00-32976. Investment of Customer Funds

AGENCY:

Commodity Futures Trading Commission.

ACTION:

Final rules; change of effective date.

SUMMARY:

The Commodity Futures Trading Commission (Commission) is moving forward the effective date of its recent rule amendments concerning the investment of customer funds by futures commission merchants (FCMs) and clearing organizations to permit FCMs and clearing organizations to engage in the expanded investment activity at an earlier date. The Commission is also making certain technical corrections to the rule amendments.

DATES:

The revision of § 1.25 published on December 13, 2000 (65 FR 77993) as amended by this rule is effective December 28, 2000. The revision of § 1.26 and the amendments to §§ 1.20, 1.27, 1.28 and 1.29 published on December 13, 2000 (65 FR 77993) are effective December 28, 2000.

FOR FURTHER INFORMATION CONTACT:

Lawrence B. Patent, Associate Chief Counsel, Paul H. Bjarnason, Jr., Special Advisory for Accounting Policy, or Ky Tran-Trong, Attorney-Advisor, Division of Trading and Markets, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581. Telephone: [phone].

SUPPLEMENTARY INFORMATION:

I. Background

On December 13, 2000, the Commission published final rules and rule amendments in the Federal Register revising its rules relating to intermediation of commodity futures and commodity options (commodity interest) transactions.^[1] As part of the new rules and rule amendments, the Commission has amended Rule 1.25 to expand the range of instruments in which FCMs and clearing organizations may invest customer funds to include such highly liquid and readily marketable instruments as certain sovereign debt, agency debt, money market mutual funds, and corporate notes (permitted investments). Additional provisions to minimize credit, volatility and liquidity risk have also been adopted. Previously, investments of customer funds had been limited to U.S. government securities, municipal securities, and instruments fully guaranteed as to principal and interest by the U.S. government. When the Commission proposed the amendments to Rule 1.25, it stated that “an expanded list of permitted investments could enhance the yield available to FCMs, clearing organizations and their customers without compromising the safety of customer funds.” ^[2]

As provided in the adopting release, the new rules and rule amendments relating to intermediaries, including the changes to Rule 1.25, are to become effective on February 12, 2001.^[3] The Commission established an effective date 60 days following publication in the Federal Register for the new rules and rule amendments relating to intermediaries, as well as for the other elements of regulatory reform adopted simultaneously by the Commission,^[4] to allow time for entities affected by the rule changes to make the necessary adjustments to their operations. The Commission has been apprised by the futures industry, however, that the implementation of new Rule 1.25 does not require such a lengthy delay, and that it may be more efficient if FCMs are permitted to implement the rule revisions relating to Rule 1.25 on an earlier date.^[5] The Commission agrees with the industry request and has determined to move forward the effective date for the amendments to Rule 1.25 to December 28, 2000. The Commission has further determined to move forward the effective date of related amendments to Rules 1.20 and 1.26-1.29.^[6]

II. Technical Corrections

Paragraph (a) of Rule 1.25 sets forth the types of permissible investments of customer funds, e.g., U.S. Treasury obligations, commercial paper, corporate notes. Each type of investment must meet certain quality requirements, including requirements for marketability, credit ratings, restrictive features and concentration limitations. Currently, these quality requirements are all contained in separate provisions of paragraph (b) of the rule, except for the requirements regarding sovereign debt, which are contained in paragraph (a)(1)(vii). The Commission believes that this placement could be confusing. Therefore, in order to clarify Rule 1,25, the requirements for all types of permitted investments are now placed together, in the same paragraphs, as follows: (i) the requirement that foreign sovereign debt be rated in the highest category by at least one nationally recognized statistical rating organization has been moved from paragraph (a)(1)(vii) to paragraph (b)(2)(i)(D) and, concurrently, the reference to permit sovereign debt contained in paragraph (b)(2)(i)(A) is no longer necessary and, therefore, has been deleted; and (ii) the requirement that investments in a particular country's sovereign debt be limited to amounts owed in that currency has been moved from paragraph (a)(1)(vii) to paragraph (b)(4)(i)(D).

III. Other Matters

The Commission has determined that there is good cause to move forward the effective date of the amendments to Rule 1.25, as well as the amendments to Rules 1.20 and 1.26-1.29, and to make the clarifying revisions discussed above to Rule 1.25 because it is not contrary to the public interest to permit FCMs and clearing organizations to invest customer funds in an expanded range of permissible investments. Such investments could potentially provide a higher yield to those FCMs and clearing organizations without compromising the safety of customer funds. The Commission has further determined that these rules may be made effective less than 30 days following their date of publication in the Federal Register because these are substantive rules that relieve a restriction on those FCMs and clearing organizations seeking to invest customer funds in a wider range of financial instruments.^[7]

List of Subjects in 17 CFR Part 1

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

In consideration of the foregoing, and pursuant to the authority contained in the Commodity Exchange Act, and in particular, Sections 4(c), 4d(2) and 8a(5) thereof, 7 U.S.C. 6(c), 6d(2) and 12a(5), the Commission hereby makes the amendments to rules 1.20 and 1.25 through 1.29 that were published on December 13, 2000 at 65 FR 77993, 78009-13 as further amended in this release, effective December 28, 2000.

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, 2a, 4, 4a, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12a, 12c, 13a, 13a-1, 16, 16a, 19, 21, 23 and 24.

2. Section 1.25 is amended by revising paragraphs (a)(1)(vii), (b)(2)(i)(A) and (b)(2)(i)(C), by redesignating paragraph (b)(2)(i)(D) as paragraph (b)(2)(i)(E), by adding a new paragraph (b)(2)(i)(D), by revising paragraph (b)(4)(i)(A) and by adding a new paragraph (b)(4)(i)(D). For the convenience of the reader, printed below is revised paragraph (a)(1)(vii) as well as the complete paragraphs (b)(2)(i) and (b)(4)(i) as revised:

§ 1.25

Investment of customer funds.

(a) * * *

(1) * * *

(vii) General obligations of a sovereign nation; and

* * * * *

(b) * * *

(2) Ratings. (i) Initial requirement. Instruments that are required to be rated by this section must be rated by a nationally recognized statistical rating organization (NRSRO), as that term is defined in § 270.2a-7 of this title. For an investment to qualify as a permitted investment, ratings are required as follows:

(A) U.S. government securities need not be rated;

(B) Municipal securities, government sponsored agency securities, certificates of deposit, commercial paper, and corporate notes, except notes that are asset-backed, must have the highest short-term rating of an NRSRO or one of the two highest long-term ratings of an NRSRO;

(C) Corporate notes that are asset-backed must have the highest ratings of an NRSRO;

(D) Sovereign debt must be rated in the highest category by at least one NRSRO; and

(E) Money market mutual funds that are rated by an NRSRO must be rated at the highest rating of an NRSRO.

* * * * *

(4) Concentration and other limitations. (i) Direct investments. (A) U.S. government securities and money market mutual funds shall not be subject to a concentration limit or other limitation.

(B) Securities of any single issuer of government sponsored agency securities held by a futures commission merchant or clearing organization may not exceed 25 percent of total assets held in segregation by the futures commission merchant or clearing organization.

(C) Securities of any single issuer of municipal securities, certificates of deposit, commercial paper, or corporate notes held by a futures commission merchant or clearing organization may not exceed 5 percent of total assets held in segregation by the futures commission merchant or clearing organization.

(D) Sovereign debt is subject to the following limits: a futures commission merchant may invest in the sovereign debt of a country to the extent it has balances in segregated accounts owed to its customers denominated in that country's currency; a clearing organization may invest in the sovereign debt of a country to the extent it has balances in segregated accounts owed to its clearing member futures commission merchants denominated in that country's currency.

* * * * *

Issued in Washington, DC on December 21, 2000 by the Commission.

Jean A. Webb,

Secretary of the Commission.

Footnotes

1.  65 FR 77993.

2.  65 FR 39008, 39014 (June 22, 2000).

3.  65 FR at 77994.

4.  See A New Regulatory Framework for Multilateral Transaction Execution Facilities, Intermediaries and Clearing Organizations, 65 FR 77962 (Dec. 13, 2000); A New Regulatory Framework for Clearing Organizations, 65 FR 78020 (Dec. 13, 2000); Exemption for Bilateral Transactions, 65 FR 78030 (Dec. 13, 2000).

5.  The Commission also notes that although publication of the amended Rule 1.25 appeared in the Federal Register on December 13, 2000, it has been available on the Commission's website since the Commission adopted it on November 22, 2000.

6.  Elsewhere in this edition of the Federal Register, the Commission is publishing a release announcing the withdrawal of the other rules and rule amendments that were part of the Commission's regulatory reform package.

7.  5 U.S.C. 553(d) generally provides that the publication or service of a substantive rule shall not be made less than 30 days before its effective date, except for: (1) a substantive rule which grants or recognizes an exemption or relieves a restriction; (2) interpretative rules and statements of policy; or (3) as otherwise provided by the agency for good cause found and published with the rule.