 25 percent of the total assets held in segregation by the futures commission merchant or derivatives clearing organization.

(D) Interests in any individual government money market fund or U.S. Treasury exchange-traded fund may not exceed 10 percent of the total assets held in segregation by the futures commission merchant or derivatives clearing organization.

(E) For purposes of determining compliance with the issuer-based concentration limits set forth in this section, securities issued by entities that are affiliated, as defined in paragraph (b)(5) of this section, shall be aggregated and deemed the securities of a single issuer. An interest in a permitted government money market fund or U.S. Treasury exchange-traded fund is not deemed to be a security issued by its sponsoring entity.

* * * * *

(4) Time-to-maturity. (i) Except for investments in government money market funds, U.S. Treasury exchange-traded funds, and permitted foreign sovereign debt subject to the requirements of paragraph (f) of this section, the dollar-weighted average of the time-to-maturity of the portfolio, as that average is computed pursuant to 17 CFR 270.2a-7, may not exceed 24 months.

* * * * *

(c) Government money market funds and U.S. Treasury exchange-traded funds. The following provisions will apply to the investment of customer funds in government money market funds or U.S. Treasury exchange-traded funds (the fund).

(1) The fund must be an investment company that is registered under the Investment Company Act of 1940 with the Securities and Exchange Commission and that holds itself out to investors as a government money market fund, in accordance with 17 CFR ( print page 7869) 270.2a-7, or an exchange-traded fund, in accordance with 17 CFR 270.6c-11.

* * * * *

(8) A futures commission merchant or derivatives clearing organization may invest in interests in U.S. Treasury exchange-traded funds if:

(i) The U.S. Treasury exchange-traded fund invests at least 95 percent of its assets in securities comprising the short-term U.S. Treasury index whose performance the fund seeks to replicate and cash; and

(ii) The purchase and liquidation of interests in the fund conform to the following requirements:

(A) Primary market transactions. The futures commission merchant or derivatives clearing organization purchases or redeems interests in the fund on a delivery versus payment basis at a price based on the net asset value computed in accordance with the Investment Company Act of 1940 and regulations thereunder. A futures commission merchant or derivatives clearing organization that is an authorized participant of the fund may redeem interests in the fund in kind, provided that the futures commission merchant or derivatives clearing organization is able to convert the securities received pursuant to the in-kind redemption into cash within one business day of the redemption request. A futures commission merchant or derivatives clearing organization that transacts with the fund through an authorized participant acting as an agent for the futures commission merchant or derivatives clearing organization must have a contractual agreement obligating the authorized participant to pay the futures commission merchant's or derivatives clearing organization's redemption of interests in the fund in cash within one business day of the redemption request.

(B) Secondary market transactions. The futures commission merchant or derivatives clearing organization acquires or sells interests in the fund on a national securities exchange registered with the Securities and Exchange Commission under section 6 of the Securities Exchange Act of 1934.

(d) Repurchase and reverse repurchase agreements. A futures commission merchant or derivatives clearing organization may buy and sell the permitted investments listed in paragraphs (a)(1)(i) through (vii) of this section pursuant to agreements for resale or repurchase of the securities (agreements to repurchase or resell), provided the agreements to repurchase or resell conform to the following requirements:

* * * * *

(2) Permitted counterparties are limited to a bank as defined in section 3(a)(6) of the Securities Exchange Act of 1934, a domestic branch of a foreign bank insured by the Federal Deposit Insurance Corporation, a securities broker or dealer, or a government securities dealer registered with the Securities and Exchange Commission or which has filed notice pursuant to section 15C(a) of the Government Securities Act of 1986. In addition, with respect to agreements to repurchase or resell permitted foreign sovereign debt, the following entities are also permitted counterparties: a foreign bank that qualifies as a depository under § 1.49(d)(3) and that is located in a money center country as the term is defined in § 1.49(a)(1) or in another jurisdiction that has adopted the currency in which the permitted foreign sovereign debt is denominated as its currency; a securities broker or dealer located in a money center country as the term is defined in § 1.49(a)(1) and that is regulated by a national financial regulator or a provincial financial regulator with respect to a Canadian securities broker or dealer; and the Bank of Canada, the Bank of England, the Banque de France, the Bank of Japan, the Deutsche Bundesbank, or the European Central Bank.

* * * * *

(7) Securities transferred to the futures commission merchant or derivatives clearing organization under the agreement are held in a safekeeping account with a bank as referred to in paragraph (d)(2) of this section, a Federal Reserve Bank, a derivatives clearing organization, or the Depository Trust Company in an account that complies with the requirements of § 1.26. Securities transferred to the futures commission merchant or derivatives clearing organization under an agreement related to permitted foreign sovereign debt may also be held in a safekeeping account that complies with the requirements of § 1.26 at a foreign bank that meets the location and qualification requirements in § 1.49(c) and (d), or with the Bank of Canada, the Bank of England, the Banque de France, the Bank of Japan, the Deutsche Bundesbank, or the European Central Bank.

* * * * *

(f) Permitted foreign sovereign debt. The following provisions will apply to investments of customer funds in permitted foreign sovereign debt.

(1) The dollar-weighted average of the remaining time-to-maturity of the portfolio of investments in permitted foreign sovereign debt, as that average is computed pursuant to 17 CFR 270.2a-7 on a country-by-country basis, may not exceed 60 calendar days. Permitted foreign sovereign debt instruments acquired under an agreement to resell shall be deemed to have a maturity equal to the period remaining until the date on which the resale of the underlying instruments is scheduled to occur, or, where the agreement is subject to demand, the notice period applicable to a demand for the resale of the securities. Permitted foreign sovereign debt instruments sold under an agreement to repurchase shall be included in the calculation of the dollar-weighted average based on the remaining time-to-maturity of each instrument sold.

(2) A futures commission merchant or a derivatives clearing organization may not invest customer funds in any permitted foreign sovereign debt that has a remaining maturity greater than 180 calendar days.

(3) If the two-year credit default spread, computed as the average of the bid and ask prices between willing buyers and sellers, of an issuing sovereign of permitted foreign sovereign debt is greater than 45 basis points:

(i) The futures commission merchant or derivatives clearing organization shall not make any new investments in that sovereign's debt using customer funds.

(ii) The futures commission merchant or derivatives clearing organization must discontinue investing customer funds in that sovereign's debt through agreements to resell as soon as practicable under the circumstances.

Appendix E to Part 1

5. Section 1.25 is further amended by redesignating the appendix to § 1.25 as appendix E to part 1.

§ 1.26

[Amended]

6. Amend § 1.26 in the paragraphs designated in the left column of the following table by removing the words indicated in the middle column from wherever they appear in the paragraph and adding in their place the words indicated in the right column. ( print page 7870)

Paragraph	Remove	Add
(a)	“money market mutual funds”	“government money market funds.”
(b)	“money market mutual fund”	“government money market fund.”
(b)	“appendix A or B to this section”	“appendix F or G to this part.”
(b)	“appendix A or B to § 1.20”	“appendix C or D to this part.”