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Screenshot of a breaking news alert e-mail from Q2 2017
The U.S. Commodity Futures Trading Commission (CFTC) today announced three separate measures that are designed to enhance the protection of customer funds. The CFTC approved an order to exempt Federal Reserve Banks that maintain customer accounts for derivatives clearing organizations (DCOs) from liability under the Commodity Exchange Act (CEA). In addition, the CFTC’s Divisions of Clearing and Risk (DCR) and Swap Dealer and Intermediary Oversight (DSIO) issued separate interpretative and no-action letters regarding the use of money market funds (MMFs) by DCOs and futures commission merchants (FCMs).
The exemption facilitates the use of Federal Reserve Banks by DCOs that have been designated by the Financial Stability Oversight Council as systemically important. The exemption permits the Federal Reserve Banks to hold such DCOs’ customer funds without being subject to liability under the CEA. The customer funds must not be commingled with the money, securities, or property in the account of any other person. The order also exempts the Federal Reserve Banks from private rights of action that could otherwise be brought under the CEA.
DCR’s interpretative letter sets forth staff’s view that it would be inconsistent with CFTC regulations for a DCO to accept or hold initial margin in MMFs, or to invest funds belonging to the DCO, its clearing members, or clearing members’ customers in MMFs that retain authority to impose redemption restrictions. Government MMFs that do not retain the authority to impose redemption restrictions would continue to be viewed as acceptable margin collateral and investments.
DSIO’s no-action letter recommends that the CFTC not take an enforcement action against an FCM that invests its funds held in segregated accounts in MMFs that retain authority to impose redemption restrictions provided such investments are limited to the amount of funds the FCM holds in excess of the firm’s targeted residual interest. The letter also recommends a no-action position for FCMs that invest customer funds in a government MMF, as defined in Securities and Exchange Commission (SEC) Rule 2a-7, without regard to Regulation 1.25 concentration limits provided that the government MMF has $5 billion or more in assets and does not retain authority to impose redemption restrictions.
The interpretative and no-action letters announced today address (a) the acceptance or holding of MMFs as margin collateral by DCOs in light of the requirements of Part 39 of CFTC regulations, and (b) the investment of customer funds in MMFs in light of the requirements of Regulation 1.25. The letters were issued to address the impact of amendments adopted by the SEC to SEC Rule 2a-7, requiring prime MMFs, and authorizing government MMFs, to retain authority to suspend participant redemptions and to impose liquidity fees under certain defined conditions. The amendments to SEC Rule 2a-7 take effect on October 14, 2016.