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

<RULE> COMMODITY FUTURES TRADING COMMISSION <CFR>17 CFR Parts 1, 22, and 30</CFR> <RIN>RIN 3038-AF24</RIN> <SUBJECT>Investment of Customer Funds by Futures Commission Merchants and Derivatives Clearing Organizations</SUBJECT> <HD SOURCE="HED">AGENCY:</HD> Commodity Futures Trading Commission. <HD SOURCE="HED">ACTION:</HD> Final rule. <SUM> <HD SOURCE="HED">SUMMARY:</HD> The Commodity Futures Trading Commission (“Commission” or “CFTC”) is amending its regulations governing the types of investments that futures commission merchants and derivatives clearing organizations may make with funds held for the benefit of customers engaging in futures, foreign futures, and cleared swaps transactions. The Commission is also revising asset-based and issuer-based concentration limits for the investment of customer funds. The Commission is also specifying market risk capital charges that a futures commission merchant must take on new investments added to the list of permitted investments in computing the firm's adjusted net capital. The amendments also revise regulations that require each futures commission merchant to report to the Commission, and to the firm's designated self-regulatory organization, the name, location, and amount of customer funds held by each depository, including any investments of customer funds held by the depository. Lastly, the Commission is eliminating the requirement that each depository holding customer funds must provide the Commission with read-only electronic access to such accounts for the futures commission merchant to treat the funds as customer segregated funds. </SUM> <EFFDATE> <HD SOURCE="HED">DATES:</HD> <E T="03">Effective date:</E> This rule is effective February 21, 2025. <E T="03">Compliance dates:</E> The compliance dates for the rule amendments are discussed in section VI of <E T="02">SUPPLEMENTARY INFORMATION</E> in the preamble to this rule. </EFFDATE> <FURINF> <HD SOURCE="HED">FOR FURTHER INFORMATION CONTACT:</HD> Amanda L. Olear, Director, (202) 418-5213, <E T="03">aolear@cftc.gov;</E> Thomas J. Smith, Deputy Director, 202-418-5495, <E T="03">tsmith@cftc.gov;</E> Warren Gorlick, Associate Director, 202-418-5195, <E T="03">wgorlick@cftc.gov;</E> Liliya Bozhanova, Associate Director, 202-418-6232, <E T="03">lbozhanova@cftc.gov;</E> Jennifer M. Narvaez, Attorney Advisor, 202-418-5742, <E T="03">jnarvaez@cftc.gov,</E> Market Participants Division, or Lihong McPhail, Research Economist, (202) 418-5722, <E T="03">lmcphail@cftc.gov,</E> Office of the Chief Economist, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW, Washington, DC 20581; Theodore Z. Polley, Associate Director, 312-596-0551, <E T="03">tpolley@cftc.gov;</E> Division of Clearing and Risk, Commodity Futures Trading Commission, 77 West Jackson Boulevard, Suite 800, Chicago, Illinois 60604. </FURINF> <SUPLINF> <HD SOURCE="HED">SUPPLEMENTARY INFORMATION:</HD> <HD SOURCE="HD1">Table of Contents</HD> <EXTRACT> <FP SOURCE="FP-2">I. Introduction</FP> <FP SOURCE="FP1-2">A. Background and Statutory Authority</FP> <FP SOURCE="FP1-2">1. Segregation of Customer Funds by Futures Commission Merchants and Derivatives Clearing Organizations</FP> <FP SOURCE="FP1-2">2. Authority for Futures Commission Merchants and Derivatives Clearing Organizations To Invest Customer Funds</FP> <FP SOURCE="FP-2">II. Requests for Amendments to the List of Permitted Investments</FP> <FP SOURCE="FP-2">III. Summary of the Proposal</FP> <FP SOURCE="FP-2">IV. Final Rule</FP> <FP SOURCE="FP1-2">A. Investment of Customer Funds</FP> <FP SOURCE="FP1-2">1. Interests in Money Market Funds</FP> <FP SOURCE="FP1-2">2. Foreign Sovereign Debt</FP> <FP SOURCE="FP1-2">3. Interests in U.S. Treasury Exchange-Traded Funds</FP> <FP SOURCE="FP1-2">4. Investments in Commercial Paper and Corporate Notes or Corporate Bonds</FP> <FP SOURCE="FP1-2">5. Investments in Permitted Investments With Adjustable Rates of Interest</FP> <FP SOURCE="FP1-2">6. Investments in Certificates of Deposit Issued by Banks</FP> <FP SOURCE="FP1-2">B. Asset-Based and Issuer-Based Concentration Limits for Permitted Investments</FP> <FP SOURCE="FP1-2">C. Futures Commission Merchant Capital Charges on Permitted Investments</FP> <FP SOURCE="FP1-2">D. Segregation Investment Detail Report</FP> <FP SOURCE="FP1-2">E. Read-Only Electronic Access to Customer Funds Accounts Maintained by Futures Commission Merchants</FP> <FP SOURCE="FP1-2">F. Revisions to the Customer Risk Disclosure Statement</FP> <FP SOURCE="FP-2">V. Section 4(c) of the Act</FP> <FP SOURCE="FP-2">VI. Compliance Dates</FP> <FP SOURCE="FP-2">VII. Administrative Compliance</FP> <FP SOURCE="FP1-2">A. Regulatory Flexibility Act</FP> <FP SOURCE="FP1-2">B. Paperwork Reduction Act</FP> <FP SOURCE="FP1-2">C. Cost-Benefit Considerations</FP> <FP SOURCE="FP1-2">1. Specified Foreign Sovereign Debt, Interests in Qualified Exchange-Traded Funds, and Associated Capital Charges</FP> <FP SOURCE="FP1-2">2. Government Money Market Funds, Commercial Paper and Corporate Notes or Bonds, and Certificates of Deposit Issued by Banks</FP> <FP SOURCE="FP1-2">3. SOFR as a Permitted Benchmark</FP> <FP SOURCE="FP1-2">4. Revision of the Read-Only Access Provisions</FP> <FP SOURCE="FP1-2">D. Antitrust Considerations</FP> </EXTRACT> <HD SOURCE="HD1">I. Introduction</HD> <HD SOURCE="HD2">A. Background and Statutory Authority</HD> <HD SOURCE="HD3">1. Segregation of Customer Funds by Futures Commission Merchants and Derivatives Clearing Organizations</HD> The Commodity Exchange Act (“Act” or “CEA”)  <SU>1</SU> <FTREF/> and the Commission's regulations thereunder  <SU>2</SU> <FTREF/> establish a framework to safeguard funds of customers engaged in CFTC-regulated derivative transactions. Core elements of this framework are requirements for a futures commission merchant (“FCM”) or a derivatives clearing organization (“DCO”) to treat customer funds as belonging to customers and not as the property of the FCM or DCO, and for the FCM or DCO to segregate customer funds from its own funds in designated customer accounts maintained at banks, trust companies, FCMs, or DCOs, as applicable. <SU>3</SU> <FTREF/> The segregation of customer funds from an FCM's or DCO's own funds is intended to ensure that customer funds are used only to support customer trading and transactions and to facilitate the return of the funds to customers in the event of the insolvency of the FCM or DCO. <FTNT> <SU>1</SU>  7 U.S.C. 1 <E T="03">et seq.</E> </FTNT> <FTNT> <SU>2</SU>  The Commission's regulations are found in chapter I of title 17 of the Code of Federal Regulations, 17 CFR parts 1 through 199. </FTNT> <FTNT> <SU>3</SU>  7 U.S.C. 6d. </FTNT> Segregated customer funds are classified as either: (i) “futures customer funds;” (ii) “Cleared Swaps Customer Collateral;” or (iii) “30.7 customer funds.”  <SU>4</SU> <FTREF/> The term “futures customer funds” is defined by Commission regulation 1.3 to mean, in relevant part, all money, securities, and property received by an FCM or DCO from, for, or on behalf of “futures customers”  <SU>5</SU> <FTREF/> to margin, guarantee, or secure futures and options on futures transactions traded on CFTC-designated contract markets, and all money accruing to futures customers resulting from trading futures and options on futures. Section 4d(a)(2) of the Act requires an FCM to treat and deal with futures customer funds received to margin, guarantee, or secure trades or contracts of any futures customer, or accruing to a futures customer as the result of such trades or contracts, as belonging to the futures customer. <SU>6</SU> <FTREF/> Section 4d(a)(2) further provides that an FCM may not commingle futures customer funds with the FCM's own funds, provided, however, that the FCM may commingle the futures customer funds of two or more futures customers and deposit the funds with any bank, trust company, DCO, or other FCM. <SU>7</SU> <FTREF/> <FTNT> <SU>4</SU>   <E T="03">See generally</E> 17 CFR 1.20 (segregation framework for futures customer funds); 17 CFR 22.2 and 22.3 (segregation framework for Cleared Swaps Customer Collateral); and 17 CFR 30.7 (segregation framework for 30.7 customer funds). </FTNT> <FTNT> <SU>5</SU>  The term “futures customer” is defined by Commission regulation 1.3 to mean, in relevant part, any person who uses an FCM as an agent in connection with trading in any contract for the purchase or sale of a commodity for future delivery or any option on such contract. 17 CFR 1.3. </FTNT> <FTNT> <SU>6</SU>  7 U.S.C. 6d(a)(2). </FTNT> <FTNT> <SU>7</SU>   <E T="03">Id.</E> </FTNT> Section 4d(b) of the Act establishes obligations for DCOs and other depositories receiving futures customer funds from FCMs pursuant to section 4d(a)(2) of the Act. <SU>8</SU> <FTREF/> Specifically, section 4d(b) provides that it is unlawful for any person, including a DCO, that has received futures customer funds to hold, dispose of, or use the funds as belonging to the depositing FCM or any person other than the futures customers of the FCM. <SU>9</SU> <FTREF/> The Commission adopted Commission regulations 1.20 through 1.30, and Commission regulations 1.32 and 1.49, to implement the segregation requirements for futures customer funds mandated by sections 4d(a)(2) and 4d(b) of the Act. <SU>10</SU> <FTREF/> <FTNT> <SU>8</SU>  7 U.S.C. 6d(b). </FTNT> <FTNT> <SU>9</SU>   <E T="03">Id.</E> </FTNT> <FTNT> <SU>10</SU>  17 CFR 1.20 through 1.30, 17 CFR 1.32, and 17 CFR 1.49, respectively. </FTNT> With respect to cleared swap transactions, Commission regulations 1.3 and 22.1  <SU>11</SU> <FTREF/> define the term “Cleared Swaps Customer Collateral” to mean, in relevant part, all money, securities, or other propert ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 577k characters. 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