Federal Register, Volume 90 Issue 13 (Wednesday, January 22, 2025)

[Federal Register Volume 90, Number 13 (Wednesday, January 22, 2025)]
[Rules and Regulations]
[Pages 7810-7877]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-30927]

[[Page 7809]]

Vol. 90

Wednesday,

No. 13

January 22, 2025

Part II

Commodity Futures Trading Commission

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17 CFR Parts 1, 22, and 30

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

Federal Register / Vol. 90 , No. 13 / Wednesday, January 22, 2025 /
Rules and Regulations

[[Page 7810]]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 1, 22, and 30

RIN 3038-AF24

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

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rule.

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SUMMARY: 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.

DATES:
Effective date: This rule is effective February 21, 2025.
Compliance dates: The compliance dates for the rule amendments are
discussed in section VI of SUPPLEMENTARY INFORMATION in the preamble to
this rule.

FOR FURTHER INFORMATION CONTACT: Amanda L. Olear, Director, (202) 418-
5213, aolear@cftc.gov; Thomas J. Smith, Deputy Director, 202-418-5495,
tsmith@cftc.gov; Warren Gorlick, Associate Director, 202-418-5195,
wgorlick@cftc.gov; Liliya Bozhanova, Associate Director, 202-418-6232,
lbozhanova@cftc.gov; Jennifer M. Narvaez, Attorney Advisor, 202-418-
5742, jnarvaez@cftc.gov, Market Participants Division, or Lihong
McPhail, Research Economist, (202) 418-5722, lmcphail@cftc.gov, 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, tpolley@cftc.gov; Division
of Clearing and Risk, Commodity Futures Trading Commission, 77 West
Jackson Boulevard, Suite 800, Chicago, Illinois 60604.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction
A. Background and Statutory Authority
1. Segregation of Customer Funds by Futures Commission Merchants
and Derivatives Clearing Organizations
2. Authority for Futures Commission Merchants and Derivatives
Clearing Organizations To Invest Customer Funds
II. Requests for Amendments to the List of Permitted Investments
III. Summary of the Proposal
IV. Final Rule
A. Investment of Customer Funds
1. Interests in Money Market Funds
2. Foreign Sovereign Debt
3. Interests in U.S. Treasury Exchange-Traded Funds
4. Investments in Commercial Paper and Corporate Notes or
Corporate Bonds
5. Investments in Permitted Investments With Adjustable Rates of
Interest
6. Investments in Certificates of Deposit Issued by Banks
B. Asset-Based and Issuer-Based Concentration Limits for
Permitted Investments
C. Futures Commission Merchant Capital Charges on Permitted
Investments
D. Segregation Investment Detail Report
E. Read-Only Electronic Access to Customer Funds Accounts
Maintained by Futures Commission Merchants
F. Revisions to the Customer Risk Disclosure Statement
V. Section 4(c) of the Act
VI. Compliance Dates
VII. Administrative Compliance
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
C. Cost-Benefit Considerations
1. Specified Foreign Sovereign Debt, Interests in Qualified
Exchange-Traded Funds, and Associated Capital Charges
2. Government Money Market Funds, Commercial Paper and Corporate
Notes or Bonds, and Certificates of Deposit Issued by Banks
3. SOFR as a Permitted Benchmark
4. Revision of the Read-Only Access Provisions
D. Antitrust Considerations

I. Introduction

A. Background and Statutory Authority

1. Segregation of Customer Funds by Futures Commission Merchants and
Derivatives Clearing Organizations
The Commodity Exchange Act (``Act'' or ``CEA'') \1\ and the
Commission's regulations thereunder \2\ 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.\3\ 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.
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\1\ 7 U.S.C. 1 et seq.
\2\ The Commission's regulations are found in chapter I of title
17 of the Code of Federal Regulations, 17 CFR parts 1 through 199.
\3\ 7 U.S.C. 6d.
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Segregated customer funds are classified as either: (i) ``futures
customer funds;'' (ii) ``Cleared Swaps Customer Collateral;'' or (iii)
``30.7 customer funds.'' \4\ 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'' \5\ 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

[[Page 7811]]

customer.\6\ 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.\7\
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\4\ See generally 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).
\5\ 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.
\6\ 7 U.S.C. 6d(a)(2).
\7\ Id.
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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.\8\ 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.\9\ 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.\10\
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\8\ 7 U.S.C. 6d(b).
\9\ Id.
\10\ 17 CFR 1.20 through 1.30, 17 CFR 1.32, and 17 CFR 1.49,
respectively.
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With respect to cleared swap transactions, Commission regulations
1.3 and 22.1 \11\ define the term ``Cleared Swaps Customer Collateral''
to mean, in relevant part, all money, securities, or other property
received by an FCM or DCO from, for, or on behalf of, a ``Cleared Swaps
Customer'' to margin, guarantee, or secure ``Cleared Swap''
positions.\12\ Section 4d(f)(2)(A) of the Act requires an FCM to treat
Cleared Swaps Customer Collateral received from a Cleared Swaps
Customer, or accruing to a Cleared Swaps Customer as a result of
Cleared Swap positions, as belonging to the Cleared Swaps Customer.\13\
Section 4d(f)(2)(B) of the Act further provides that an FCM may not
commingle Cleared Swaps Customer Collateral of a Cleared Swaps Customer
with the FCM's own funds.\14\ The FCM may, however, commingle Cleared
Swaps Customer Collateral of two or more Cleared Swaps Customers and
deposit the funds in any bank, trust company, DCO, or other FCM.\15\
Additionally, section 4d(f)(6) of the Act provides that it is unlawful
for any person, including a DCO and any depository institution, that
receives Cleared Swaps Customer Collateral to hold, dispose of, or use
the Cleared Swaps Customer Collateral as belonging to the depositing
FCM or any person other than the Cleared Swaps Customer of the FCM.\16\
The Commission adopted Commission regulations 22.2 through 22.13, and
Commission regulations 22.15 through 22.17, to implement the
segregation requirements for Cleared Swaps Customer Collateral mandated
by section 4d(f) of the Act.\17\
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\11\ 17 CFR 22.1.
\12\ Commission regulation 22.1 defines the term ``Cleared Swaps
Customer'' to mean, in relevant part, any customer entering into a
Cleared Swap. The Act and Commission regulation 22.1 further define
the term ``Cleared Swap'' to mean any swap that is, directly or
indirectly, submitted to, and cleared by, a DCO registered with the
Commission. 7 U.S.C. 1a(7) and 17 CFR 22.1.
\13\ 7 U.S.C. 6d(f)(2)(A).
\14\ 7 U.S.C. 6d(f)(2)(B).
\15\ 7 U.S.C. 6d(f)(3)(A)(i).
\16\ 7 U.S.C. 6d(f)(6).
\17\ 17 CFR 22.2 through 22.13, and 17 CFR 22.15 through 22.17,
respectively. Protection of Cleared Swaps Customer Contracts and
Collateral; Conforming Amendments to the Commodity Broker Bankruptcy
Provisions, 77 FR 6336 (Feb. 7, 2012) (``Protection of Cleared Swaps
Customer Contracts and Collateral'').
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Part 30 of the Commission's regulations govern the requirements
imposed on FCMs that carry futures positions for customers trading on
foreign markets.\18\ Commission regulation 30.1 defines the term ``30.7
customer funds'' to mean any money, securities, or other property
received by an FCM from, for, or on behalf of a U.S. person or foreign-
domiciled person (a ``30.7 customer'') \19\ to margin, guarantee, or
secure futures or options on futures positions executed on foreign
boards of trade (``foreign futures'').\20\ Section 4(b)(2)(A) of the
Act authorizes the Commission to adopt regulations requiring FCMs to
safeguard 30.7 customer funds deposited by 30.7 customers for trading
on foreign boards of trade,\21\ which the Commission did by adopting
Commission regulation 30.7.\22\ As part of the safeguarding
requirements, Commission regulation 30.7(e)(2) requires an FCM to
segregate 30.7 customer funds from the FCM's own funds, and Commission
regulation 30.7(b) provides that an FCM may hold 30.7 customer funds
only with certain specified depositories, including banks, trust
companies, DCOs, foreign brokers, and clearing organizations of foreign
boards of trade.\23\
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\18\ 17 CFR part 30.
\19\ Commission regulation 30.1 defines the term ``30.7
customer'' to mean any person located in the U.S., its territories
or possessions, as well as any foreign-domiciled person, who trades
in foreign futures or foreign options through an FCM. 17 CFR 30.1.
\20\ 17 CFR 30.1.
\21\ 7 U.S.C. 6(b)(2)(A).
\22\ 17 CFR 30.7.
\23\ 17 CFR 30.7(b) and 17 CFR 30.7(e)(2).
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In order to simplify the discussion in this preamble, the terms
``futures customer funds,'' ``Cleared Swaps Customer Collateral,'' and
``30.7 customer funds,'' are used when referring to regulations
applicable specifically to futures customers, Cleared Swaps Customers,
and 30.7 customers, respectively. In addition, the term ``Customer
Funds'' is used when referring collectively to ``futures customer
funds,'' ``Cleared Swaps Customer Collateral,'' and ``30.7 customer
funds.''
2. Authority for Futures Commission Merchants and Derivatives Clearing
Organizations To Invest Customer Funds
The Act establishes the authority for FCMs and DCOs to invest
Customer Funds. Section 4d(a)(2) of the Act authorizes FCMs to invest
futures customer funds in: (i) obligations of the U.S.; (ii)
obligations fully guaranteed as to principal and interest by the U.S.;
and (iii) general obligations of any State or of any political
subdivision of a State.\24\ The Commission's predecessor agency, the
Commodity Exchange Authority of the U.S. Department of Agriculture,
adopted Commission regulation 1.25 to implement section 4d(a)(2) of the
Act, and authorized FCMs and DCOs to invest futures customer funds in
the instruments enumerated in section 4d(a)(2) (the ``Permitted
Investments'').\25\
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\24\ 7 U.S.C. 6d(a)(2).
\25\ See generally Title 17--Commodity and Securities Exchanges,
33 FR 14454 (Sept. 26, 1968), amending Commission regulation 1.25
and providing that FCMs and clearing organizations may invest
futures customer funds in obligations of the U.S., in general
obligations of any State or of any political subdivision of any
State, or in obligations fully guaranteed as to principal and
interest by the U.S.
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The Commission subsequently expanded the Permitted Investments in
2000 to include certificates of deposit, commercial paper, corporate
notes, foreign sovereign debt, and interests in money market funds.\26\
The Commission

[[Page 7812]]

also authorized FCMs and DCOs to buy the Permitted Investments under
agreements to resell the securities (``reverse repurchase agreements'')
and to sell the Permitted Investments under agreements to repurchase
the securities (``repurchase agreements'').\27\ To minimize credit
risk, market risk, and liquidity risk to the Permitted Investments, the
Commission imposed conditions that are required to be met, including a
restriction on the dollar-weighted average of the time-to-maturity of
the securities held in segregated portfolios, asset-based and issuer-
based concentration limits, and prohibitions on certain investments
containing embedded derivatives.\28\ More generally, Commission
regulation 1.25 contains an overarching requirement that all Permitted
Investments must be ``consistent with the objectives of preserving
principal and maintaining liquidity.'' \29\ In adopting the 2000
Permitted Investments Amendment, the Commission stated that it was
expanding the range of instruments in which FCMs may invest customer
funds beyond those listed in section 4d(a)(2) of the Act to enhance the
yield available to FCMs, clearing organizations, and their customers
without compromising the safety of futures customer funds.\30\
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\26\ See generally Rules Relating to Intermediaries of Commodity
Interest Transactions, 65 FR 77993 (Dec. 13, 2000) (amending
Commission regulation 1.25 to permit FCMs and DCOs to invest
customer funds in certificates of deposit, commercial paper,
corporate notes, foreign sovereign debt, and interest in money
market funds); and Investment of Customer Funds, 65 FR 82270 (Dec.
28, 2000) (making technical corrections and accelerating the
effective date of the final rules from February 12, 2001 to December
28, 2000) (collectively, the ``2000 Permitted Investments
Amendment''). The 2000 Permitted Investments Amendment was adopted
pursuant to section 4(c) of the Act, which 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. The Commission may grant 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. 7 U.S.C. 6(c)(1). A further discussion of
section 4(c)(1) of the Act is set forth in section V of this
preamble.
\27\ 2000 Permitted Investments Amendment at 78001-78004.
Reverse repurchase agreements and repurchase agreements are
collectively referred to as ``Repurchase Transactions'' in this
preamble.
\28\ 17 CFR 1.25(b).
\29\ Id.
\30\ 2000 Permitted Investments Amendment at 78007.
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The list of investments that qualify as Permitted Investments has
undergone several revisions following the 2000 Permitted Investments
Amendment.\31\ In its current form, Commission regulation 1.25 lists
seven categories of investments that qualify as Permitted Investments:
(i) obligations of the U.S. and obligations fully guaranteed as to
principal and interest by the U.S. (``U.S. government securities'');
(ii) general obligations of any State or political subdivision of a
State (``municipal securities''); (iii) obligations of any U.S.
government corporation or enterprise sponsored by the U.S. (``U.S.
agency obligations''); (iv) certificates of deposit issued by a bank;
(v) commercial paper fully guaranteed by the U.S. under the Temporary
Liquidity Guarantee Program (``TLGP'') as administered by the Federal
Deposit Insurance Corporation (``FDIC'') (``commercial paper''); (vi)
corporate notes and bonds fully guaranteed as to principal and interest
by the U.S. under the TLGP (``corporate notes and bonds''); and (vii)
interests in money market mutual funds.\32\ In addition, Commission
regulation 1.25(a)(2) permits FCMs and DCOs to buy and sell the
Permitted Investments under Repurchase Transactions.\33\
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\31\ E.g., Investment of Customer Funds and Record of
Investments, 70 FR 28190 (May 17, 2005) (``2005 Permitted
Investments Amendment''), and Investment of Customer Funds and Funds
Held in an Account for Foreign Futures and Foreign Options
Transactions, 76 FR 78776 (Dec. 19, 2011) (``2011 Permitted
Investments Amendment'').
\32\ 17 CFR 1.25(a)(1).
\33\ 17 CFR 1.25(a)(2).
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Section 4(b)(2)(A) of the Act grants the Commission authority to
adopt rules and regulations regarding an FCM's safeguarding of 30.7
customer funds.\34\ Prior to 2011, an FCM was not subject to a specific
regulation defining the investments that the firm could enter into with
30.7 customer funds.\35\ In 2011, the Commission determined that the
terms of Commission regulation 1.25 should also apply to an FCM's
investment of 30.7 customer funds, and amended Commission regulation
30.7 to provide that to the extent an FCM invests 30.7 customer funds,
the firm must invest such funds subject to, and in compliance with, the
terms and conditions of Commission regulation 1.25.\36\
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\34\ 7 U.S.C. 6(b)(2)(A).
\35\ 2011 Permitted Investments Amendment at 78777, providing
that because Congress did not expressly apply the investment
limitations set forth in section 4d of the Act to 30.7 customer
funds, the Commission historically has not subjected such funds to
the investment limitations applicable to futures customer funds.
\36\ 17 CFR 30.7. The Commission stated that it was appropriate
to align the investment standards of Commission regulation 30.7 with
those of Commission regulation 1.25 because many of the same
prudential concerns arise with respect to both segregated customer
funds and 30.7 customer funds. 2011 Permitted Investment Amendment
at 78791.
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The Commission also extended the requirements of Commission
regulation 1.25 to FCMs and DCOs investing Cleared Swaps Customer
Collateral.\37\ The Commission adopted Commission regulations 22.2 and
22.3 in 2012 \38\ pursuant to its authority under section 4d(f)(4) of
the Act, which provides that Cleared Swaps Customer Collateral may be
invested by an FCM or DCO in: (i) obligations of the U.S.; (ii) general
obligations of any State or of any political subdivision of a State;
(iii) obligations fully guaranteed as to principal and interest by the
U.S.; and (iv) any other investment that the Commission may by rule or
regulation prescribe.\39\ Section 4d(f)(4) of the Act further provides
that the investments must be made in accordance with the rules and
regulations, and subject to any conditions, that the Commission may
prescribe.\40\
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\37\ See 17 CFR 22.2(e)(1) and 17 CFR 22.3(d).
\38\ See generally Protection of Cleared Swaps Customer
Contracts and Collateral.
\39\ 7 U.S.C. 6d(f).
\40\ 7 U.S.C. 6d(f)(4).
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In addition to enumerating the Permitted Investments that FCMs and
DCOs may enter into with Customer Funds, Commission regulation 1.25
also imposes several conditions on the investment of Customer Funds.
Commission regulation 1.25(b)(3) contains both asset-based and issuer-
based concentration limits applicable to Permitted Investments. The
asset-based concentration limits restrict the total amount of Customer
Funds that an FCM or DCO may invest in any particular Permitted
Investment instrument or asset class to a defined percentage of the
total funds held in segregation by the FCM or DCO.\41\ The issuer-based
concentration limits cap the total amount of Customer Funds that may be
invested in Permitted Investment instruments offered, or managed, by a
particular issuer to a defined percentage of the total funds held in
segregation by the FCM or DCO.\42\
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\41\ 17 CFR 1.25(b)(3)(i).
\42\ 17 CFR 1.25(b)(3)(ii).
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To limit risk to customers from the investment of Customer Funds,
Commission regulations provide that FCMs and DCOs are financially
responsible for any losses resulting from Permitted Investments and
explicitly prohibit the allocation of investment losses to customers or
clearing FCMs, respectively.\43\
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\43\ Commission regulation 1.29 provides that FCMs or DCOs, as
applicable, shall bear sole responsibility for any losses resulting
from the investment of futures customer funds, and further provides
that no investment losses shall be borne or otherwise allocated to
FCM customers or to clearing FCMs and their customers. 17 CFR
1.29(b).
Commission regulation 22.2(e)(1) provides that an FCM shall bear
sole responsibility for any losses resulting from the investment of
Cleared Swaps Customer Collateral and may not allocate investment
losses to Cleared Swaps Customers of the FCM. 17 CFR 22(e)(1).
Commission regulation 30.7(i) provides that an FCM shall bear
sole financial responsibility for any losses resulting from the
investment of 30.7 customer funds, and further provides that no
investment losses may be allocated to the 30.7 customers of the FCM.
17 CFR 30.7(i).
In addition, Commission regulation 22.3(d) provides that DCOs
may invest Cleared Swaps Customer Collateral in Permitted
Investments set forth in Commission regulation 1.25. The regulation,
however, does not provide that a DCO is responsible for investment
losses. The Commission proposed to amend Commission regulation
22.3(d) to explicitly provide that a DCO shall bear sole
responsibility for any losses resulting from the investment of
Cleared Swaps Customer Collateral and may not allocate such losses
to Cleared Swaps Customers. Investment of Customer Funds by Futures
Commission Merchants and Derivatives Clearing Organizations, 88 FR
81236 at 81238-81239, 81259 (Nov. 21, 2023).

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[[Page 7813]]

The Commission has previously noted the importance of conducting
periodic assessments of Commission regulation 1.25 and, as necessary,
revising regulatory policies to strengthen safeguards designed to
minimize risk while retaining an appropriate degree of investment
flexibility and opportunities for capital efficiency for DCOs and FCMs
investing customer segregated funds.\44\ In furtherance of these
objectives, and in consideration of the requests for amendments to
Commission regulation 1.25 discussed in section II of this preamble,
the Commission published a notice of proposed rulemaking to amend the
list of Permitted Investments in Commission regulation 1.25 and to
adopt several related amendments to its rules governing the investment
of Customer Funds by FCMs and DCOs.\45\
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\44\ 2011 Permitted Investments Amendment at 78777.
\45\ Investment of Customer Funds by Futures Commission
Merchants and Derivatives Clearing Organizations, 88 FR 81236 (Nov.
21, 2023) (``Proposal'').
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II. Requests for Amendments to the List of Permitted Investments

The Futures Industry Association (``FIA'') and CME Group Inc.
(``CME'') (collectively, the ``Petitioners'') submitted a joint
petition requesting that the Commission issue an order under section
4(c) of the Act, or take such other action as the Commission deems
appropriate, to expand the list of Permitted Investments that FCMs and
DCOs may enter into with Customer Funds.\46\ The Petitioners requested
an extension of the Permitted Investments to include the foreign
sovereign debt of Canada, France, Germany, Japan, and the United
Kingdom (``Specified Foreign Sovereign Debt''), subject to the
condition that any investment is limited to balances owed by FCMs and
DCOs to customers and FCM clearing members, respectively, denominated
in the applicable currency of Canada, France, Germany, Japan, or the
United Kingdom.\47\ The Petitioners further requested that the
Commission exempt FCMs and DCOs from the provisions of Commission
regulation 1.25(d)(2) to authorize FCMs and DCOs to enter into
Repurchase Transactions involving Specified Foreign Sovereign Debt with
foreign banks and foreign securities brokers or dealers, and to deposit
Specified Foreign Sovereign Debt in safekeeping accounts at foreign
banks.\48\
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\46\ Petition for Order under section 4(c) of the Commodity
Exchange Act, dated May 24, 2023 (the ``Joint Petition''). On
September 22, 2023, the Petitioners submitted updated data in
support of the Joint Petition and corrected an inadvertent
transposition of data items in the Joint Petition. Supplement to
Petition for Order under section 4(c) of the Commodity Exchange Act
(``Supplement to Joint Petition''). The Joint Petition and the
Supplement to Joint Petition are available on the Commission's
website, https://www.cftc.gov/media/9531/FIA_CMEPetition_Regulation125_052423/download and https://www.cftc.gov/media/9536/FIALetterSupplementing_Regulation125_092223/download.
\47\ Joint Petition at p. 4. The currencies of Canada, France,
Germany, Japan, and the United Kingdom are the Canadian dollar, the
euro (France and Germany), the yen (Japan), and the British pound
(United Kingdom).
\48\ Joint Petition at p. 5.
Commission regulation 1.25(d)(2) provides that an FCM or DCO may
enter into Repurchase Transactions only with the following
counterparties: (i) a bank as defined in section 3(a)(6) of the
Securities Exchange Act of 1934; (ii) a domestic branch of a foreign
bank insured by the FDIC; (iii) an SEC-registered securities broker
or dealer; or (iv) an SEC-registered government securities broker or
dealer. Section 3(a)(6) of the Securities Exchange Act of 1934
defines the term ``bank'' to mean: (i) a banking institution
organized under the laws of the U.S. or a Federal savings
association; (ii) a member bank of the Federal Reserve System; (iii)
any other banking institution or savings association doing business
under the laws of any State or the U.S., a substantial portion of
the business of which consists of receiving deposits or exercising
fiduciary powers similar to those permitted to national banks under
the authority of the Comptroller of the Currency, and which is
supervised and examined by a State or Federal authority having
supervision over banks or savings associations; and (iv) a receiver,
conservator, or other liquidating agent of any institution or firm
included in clauses (i), (ii), or (iii) above (``Section 3(a)(6)
bank''). 15 U.S.C. 78c(a)(6). Foreign-domiciled banks and foreign
securities brokers or dealers are not authorized counterparties for
Repurchase Transactions under Commission regulation 1.25(d)(2).
In addition, Commission regulation 1.25(d)(7) provides that
securities transferred to an FCM or DCO under Repurchase
Transactions must be held in safekeeping accounts with certain U.S.-
domiciled banks, a Federal Reserve Bank, a DCO, or the Depository
Trust Company in an account that complies with the requirements of
Commission regulation 1.26.
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In support of the request, the Petitioners stated that the
Commission issued an order in 2018 pursuant to section 4(c) of the Act
providing a limited exemption to section 4d of the Act and Commission
regulation 1.25 to permit DCOs to invest futures customer funds and
Cleared Swaps Customer Collateral in the foreign sovereign debt of
France and Germany.\49\ The Petitioners also asserted that the
Commission's stated rationale for issuing the 2018 Order and providing
an exemption to DCOs also applies to investments made by FCMs and
extends to the sovereign debt of Canada, Japan, and the United Kingdom,
in addition to France and Germany.
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\49\ Order Granting Exemption from Certain Provisions of the
Commodity Exchange Act Regarding Investment of Customer Funds and
from Certain Related Commission Regulations, 83 FR 35241 (Jul. 25,
2018) (``2018 Order''). The 2018 Order provides an exemption only to
DCOs. FCMs are not subject to the 2018 Order.
---------------------------------------------------------------------------

The 2018 Order's section 4(c) exemption for DCOs is subject to
conditions, including that: (i) investment in French or German
sovereign debt is limited to investments made with euro-denominated
balances owed to the futures customers and Cleared Swaps Customers of
FCM clearing members; (ii) the dollar-weighted average of the remaining
time-to-maturity of a DCO's portfolio of investments in each of French
and German sovereign debt may not exceed 60 days; and (iii) a DCO may
not make a direct investment in any sovereign debt instrument of France
or Germany that has a remaining time-to-maturity in excess of 180
calendar days.\50\ The 2018 Order also provides that if the two-year
credit default spread of the French or German sovereign debt exceeds 45
basis points (``BPS''), the DCO may not make any new direct investments
in the relevant sovereign debt using futures customer funds or Cleared
Swaps Customer Collateral and must discontinue investing futures
customer funds and Cleared Swaps Customer Collateral in the relevant
debt through Repurchase Transactions as soon as practicable under the
circumstances.\51\
---------------------------------------------------------------------------

\50\ Conditions (3)(a), 3(c), and 3(d) of the 2018 Order at
35245.
\51\ Condition (3)(b) of the 2018 Order at 35245.
---------------------------------------------------------------------------

The 2018 Order also grants an exemption from Commission regulation
1.25(d)(2) to permit DCOs to enter into Repurchase Transactions
involving French or German sovereign debt with foreign banks and
foreign securities brokers or dealers as counterparties.\52\ A DCO may
enter into Repurchase Transactions with a foreign bank or foreign
securities broker or dealer provided that the firm qualifies as a
permitted depository under Commission regulation 1.49(d)(3) and is
located in a ``money center country'' \53\ or in another jurisdiction
that has adopted the euro as its currency.\54\ The 2018 Order further
grants an exemption from the requirement in Commission regulation
1.25(d)(7) that securities transferred to an FCM or DCO under reverse
repurchase agreements must be held in

[[Page 7814]]

safekeeping accounts with certain U.S.-domiciled banks, a Federal
Reserve Bank, a DCO, or the Depository Trust Company, to permit DCOs to
hold French or German sovereign debt received under reverse repurchase
agreements in a safekeeping account with foreign banks that qualify as
depositories for Customer Funds under Commission regulation
1.49(d)(3).\55\
---------------------------------------------------------------------------

\52\ Condition 2(a) of the 2018 Order at 35245.
\53\ Commission regulation 1.49(a) defines the term ``money
center country'' as Canada, France, Italy, Germany, Japan, and the
United Kingdom.
\54\ Conditions 2(b) and 3(e) of the 2018 Order at 35245.
Commission regulation 1.49(d)(3) provides that to qualify as a
depository for Customer Funds, a foreign depository must be a bank
or trust company that has in excess of $1 billion in regulatory
capital, a registered FCM, or a DCO. 17 CFR 1.49(d)(3).
\55\ Condition 2(b) of the 2018 Order at 35245. Commission
regulation 1.25(d)(7) provides that securities transferred to an FCM
or DCO under a reverse repurchase agreement must be held in a
safekeeping account only with the following depositories: (i) a
section 3(a)(6) bank; (ii) a domestic branch of a foreign bank
insured by the FDIC; (iii) a Federal Reserve Bank; (iv) a DCO; or
(v) the Depository Trust Company. 17 CFR 1.25(d)(7). A foreign-
domiciled bank is currently not an authorized depository for
securities transferred to an FCM or DCO under Commission regulation
1.25(d)(7).
---------------------------------------------------------------------------

The Petitioners further requested that FCMs and DCOs be permitted
to invest Customer Funds in certain exchange-traded funds (``ETFs'')
that invest primarily in short-term U.S. Treasury securities (``U.S.
Treasury ETFs'').\56\ In support of their request, the Petitioners
stated that U.S. Treasury ETFs have characteristics that may be
consistent with those of other Permitted Investments and may provide
FCMs and DCOs with an opportunity to diversify further their
investments of customer funds.\57\
---------------------------------------------------------------------------

\56\ Joint Petition at pp. 8-9.
\57\ Id.
---------------------------------------------------------------------------

The Commission also received a petition from Invesco Capital
Management LLC (``Invesco''), which serves as a sponsor of various
ETFs, advocating for the addition of U.S. Treasury ETF securities to
the list of Permitted Investments.\58\ Invesco stated that U.S.
Treasury ETFs would provide FCMs and DCOs with additional investment
choices for Customer Funds, promote operational efficiencies, and offer
potentially better investment returns for FCMs, DCOs, and their
customers, and facilitate financial market innovation.\59\ Invesco
further stated that listing U.S. Treasury ETFs as Permitted Investments
would be consistent with the public interest and the customer
protection regime under the Act and Commission regulations as U.S.
Treasury ETFs may only invest in instruments that are otherwise
eligible as Permitted Investments for Customer Funds.\60\ Invesco
further noted that because U.S. Treasury ETFs invest in a sub-set of
the same high-quality liquid instruments that are Permitted Investments
under Commission regulation 1.25 (i.e., U.S. government securities),
the ETFs offer an indirect, possibly simpler, and more cost-efficient
way for FCMs and DCOs to invest Customer Funds in U.S. Treasury
securities and obligations fully guaranteed as to principal and
interest by the U.S. by eliminating the need for FCMs and DCOs to
administer direct investments in individual U.S. government
securities.\61\
---------------------------------------------------------------------------

\58\ Letter from Anna Paglia, Chief Executive Officer, Invesco
Capital Management LLC, dated September 28, 2023 (``Invesco
Petition''), available at https://www.cftc.gov/media/9541/Invesco_CFTCPetition_Regulation125_092823/download. Invesco is
registered with the Commission as a commodity pool operator and
commodity trading advisor, and is registered with the Securities and
Exchange Commission (``SEC'') as an investment adviser.
\59\ Invesco Petition at p. 1.
\60\ Id. at p. 9.
\61\ Id. at p. 2.
---------------------------------------------------------------------------

Lastly, the Petitioners also requested that the Commission amend
its regulations consistent with CFTC Staff Letter 21-02 and CFTC Staff
Letter 22-21 \62\ to permit FCMs and DCOs to invest Customer Funds in
qualifying Permitted Investments that have adjustable rates of interest
that correlate closely to SOFR.\63\
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\62\ CFTC Staff Letter 21-02, CFTC Regulation 1.25--Investment
of Customer Funds--Time-Limited No-Action Position for Investments
in Securities with an Adjustable Rate of Interest Benchmarked to the
Secured Overnight Financing Rate (Jan. 4, 2021) (``Staff Letter 21-
02'') available at the Commission's website: https://www.cftc.gov/LawRegulation/CFTCStaffLetters/letters.htm?title=21-02&field_csl_letter_year_value=&field_csl_dodd_frank_exists_value=All
; CFTC Staff Letter 22-21, CFTC Regulation 1.25--Investment of
Customer Funds in Securities with an Adjustable Rate of Interest
Benchmarked to the Secured Overnight Financing Rate--Extension of
Time-Limited No-Action Position Concerning Investments by Futures
Commission Merchants and No-Action Position Concerning Investments
by Derivatives Clearing Organizations (Dec. 23, 2022) (``Staff
Letter 22-21'') available at the Commission's website: www.cftc.gov/LawRegulation/CFTCStaffLetters/letters.htm?title=22-21&field_csl_letter_year_value=&field_csl_dodd_frank_exists_value=All
.
\63\ Joint Petition at p. 4.
---------------------------------------------------------------------------

III. Summary of the Proposal

In order to revise Commission regulation 1.25 to address outdated
provisions, and in consideration of the Joint Petition and the Invesco
Petition, the Commission proposed to amend the list of Permitted
Investments to: (i) add two new asset classes (i.e., Specified Foreign
Sovereign Debt instruments and U.S. Treasury ETFs), subject to certain
conditions; (ii) limit the scope of money market funds (``MMFs'') whose
interests qualify as Permitted Investments; and (iii) remove corporate
notes, corporate bonds, and commercial paper. The Commission also
proposed amendments to FCM financial reporting requirements to reflect
the proposed amendments to the list of Permitted Investments. The
Commission further proposed changes to the counterparty and depository
requirements of Commission regulation 1.25(d)(2) and (7), and revisions
to the concentration limits for Permitted Investments set forth in
Commission regulation 1.25(b)(3). The Commission also specified
proposed capital charges that FCMs would have to apply to the proposed
new Permitted Investment instruments and proposed a clarifying
amendment to Commission regulation 22.3(d) to specify that DCOs bear
the financial responsibility for losses resulting from investment of
Customer Funds in Permitted Investments. The Commission further
proposed to replace LIBOR with SOFR as a permitted benchmark for the
interest rate of adjustable rate securities that qualify as Permitted
Investments. Lastly, the Commission proposed to amend its regulations
to eliminate the requirement that a depository holding customer funds
must provide the Commission with read-only electronic access to such
accounts for the FCM to treat the accounts as customer segregated fund
accounts.\64\ Each of these proposed amendments are discussed in
section IV. of this preamble.
---------------------------------------------------------------------------

\64\ See generally Proposal.
---------------------------------------------------------------------------

The comment period for the Proposal closed on January 17, 2024. The
Commission received 17 comment letters from various interested parties,
including investor advocacy groups, trade associations, and financial
services companies.\65\ The majority of commenters expressed support
for the Proposal, generally noting that the proposed amendments
represent appropriate updates to the list of Permitted Investments.
Several commenters specifically supported the inclusion of foreign
sovereign debt and U.S. Treasury ETFs as Permitted Investments.\66\
Conversely, two

[[Page 7815]]

commenters opposed allowing FCMs and DCOs to invest Customer Funds in
foreign sovereign debt.\67\ Many commenters also recommended revisions
to the proposed conditions underlying the Proposal, including the
conditions proposed for investment in certain short-term U.S. Treasury
ETFs.\68\
---------------------------------------------------------------------------

\65\ The following entities submitted comments: Alternative
Investment Management Association (``AIMA''); Americans for
Financial Reform Education Fund, Consumer Federation of America,
Food & Water Watch, Institute for Agriculture and Trade Policy, and
Public Citizen (collectively, the ``Investor Advocacy Group'' and
the ``Investor Advocacy Group Joint Letter''); Better Markets;
BlackRock, Inc. (``BlackRock''); Eurex Clearing AG (``Eurex'');
Federated Hermes, Inc. (``Federated Hermes''); Futures Industry
Association and CME Group Inc. (``FIA/CME Joint Letter''); The
Global Association of Central Counterparties (``CCP Global'');
Intercontinental Exchange Inc. (``ICE''); Invesco Capital Management
LLC (``Invesco''); Investment Company Institute (``ICI''); Managed
Funds Association (``MFA''); National Futures Association (``NFA'');
Nodal Clear, LLC (``Nodal''); the Asset Management Group of the
Securities Industry and Financial Markets Association (``SIFMA
AMG''); State Street Global Advisors (``SSGA''); and World
Federation of Exchanges (``WFE''). The comment letters are available
at https://comments.cftc.gov/PublicComments/CommentList.aspx?id=7453.
\66\ Invesco at pp. 2-3; ICI at p. 2; AIMA at pp. 2-3; FIA/CME
Joint Letter at pp. 2, 4-15; MFA at pp. 2-6; Nodal at pp. 1-2; SIFMA
AMG at pp. 2-8, 12; CCP Global at pp. 2-4 WFE at pp. 3-6.
\67\ Better Markets at pp. 3-7; Investor Advocacy Group Joint
Letter at pp. 1-2.
\68\ AIMA at pp. 2-3; MFA at pp. 5-6; FIA/CME Joint Letter at
pp. 11-16; CCP Global at pp. 3-4; BlackRock at pp. 2-6; Invesco at
pp. 3-5; ICI at pp. 2-6 SIFMA AMG at pp. 4-6; SSGA at pp. 2-3; WFE
at pp. 5-6.
---------------------------------------------------------------------------

In consideration of the broad public input expressed in the public
comments and the Commission's experience administering the rules that
govern investments of Customer Funds by FCMs and DCOs, the Commission
is adopting the proposed amendments, subject to the changes discussed
below.\69\
---------------------------------------------------------------------------

\69\ The final rulemaking is referred to as the ``Final Rule''
in this preamble.
---------------------------------------------------------------------------

IV. Final Rule

A. Investment of Customer Funds

1. Interests in Money Market Funds
a. Proposal
Commission regulation 1.25(a)(1)(vii) currently provides that FCMs
and DCOs may invest Customer Funds in interests in MMFs, subject to
specified terms and conditions.\70\ To qualify as a Permitted
Investment, an MMF must: (i) be an investment company registered with
the SEC under the Investment Company Act of 1940 \71\ and hold itself
out to investors as an MMF in accordance with SEC Rule 2a-7; \72\ (ii)
be sponsored by a federally-regulated financial institution, a section
3(a)(6) bank,\73\ an investment adviser registered under the Investment
Advisers Act of 1940,\74\ or a domestic branch of a foreign bank
insured by the FDIC; and (iii) compute, and make available to MMF
shareholders, the net asset value (``NAV'') of the fund by 9 a.m. of
the business day following each business day.\75\
---------------------------------------------------------------------------

\70\ 17 CFR 1.25(a)(vii).
\71\ 15 U.S.C. 80a-1--80a-64.
\72\ 17 CFR 270.2a-7 (``SEC Rule 2a-7'').
\73\ For a definition of section 3(a)(6) bank, see supra note
52.
\74\ 15 U.S.C. 80b-1--80b-21.
\75\ 17 CFR 1.25(c).
---------------------------------------------------------------------------

As further described below, the Commission proposed to amend
Commission regulation 1.25(a)(1)(vii) to limit the scope of MMFs whose
interests qualify as Permitted Investments in response to two sets of
rule amendments adopted by the SEC regarding MMFs, which rendered, in
the Commission's view, certain MMFs incompatible with the liquidity
requirements of Commission regulation 1.25.\76\ Specifically, the
Commission proposed to limit Permitted Investments in MMFs to interests
in certain ``government money market funds,'' as defined in SEC Rule
2a-7.\77\ A Government MMF is defined in SEC Rule 2a-7 as a fund that
invests 99.5 percent or more of its total assets in cash, ``government
securities,'' and/or Repurchase Transactions that are collateralized
fully by cash or ``government securities.'' \78\ A ``government
security'' is defined as any security issued or guaranteed as to
principal or interest by the United States, or by a person controlled
or supervised by and acting as instrumentality of the Government of the
United States pursuant to authority granted by the Congress of the
United States; or any certificate of deposit of any of the
foregoing.\79\ Therefore, a ``government security'' encompasses ``U.S.
government securities'' and ``U.S. agency obligations'' as defined
under Commission regulation 1.25(a)(1)(i) and (iii), respectively.\80\
---------------------------------------------------------------------------

\76\ Proposal at 81240-81243.
\77\ Id. SEC Rule 2a-7 addresses MMFs that primarily invest in
securities issued or guaranteed by the U.S. government (``government
money market funds'' or ``Government MMFs''), MMFs that primarily
invest in short-term corporate debt securities (``Prime MMFs''), and
other types of MMFs that are not relevant to this Proposal, such as
tax-exempt funds. 17 CFR 270.2a-7.
\78\ 17 CFR 270.2a-7(a)(14).
\79\ 15 U.S.C. 80a-2(a)(16).
\80\ Commission regulation 1.25(a)(1)(i) and (iii) defines
``U.S. government securities'' as obligations of the U.S. and
obligations fully guaranteed as to principal and interest by the
U.S. and ``U.S. agency obligations'' as obligations of any U.S.
government corporation or enterprise sponsored by the U.S.
government, respectively.
---------------------------------------------------------------------------

As noted above, the Commission proposed to amend Commission
regulation 1.25 to limit the scope of MMFs that qualify as Permitted
Investments in response to SEC revisions to its MMF rules.
Specifically, in 2014, the SEC amended SEC Rule 2a-7 to authorize an
MMF to impose liquidity fees on participant redemptions, or to
temporarily suspend participant redemptions, if the MMF's investment
portfolio triggered certain liquidity thresholds.\81\ The 2014 SEC MMF
Final Rule was adopted to mitigate the adverse effects on fund
liquidity resulting from increased participant redemptions during times
of financial stress.\82\ The 2014 SEC Redemption Provisions were
mandatory for Prime MMFs, and Government MMFs could voluntarily elect
to impose the 2014 SEC Redemption Provisions (``Electing Government
MMFs'').\83\
---------------------------------------------------------------------------

\81\ Money Market Fund Reform; Amendments to Form PF, 79 FR
47736 (Aug. 14, 2014) (``2014 SEC MMF Final Rule''). See 17 CFR
270.2a-7(c)(2).
\82\ 2014 SEC MMF Final Rule at 47747. See also Proposal at
81241-81243. The liquidity fees and suspension of redemptions
provisions introduced by the 2014 SEC MMF Final Rule are referred to
as the ``2014 SEC Redemption Provisions'' in this document.
\83\ 17 CFR 270.2a-7(c)(2)(iii).
---------------------------------------------------------------------------

Commission staff subsequently received inquiries from market
participants concerning the permissibility of investing Customer Funds
in MMF interests under Commission regulation 1.25 in light of the 2014
SEC Redemption Provisions. In response, Commission staff issued CFTC
Staff Letter 16-68 \84\ and CFTC Staff Letter 16-69 \85\ addressing the
2014 SEC Redemption Provisions and the investment of Customer Funds in
MMFs by FCMs and DCOs, respectively. Staff Letter 16-68 \86\ expresses
DSIO's view that the 2014 SEC Redemption Provisions conflict with
paragraphs (b)(1) \87\ and (c)(5)(i) \88\ of Commission regulation
1.25, as the Redemption Provisions have the effect of potentially
reducing the liquidity of Prime MMFs and Electing Government MMFs
through the imposition of fees and suspension of redemptions.
Therefore, DSIO stated that FCMs may no longer

[[Page 7816]]

invest Customer Funds in Prime MMFs and Electing Government MMFs.\89\
---------------------------------------------------------------------------

\84\ CFTC Letter No. 16-68, No-Action Relief with Respect to
CFTC Regulation 1.25 Regarding Money Market Funds (Aug. 8, 2016)
(``Staff Letter 16-68'') available at the Commission's website:
www.cftc.gov/LawRegulation/CFTCStaffLetters/letters.htm?title=16-68&field_csl_letter_year_value=&field_csl_dodd_frank_exists_value=All
.
Staff Letter 16-68 was issued by the Commission's Division of
Swap Dealer and Intermediary Oversight (``DSIO'') (subsequently
renamed the Market Participants Division (``MPD'')).
\85\ CFTC Letter No. 16-69, Staff Interpretation Regarding CFTC
Part 39 In Light Of Revised SEC Rule 2a-7 (Aug. 8, 2016) (``Staff
Letter 16-69''). Staff Letter 16-69 was issued by the Commission's
Division of Clearing and Risk (``DCR'') and is available at the
Commission's website: www.cftc.gov/LawRegulation/CFTCStaffLetters/letters.htm?title=16-69&field_csl_letter_year_value=&field_csl_dodd_frank_exists_value=All
.
\86\ See also CFTC Staff Advisory No. 16-75, Practical
Application of No-Action Letter No. 16-68 Regarding the Investments
in Money Market Mutual Funds (Oct. 18, 2016) (``Staff Letter 16-
75'') (discussing the practical applicability and effect of Staff
Letter 16-68) available at the Commission's website: https://www.cftc.gov/LawRegulation/CFTCStaffLetters/letters.htm?title=16-75&field_csl_letter_year_value=&field_csl_dodd_frank_exists_value=All
.
\87\ 17 CFR 1.25(b)(1) (investments of customer funds must be
highly liquid such that the investments must have the ability to be
liquidated and converted into cash within one business day without
material discount in value).
\88\ 17 CFR 1.25(c)(5)(i) (to qualify as a Permitted Investment
an MMF must be legally obligated to pay a fund investor (including
an FCM) by the close of business on the day following a redemption
request).
\89\ Staff Letter 16-68 at p. 2. However, DSIO also states in
Staff Letter 16-68 that it would not recommend an enforcement action
to the Commission if an FCM invested Customer Funds held in
segregation that represents an excess over the firm's targeted
residual interest in Prime and Electing Government MMFs. Staff
Letter 16-68 at pp. 3-4.
---------------------------------------------------------------------------

Staff Letter 16-69 set forth DCR's interpretation that Commission
regulations 39.15(c) and (e) \90\ prohibit a DCO from holding funds
belonging to clearing members or their customers in Prime MMFs or
Electing Government MMFs. Staff Letter 16-69 also states that the 2014
SEC Redemption Provisions are not consistent with Commission regulation
39.15(c), which requires a DCO to hold funds and assets belonging to
clearing members and their customers in a manner that minimizes the
risk of loss or of delay in the access by the DCO to such funds and
assets. Staff Letter 16-69 further provides that the 2014 SEC
Redemption Provisions are inconsistent with Commission regulation
39.15(e), which limits a DCO to investing funds and assets belonging to
clearing members and their customer in instruments with minimal credit,
market, and liquidity risk. FCMs and DCOs have not invested Customer
Funds in Prime MMFs or Electing Government MMFs since the issuance of
Staff Letters 16-68 and 16-69 in 2016.\91\
---------------------------------------------------------------------------

\90\ 17 CFR 39.15(c) and (e).
\91\ While Staff Letter 16-68 provides that DSIO would not
recommend an enforcement action against an FCM that invested
Customer Funds in Prime and Electing Government MMFs, provided that
the amount invested represents an amount held in customer segregated
accounts that exceeds the firm's targeted residual interest amount,
staff is not aware of FCMs investing Customer Funds in such MMFs.
---------------------------------------------------------------------------

In August 2023, the SEC adopted additional amendments to its MMF
rules, including amendments revising the 2014 SEC Redemption Provisions
discussed above.\92\ The 2023 SEC MMF Reforms address issues observed
by the SEC with MMFs in connection with the economic shock from the
onset of the COVID-19 pandemic. Specifically, the SEC stated in March
2020, that concerns about the impact of COVID-19 pandemic led investors
to reallocate their assets into cash and short-term government
securities. Certain Prime MMFs, in particular, experienced significant
outflows, contributing to stress on short-term funding markets that
resulted in government intervention to enhance the liquidity of such
markets.\93\ The events of March 2020 led the SEC to re-evaluate
certain aspects of the regulatory framework applicable to MMFs. In
considering the potential factors that caused the increased redemption
activity in March 2020, the SEC noted that, among other concerns, fears
about the potential imposition of redemption gates and liquidity fees
based on observed declines in some funds' weekly liquid assets appear
to have incentivized investors to redeem from certain MMFs.\94\
Further, according to the SEC, the presence of a liquidity threshold
for consideration of fees and gates appears to have affected fund
managers' behavior, encouraging the sale of long-term portfolio assets
to maintain weekly liquid assets above the 30 percent threshold.\95\
The SEC also cited evidence suggesting that investors are particularly
sensitive to the potential imposition of redemption gates, which
restricts MMF share redemption for the duration of the gate.\96\ In the
SEC's view, generally supported by commenters' feedback, the gates and
liquidity fees associated with predictable weekly liquid asset triggers
proved counterproductive in stemming heavy redemptions from certain
MMFs.\97\ Thus, the SEC concluded that MMFs needed better functioning
tools for managing through stress while mitigating harm to
shareholders.\98\
---------------------------------------------------------------------------

\92\ Money Market Fund Reforms; Form PF Reporting Requirements
for Large Liquidity Fund Advisers, Technical Amendments to Form N-
CSR and Form N-1A, 88 FR 51404 (Aug. 3, 2023) (``2023 SEC MMF
Reforms''). The 2023 SEC MMF Reforms became effective on October 2,
2023.
\93\ As noted in the 2023 SEC MMF Reforms' adopting release, to
support the short-term funding markets, on March 18, 2020, the
Federal Reserve, with the approval of the Department of the
Treasury, established the Money Market Mutual Fund Liquidity
Facility. The facility provided loans to financial institutions on
advantageous terms to purchase securities from MMFs that were
raising liquidity. 2023 SEC MMF Reforms at 51408.
\94\ 2023 SEC MMF Reforms at 51407. The term ``weekly liquid
assets'' is generally defined as: (i) cash; (ii) direct obligations
of the U.S. Government; (iii) U.S. Agency securities that are issued
at a discount to the principal amount to be repaid at maturity and
have a remaining time to maturity of 60 days or less; (iv)
securities that mature, or are subject to a demand feature that is
exercisable and payable, within 5 business days; or (v) amounts
receivable and due unconditionally within 5 business days on pending
sales of portfolio securities. 17 CFR 270-2a-7(c)(a)(28).
\95\ 2023 SEC MMF Reforms at 51407.
\96\ Id. at 51409.
\97\ Id.
\98\ Id. at 51408.
---------------------------------------------------------------------------

Accordingly, in an effort to improve the resilience of MMFs and
address the issue of preemptive investor redemption behavior,
particularly in times of stress, the SEC adopted changes to the fee and
gate provisions in SEC Rule 2a-7. The 2023 SEC MMF Reforms, among other
things, amended the 2014 SEC Redemption Provisions by removing a Prime
MMF's ability to temporarily suspend participant redemptions and by
removing an Electing Government MMF's ability to voluntarily retain
authority to suspend participant redemptions.\99\ The 2023 SEC MMF
Reforms also require Prime MMFs to impose a liquidity fee when the fund
experiences net redemptions that exceed 5 percent of the fund's net
assets, and permit Prime MMFs to impose a discretionary liquidity fee
if the fund's board of directors determines that a fee is in the best
interest of the fund.\100\ Government MMFs are not required to
implement the mandatory liquidity fee but may choose to rely on the
ability to impose discretionary liquidity fees.\101\ Such fees,
however, are no longer tied to the weekly liquid asset threshold.\102\
---------------------------------------------------------------------------

\99\ Id. at 51410.
\100\ 17 CFR 270.2a-7(c)(2)(i) and (ii) (as amended by the 2023
SEC MMF Reforms). SEC Rule 2a-7(c)(2)(i) provides, in relevant part,
that if a Prime MMF's board of directors, including a majority of
the directors who are not interested persons of the fund, determines
that a liquidity fee is in the best interest of the fund, the fund
must institute a liquidity fee that does not exceed two percent of
the value of the shares redeemed. In addition, SEC Rule 2a-
7(c)(2)(ii) provides, in relevant part, that a Prime MMF must apply
a liquidity fee to all shares that are redeemed if the fund
experiences total daily net redemptions that exceed 5 percent of the
fund's net asset value, or such smaller amount of net redemptions as
the board of directors of the fund determines.
\101\ 17 CFR 270.2a-7(c)(2)(i)(B) (as amended by the 2023 SEC
MMF Reforms). SEC Rule 2a-7(c)(2)(i)(B) permits Government MMFs to
elect to impose the discretionary liquidity fees on shareholder
redemptions.
\102\ 17 CFR 270.2a-7(c)(2)(i) (as amended by the 2023 SEC MMF
Reforms).
---------------------------------------------------------------------------

The SEC's liquidity fee mechanism is designed to address
shareholder dilution and the potential for first-mover advantage by
allocating liquidity costs to redeeming investors. Although the
mechanism may contribute to decreasing outflows from certain MMFs, the
Commission preliminarily considered that the potential imposition of a
fee would nonetheless potentially reduce the principal of an FCM's or
DCO's investment in MMF shares, particularly during periods of market
stress and high shareholder redemptions. Such potential loss of
principal could have an adverse impact on the ability of an FCM or DCO
to fully repay customers, who may need liquidity in their accounts to
meet trading losses and/or margin calls. Therefore, consistent with the
positions taken in Staff Letter 16-68 and Staff Letter 16-69, the
Commission proposed to limit the scope of MMFs whose interests qualify
as Permitted Investments to funds that are not subject to a liquidity
fee (i.e., Government MMFs that are not Electing Government MMFs
(referred to in this release as

[[Page 7817]]

``Permitted Government MMFs'')).\103\ As discussed in the Proposal, to
qualify as a Permitted Government MMF, at least 99.5 percent of the
fund's investment portfolio must be comprised of cash, government
securities (i.e., U.S. Treasury securities, securities fully-guaranteed
as to principal and interest by the U.S. Government, and U.S. agency
obligations), and/or Repurchase Transactions that are fully
collateralized by government securities as set forth in SEC Rule 2a-
7.\104\ The Commission's goal in proposing the amendment was to ensure
that FCMs and DCOs invest Customer Funds in instruments that are
consistent with the objectives of Commission regulation 1.25 of
preserving principal and maintaining liquidity of the investments.
---------------------------------------------------------------------------

\103\ See Proposal at 81240-81243 and proposed paragraph
(a)(1)(v) of Commission regulation 1.25.
\104\ See Proposal at 81240-81241.
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To eliminate MMFs whose redemptions may be subject to a liquidity
fee from the scope of Permitted Investments under Commission regulation
1.25, the Commission proposed revising Commission regulation
1.25(a)(1)(vii), which would be redesignated as Commission regulation
1.25(a)(1)(iv) to accommodate other amendments to Commission regulation
1.25(a) discussed in the Proposal, by replacing the term ``money market
mutual fund'' with the term ``government money market funds as defined
in Sec. 270.2a-7 of this title, provided that the funds do not elect
to be subject to liquidity fees in accordance with Sec. 270.2a-7 of
this title (government money market fund).'' \105\ The Commission also
proposed further conforming changes throughout Commission regulation
1.25, and the appendix to Commission regulation 1.25, by replacing all
references to ``money market mutual fund'' with ``government money
market fund.'' \106\ In addition, the appendix to Commission regulation
1.25 was proposed to be redesignated as appendix E to part 1 to address
a change in the rules of the Office of the Federal Register regarding
the structure of regulatory text to be codified in the Code of Federal
Regulations.\107\ Further, the Commission proposed conforming
amendments to Commission regulations 1.26 and 30.7(d), which require an
FCM and/or DCO, as applicable, that invests Customer Funds in Permitted
Investments, including qualifying MMFs, to obtain and retain in its
files a written acknowledgement letter from the depository holding the
instruments stating that the depository was informed that the
instruments belong to customers and are being held in accordance with
the provisions of the Act and Commission regulations.\108\ The
Commission also proposed conforming amendments to the appendices
setting forth the template acknowledgment letters.\109\ Specifically,
the Commission proposed to replace the references to ``money market
mutual fund'' with ``government money market fund'' in Commission
regulation 1.26, appendix A and appendix B to Commission regulation
1.26 (to be redesignated appendix F and appendix G to part 1),
Commission regulation 30.7(d), and appendix F to part 30 of the
Commission's regulations.\110\
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\105\ Proposal at 81240-81243, proposed Commission regulation
1.25(a)(1)(v).
\106\ Proposal at 81243.
\107\ Id.
\108\ Id. at 81263.
\109\ Id.
\110\ Id.
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The Commission also noted that the proposed amendments removing
interests in MMFs whose redemptions may be subject to a liquidity fee
from the scope of Permitted Investments would prohibit an FCM from
depositing proprietary interests in such MMFs into Customer Funds
accounts.\111\ The Commission stated that Commission regulations
1.23(a)(1), 22.2(e)(3)(i), and 30.7(g)(1) permit FCMs to deposit
proprietary cash and unencumbered securities into the accounts of
futures customers, Cleared Swaps Customers, and 30.7 customers,
respectively, to help ensure that at all times the accounts maintain
sufficient funds to cover the amounts due to all customers.\112\ The
proprietary securities deposited by FCMs into customer accounts,
however, must satisfy the criteria of a Permitted Investment as
specified in Commission regulation 1.25.\113\ Therefore, with respect
to MMFs, FCMs would only be permitted to deposit proprietary interest
in Permitted Government MMFs in the accounts of futures customers,
Cleared Swaps Customers, and 30.7 customers under the Proposal.
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\111\ Proposal at 81242.
\112\ 17 CFR 1.23(a)(1), 22.2(e)(3)(i), and 30.7(g)(1). A
customer account is ``undersegregated'' if an FCM holds less funds
in the account than is necessary to cover the total amount due to
the customer at any given point in time.
\113\ Id.
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b. Comments
The Commission received six comments on the proposed limit of the
scope of MMFs whose interests qualify as Permitted Investments to
Permitted Government MMFs.\114\ Each of the commenters supported the
proposed limitation.\115\ AIMA noted that the amendments would
appropriately update the list of Permitted Investments in line with
sound risk management practices.\116\ ICI stated that the proposed
amendments are consistent with the regulatory objective of limiting
Permitted Investments to safe, short-term instruments.\117\ Though
supportive of the proposed amendments, BlackRock raised concerns about
the Proposal's rationale, asserting that in discussing investor
behavior during the March 2020 events, the Commission failed to
acknowledge that there was a broader ``dash for cash'' occurring across
asset classes, not just MMFs, at that time period.\118\
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\114\ See AIMA at p. 3; BlackRock at pp. 2, 6; Federated Hermes
at pp. 1-2; FIA/CME Joint Letter at p. 21; ICI at p. 2; MFA at p. 6.
\115\ Id.
\116\ AIMA at p. 3.
\117\ ICI at p. 2.
\118\ BlackRock at p. 6.
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In addition to supporting the proposed revisions to the scope of
the MMFs, FIA and CME recommended an amendment to the template
acknowledgement letters for Government MMFs set forth in appendices A
and B to Commission regulation 1.26 for direct investments by FCMs and
DCOs of futures customer funds and Cleared Swaps Customer Collateral in
MMFs, and appendix F to part 30 for direct investments by FCMs of 30.7
customer funds in MMFs.\119\ Specifically, FIA and CME recommended that
each template acknowledgment letter include a representation from the
Government MMF that the fund does not elect to impose discretionary
liquidity fees.\120\
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\119\ FIA/CME Joint Letter at p. 21. As discussed in the
Proposal, Commission regulations 1.26 and 30.7(d) require an FCM or
DCO, as applicable, to obtain, and retain in its files, a written
acknowledgment from each depository holding Permitted Investments.
Proposal at 81263.
\120\ Id. The FIA/CME Joint Letter included the following
suggested language: ``Furthermore, you acknowledge and agree that
the Shares are in a fund that holds itself out to investors as a
government money market fund, in accordance with 17 CFR 270.2a-7. In
addition, the Shares are in a fund that does 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).'' FIA/CME Joint Letter
at p. 21.
---------------------------------------------------------------------------

Finally, in response to the Commission's request for comment on
whether the Commission should revise Commission regulation
1.25(b)(5)(ii) to prohibit FCMs and DCOs from investing Customer Funds
in a fund affiliated with the FCM or DCO, commenters asserted that no
changes were

[[Page 7818]]

necessary.\121\ These commenters noted that ``risk posed by
affiliates'' is a component of the risk management program that FCMs
are required to adopt pursuant to Commission regulation 1.11.\122\ The
commenters further asserted that because Permitted Investments
involving FCM affiliates are already subject to the policies,
procedures, and controls of consolidated risk management programs, as
well as existing statutory and regulatory requirements, there is no
reason to revisit the Commission's previous consideration of this
issue.\123\
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\121\ Proposal at 81243, Question 2. Commission regulation
1.25(b)(5)(ii) provides, in relevant part, that an FCM or DCO may
not invest Customer Funds in obligations of an affiliated entity,
but permits investments by FCMs and DCOs in interest in funds
affiliated with the applicable FCM or DCO.
\122\ FIA/CME Joint Letter at p. 19; MFA at p. 6.
\123\ Id. (referencing the Commission's final rule Enhancing
Protections Afforded Customers and Customer Funds Held by Futures
Commission Merchants and Derivatives Clearing Organizations, 78 FR
68506 at 68520 Nov. 14, 2013) (``2013 Protections of Customer Funds
Release''), which notes that an FCM's risk management policies and
procedures under Commission regulation 1.11 must include procedures
for assessing the appropriateness of investing customer funds in
accordance with Commission regulation 1.25, and ``must take into
consideration the market, credit, counterparty, operational, and
liquidity risks associated with the investments.'')
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c. Discussion
The Commission has considered the comments received, and is
adopting as proposed the amendments to Commission regulation 1.25 to
limit the scope of MMFs that qualify as Permitted Investments for
Customer Funds to Permitted Government MMFs. As stated in the Proposal,
the Commission's intent in eliminating Prime MMFs and Electing
Government MMFs from the list of Permitted Investments is to ensure
that Customer Funds are managed with the objectives of preserving
principal of the investments, consistent with the general requirements
of Commission regulation 1.25(b).\124\ The SEC requirement for Prime
MMFs to impose a liquidity fee on shareholder redemptions when the fund
experiences net redemptions that exceed 5 percent of the fund's net
assets and the separate authority granted by the SEC that permits funds
to impose discretionary liquidity fees of up to 2 percent on
shareholder redemptions if the board of directors determines that such
a fee is in the best interest of the fund are not consistent with the
obligation imposed under Commission regulation 1.25(b) on FCMs and DCOs
to preserve the principal of Customer Funds invested in Permitted
Investments. The imposition of mandatory or discretionary liquidity
fees on an FCM's or DCO's redemption request from a Prime MMF or an
Electing Government MMF may result in an FCM or DCO not realizing the
full principal value of its investment upon its redemption request. The
inability of the FCM or DCO to receive the full principal value of its
investment of Customer Funds presents potential financial risk to the
FCM or DCO as it may not have sufficient funds to fully repay the
account balances of each customer. Thus, the Commission is revising the
list of Permitted Investments to remove Prime MMFs and Electing
Government MMFs.
---------------------------------------------------------------------------

\124\ Proposal at 81242. Commission regulation 1.25(b) provides,
in relevant part, that an FCM or DCO is required to manage its
Permitted Investments consistent with the objectives of preserving
principal and maintaining liquidity of the Customer Funds. 17 CFR
1.25(b).
---------------------------------------------------------------------------

The Commission is also maintaining current Commission regulation
1.25(b)(5)(ii), which provides that an FCM or DCO may invest Customer
Funds in a fund affiliated with that FCM or DCO. Consistent with its
views expressed in connection with the risk management program mandated
by Commission regulation 1.11,\125\ the Commission expects that FCMs
will assess the appropriateness of investing Customer Funds in
affiliated funds in accordance with this program.\126\ Similarly,
because DCO Core Principle F and Commission regulation 39.15(e) require
a DCO to hold Customer Funds only in instruments with minimal credit,
market, and liquidity risks, the Commission expects that DCOs will
assess the risk of investing Customer Funds in affiliated funds before
doing so. In addition, investment advisers that act as investment
managers of a fund have fiduciary duties to their client, the fund,
under the Investment Adviser Act of 1940.\127\ In this context, the
investment adviser has a duty to eliminate, or disclose and mitigate,
conflicts of interest that may impact the advisory relationship.\128\
Therefore, as investors in a fund that qualifies as a Permitted
Investment, FCMs and DCOs should not receive either preferential or
disadvantageous treatment compared to other investors in the fund.
---------------------------------------------------------------------------

\125\ 2013 Protections of Customer Funds Release at 68519-68520.
\126\ Commission regulation 1.11(e)(1)(ii) provides that an
FCM's risk management program must consider risks posed by
affiliates, all lines of business of the FCM, and all other trading
activity engaged in by the FCM. 17 CFR 1.11(e)(1)(ii).
\127\ See Commission Interpretation Regarding Standard of
Conduct for Investment Adviser, SEC, 84 FR 33669 (July 12, 2019) at
33670.
\128\ Id. at 33677.
---------------------------------------------------------------------------

Lastly, in response to the comment asserting that the Commission
failed to acknowledge the broader ``dash for cash'' that occurred
across assets classes in March 2020,\129\ the Commission was recounting
the SEC's rationale for adopting the 2023 SEC MMF Reforms. The
Commission's own rationale for revising the scope of MMFs whose
interests qualify as Permitted Investments is the potential reduced
liquidity of Prime MMFs and Electing Government MMFs resulting from the
implementation of liquidity fees by such funds under the SEC's
regulatory framework.
---------------------------------------------------------------------------

\129\ Blackrock at p. 6.
---------------------------------------------------------------------------

To eliminate MMFs whose redemptions may be subject to a liquidity
fee from the scope of Permitted Investments under Commission regulation
1.25, the Commission is revising Commission regulation 1.25(a)(1)(vii),
which is redesignated Commission regulation 1.25(a)(1)(iv) to
accommodate other amendments to Commission regulation 1.25(a) discussed
in this Final Rule, by replacing the term ``money market mutual fund''
with the term ``government money market funds as defined in Sec.
270.2a-7 of this title, provided that the funds do not elect to be
subject to liquidity fees in accordance with Sec. 270.2a-7 of this
title (government money market fund).'' The Commission is also adopting
further conforming changes throughout Commission regulation 1.25 and
the appendix to Commission regulation 1.25 by replacing all references
to ``money market mutual fund'' with ``government money market fund.''
In addition, the appendix to Commission regulation 1.25 is redesignated
as appendix E to part 1 to address a change in the rules of the Office
of the Federal Register regarding the structure of regulatory text to
be codified in the Code of Federal Regulations.
To reflect the Final Rule's amendments to the scope of MMFs that
qualify as Permitted Investments, the Commission is also adopting
conforming amendments to Commission regulation 1.26, appendices A and B
to Commission regulation 1.26, Commission regulation 30.7(d), and
appendix F to part 30 of the Commission's regulations, as proposed.
Specifically, the Commission is adopting conforming amendments to
paragraphs (a) and (b) of Commission regulation 1.26 to replace the
term ``money market mutual fund'' with the term ``government money
market fund.'' Paragraph (b) of Commission regulation 1.26 is further
revised to reflect the redesignation of appendices A and B to
Commission regulation 1.26 as

[[Page 7819]]

``appendices F and G to part 1 of the Commission's regulations'' and to
reflect the redesignation of appendices A and B to Commission
regulation 1.20 as ``appendices C and D to part 1.'' \130\ The
Commission is also amending appendices A and B to Commission regulation
1.26 (redesignated appendices F and G to part 1) to replace the term
``Money Market Mutual Fund'' with ``Government Money Market Fund.''
---------------------------------------------------------------------------

\130\ Commission regulation 1.26 currently refers to ``appendix
A or B to this section'' and ``appendix A or B to Sec. 1.20.''
Appendix A and appendix B to Commission regulation 1.26 are being
redesignated appendix F and appendix G to part 1, and appendix A and
B to Commission regulation 1.20 are being redesignated appendix C
and D to part 1, to address a change in the rules of the Office of
the Federal Register regarding the structure of regulatory text to
be codified in the Code of Federal Regulations.
---------------------------------------------------------------------------

In addition, the Commission is making conforming changes to
Commission regulation 30.7(d)(2) and 30.7(l)(5)(iii)(G) (redesignated
Commission regulation 30.7(l)(5)(iii)(F)) to replace the term ``money
market mutual fund'' with ``government money market fund.'' The
Commission is also implementing changes to appendix F to part 30, to
replace the term ``money market mutual fund'' with ``government money
market fund.''
In response to FIA/CME Joint Letter, the Commission is also
adopting additional conforming changes to the template acknowledgement
letters set forth in appendices A and B to Commission regulation 1.26
(redesignated as appendices F and G to part 1) and in appendix F to
part 30 to reflect the changes to the scope of MMFs that qualify as
Permitted Investments.\131\ Specifically, the Commission is including a
template representation that the Government MMF does not elect to
impose discretionary liquidity fees. The Commission understands that
including language to memorialize the representation in the template
acknowledgement letter may create efficiencies for registrants seeking
to ascertain that the MMF meets the eligibility conditions of
Commission regulation 1.25. Thus, the Commission is including the
following statement after the second full paragraph of the template
acknowledgment letters in appendices A and B to Commission regulation
1.26 (redesignated appendices F and G to part 1 for FCMs and DCOs,
respectively) and appendix F to part 30: Furthermore, you acknowledge
and agree that the Shares are in a fund that holds itself out to
investors as a government money market fund, in accordance with 17 CFR
270.2a-7. In addition, you acknowledge and agree that the Shares are in
a fund that does 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).
---------------------------------------------------------------------------

\131\ FIA/CME Joint Letter at p. 21.
---------------------------------------------------------------------------

As discussed in section IV.E. of this preamble regarding the
removal of read-only electronic access, FCMs do not need to obtain new
acknowledgment letters for existing accounts at depositories holding
Customer Funds reflecting this new language regarding government money
market funds. Instead, revised acknowledgment letters must be obtained
only for accounts opened after the effective date of this Final Rule or
if the FCM is required to obtain a new acknowledgment letter for
reasons unrelated to the addition of the government money market fund
language after the effective date of this Final Rule.
2. Foreign Sovereign Debt
a. Proposal
The Commission authorized FCMs and DCOs to invest futures customer
funds in foreign sovereign debt as part of the 2000 Permitted
Investments Amendment.\132\ The investments were subject to specified
conditions, including that investments in the debt of a particular
foreign sovereign were limited to balances owed by FCMs or DCOs to
customers denominated in the currency of the applicable sovereign
debt.\133\
---------------------------------------------------------------------------

\132\ 2000 Permitted Investments Amendment at 78003.
\133\ Id.
---------------------------------------------------------------------------

The Commission subsequently proposed to eliminate foreign sovereign
debt as a Permitted Investment in 2010 citing an interest in
simplifying the regulation and safeguarding futures customer funds in
light of economic crises experienced by a number of foreign
sovereigns.\134\ Specifically, the 2010 Proposed Permitted Investments
Amendment cited a Division of Clearing and Intermediary Oversight
(``DCIO'') 2007 review of the investment of futures customer funds and
30.7 customer funds.\135\ The 2007 Review revealed that only three of
the total 87 active FCMs invested futures customer funds in foreign
sovereign debt at any time during that year, and that only one FCM
invested 30.7 customer funds in foreign sovereign debt.\136\
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\134\ Investment of Customer Funds and Funds Held in Account for
Foreign Futures and Foreign Options Transactions, 75 FR 67645 (Nov.
3, 2010) at 67645 (``2010 Proposed Permitted Investments
Amendment'').
\135\ Id. at 67643 (``2007 Review''). MPD is a successor
division to DCIO. The 2007 Review was conducted to further staff's
understanding of FCM investment strategies and practices for
customer funds and to assess whether any changes to the Commission's
regulations would be appropriate.
\136\ Id. at 67645.
---------------------------------------------------------------------------

The Commission subsequently eliminated foreign sovereign debt as a
Permitted Investment in 2011.\137\ In eliminating foreign sovereign
debt as a Permitted Investment, the Commission stated that it
recognized that the safety of sovereign debt issuances of one country
may vary greatly from the sovereign debt issuances of another country
and that investments in certain sovereign debt may be consistent with
the objective of preserving principal and maintaining liquidity of
investments entered into with Customer Funds specified in Commission
regulation 1.25.\138\ The Commission expanded on this view by stating
that it was amenable to considering requests for section 4(c)
exemptions to permit FCMs and DCOs to invest futures customer funds in
foreign sovereign debt upon a demonstration that the investment is
appropriate in light of the objectives of Commission regulation 1.25,
and the issuance of the exemption satisfies the criteria set forth in
section 4(c).\139\ Specifically, the Commission stated that it would
consider permitting futures customer funds to be invested in the
foreign sovereign debt of a country to the extent that: (i) FCMs or
DCOs held balances in segregated accounts owed to customers denominated
in that country's currency; and (ii) the foreign sovereign debt serves
to preserve principal and maintain liquidity of futures customer funds
as required for all other investments of Customer Funds under
Commission regulation 1.25.\140\
---------------------------------------------------------------------------

\137\ 2011 Permitted Investments Amendment at 78780-78782.
\138\ Id. at 78782.
\139\ Id.
\140\ Id.
---------------------------------------------------------------------------

As discussed in section II. of this preamble, the Commission issued
an order in 2018 pursuant to section 4(c) granting DCOs a limited
exemption from the prohibition on the investment of customer funds in
foreign sovereign debt consistent with its views and the criteria
expressed in the 2011 Permitted Investments Amendment.\141\
Specifically, the 2018 Order authorizes DCOs to invest euro-denominated
futures customer funds and Cleared Swaps Customer Collateral in euro-
denominated sovereign debt issued by France or Germany.\142\ The 2018
Order

[[Page 7820]]

also contains conditions designed to ensure that the investments
preserve the principal and maintain the liquidity of customer funds.
Specifically, the conditions provide that: (i) investments of futures
customer funds and Cleared Swaps Customer Collateral in the sovereign
debt of France and Germany is limited to investments made with euro
customer cash; (ii) if the two-year credit default spread of France or
Germany, as applicable, exceeds 45 BPS, a DCO must not make any new
direct investments in the relevant debt using futures customer funds or
Cleared Swaps Customer Collateral, and a DCO must discontinue investing
futures customer funds and Cleared Swaps Customer Collateral in the
relevant debt instruments through Repurchase Transactions as soon as
practicable under the circumstances; (iii) the dollar-weighted average
of the time-to-maturity of a DCO's portfolio of investments in each of
France or Germany's sovereign debt may not exceed 60 days; (iv) a DCO
may not make a direct investment in the sovereign debt instruments of
France or Germany that have a remaining time-to-maturity of greater
than 180 calendar days; (v) a DCO may use futures customer funds or
Cleared Swaps Customer Collateral to enter into Repurchase Transactions
for French or German sovereign debt with a counterparty that is a
foreign bank that qualifies as a permitted depository under Commission
regulation 1.49(d)(3) and that is located in a money center country (as
defined in Commission regulation 1.49(a)(1)) or in another jurisdiction
that has adopted the euro as it currency, a securities dealer located
in a money center country as defined in Commission regulation
1.49(a)(1) that is regulated by a national financial regulator, or the
European Central Bank, The Deutsche Bundesbank, or the Banque de
France; and (vi) a DCO may hold the sovereign debt of France or Germany
purchased under Repurchase Transactions with a foreign depository only
if the depository meets the location and qualification requirements
contained in Commission regulation 1.49(c) and (d) and if the account
complies with the requirements of Commission regulation 1.26.\143\
---------------------------------------------------------------------------

\141\ 2018 Order.
\142\ 2018 Order at 35244-35245. The petitioners of the 2018
Order did not request any relief with respect to the investment of
30.7 customer funds, which are held by FCMs for 30.7 customers are
trading on foreign contract markets that are not Commission
designated contract markets.
\143\ Conditions 3(a)-(f) of the 2018 Order at 35245.
---------------------------------------------------------------------------

As stated in section II. of this preamble, the FIA and CME
submitted a joint petition requesting that the Commission expand the
scope of the 2018 Order by permitting both DCOs and FCMs to invest
Customer Funds (i.e., futures customer funds, Cleared Swaps Customer
Collateral, and 30.7 customer funds, as applicable) in the sovereign
debt of Canada, France, Germany, Japan, and the United Kingdom (i.e.,
the Specified Foreign Sovereign Debt).\144\ In support of the Joint
Petition, the Petitioners asserted that the Commission's justification
for issuing the 2018 Order to permit DCOs to invest futures customer
funds and Cleared Swaps Customer Collateral in French and German
sovereign debt is also applicable to FCMs. Specifically, the
Petitioners stated that FCMs face the same challenges in assuring the
protection of foreign currencies received from customers to margin
cleared transactions as DCOs.\145\ In this regard, the Petitioners
noted that, in issuing the 2018 Order, the Commission stated that cash
held in unsecured deposit accounts at commercial banks is exposed to
the credit risk of the banks.\146\ The Petitioners asserted that this
credit risk can be effectively eliminated if an FCM or DCO is permitted
to invest Customer Funds denominated in Canadian dollars (``CAD''),
euros (``EUR''), Japanese yen (``JPY''), or Great Britain pounds
(``GBP'') in the sovereign debt of Canada, France, Germany, Japan, or
the UK (i.e., Specified Foreign Sovereign Debt).\147\ The Petitioners
further stated that although investments through Repurchase
Transactions involve exposure to a commercial counterparty, an FCM or
DCO would receive the additional added benefit of receiving securities
as collateral against that counterparty's credit risk.\148\
---------------------------------------------------------------------------

\144\ See generally Joint Petition.
\145\ Joint Petition at p. 2.
\146\ Id.
\147\ Id.
\148\ Id. Consistent with arguments presented in connection with
the 2018 Order, the Petitioners further argued that ``in the event a
securities custodian enters insolvency proceedings, [a DCO or FCM]
would have a claim to specific securities rather than a general
claim against the assets of the custodian.'' Id. See also 2018 Order
at 35242.
---------------------------------------------------------------------------

After considering the Joint Petition and assessing changes to the
holding of non-U.S. dollar currencies by FCMs and DCOs since the 2007
Review, the Commission proposed to permit both FCMs and DCOs to invest
Customer Funds in Specified Foreign Sovereign Debt securities.\149\
Specifically, the Commission proposed revising Commission regulation
1.25 to include Specified Foreign Sovereign Debt instruments as
Permitted Investments, subject to conditions that are consistent with
the conditions specified in the Commission's 2018 Order. As detailed in
the Proposal, an FCM or DCO: (i) would be permitted to invest Customer
Funds in the sovereign debt of Canada, France, Germany, Japan, and the
United Kingdom (i.e., the Specified Foreign Sovereign Debt); \150\ (ii)
may only invest Customer Funds in the Specified Foreign Sovereign Debt
of a particular country to the extent that the FCM or DCO has balances
in accounts owed to customers denominated in such country's currency;
\151\ (iii) would not be permitted to make new investments of Customer
Funds in the Specified Foreign Sovereign Debt of a particular country
if such country's two-year credit default spread exceeded 45 BPS; and,
(iv) would be required to discontinue investing Customer Funds in the
Specified Foreign Sovereign Debt of a particular country through
Repurchase Transactions as soon as practicable under the circumstances
if such country's two-year credit default spread exceeded 45 BPS.\152\
---------------------------------------------------------------------------

\149\ Proposal at 81243-81248.
\150\ Proposal at 81244 and proposed Commission regulation
1.25(a)(1)(vii). The proposed condition defining the Specified
Foreign Sovereign Debt is consistent with clause (1) of the 2018
Order, which provides that the Commission's order is limited to the
sovereign debt of France and Germany.
\151\ Proposal at 81244-81245 and proposed Commission regulation
1.25(a)(1)(vii)(A) and (B). The proposed condition is consistent
with condition 3(a) of the 2018 Order, which limits a DCO's
investment in French or German sovereign debt to the extent the DCO
owes balances owed to customers denominated in euros.
\152\ Proposal at 81245 and proposed Commission regulations
1.25(f)(3). The proposed conditions are consistent with condition
3(b) of the 2018 Order.
---------------------------------------------------------------------------

The Commission also proposed to limit the time-to-maturity of
investments in Specified Foreign Sovereign Debt.\153\ Specifically, the
Commission proposed that an FCM or DCO would be required to ensure that
the dollar-weighted average time-to-maturity of its portfolio of
investments in the Specified Foreign Sovereign Debt, as the average is
computed under SEC Rule 2a-7 under the Investment Company Act of 1940
(``SEC Rule 2a-7'') \154\ on a country-by-country basis, does not
exceed 60 calendar days.\155\ The Proposal further provided that if the
portfolio includes Specified Foreign Sovereign Debt securities acquired
under a reverse repurchase agreement, the FCM or DCO shall use the
maturity of the reverse repurchase agreement to compute the dollar-
weighted average time-to-maturity of the portfolio as opposed to the
remaining time-to-maturity of the securities.\156\ This

[[Page 7821]]

approach takes into account the contractual obligation to resell the
securities within one business day or on demand as required by
Commission regulation 1.25(d)(6).\157\ Conversely, if the FCM or DCO
sells Specified Foreign Sovereign Debt securities under a repurchase
agreement, the FCM or DCO shall include the debt securities in the
calculation of the dollar-weighted average based on the remaining time-
to-maturity of each security sold, to account for the contractual
obligation to repurchase such securities.\158\ In addition, an FCM or
DCO would not be permitted to make direct investments in Specified
Foreign Sovereign Debt securities with a remaining time-to-maturity
greater than 180 calendar days.\159\
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\153\ Proposal at 81245-81246.
\154\ 17 CFR 270.2a-7.
\155\ Proposed Commission regulation 1.25(f)(1). The proposed
condition is consistent with condition 3(c) of the 2018 Order.
\156\ Consistent with SEC Rule 2a-7(i)(6), the reverse
repurchase agreement would 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 instruments. See proposed Commission
regulation 1.25(f)(1).
\157\ 17 CFR 1.25(d)(6).
\158\ Proposal at 81245-81246 and proposed Commission regulation
1.25(f)(1). In addition, under the Proposal, the dollar-weighted
average of the time-to-maturity of the portfolio would be computed
pursuant to SEC Rule 2a-7 (17 CFR 270.2a-7), consistent with the
general time-to-maturity provision in Commission regulation
1.25(b)(4)(i). Commission regulation 1.25(b)(4)(i) provides that
except for investments in MMFs, the dollar-weighted average time-to-
maturity of an FCM's or DCO's portfolio of Permitted Investments, as
computed under SEC Rule 2a-7, may not exceed 24 months. 17 CFR
1.25(b)(4)(i). The Commission also proposed to amend Commission
regulation 1.25(b)(4)(i) to exclude Specified Foreign Sovereign
Debt, which, as discussed, would be subject to its own dollar-
weighted average time-to-maturity limit.
\159\ Proposed Commission regulation 1.25(f)(2). The proposed
condition is consistent with condition 3(d) of the 2018 Order.
---------------------------------------------------------------------------

The Commission also proposed to expand the permissible Repurchase
Transaction counterparties and depositories under Commission
regulations 1.25(d)(2) and (7) to include certain foreign entities to
effectively permit FCMs and DCOs to engage in Repurchase Transactions
with Specified Foreign Sovereign Debt securities pursuant to Commission
regulation 1.25(a)(2).\160\ Currently Commission regulation 1.25(d)(2)
limits counterparties with whom an FCM or DCO may enter into Repurchase
Transactions involving Customer Funds or Permitted Investments to a
section 3(a)(6) \161\ bank, a domestic branch of a foreign bank insured
by the FDIC, a securities broker or dealer, or a government securities
dealer registered with the SEC or which has filed a notice pursuant to
section 15C(a) of the Government Securities Act of 1986.\162\
Additionally, Commission regulation 1.25(d)(7) further requires an FCM
or DCO to hold the securities transferred to the FCM or DCO under a
reverse repurchase agreement in a safekeeping account with a bank as
referred to in Commission regulation 1.25(d)(2), a Federal Reserve
Bank, a DCO, or the Depository Trust Company.\163\
---------------------------------------------------------------------------

\160\ Proposal at 81246-81247. Commission regulation
1.25(a)(2)(i) provides that FCMs and DCOs may engage in Repurchase
Transactions with Permitted Investments provided the transactions
are in accordance with the provisions of Commission regulation
1.25(d). 17 CFR 1.25(a)(2)(i).
\161\ For a definition of section 3(a)(6) bank, see supra note
52.
\162\ Public Law 99-571, 100 Stat. 3208 (Oct. 28, 1986).
\163\ 17 CFR 1.25(d)(7).
---------------------------------------------------------------------------

The Commission noted in the Proposal that, absent amendment to the
counterparty and depository provisions of Commission regulations
1.25(d)(2) and (7), an FCM's and DCO's ability to buy and sell
Specified Foreign Sovereign Debt pursuant to Repurchase Transactions
would be restricted given that participants in such markets are
predominantly non-U.S. entities.\164\ The Commission, therefore,
proposed to add foreign banks and foreign securities brokers or dealers
meeting certain requirements discussed below, as well as the European
Central Bank and the central banks of Canada, France, Germany, Japan,
and the United Kingdom, to the list of permitted counterparties for
Repurchase Transactions.\165\ To be deemed a permitted counterparty,
the Proposal provided that a foreign bank would have to qualify as a
depository under Commission regulation 1.49(d)(3) by maintaining
regulatory capital in excess of $1 billion, and would also have to be
located in a money center country as defined in Commission regulation
1.49(a)(1) (i.e., Canada, France, Italy, Germany, Japan, or the United
Kingdom) or in another jurisdiction that adopted the currency of the
permitted foreign sovereign debt.\166\ Similarly, a foreign securities
broker or dealer would have to be located in a money center country and
be regulated by a national financial regulator.\167\ The proposed
provisions were designed to ensure that counterparties would be
regulated entities comparable to counterparties currently permitted
under Commission regulation 1.25(d)(2) and are consistent with the
Repurchase Transaction counterparty conditions specified in the 2018
Order.\168\
---------------------------------------------------------------------------

\164\ Proposal at 81246-81247.
\165\ Id., and proposed Commission regulation 1.25(d)(2).
\166\ Id.
\167\ Id.
\168\ Condition (e) of the 2018 Order.
---------------------------------------------------------------------------

The Commission also proposed to permit Specified Foreign Sovereign
Debt securities transferred to an FCM or DCO under a reverse repurchase
agreement to be held with a foreign bank that qualifies as a permitted
depository under Commission regulation 1.49 by maintaining in excess of
$1 billion in regulatory capital.\169\ The Commission noted that
mandating the safekeeping of foreign securities purchased through
reverse repurchase agreements with a U.S. custodian, as required under
the current regulation, may be inefficient or impractical.\170\ The
proposed amendment to permit a foreign bank that satisfies the
requirements of current Commission regulation 1.49 was designed to
ensure that any additional foreign depositories authorized to hold
Specified Foreign Sovereign Debt securities would be comparable to
those currently permitted under Commission regulation 1.25(d)(7), and
is consistent with the conditions of the 2018 Order.\171\
---------------------------------------------------------------------------

\169\ Proposed Commission regulation 1.25(d)(7).
\170\ Proposal at 81247.
\171\ Id. And Condition (f) of the 2018 Order.
---------------------------------------------------------------------------

Lastly, the Commission proposed to amend Commission regulation
1.25(b)(4)(i), which provides that except for investments in MMFs, the
dollar-weighted average time-to-maturity of an FCM's or DCO's portfolio
of Permitted Investments, as computed under SEC Rule 2a-7, may not
exceed 24 months.\172\ The proposed amendment would exclude Specified
Foreign Sovereign Debt from the calculation of the dollar-weighted
average time-to-maturity of the portfolio specified under Commission
regulation 1.25(b)(4)(i).\173\ The Commission proposed to exclude
Specified Foreign Sovereign Debt as such debt would be subject to a
separate dollar-weighted average time-to-maturity limit of 60 calendar
days, which is substantially shorter than the two-year dollar-weighted
average time-to-maturity requirement for the overall portfolio required
by Commission regulation 1.25(b)(4)(i).
---------------------------------------------------------------------------

\172\ Proposal at 81246.
\173\ Proposed Commission regulation 1.25(b)(4)(i).
---------------------------------------------------------------------------

b. Comments
The Commission received 12 comments in response to the proposed
addition of Specified Foreign Sovereign Debt to the list of Permitted
Investments for Customer Funds. Ten commenters supported the
Proposal.\174\ Two commenters opposed the Proposal.\175\
---------------------------------------------------------------------------

\174\ AIMA; CCP Global; Eurex; FIA/CME Joint Letter; ICE; MFA;
NFA; Nodal; SIMFA AMG; and WFE.
\175\ Investor Advocacy Group Joint Letter and Better Markets.
---------------------------------------------------------------------------

Several commenters expressing support for the Proposal stated that
permitting investment in the Specified Foreign Sovereign Debt provides
FCMs

[[Page 7822]]

and DCOs with a risk management tool to effectively manage foreign
currency risk from holding Customer Funds denominated in non-U.S.
dollars.\176\ In this regard, MFA stated that Commission regulation
1.25 currently requires an FCM holding excess non-U.S. dollar Customer
Funds to first convert such currency to U.S. dollars before investing
the funds in Permitted Investments, thereby exposing the FCM and
customers to foreign currency risk.\177\ MFA further stated that a more
prudent risk management approach would be for an FCM to invest excess
CAD, EUR, GBP, and JPY in corresponding Specified Foreign Sovereign
Debt securities, which eliminates the foreign currency exposure to the
FCM and customers.\178\ Similarly, AIMA asserted that allowing FCMs and
DCOs to invest foreign-denominated Customer Funds in short-term
sovereign bonds of the same currency would reduce the currency risk
associated with investing those funds in U.S. dollar-denominated
investments.\179\ FIA and CME echoed these comments, stating that the
Proposal expands the risk management tools available to FCMs and DCOs
to manage risk associated with holding Customer Funds by mitigating
foreign currency risk resulting from converting foreign currencies into
U.S. dollars in order to invest in U.S. dollar-denominated Permitted
Investments.\180\
---------------------------------------------------------------------------

\176\ AIMA at p. 2; FIA/CME Joint Letter at p. 2; MFA at pp. 1-
2; CCP Global at p. 1; WFE at p. 4.
\177\ MFA at pp. 3-4.
\178\ Id.
\179\ AIMA at p. 2.
\180\ FIA/CME Joint Letter at pp. 2, 6-7.
---------------------------------------------------------------------------

Several commenters also observed that the ability to invest foreign
currency balances owed to customers in Specified Foreign Sovereign Debt
securities reduces potential credit risk that FCMs and DCOs would
otherwise be exposed to by depositing the foreign currencies in
unsecured commercial bank accounts.\181\ CCP Global stated that,
consistent with the Joint Petition, the ability of FCMs and DCOs to
invest customer foreign currencies in Specified Foreign Sovereign Debt
securities effectively eliminates the credit risk of commercial banks
that FCMs and DCOs are exposed to, while holding such funds in
unsecured deposit accounts.\182\ AIMA noted that investing foreign
currencies belonging to customers, particularly non-U.S. clients, in
Specified Foreign Sovereign Debt is a more prudent option than
depositing funds with a foreign depository institution that provides
less insolvency protection, as such deposits would be at greater risk
of being treated as unsecured claims compared to securities held in
custody.\183\ FIA and CME stated that in the event of a foreign
depository's insolvency, claims to uninsured cash balances are at
greater risk of being treated as unsecured claims against the
depository estate than claims to specific securities held in
custody.\184\ FIA and CME further stated that FCMs, DCOs, and customers
are in a better risk posture when FCMs and DCOs are able to diversify
non-U.S. dollar exposures by leveraging both permitted non-U.S.
depositories for cash as well as Permitted Investments in Specified
Foreign Sovereign Debt securities.\185\
---------------------------------------------------------------------------

\181\ AIMA at p. 2; Eurex at p. 2; WFE at p. 4; MFA at pp. 2-5;
FIA/CME Joint Letter at pp. 2-11; CCP Global at p.1; Nodal at p. 2;
NFA at p. 1.
\182\ CCP Global at p. 1.
\183\ AIMA at p. 2.
\184\ FIA/CME Joint Letter at p. 7.
\185\ Id.
---------------------------------------------------------------------------

FIA and CME further commented that the significant growth in the
holding of foreign currencies, particularly CAD, EUR, JPY, and GBP,
which comprise the currencies of the Specified Foreign Sovereign Debt
securities, provides compelling evidence demonstrating the risk
management rationale for expanding the list of Permitted Investments to
include Specified Foreign Sovereign Debt securities.\186\ Specifically,
FIA and CME referenced the Proposal, where the Commission stated that
as of August 15, 2023, FCMs collectively held an aggregate U.S. dollar
equivalent of $51 billion of Customer Funds denominated in the
currencies of the Specified Foreign Sovereign Debt, which represented
approximately 10 percent of the total $490 billion of Customer Funds
held in segregated accounts on that date.\187\ FIA and CME stated that
the increase in foreign currency-denominated Customer Funds is
attributable primarily to the growth in cleared swaps, which only
commenced when the Commission issued the 2011 Permitted Investments
Amendment eliminating foreign sovereign debt as a Permitted
Investment.\188\ In FIA and CME's view, it would be impractical--and
unfair to Cleared Swaps Customers--to continue incentivizing FCMs to
manage currency fluctuation risk by refusing margin deposits not
denominated in U.S. dollars or requiring customers depositing such
balances to assume the foreign currency risk.\189\
---------------------------------------------------------------------------

\186\ Id.
\187\ Id. See also Proposal at 81243-81244.
\188\ FIA/CME Joint Letter at p. 7. FIA and CME stated that
Cleared Swaps Customers deposit initial margin in foreign currency
to a much greater extent than do futures customers or 30.7
customers. Specifically, FIA and CME stated that based on a survey
of members, the growth of CAD, EUR, GBP and JPY customer balances
(measured by the total equity value of accounts holding cash,
securities, and positions denominated in those currencies, expressed
in U.S. dollar-equivalent basis) between November 30, 2018 and
November 30, 2023 has been most pronounced for the Cleared Swaps
origin. FIA and CME stated that for members surveyed, CAD/EUR/GBP/
JPY Cleared Swaps Customer Collateral balances totaled USD 1.6
billion in 2018 and USD 9.8 billion in 2023, a 600 percent increase.
FIA/CME Joint Letter at pp. 7-8, note 37.
\189\ FIA/CME Joint Letter at pp. 7-8.
---------------------------------------------------------------------------

FIA and CME also observed that as non-U.S. dollar customer funds
balances have increased, so has the customer demand for FCM flexibility
in servicing multi-currency accounts.\190\ The commenters explained
that many customers, particularly Cleared Swaps Customers, deposit non-
U.S. dollar cash and rely on FCMs to manage those deposits to satisfy
margin calls on their behalf denominated in one or more other
currencies. They further asserted that since several of the Commission-
registered DCOs clearing swaps are located in the United Kingdom and
the European Union, the complexity of single-currency margining
processes is compounded by the operational complexity of Cleared Swaps
Customer Collateral segregation and ``residual interest''
requirements.\191\ In particular, FIA and CME stated that to comply
with Commission regulation 22.2(f)(4), which requires that an FCM
maintain in segregation, at all times, ``an amount equal to the sum of
any credit balances that the Cleared Swaps Customers of the [FCM] have
in their accounts,'' FCMs may need to source non-U.S. dollar assets to
cover deficits in advance of settlement with DCOs outside of U.S.
banking hours.\192\ In this regard, FIA and CME asserted that having
the ability to convert non-cash balances into Specified Foreign
Sovereign Debt and to use Specified Foreign Sovereign Debt instruments
to cover deficits incurred outside of U.S. banking hours would assist
FCMs to control the higher level of operational risk associated with
single-currency margining and Cleared Customer Collateral-specific
segregation compliance processes.\193\
---------------------------------------------------------------------------

\190\ FIA/CME Joint Letter at p. 8.
\191\ Id.
\192\ Id. and 17 CFR 22.2(f)(4). Commission regulation
22.2(e)(3) further states that an FCM may deposit in the Cleared
Swaps Customer Accounts its own money, securities, or other property
to ensure that it is always in compliance with the segregation
requirements of Commission regulation 22.2(f), provided, that the
proprietary funds deposited are cash or unencumbered Permitted
Investments. 17 CFR 22.2.
\193\ FIA/CME Joint Letter at p. 8, citing as an example an FCM
transferring proprietary funds in the form of Specified Foreign
Sovereign Debt instruments to a Cleared Swaps Customer Collateral
Account to cover a deficit and ensure compliance with its
segregation requirements outside of U.S. banking hours.

---------------------------------------------------------------------------

[[Page 7823]]

Commenters also supported the Proposal by noting that the credit,
liquidity, and volatility characteristics of Specified Foreign
Sovereign Debt securities are comparable to those of U.S. Treasury
securities.\194\ Specifically, FIA and CME stated that if measuring
liquidity by the bid-ask spread, ``the short-term Specified Foreign
Sovereign Debt instruments in scope of the Proposed Regulation all
demonstrate abundant market liquidity; they are comparable to, if not
identical with, bid-ask spreads in U.S. government securities of the
same tenors.'' \195\ WFE further emphasized the low risk of default
associated with these instruments.\196\
---------------------------------------------------------------------------

\194\ E.g., Eurex at p. 2; ICE at p. 2. See also MFA at p. 3 and
FIA/CME Joint Letter at p. 5 (noting that if liquidity is measured
by bid-ask spread (i.e., the difference between the lowest ask price
and the highest bid price), the short-term Specified Foreign
Sovereign Debt instruments referenced in the Proposal are all highly
liquid and comparable from a liquidity perspective to U.S.
government securities with the same tenors).
\195\ FIA/CME Joint Letter at p. 5.
\196\ WFE at p. 4 (referencing available credit ratings for the
relevant foreign sovereign debt instruments).
---------------------------------------------------------------------------

Better Markets and the Investor Advocacy Group opposed the proposed
addition of Specified Foreign Sovereign Debt to the list of Permitted
Investments, stating that such investments could compromise the
protection of Customer Funds and put customers at undue financial
risk.\197\ Specifically, Better Markets stated that investments in
foreign sovereign debt can exhibit variable degrees of liquidity,
affected by factors such as market conditions, geopolitical stability,
and economic policies.\198\ Better Markets further stated that in times
of financial stress or market volatility, foreign sovereign debt
instruments may not be readily convertible to cash without significant
loss of value. Better Markets argued that the reduced liquidity could
hinder the ability of DCOs and FCMs to promptly meet withdrawal
requests or margin calls, potentially compromising their operational
efficiency and financial stability.\199\ Better Markets further stated
that the increased exposure to credit and market risks could lead to
situations where losses from investments in foreign sovereign debt
impact DCOs' and FCMs' financial health to the extent of potentially
limiting DCOs' and FCMs' ability to return Customer Funds. Better
Markets also asserted that the proposed conditions to investing in
Specified Foreign Sovereign Debt, such as the 45 BPS cap on the two-
year credit default swap spread and the limits on the time-to-maturity
of investments, may not be sufficient to mitigate the underlying
liquidity concerns.\200\ Better Markets also criticized the use of
credit default swap spreads as an indicator of the creditworthiness of
the issuing sovereign, noting that the reliability of credit default
swap spreads depends heavily on the health and liquidity of the credit
default swaps market.\201\
---------------------------------------------------------------------------

\197\ Better Markets at p. 3; Investor Advocacy Group Joint
Letter at p. 1.
\198\ Better Markets at pp. 5-6.
\199\ Id.
\200\ Id. at p. 6.
\201\ Id.
---------------------------------------------------------------------------

Better Markets also asserted that allowing investments of Customer
Funds in foreign sovereign debt would constitute a relaxation of
regulatory enhancements introduced following the failures of MF Global
Inc. (``MF Global'') and Peregrine Financial Group
(``Peregrine'').\202\ Specifically, Better Markets stated that the
failures of both MF Global and Peregrine resulted from misuse of
customer funds and fraud, which caused significant customer
losses.\203\ In addition, the Investor Advocacy Group noted that the
failure of MF Global resulted, at least in part, due to risky
investments in foreign sovereign debt.\204\
---------------------------------------------------------------------------

\202\ Id. at p. 2.
\203\ Id.
\204\ Investor Advocacy Group Joint Letter at p. 1 (the
expansion of Permitted Investments to include foreign debt
instruments of France, Germany, Canada, Japan, and the United
Kingdom could put customers at undue financial risk and asserting
that avoiding such risk was the rationale for prohibiting
investments in foreign sovereign debt in 2011 after the MF Global
meltdown).
---------------------------------------------------------------------------

More generally, Better Markets and the Investor Advocacy Group
contended that the Commission lacks a compelling, public interest-
focused rationale for expanding the list of Permitted Investments to
include Specified Foreign Sovereign Debt.\205\ In particular, these
commenters criticized the Commission's consideration of the potential
increase in profits for DCOs and FCMs as a benefit of the proposed
expansion of the list of Permitted Investments.\206\ Better Markets
also argued that higher profits for DCOs and FCMs do not inherently
guarantee reduced customer charges.\207\ Instead, Better Markets stated
that the current financial landscape, characterized with high interest
rates, has generated substantial additional revenue for FCMs,
reportedly amounting to hundreds of millions of dollars, and has led to
an expectation of an expansion of the number of FCMs entering the
market.\208\
---------------------------------------------------------------------------

\205\ Better Markets at p. 6; Investor Advocacy Group Joint
Letter at pp. 1-2.
\206\ Investor Advocacy Group Joint Letter at p. 1.
\207\ Better Markets at p. 4. Better Markets states that there
is substantial historical evidencing that benefits accruing at the
higher end of the economic spectrum (e.g., DCOs and FCMs) do not
``trickle down'' effectively to lower levels (e.g., customers),
citing 50 years of tax cuts for the rich failed to trickle down,
economics study says, CBS News Money Watch (December 17, 2020),
available at https://www.cbsnews.com/news/tax-cuts-rich-5-years-no-trickel-down/.
\208\ Id. Better Markets, citing Futures Commission Merchants
Target Expansion, Traders Magazine (June 26, 2023), available at
https://www.tradersmagazine.com/departments/clearing/fcms-target-expansion/.
---------------------------------------------------------------------------

Separately, four commenters responded to the Commission's request
for comment on whether the Commission should impose a ``cooling-off ''
period, following an exceedance of the 45 BPS limit on the two-year
credit default swap spread of the issuing foreign sovereign, during
which investments in Specified Foreign Sovereign Debt would remain
prohibited.\209\ FIA and CME stated that a ``cooling-off'' period was
not necessary because, in their view, an exceedance of the 45 BPS limit
would most likely be related to broader market volatility conditions,
the improvement of which itself constitutes a cooling-off period.\210\
CCP Global agreed with the Commission that there should be a mechanism
to exclude a sovereign's debt in the event of an increased credit risk,
but advocated for a phased ``cooling-off'' period and flexibility in
terms of the number of breaches before investments are limited.\211\
CCP Global also warned against potential ``cliff-edge'' effects due to
the use of hard limits, which could aggravate volatility in the
underlying bond market.\212\ CCP Global further noted that given the
limited maturity of investments in reverse repurchase agreements (i.e.,
reverse repurchase agreements must be limited to an overnight maturity
or reversible upon demand), imposing an immediate limitation on new
investments would have the effect of requiring a large proportion of
all FCM and DCO investments in reverse repurchase agreements
collateralized by the relevant debt to be re-allocated within one
business day.\213\ WFE similarly recommended that the Commission
consider a minimum period of time or number of times that this limit is
breached before investment in the applicable Specified Foreign
Sovereign

[[Page 7824]]

Debt security is prohibited.\214\ ICE stated that requiring DCOs to
discontinue investment in Specified Foreign Sovereign Debt securities
due to fluctuations in credit default swap spreads could be
disruptive.\215\ In ICE's view, this restriction is not necessary given
the jurisdictions involved.\216\
---------------------------------------------------------------------------

\209\ Proposal at 81247, Question 4. Comments in response to
Question 4 were submitted by CCP Global at pp. 2-3; FIA/CME Joint
Letter at pp. 10-11; ICE at p. 3; and WFE at p. 4.
\210\ FIA/CME Joint Letter at p. 11.
\211\ CCP Global at p. 2.
\212\ Id.
\213\ Id.
\214\ WFE at p. 4.
\215\ ICE at p. 3.
\216\ ICE at p. 3. FIA and CME also noted that immediate
divestment should not be required after a change in credit default
spread. See FIA/CME Joint Letter at p. 10.
---------------------------------------------------------------------------

FIA and CME also observed that the Commission did not indicate
whether the calculation of the 45 BPS credit default spread condition
should be based on the bid, offer or mid-level.\217\ FIA and CME
proposed that the 45 BPS credit default spread condition be determined
using mid-level pricing.\218\ FIA and CME stated that mid-level pricing
is a widely accepted pricing convention, including for sovereign
debt.\219\
---------------------------------------------------------------------------

\217\ FIA/CME Joint Letter at p. 10.
\218\ Id.
\219\ Id.
---------------------------------------------------------------------------

In addition, FIA and CME reiterated their request, originally
expressed in the Joint Petition, that the Commission set a six-month
dollar-weighted average time-to-maturity limit for the portfolio of
Specified Foreign Sovereign Debt, and a maximum two-year remaining
time-to-maturity condition for individual instruments.\220\ Although
FIA and CME agreed with the Commission's observation in the Proposal
that the new issuance supply of Specified Foreign Sovereign Debt
meeting the proposed restrictions appears ``adequate to satisfy the
demand for investments of Customer Funds in the relevant instruments,''
FIA and CME asserted that the time-to-maturity restrictions ``may be
safely expanded, thereby enhancing liquidity (with the attendant
additional benefit of enhanced price stability and diversification
across currencies and tenors), without increasing credit risk.'' \221\
---------------------------------------------------------------------------

\220\ FIA/CME Joint Letter at pp. 9-10. Joint Petition at pp. 5-
6 (asserting that the new issuance supply of the Specified Foreign
Sovereign Debt meeting the restrictions is limited and would be
thinly traded/quoted).
\221\ FIA/CME Joint Letter at pp. 9-10.
---------------------------------------------------------------------------

Commenters also supported the Commission's proposal to revise
Commission regulations 1.25(d)(2) and (7) by expanding the eligible
counterparties for Repurchase Transactions for Specified Foreign
Sovereign Debt securities to include foreign banks, foreign securities
brokers and dealers, and the central banks of Canada, France, Germany,
Japan, and the United Kingdom, and by including foreign banks as
eligible custodians for securities received by FCMs and DCOs under
agreements to resell the securities.\222\ ICE stated that the principal
custodians for foreign sovereign debt securities are located outside of
the U.S., and that custody through a U.S. institution as required under
Commission regulation 1.25 would be impractical or involve an indirect
custodial relationship through a foreign bank or dealer in the relevant
jurisdiction. ICE also requested that the Commission revise Commission
regulation 1.25(d)(7) to explicitly include the central banks of
Canada, France, Germany, Japan, the United Kingdom, and the European
Central Bank as eligible custodians for Specified Foreign Sovereign
Debt securities.\223\
---------------------------------------------------------------------------

\222\ ICE at p. 3; FIA/CME Joint Letter at p. 9; WFE at p. 4.
See also Proposal at 81246-81247 and proposed Commission regulation
1.25(d)(2) and (7).
\223\ ICE at p. 3.
---------------------------------------------------------------------------

Separately, three commenters asserted that the Proposal's goals of
increasing investment vehicles for DCOs, while minimizing credit risk,
market risk, and liquidity risk could be effectively met if DCOs were
allowed to deposit Customer Funds at the Federal Reserve Banks.\224\
The commenters thus recommended that the Commission advocate for
Federal Reserve deposit access for all DCOs.\225\
---------------------------------------------------------------------------

\224\ Eurex at p. 2, CCP Global at p. 2, Nodal at p. 2.
\225\ Id.
---------------------------------------------------------------------------

BlackRock also requested that the Commission amend Commission
regulation 1.25(d)(2) to allow FCMs and DCOs to invest Customer Funds
pursuant to Repurchase Transactions cleared by a covered clearing
agency registered with the SEC under section 17A of the Securities
Exchange Act.\226\
---------------------------------------------------------------------------

\226\ BlackRock at p. 7-8 (referring to the recommendation made
by the Global Market Structure Subcommittee of the Commission's
Global Markets Advisory Committee on November 6, 2023). See Proposal
by FICC to add CCPs as Permitted Repo Counterparties under CFTC Rule
1.25 Recommendation, November 6, 2023, available at https://www.cftc.gov/PressRoom/Events/opaeventgmac110623.
---------------------------------------------------------------------------

c. Discussion
The Commission is amending Commission regulation 1.25 to add
Specified Foreign Sovereign Debt to the list of Permitted Investments
as proposed, subject to certain clarifications and revisions to address
comments. The amendments incorporate and expand upon the exemptive
relief provided by the Commission in the 2018 Order by authorizing DCOs
to invest Customer Funds in the sovereign debt of Canada, Japan, and
the United Kingdom in addition to the sovereign debt of France and
Germany. The amendments also expand upon the 2018 Order by authorizing
FCMs to invest Customer Funds in the Specified Foreign Sovereign
Debt.\227\
---------------------------------------------------------------------------

\227\ Final Commission regulation 1.25(a)(1)(vi). The Final Rule
thus supersedes the 2018 Order.
---------------------------------------------------------------------------

After considering the public comments, the Commission continues to
believe that adding Specified Foreign Sovereign Debt securities as a
Permitted Investment provides FCMs and DCOs with an option to manage
the potential foreign exchange risk that may arise in their
administration and investment of Customer Funds. Specifically, 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 introduce potential foreign
currency fluctuation risk to the FCMs and DCOs.\228\ If the U.S. dollar
decreases in value relative to the particular foreign currency, the FCM
or DCO may not receive sufficient foreign currency to cover the full
amount owed to its customers upon the conversion of the U.S. dollar-
denominated investment back to the applicable foreign currency. This
may further impact an FCM's or DCO's obligation under Commission
regulation 1.25(b)(1) to preserve the principal of Customer Funds
invested in Permitted Investments. Thus, to provide FCMs and DCOs with
an investment option that allows them to manage potential foreign
exchange risk, while staying consistent with the general objectives set
forth in Commission regulation 1.25 of preserving principal and
maintaining liquidity of Permitted Investments,\229\ the Commission is
adopting the conditions discussed above as proposed. These conditions
are consistent with the criteria specified in

[[Page 7825]]

the 2011 Permitted Investments Amendment \230\ and the conditions set
forth in the Commission's 2018 Order.\231\
---------------------------------------------------------------------------

\228\ In reaching this conclusion, the Commission considered,
among other factors, the daily volatility of exchange rates of the
relevant currency pairs. Specifically, based on data from the
Federal Reserve Bank of St. Louis' FRED database, the Commission
noted that for the period from September 2018 to September 2023, the
standard deviation of the daily percentage change of exchange rate
between the relevant currency pairs was 0.45 percent for the CAD/USD
pair, 0.46 percent for the EUR/USD pair, 0.61 percent for the GBP/
USD pair, and 0.55 percent for the JPY/USD pair, indicating a
currency fluctuation that is an additional risk factor with respect
to the return on investment of customer foreign currency deposits in
U.S. dollar-denominated assets. The Commission also adopted foreign
sovereign debt as a Permitted Investment in 2000 to mitigate the
potential foreign currency fluctuation risk facing FCMs and DCOs in
converting foreign currencies to U.S. dollars for investment
purposes. 2000 Permitted Investments Amendment at 78003.
\229\ 17 CFR 1.25(b).
\230\ 2011 Permitted Investments Amendment at 78782 (stating
that the Commission would consider permitting foreign sovereign debt
investments to the extent that: (i) the petitioner has balances in
segregated accounts owed to customers or clearing member FCMs in
that country's currency; and (ii) the sovereign debt serves to
preserve principal and maintain liquidity of customer funds as
required for all other investments of customer funds under
Commission regulation 1.25).
\231\ 2018 Order at 35245.
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First, an FCM or DCO will be permitted to invest in the foreign
sovereign debt of only Canada, France, Germany, Japan, and the United
Kingdom. The Commission's determination to include the foreign
sovereign debt to these five countries is based on various factors. As
a preliminary matter, each of these countries, including the U.S., is a
member of the Group of 7 (``G7''), which represents the world's largest
industrial democracies, and qualifies as a ``money center country'' as
the term is defined in Commission regulation 1.49(a)(1).\232\
Additionally, the currencies of the five jurisdictions represent a
material portion of the total amount of non-U.S. dollar-denominated
obligations that FCMs owe to customers. FCMs collectively held an
aggregate of a U.S. dollar equivalent of $64 billion of Customer Funds
denominated in CAD, EUR, JPY, and GBP on August 13, 2024.\233\ The $64
billion represented approximately 12 percent of the total $511 billion
of Customer Funds held by FCMs in segregated accounts on August 13,
2024.\234\
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\232\ 17 CFR 1.49(a). In the absence of customer instructions to
the contrary, Commission regulation 1.49(c) limits permissible
locations of depositories of Customer Funds to the U.S., the country
of origin of the currency, and a ``money center country.'' The
concept of ``money center country'' is defined to mean Canada,
France, Italy, Germany, Japan, and the United Kingdom, and is
intended to correspond, together with the U.S., to the list of G7
countries. Denomination of Customer Funds and Location of
Depositories, 68 FR 5551 (Feb. 4, 2003) at 5546.
\233\ Based on data provided by CME. The amount has increased
compared to the amount the Commission considered in the Proposal
(i.e., $51 billion, representing approximately 10 percent of the
Customer Funds held in segregation, on August 15, 2023). Proposal at
81243-81244.
\234\ The $511 billion represents the U.S. dollar equivalent of
the total value of margin assets held by FCMs for futures customers,
Cleared Swaps Customers, and 30.7 customers as reported to CME as of
August 15, 2023. The breakdown by currency was as follows: CAD 17
billion; EUR 19 billion; GBP 7 billion; and JPY 21 billion. Some of
these funds may have also been posted by the FCMs to DCOs as
customer margin collateral.
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In addition, prior to proposing to allow FCMs and DCOs to invest in
the sovereign debt of the enumerated countries, the Commission analyzed
the credit, liquidity, and volatility characteristics of Specified
Foreign Sovereign Debt. In particular, the Commission considered data
provided by the Petitioners in support of the Joint Petition's
statement that the credit default swaps of Canada, France, Germany,
Japan, and the United Kingdom have relatively narrow spreads similar to
the credit default spread of the U.S.\235\ To assess the liquidity of
Specified Foreign Sovereign Debt, the Commission also considered the
amounts of outstanding marketable Canadian, French, German, Japanese,
and United Kingdom debt instruments with time-to-maturity of two years
or less.\236\
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\235\ Proposal at 81244, note 110 (referencing Joint Petition at
pp. 6-7). Data provided in the Joint Petition, subsequently
clarified by the Supplement to Joint Petition, indicates that in the
period between April 2018 and April 2023, the average 2-year credit
default swap spreads of Canada, France, Germany, Japan, and the UK
were 13.9 BPS, 9.6 BPS, 5.3 BPS, 7.4 BPS, and 12.2 BPS,
respectively, whereas the average 2-year credit default swap spread
of the U.S. was 15.1 BPS. Joint Petition at p. 7 and Supplement to
Joint Petition at p. 1.
\236\ Id. note 111 (referencing appendix A to Joint Petition and
Supplement to Joint Petition at p. 1, which indicate that the
outstanding debt in instruments with time-to-maturity of two years
or less issued by Canada, France, Germany, Japan, and the United
Kingdom, based on information available on Bloomberg as of July 11,
2023, was equal to the USD equivalence of $447 billion, $594
billion, $557 billion, $2.6 trillion, and $534 billion,
respectively; Bank of International Settlements' Debt Securities
Statistics, available here: https://www.bis.org/statistics/secstats_to180923.htm; and 2021 Survey on Liquidity in Government
Bond Secondary Markets, Organization for Economic Co-operation and
Development, available here: https://www.oecd-ilibrary.org/governance/oecd-sovereign-borrowing-outlook-2022_3f4e2676-en, which
confirms that Specified Foreign Sovereign Debt instruments presented
good liquidity characteristics in 2021).
---------------------------------------------------------------------------

With regard to the volatility characteristics of Specified Foreign
Sovereign Debt, the Commission concluded that expanding the list of
Permitted Investments to include the sovereign debt of these five G7
countries is warranted based on available data that the price risk of
the relevant foreign sovereign debt is comparable to that of U.S.
Treasury securities that are already included in the list of Permitted
Investments. Specifically, using one-year sovereign debt instruments
yield data for the period September 21, 2018 to September 20, 2023, the
Commission observed that the standard deviation of daily yield change
for one-year U.S. Treasury bills was 9 BPS, whereas the same measure
for Canadian, French, German, Japanese, and United Kingdom one-year
debt instruments ranged from 1 to 7 BPS.\237\ The Commission's
determination that the price risk of Specified Foreign Sovereign Debt
instruments is comparable to that of U.S. Treasury securities, and
therefore merits inclusion in the list of Permitted Investments, is
based on data from an inquiry including the more recent period of
September 20, 2023 to September 5, 2024, using the standard deviation
of daily yield change for one-year debt instruments.\238\ Finally, in
proposing to add Specified Foreign Sovereign Debt to the list of
Permitted Investments, the Commission surmised that holding high-
quality foreign sovereign debt may pose less risk to Customer Funds
than the credit risk of commercial banks through unsecured bank demand
deposit accounts.\239\
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\237\ The Commission reviewed yield data available through
Bloomberg, a proprietary financial data provider, for 1-year
sovereign debt instruments issued by Canada, France, Germany, Japan,
the United Kingdom, and the U.S.
\238\ The Commission reviewed one-year sovereign debt
instruments yield data, available through Bloomberg, for the period
from September 21, 2018 to September 5, 2024. During this period,
the standard deviation of daily yield change for U.S. Treasury bills
was approximately 9 BPS, whereas the same measure for Canadian,
French, German, Japanese, and United Kingdom one-year debt
instruments ranged from approximately 1 to approximately 6 BPS.
\239\ The Commission discussed the preferability from a risk
management perspective of investing foreign currency in high quality
foreign sovereign debt relative to the credit risk posed by
unsecured demand deposit accounts at commercial banks in issuing the
2018 Order permitting DCOs to invest futures customer funds and
Cleared Swaps Customer Collateral in French and German sovereign
debt. 2018 Order at 35245-35246.
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Second, an FCM or DCO is permitted to invest in the Specified
Foreign Sovereign Debt of a country only to the extent that the FCM or
DCO has balances in accounts owed to customers denominated in the
country's currency.\240\ This restriction takes into account both the
need to ensure the safety of Customer Funds and the Commission's desire
to provide a degree of investment flexibility to FCMs and DCOs.\241\ As
noted in the Proposal, an

[[Page 7826]]

FCM or DCO seeking to invest deposits or amounts owed to customers
denominated in foreign currencies, absent the ability to invest in
identically-denominated sovereign debt securities, would need to
convert the foreign currencies to a U.S. dollar-denominated asset,
which would increase the FCM's or DCO's exposure to foreign currency
fluctuation risk.\242\ Commenters did not raise concerns regarding this
condition, and as such, the Commission is adopting this requirement as
proposed.
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\240\ Final Commission regulation 1.25(a)(1)(vi).
\241\ As discussed above, prior to 2011, the Commission
permitted an FCM or DCO to invest Customer Funds in foreign
sovereign debt subject to the condition that the FCM or DCO held
balances owed to customers denominated in the currency of the
foreign country. In the wake of the 2008 financial crisis, the
Commission eliminated foreign sovereign debt from the list of
permitted investments noting at the time that ``in many cases, the
potential volatility of foreign sovereign debt in the current
economic environment and the varying degrees of financial stability
of different issuers make foreign sovereign debt inappropriate for
hedging foreign currency risk.'' 2011 Permitted Investments
Amendment at 78781. Yet the Commission recognized that ``the safety
of sovereign debt issuances of one country may vary greatly from
those of another, and that investment in certain sovereign debt
might be consistent with the objectives of preserving principal and
maintaining liquidity, as required by Regulation 1.25.'' Id. at
78782. For the reasons discussed above, the Commission is
reinstating certain foreign sovereign debt consistent with the
Commission's statement in the 2011 Permitted Investments Amendment
that it would consider permitting such investments provided that the
investments: (i) are limited to balances owed to customers
denominated in the currency of the applicable foreign sovereign, and
(ii) serve to preserve the principal and maintain the liquidity of
Customer Funds. Id. at 78782. The Final Rule is also consistent with
the Commission's approach in the 2018 Order of permitting DCOs to
invest in the sovereign debt of France and Germany to the extent
such foreign sovereign debt satisfies specific criteria
demonstrating consistency with the credit, liquidity, and volatility
of short-term U.S. Treasury securities.
\242\ 2011 Permitted Investments Amendment at 78003.
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Third, the Commission proposed to permit FCMs and DCOs to invest in
Specified Foreign Sovereign Debt provided that the two-year credit
default spread of the issuing sovereign is 45 BPS or less.\243\ As
discussed in the Proposal, the 45 BPS limit is consistent with the
conditions specified in the 2018 Order.\244\ The Commission set the cap
of 45 BPS in the 2018 Order based on a historical analysis of the two-
year credit default spread of the U.S. (``U.S. Spread'').\245\ Forty-
five BPS was, at the time, approximately two standard deviations above
the mean U.S. Spread over the preceding eight years.\246\ The
Commission observed that over that eight-year period of July 3, 2009 to
July 3, 2017, the U.S. Spread was 45 BPS or less approximately 95
percent of the time and exceeded 45 BPS approximately 5 percent of the
time. During the same period, the two-year German spread exceeded 45
BPS approximately 6 percent of the time and the two-year French spread
exceeded 45 BPS approximately 25 percent of the time, with all
exceedances occurring between July 2009 and September 2012, in the
aftermath of the 2008 financial crisis and the European sovereign debt
crisis.\247\
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\243\ Proposed Commission regulation 1.25(f)(3).
\244\ Proposal at 81245.
\245\ 2018 Order at 35243.
\246\ In 2018, the Commission reviewed the daily U.S. Spread
from July 3, 2009 to July 3, 2017. Over that time period, the U.S.
Spread had a mean of approximately 26.5 BPS and a standard deviation
of approximately 9.72 BPS. Forty-five BPS were approximately two
standard deviations above the 26.5 mean.
\247\ See 2018 Order at 35243.
---------------------------------------------------------------------------

During the more recent period of September 21, 2018 to September
20, 2023 preceding the issuance of the Proposal, the U.S. Spread had a
mean of approximately 16.4 BPS,\248\ which was lower than the mean
spread of 26.5 BPS for the July 3, 2009 to July 3, 2017 period. In that
same time period, the two-year credit default swap spread of the
sovereigns issuing the Specified Foreign Sovereign Debt did not exceed
45 BPS. Thus, based on these U.S. Spread and Specified Foreign
Sovereign Debt data, the Commission is maintaining the cap of 45 BPS
established in the 2018 Order.\249\
---------------------------------------------------------------------------

\248\ Based on an assessment conducted by CFTC staff on
September 20, 2023.
\249\ Using the daily U.S. Spread data from July 3, 2009 to July
3, 2017 and assuming the two-year credit default spread follows a
normal distribution, the Commission estimated that there was less
than 2.5 percent likelihood that the U.S. credit default spread
would exceed 45 BPS over a two-year period. In addition, the
Commission's estimate, based on the daily U.S. Spread data from
September 21, 2018 to September 5, 2024, indicates that there is
less than 1 percent likelihood, under both normal and empirical
distributions, that the two-year credit default swap spread of the
sovereigns issuing Specified Foreign Sovereign Debt would exceed 45
BPS. Therefore, the Commission has determined to adopt a threshold
of 45 BPS for countries whose debt may qualify as a Permitted
Investment under Commission regulation 1.25.
---------------------------------------------------------------------------

Consistent with the Proposal, if the credit default spread of the
issuing sovereign exceeds the 45 BPS cap, FCMs and DCOs will not be
permitted to make further investments, but neither will they be
required to immediately divest their current investments in Specified
Foreign Sovereign Debt. The prohibition on new investments will reduce
the exposure to Customer Funds by avoiding the risk of default on the
Specified Foreign Sovereign Debt. In situations where the 45 BPS cap is
exceeded, FCMs and DCOs will hold Customer Funds denominated in foreign
currency in cash or invest the foreign currency in U.S. dollar-
denominated Permitted Investments rather than Specified Foreign
Sovereign Debt. In addition, the requirement that the dollar-weighted
average time-to-maturity of the portfolio of Specified Foreign
Sovereign Debt not exceed 60 calendar days helps mitigate price risks
to the Customer Funds that might arise from a country's two-year credit
default spread exceeding the 45 BPS limit.
In addition, in response to a comment stating that the Commission
did not specify how the 45 BPS limit should be calculated, the
Commission is clarifying that the 45 BPS credit default spread must be
determined using mid-level pricing, rather than the bid or ask
price.\250\ The mid-price is the average of the bid and ask prices,
representing a midpoint between what buyers are willing to pay (bid)
and what sellers are asking for (ask). This mid-point price provides a
more balanced view of the security's credit risk, without the skew of
immediate buy or sell pressures.
---------------------------------------------------------------------------

\250\ FIA/CME Joint Letter at p. 10 (recommending that the
spread be determined using the mid-level and asserting that mid-
level pricing is a widely accepted pricing convention for a wide
range of asset classes including sovereign debt).
---------------------------------------------------------------------------

The Commission also requested comments as to whether it was
appropriate to impose a ``cooling-off'' period before an FCM or DCO
could invest Customer Funds in the Specified Foreign Sovereign Debt of
a particular country once the two-year credit default spread of the
country exceeded 45 BPS.\251\ As commenters noted, market conditions
based on broader volatility will self-resolve and result in a market
driven ``cooling-off'' period.\252\ Moreover, because FCMs and DCOs
will not be able to make new investments in Specified Foreign Sovereign
Debt until the credit default spread is back within the required
limits, any ``cooling-off'' period promulgated by the Commission could
potentially be arbitrary and inconsistent with the market's assessment
that the increased credit risk that resulted in the exceedance of the
45 BPS cap no longer exists. Thus, the Commission is not specifying a
``cooling-off'' period during which FCMs and DCOs may not engage in
investment in the applicable Specified Foreign Sovereign Debt.
---------------------------------------------------------------------------

\251\ Proposal at 81247, Question 4.
\252\ FIA/CME Joint Letter at pp. 10-11.
---------------------------------------------------------------------------

However, the Commission has determined to immediately halt the
purchase of additional Specified Foreign Sovereign Debt once the 45 BPS
cap is exceeded. Specifically, the Commission does not agree with
commenters who suggested that there should be ``flexibility'' with
respect to the number of breaches of the 45 BPS cap before investments
are limited,\253\ because the breach of the 45 BPS cap indicates the
market's assessment of an increased likelihood of credit risk. The
Commission acknowledges those comments cautioning that there is a
potential for unintended consequences such as ``cliff-edge effects,''
\254\ but it is for that reason that the Commission is taking a
measured and balanced approach to such situations where the 45 BPS
limit has been exceeded. Therefore, the Commission is not requiring
that FCMs and DCOs sell

[[Page 7827]]

Specified Foreign Sovereign Debt that has already been purchased
because it could increase volatility and the potential for procyclical
impacts. The Commission, however, maintains its position that FCMs and
DCOs must stop making direct investments in, or engaging in Repurchase
Transactions involving, Specified Foreign Sovereign Debt of a country
whose credit default swap spread on two-year debt instruments has
exceeded 45 BPS.
---------------------------------------------------------------------------

\253\ See CCP Global at p. 2; WFE at p. 4-5.
\254\ See CCP Global at p. 2.
---------------------------------------------------------------------------

The Commission is also adopting the 60-calendar-day dollar-weighted
average time-to-maturity of investments in Specified Foreign Sovereign
Debt, as proposed.\255\ As discussed in the Proposal, the restrictions
on time-to-maturity will ensure that an FCM's or DCO's portfolio of
Specified Foreign Sovereign Debt is comprised of sovereign debt
instruments that mature within a relatively short period of time.\256\
The short time-to-maturity requirement is intended to assist FCMs and
DCOs in managing and mitigating potential market and/or credit risk by
providing FCMs and DCOs with the option of holding the foreign
sovereign debt securities to maturity during periods of market stress
and price volatility rather than selling the securities at potentially
significant discounts. The option to hold the debt securities to
maturity may be particularly valuable to FCMs and DCOs from a risk
management perspective during periods of significant interest rate
movements, which could exacerbate market risk in sovereign debt
markets. Thus, the Commission has determined to adopt a 60-calendar-day
dollar-weighted average time-to-maturity requirement for Specified
Foreign Sovereign Debt securities, computed on a portfolio of
securities on a country-by-country basis, and a 180-calendar-day
maximum remaining time-to-maturity requirement for each individual
Specified Foreign Sovereign Debt security.
---------------------------------------------------------------------------

\255\ Final Commission regulation 1.25(f)(1) and (2).
\256\ Proposal at 81245-81246.
---------------------------------------------------------------------------

In addition, data regarding the new issuances of short-term
Specified Foreign Sovereign Debt supports the lower 60-day dollar-
weighted average time-to-maturity requirement and the 180-day maximum
remaining time-to-maturity requirement proposed.\257\ Therefore, the
proposed time-to-maturity conditions more effectively account for
liquidity needs with the market and credit risk management
considerations than the six-month dollar-weighted portfolio average and
two-year individual remaining time-to-maturity limits recommended by
FIA and CME. Furthermore, as discussed in the Proposal, using the
maturity of reverse repurchase agreements in calculating the dollar-
weighted average of the portfolio of investments in Specified Foreign
Sovereign Debt will reduce the average time-to-maturity of the
portfolio as a whole. This approach takes into account the expected
resale of the instruments, which must be contractually scheduled to
occur within one business day or on demand as required by Commission
regulation 1.25(d)(6).\258\ Conversely, if the FCM or DCO sells
Specified Foreign Sovereign Debt instruments under a repurchase
agreement, the FCM or DCO is required to include the instruments in the
calculation of the dollar-weighted average based on the remaining time-
to-maturity of each instrument sold, to account for the expected
repurchase of such instruments.\259\
---------------------------------------------------------------------------

\257\ Data made available by the Bank of Canada, l'Agence France
Tr[eacute]sor (the French Finance Agency), the Bundesrepublik
Deutschland Finanzagentur (the German Finance Agency), the Japan
Ministry of Finance, and the United Kingdom Debt Management Office
indicate that the five jurisdictions issue a sizable amount of debt
securities with time-to-maturity of less than 180 days on a frequent
basis. Specifically, in July 2024, Canada auctioned approximately
USD 35 billion, France auctioned approximately $26.2 billion,
Germany auctioned approximately $8.2 billion, Japan auctioned
approximately $12.5 billion, and the United Kingdom auctioned
approximately $41 billion in debt instruments with time-to-maturity
of six months or less (see Canadian Treasury bills auction results
at https://www.bankofcanada.ca/markets/government-securities-auctions/calls-for-tenders-and-results/regular-treasury-bills/;
French BTF auction history at https://www.aft.gouv.fr/en/dernieres-adjudications); German Bubills issuance results at https://www.deutsche-finanzagentur.de/en/federal-securities/issuances/issuance-results (refer to reopening of 12-month Bubills with
residual maturities between three and six months); Japanese T-bills
auction results at https://www.mof.go.jp/english/policy/jgbs/auction/past_auction_results/index.html; and United Kingdom Treasury
Bill tender results at https://www.dmo.gov.uk/data/treasury-bills/tender-results/).
\258\ 17 CFR 1.25(d)(6).
\259\ Final Commission regulation 1.25(f)(1).
---------------------------------------------------------------------------

In addition, as discussed in the Proposal, with the adoption of the
60-day dollar-weighted portfolio average time-to-maturity requirement,
the Commission is also amending Commission regulation 1.25(b)(4)(i) to
exclude Specified Foreign Sovereign Debt from the calculation of the
dollar-weighted average time-to-maturity of the FCM's or DCO's full
portfolio of investment of Customer Funds.\260\ This amendment reflects
that Specified Foreign Sovereign Debt will be subject to its own
dollar-weighted average time-to-maturity limit.
---------------------------------------------------------------------------

\260\ Proposal at 81246.
---------------------------------------------------------------------------

The Commission acknowledges the request of Eurex, CCP Global, and
Nodal in their public comments \261\ that the Commission work with the
Federal Reserve Board to permit all DCOs to deposit Customer Funds at
the Federal Reserve Banks. The Commission supports DCOs having deposit
accounts at Federal Reserve Banks; \262\ however, granting access to
such accounts is not within the jurisdiction of the Commission.
---------------------------------------------------------------------------

\261\ Eurex at p. 2, CCP Global at p. 2, Nodal at p. 2.
\262\ See, e.g., Behnam urges wider CCP access to Fed deposit
accounts, Risk.net (Apr. 1, 2022), available at https://www.risk.net/regulation/7945026/behnam-urges-wider-ccp-access-to-fed-deposit-accounts.
---------------------------------------------------------------------------

Consistent with the Proposal, the Commission is also amending
Commission regulations 1.25(d)(2) and (7) to expand permissible
counterparties and depositories that can be used in connection with
Repurchase Transactions to include certain foreign entities. Without
amendment to these counterparty and depository provisions, an FCM's and
DCO's ability to buy and sell Specified Foreign Sovereign Debt
securities pursuant to Repurchase Transactions would be restricted
because participants in the foreign market are predominantly non-U.S.
entities. The Commission is therefore adding foreign banks and foreign
brokers or dealers meeting certain requirements, as well as the
European Central Bank and the central banks of Canada, France, Germany,
Japan, and the United Kingdom, to the list of permitted
counterparties.\263\ To be deemed a permitted counterparty, a foreign
bank must qualify as a depository under Commission regulation
1.49(d)(3) by holding regulatory capital in excess of $1 billion, and
must be located in a money center country as defined in Commission
regulation 1.49(a)(1) (i.e., Canada, France, Italy, Germany, Japan, and
the United Kingdom) or in another jurisdiction that has adopted the
currency of the permitted foreign sovereign debt. Similarly, a foreign
broker or dealer must be located in a money center country and be
regulated by a foreign financial regulator or a provincial financial
regulator with respect to a Canadian securities broker or dealer.\264\
The newly adopted

[[Page 7828]]

provisions are designed to ensure that the counterparties to an FCM's
or DCO's Repurchase Transactions are regulated entities comparable to
those counterparties already permitted under Commission regulation
1.25(d)(2). The final revisions to Commission regulation 1.25(d)(2) are
also consistent with the counterparty conditions set forth in the 2018
Order.\265\
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\263\ Final Commission regulation 1.25(d)(2). ICE requested in
its comment letter that the Commission explicitly include the
central banks of Canada, France, Germany, Japan, the United Kingdom,
and the European Central Bank. See ICE at p. 3. The Commission is
including these recommendations in the terms of the Final Rule.
\264\ The Commission is revising the Final Rule to provide that
Canadian securities brokers or dealers may be subject to applicable
provincial financial regulators in recognition of the Canadian
regulatory structure vests supervisory authority with provincial
regulators. Final Commission regulation 1.25(d)(2).
\265\ 2018 Order, Condition (e) at 35245.
---------------------------------------------------------------------------

In response to Better Markets' assertion that allowing investments
in Specified Foreign Sovereign Debt is relaxing some of the stringent
requirements put in place after the collapse of MF Global,\266\ the
Commission notes that the impetus for eliminating foreign sovereign
debt from the list of Permitted Investments in 2011 was not the
bankruptcy of MF Global. Under the 2000 Permitted Investments
Amendment, FCMs and DCOs were permitted to invest in the foreign
sovereign debt of any foreign sovereign provided that the FCM or DCO
owed balances denominated in that currency to customers. The Commission
eliminated foreign sovereign debt in the 2011 Permitted Investments
Amendment primarily due to its concerns with the varying degree of
financial stability of different issuers as well as because it was not
persuaded that foreign sovereign debt was used with sufficient
frequency to justify commenters' claims that such debt assisted with
the diversification of Customer Funds.\267\ However, as previously
stated, with respect to concerns regarding the economic stability of
certain countries, the Commission recognized that the safety of
sovereign debt issuances of one country may vary greatly from those of
another. In this context, the Commission stated that it was amenable to
considering applications for exemptions with respect to investments in
certain foreign sovereign debt instruments upon a demonstration that
the investment in the sovereign debt of one or more countries is
appropriate in light of the objectives of Commission regulation 1.25
and that the issuance of the exemption satisfies the criteria set forth
in section 4(c) of the Act.\268\
---------------------------------------------------------------------------

\266\ Better Markets at p. 3.
\267\ 2011 Permitted Investments Amendment at 78781.
\268\ Id. at 78782.
---------------------------------------------------------------------------

The Commission continues to recognize that the safety of sovereign
debt issuances of one country may vary greatly from the sovereign debt
issuances of another country. Because of this, the Commission finds
that investment in Specified Foreign Sovereign Debt that meets the
tightly circumscribed risk characteristics set forth in the 2018 Order
and restated in the Final Rule is consistent with the objectives of
preserving principal and maintaining liquidity of investments specified
in Commission regulation 1.25.\269\ In light of the varying liquidity
and credit risk associated with foreign sovereign debt, the Commission
is recognizing jurisdictions whose short-term debt instruments meet the
general objectives set forth in Commission regulation 1.25 of
preserving principal and maintaining liquidity, subject to the
conditions discussed above that are consistent with the conditions
specified in the 2018 Order.
---------------------------------------------------------------------------

\269\ Id. at 78782.
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In addition, MF Global's trading losses, which Better Markets
references in asserting that FCMs' and DCOs' investments in Specified
Foreign Sovereign Debt might compromise the protection of Customer
Funds,\270\ were undertaken as speculative proprietary investments and
not as investments of Customer Funds. MF Global engaged in, among other
speculative investments, proprietary repurchase-to-maturity
transactions collateralized with sovereign debt issued by various
European countries that were experiencing economic distress.\271\ As
the value of the European sovereign debt positions deteriorated in the
summer of 2011, and as MF Global's credit ratings were downgraded in
the fall of 2011, MF Global was required to pay additional variation
and initial margin on its proprietary transactions.\272\ To satisfy the
firm's liquidity needs and, more generally, to support the firm's
proprietary transactions and the operations of the firm's affiliates,
MF Global unlawfully used Customer Funds.\273\ The firm's misuse of
Customer Funds violated the Act and Commission regulations and would
have been impermissible regardless of the type of investments involved
in such malfeasance.\274\
---------------------------------------------------------------------------

\270\ Better Markets at p. 3.
\271\ Another MF Global affiliate was also involved in the
transactions, but MF Global held the economic risk of ownership.
First Report of Louis J. Freeh, Chapter 11 Trustee of MF Global
Holdings LTD., et al., for the Period of October 31, 2011 through
June 4, 2012 (``MF Global Trustee Report'') at p. 33, available at
https://www.cftc.gov/sites/default/files/idc/groups/public/@newsroom/documents/file/h0711reportoflouisjfreeh060412.pdf.
\272\ Id. at pp. 36-37.
\273\ CFTC Release No. 7508-17, Consent Order: Jon S. Corzine
(Jan. 5, 2017) at p. 6.
\274\ Moreover, MF Global had invested not in the sovereign debt
of Canada, France, Germany, Japan and the United Kingdom, which meet
the liquidity, volatility, and credit characteristics that are
consistent with the overall objectives set forth in Commission
regulation 1.25 of preserving principal and maintaining liquidity of
Customer Funds, but rather, such Customer Funds were ultimately used
to support high-risk transactions involving the sovereign debt of
Belgium, Ireland, Italy, Portugal, and Spain. None of these
jurisdictions are on the list of allowable foreign sovereign debt
that is being added to the list of Permitted Investments. See MF
Global Trustee Report at p. 40.
---------------------------------------------------------------------------

Peregrine's failure was also the result of the misappropriation of
Customer Funds and violations of the Commission segregation
requirements for Customer Funds.\275\ Peregrine's owner and Chief
Executive Officer plead guilty to the embezzlement of customer funds
and making false statements to the Commission.\276\ These unlawful
actions have no bearing on the types of Permitted Investments
authorized by the Commission.
---------------------------------------------------------------------------

\275\ CFTC Release No. 7116-15.
\276\ U.S. Attorney's Office Northern District of Iowa, Press
Release, Peregrine Financial Group CEO Sentenced To 50 Years For
Fraud, Embezzlement, And Lying To Regulators [Court's Sentence Is
The Maximum Allowed By Law]. January 31, 2013. Available at https://www.justice.gov/usao-ndia/pr/peregrine-financial-group-ceo-sentenced-50-years-fraud-embezzlement-and-lying.
---------------------------------------------------------------------------

Moreover, the Commission adopted major revisions to its rules to
enhance the protection of Customer Funds in response to the MF Global
and Peregrine bankruptcies. Specifically, the Commission adopted
Commission regulation 1.11,\277\ which requires each FCM carrying
customer accounts to establish a risk management program designed to
monitor and manage risks associated with the activities of the FCM,
including risks associated with the segregation of Customer Funds, FCM
operations, and capital resources.\278\ Commission regulation 1.11
requires an FCM to establish written policies and procedures that are
reasonably designed to ensure that Customer Funds are separately
accounted for and segregated as belonging to customers as required by
the Act and Commission regulations. Furthermore, the written policies
and procedures must, at a minimum, include or address: (i) a process
for assessing the appropriateness of specific investments of Customer
Funds in Permitted Investments, including the consideration of the
market, credit, counterparty, operational, and liquidity risks
associated with the investments, and an assessment of whether the
investments are managed consistent with the objectives of preserving
principal and maintaining liquidity of Customer Funds; (ii) a process
for the evaluation of depositories of segregated

[[Page 7829]]

funds, including, at a minimum, documented criteria addressing the
depository's capitalization, creditworthiness, operational reliability,
and access to liquidity; (iii) an account opening process for
depositories, including documented authorization requirements,
procedures to ensure that customer segregated funds are not deposited
with a depository prior to the FCM receiving a written acknowledgment
letter, and procedures to ensure that the account is properly titled as
a customer segregated account under the Act and Commission regulations;
and (iv) a program to monitor an approved depository on an ongoing
basis to assess its continued satisfaction of the FCM's established
criteria, including a thorough due diligence review of each depository
at least annually.\279\
---------------------------------------------------------------------------

\277\ 17 CFR 1.11.
\278\ 2013 Protections of Customer Funds Release at 68517-68521.
See also 17 CFR 1.11.
\279\ 17 CFR 1.11(e)(3).
---------------------------------------------------------------------------

The Commission also revised Commission regulation 1.10 to require,
among other things, an FCM to report and maintain a targeted amount of
residual interest (i.e., excess segregated funds above the full balance
owed to customers) that the FCM seeks to hold in segregated accounts as
a buffer to prevent the accounts from becoming undersegregated.\280\
Additionally, the Commission amended Commission regulation 1.16 to
ensure the high quality of annual audits of the FCM's financial
statements by public accountants. The amendments to Commission
regulation 1.16 require public accountants to be registered with, and
examined by, the Public Company Accounting Oversight Board (``PCAOB''),
and further require that the public accountant's audit report state
whether the audit was conducted in accordance with auditing standards
established or adopted by the PCAOB.\281\
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\280\ 2013 Protections of Customer Funds Release at 68513-68516.
\281\ Id. at 68577.
---------------------------------------------------------------------------

The Commission further revised Commission regulation 1.12 to
enhance reporting by FCMs to the Commission. Specifically, Commission
regulation 1.12 was amended to define several additional reportable
events that require an FCM to file a notice with the Commission and
with the FCM's designated self-regulatory organization.\282\ Among
other changes, the revisions included a requirement for FCMs to provide
immediate notice whenever the FCM discovers or is informed that it has
invested Customer Funds in investments that do not qualify as Permitted
Investments, or if the FCM holds Permitted Investments in a manner that
is not in compliance with the provisions of Commission regulation
1.25.\283\
---------------------------------------------------------------------------

\282\ Id. at 68521-68522.
\283\ Id. at 68522.
---------------------------------------------------------------------------

The additional Customer Funds safeguards adopted in 2013 are not
affected by the amendments adopted in this Final Rule.\284\ In light of
the enhanced safeguards that are now in place with respect to the
segregation of Customer Funds,\285\ and the limitation of investment in
foreign sovereign debt to jurisdictions whose debt meets certain
liquidity, volatility, and credit characteristics consistent with the
overall objectives set forth in Commission regulation 1.25 of
preserving principal and maintaining liquidity of Customer Funds,
concerns regarding the past failures of MF Global and Peregrine are
already addressed.
---------------------------------------------------------------------------

\284\ The Commission acknowledges, as discussed further in
section IV.E. of this preamble, that the read-only electronic access
to account information provisions are being removed. However, the
same information will be accessible through CME and NFA 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. This will allow the same
information to be accessible to the Commission without the current
difficulties involved in the read-only access currently maintained.
\285\ See generally 2013 Protections of Customer Funds Release.
---------------------------------------------------------------------------

The Commission is not addressing BlackRock's request for amendments
to Commission regulation 1.25(d)(2) to allow FCMs and DCOs to invest
Customer Funds pursuant to Repurchase Transactions cleared by a covered
clearing agency registered with the SEC because this requested change
was not proposed and discussed as part of the Proposal.\286\ Any
potential amendment to effectuate such change would be addressed
separately from this Final Rule.
---------------------------------------------------------------------------

\286\ BlackRock at p. 7-8 (referring to the recommendation made
by the Global Market Structure Subcommittee of the Commission's
Global Markets Advisory Committee on November 6, 2023). See
generally Proposal by FICC to add CCPs as Permitted Repo
Counterparties under CFTC Rule 1.25 Recommendation, November 6,
2023, available at https://www.cftc.gov/PressRoom/Events/opaeventgmac110623.
---------------------------------------------------------------------------

Finally, as discussed previously, some commenters raised concerns
about the profits of FCMs and DCOs and whether increased profits were
in line with the public interest language in the Act to justify these
changes to the list of Permitted Investments.\287\ In assessing the
public interest as part of its analysis of the conditions of section
4(c) of the Act, the Commission has considered more than just the
potential profits of FCMs and DCOs.\288\ As discussed above, the use of
foreign sovereign debt provides FCMs and DCOs with an effective risk
management tool for foreign currency exchange risk. By investing
customers' foreign currency deposits in the sovereign debt of the
applicable foreign currency, an FCM or DCO avoids the need to convert
the foreign currency deposits into U.S. dollar-denominated assets and
reduces potential foreign currency fluctuation risk associated with
such transactions. The ability to manage foreign currency fluctuation
risk benefits FCMs, DCOs, customers, and the markets. In addition, as
discussed above, holding Customer Funds in foreign sovereign debt
securities with custodians may provide enhanced protections to the
funds relative to holding the funds as unsecured deposits with
commercial banks.
---------------------------------------------------------------------------

\287\ See Investor Advocacy Group Joint Letter at p. 1 (arguing
that ``[t]he CFTC must not embed revenues and profits of exchanges
and brokers into the fabric of its definition of the public
interest.''); Better Markets at p. 4 (asserting that ``[i]n the
context of FCMs, higher profits do not inherently guarantee reduced
customer charges. The dynamics of profit allocation within
businesses, market competition, and economic realities often
complicate the direct correlation between increased profits and
reduced costs for customers.'').
\288\ 7 U.S.C. 6(c). With respect to investments of futures
customer funds, the Commission is changing the list of Permitted
Investments pursuant to authority under section 4(c) of the Act.
---------------------------------------------------------------------------

Furthermore, permitting investments in Specified Foreign Sovereign
Debt facilitates FCMs' and DCOs' overall risk management in recognition
of how the market has evolved since the 2007 Review.\289\ As previously
noted, the 2007 Review revealed that only three of the total 87 active
FCMs invested futures customer funds in foreign sovereign debt at any
time during that year, and that only one FCM invested 30.7 customer
funds in foreign sovereign debt.\290\ This contrasts sharply to the $64
billion U.S. dollar equivalent of Customer Funds held in CAD, EUR, GBP,
and JPY by FCMs today.
---------------------------------------------------------------------------

\289\ 2010 Proposed Permitted Investments Amendment at 67643.
\290\ Id. at 67645.
---------------------------------------------------------------------------

The Commission has also determined that it is in the public
interest to allow FCMs and DCOs to invest in foreign sovereign debt
because there will be increased resources for financial stability and
responsible innovation. Any increase in profits by FCMs and DCOs as a
result of these expanded investment options would generate income and
potentially increase their presence in the futures market and other
relevant markets to support greater competition. This is particularly
important because the futures industry has experienced considerable
consolidation, with the number of FCMs

[[Page 7830]]

declining from over 400 in the late 1970s,\291\ to 177 FCMs in January
2004,\292\ to just 64 as of May 2024.\293\ Over approximately the same
period, however, there has been a dramatic increase in Customer Funds
held at FCMs to support derivatives trading, with client margin
requirements increasing by about 700 percent in the past 20 years, from
approximately $60 billion to over $500 billion in 2023.\294\ Such a
significant reduction in the number of FCMs concentrates risk related
to Customer Funds in fewer firms, thereby increasing the possibility of
systemic risk, particularly as the decline in the number of FCMs
creates challenges in porting customer positions to another firm in the
event of an FCM failure. Therefore, the changes in this Final Rule that
could potentially increase revenue generated by FCMs could serve to
increase entrants to the FCM market by making entrance more attractive
and mitigate forces that would result in further consolidation of the
market, thereby supporting both institutional and retail customers'
access to FCMs and reducing concentration and potential systemic
risk.\295\
---------------------------------------------------------------------------

\291\ See Statement of CFTC Commissioner Giancarlo to the Market
Risk Advisory Committee (``MRAC''), June 1, 2015.
\292\ Selected FCM Financial Data as of January 31, 2004,
COMMODITY FUTURES TRADING COMM'N (2004), available at https://www.cftc.gov/sites/default/files/files/tm/fcm/tmfcmdata0401.pdf.
\293\ Emm, E., Gay, G., Shen, M., Futures commission merchants,
customer funds and capital requirements: An organizational analysis
of the futures industry, Journal of Commodity Markets 18 (2020)
100093; Financial Data on FCMs as of February 29, 2024, available at
https://www.cftc.gov/MarketReports/financialfcmdata/index.htm.
\294\ Transcript, MRAC, April 9, 2024, p. 78, available at
https://www.cftc.gov/sites/default/files/2024/07/1721936529/mrac_transcript040924.pdf.
\295\ Better Markets questioned the need for any ``regulatory
change aimed at further increasing profitability.'' Better Markets
at p. 4. In support of its assertion, Better Markets cited a Traders
Magazine article that references a 2023 study by Acuiti asserting
that rising interest rates and higher trading volumes could
potentially increase the number of FCM registrants. See A. Lyudvig,
Futures Commission Merchants Target Expansion (June 26, 2023)
available at https://www.tradersmagazine.com/departments/clearing/fcms-target-expansion/ (``Traders Magazine Article''); see also
Acuiti, The Growing Opportunity in Derivatives Clearing, (2023),
available at https://www.acuiti.io/wp-content/uploads/2023/06/The-Growing-Opportunities-in-Derivatives-Clearing.pdf (``2023 Acuiti
Study''). However, the Acuiti study also found that ``[t]he market
needs more FCMs,'' and that for some firms, such as proprietary
trading and smaller hedge funds, the ``reliance on a smaller number
of providers presents a major risk to their operational models.''
2023 Acuiti Study at 13. In addition, the Acuiti study was nuanced
in its prediction of new entrants, finding that ``[o]pinion was more
mixed on whether increased interest rates were likely to attract new
FCMs to market.'' Id. at 6. In the Commission's view, the Acuiti
study shows further support for the Commission's interest in
providing additional avenues for FCMs to generate revenue to
potentially reduce costs to clients, rather than the alternative
perspective articulated by Better Markets that such regulatory
changes are not in the public interest.
---------------------------------------------------------------------------

There is no guarantee that the potential for additional profits
will benefit customers directly at all times; however, as described
above, the increased investment options may potentially reduce
concentration in the FCM industry, mitigate foreign currency risk, and
facilitate FCMs' ability to answer margin calls in foreign currency,
all of which directly benefit FCM customers.
In consideration of comments received, the Commission is amending
Commission regulation 1.25(a)(1) to add Specified Foreign Sovereign
Debt to the list of Permitted Investments, subject to the conditions as
described above. The Commission is adding Commission regulation
1.25(a)(vi), as redesignated to accommodate other amendments to the
list of Permitted Investments pursuant to this Final Rule. Paragraph
(vi) reflects the addition of general obligations of Canada, France,
Germany, Japan, and the United Kingdom as a Permitted Investment.
3. Interests in U.S. Treasury Exchange-Traded Funds
a. Proposal
As part of its periodic reassessment of the list of Permitted
Investments of Customer Funds, and as a result of its consideration of
industry input provided in the Joint Petition and the Invesco Petition,
the Commission proposed to include shares in certain U.S. Treasury ETFs
to the list of Permitted Investments under Commission regulation 1.25.
ETFs are collective investment vehicles that issue redeemable
securities that are also traded at the market price on national
securities exchanges.\296\ Like other investment companies, an ETF
pools the assets of multiple investors and invests those assets
according to a set investment objective and principal investment
strategies. Each share of an ETF represents an undivided fractional
interest in the underlying assets of the ETF.\297\ Similar to indexed
mutual funds, many ETFs are designed to passively track a particular
market index, investing in all, or a representative sample, of the
instruments included in the index, and aiming to achieve the same
return as the tracked index.\298\ Other ETFs are actively managed, with
portfolio managers buying and selling securities in accordance with an
investment strategy.\299\
---------------------------------------------------------------------------

\296\ See generally Exchange-Traded Funds, 84 FR 57162 (Oct. 24,
2019) (``SEC ETFs Release'').
\297\ Id. at 57164.
\298\ See generally ``Exchange-Traded Funds,'' publication by
FINRA, available at: https://www.finra.org/investors/learn-to-invest/types-investments/investment-funds/exchange-traded-fund.
\299\ Id.
---------------------------------------------------------------------------

As an open-end investment company,\300\ similar to a mutual
fund,\301\ an ETF continuously offers its shares for sale. Unlike
mutual funds, however, ETFs do not sell shares to, or redeem shares
from, investors directly. Instead, ETFs issue (and redeem) shares to
(and from) ``authorized participants''--market intermediaries that have
a contractual arrangement with the ETF (or its distributor) and are
members or participants of a clearing agency registered with the SEC--
in blocks called ``creation units.'' \302\ Authorized participants play
a key role for ETF shares as they are the only investors that are
allowed to transact directly with the ETF.\303\ An authorized
participant must: (i) be an SEC-registered broker or dealer or other
securities market participant (such as a bank or other financial
institution that is not required to register as a broker or dealer to
engage in securities transactions); (ii) be a full participating member
of the National Securities Clearing Corporation and the Depository
Trust Company; and (iii) have entered into an authorized participant
agreement with the ETF (and potentially other parties, such as the
ETF's sponsor, distributor, or transfer agent).\304\
---------------------------------------------------------------------------

\300\ An ``open-end company'' is defined as a ``management
company which is offering for sale or has outstanding any redeemable
security of which it is the issuer.'' 15 U.S.C. 80a-5. Some ETFs may
also be structured as unit-investment trusts (e.g., SPDR[supreg] S&P
500[supreg] ETF Trust and SPDR[supreg] Dow Jones Industrial Average
ETF Trust), which have characteristics of both open-end and closed-
end companies. 15 U.S.C. 80a-4 (defining unit investment trusts);
Unit Investment Trusts (UITs), Glossary, available at https://www.investor.gov/introduction-investing/investing-basics/glossary/unit-investment-trusts-uits. The regulatory framework set forth by
SEC Rule 6c-11, however, applies only to ETFs that are organized as
open-end investment companies. 17 CFR 270.6c-11.
\301\ A ``mutual fund'' is a type of open-end investment
company, meaning that investors can purchase and redeem shares in
the fund on a continuous basis at the NAV of the shares. See
generally Securities and Exchange Commission, Mutual Funds and ETFs,
A Guide for Investors, available at https://www.sec.gov/investor/pubs/sec-guide-to-mutual-funds.pdf. Mutual funds pool the money of
many investors to purchase a range of securities and other assets to
meet specified investment objectives. Id.
\302\ See 17 CFR 270.6c-11 (defining ``exchange-traded fund'').
\303\ Invesco Petition at p. 5.
\304\ Id.

---------------------------------------------------------------------------

[[Page 7831]]

An authorized participant may act as a principal for its own
account or as an agent for others when purchasing or redeeming creation
units.\305\ Purchases and redemptions of ETF shares by an authorized
participant are referred to as ``primary market transactions'' and
occur at the next-calculated NAV. As noted above, ETF shares can also
be purchased and sold in the secondary market at market prices that may
reflect a discount or premium to the ETF's NAV.
---------------------------------------------------------------------------

\305\ SEC ETFs Release at 57164; see also David Abner, The ETF
Handbook: How to Value and Trade Exchange-Traded Funds, 2nd ed.
(2016).
---------------------------------------------------------------------------

In assessing the potential expansion of the list of Permitted
Investments, the Commission considered statements emphasizing the
liquidity of U.S. Treasury ETF shares and the diversification
opportunity that such ETFs provide for Customer Funds.\306\ In
particular, as discussed in the Proposal, the Petitioners stated that
U.S. Treasury ETFs have characteristics that they believe are
consistent with those of current Permitted Investments and may provide
FCMs and DCOs with an opportunity to diversify their investments of
Customer Funds.\307\ Similarly, the Invesco Petition focused on the
fact that U.S. Treasury ETFs invest in a sub-set of the same high-
quality liquid instruments that are Permitted Investments under
Commission regulation 1.25 (i.e., U.S. government securities).\308\
Invesco also noted that ETFs, as registered investment companies whose
shares are registered under the Securities Act and Exchange Act, must
comply with a number of SEC financial reporting requirements and
liquidity risk management program requirements.\309\ Finally, Invesco
asserted that the design and characteristics, such as price and
investment transparency, and intra-day trading and liquidity, are
additional features that help make interests in U.S. Treasury ETFs a
safe and efficient vehicle for investment of Customer Funds.\310\
---------------------------------------------------------------------------

\306\ Proposal at 81248.
\307\ Id. and Joint Petition at pp. 8-9.
\308\ Proposal at 81248 and Invesco Petition at p. 2.
\309\ Proposal at 81248 and Invesco Petition at pp. 6-7.
Financial requirements include: (i) annual shareholder report,
including audited financial statements (17 CFR 270.30e-1); (ii)
semi-annual shareholder report, including unaudited financial
statements (17 CFR 270.30e-1); (iii) monthly portfolio statistics
and holdings filed quarterly (17 CFR 270.30b1-9); (iv) annual census
report containing financial-related information (17 CFR 270.30a-1);
and (v) periodic reports with respect to portfolio liquidity and
derivatives use (17 CFR 270.30b1-10). With respect to liquidity risk
management, SEC regulations require open-end investment companies,
including ETFs, to adopt and implement a liquidity risk management
program that is reasonably designed to assess and manage liquidity
risk, which is defined to mean the risk that the fund could not meet
requests to redeem shares issued by the fund without significant
dilution of remaining investors' interests in the fund (17 CFR
270.22e-4).
\310\ Invesco Petition at p. 2.
---------------------------------------------------------------------------

The Commission also conducted an independent preliminary analysis
of the risk profile and volatility of ETFs investing primarily in
short-term U.S. Treasury securities and observed that during the period
covered by the analysis, the relevant ETFs presented characteristics
that were comparable to that of the underlying U.S. Treasury security
investments.\311\ Specifically, using data available on Bloomberg, the
Commission observed that for the period June 2020-September 2023, the
Invesco Collateral Treasury ETF, as well as four other short-term U.S.
Treasury ETFs that CME accepts as performance bond--SPDR[supreg]
Bloomberg 1-3 Month T-Bill ETF, Goldman Sachs Access Treasury 0-1 Year
ETF, iShares 0-3 Month Treasury Bond ETF, and iShares Short Treasury
Bond ETF--had a standard deviation for a two-day period of risk of
approximately 6 BPS, whereas one-year U.S. Treasury securities had a
standard deviation of 8 BPS for the same period.
---------------------------------------------------------------------------

\311\ Proposal at 81250.
---------------------------------------------------------------------------

Further, the Commission considered the limited types of investments
that meet the requirements of Commission regulation 1.25. As a result
of various regulatory reforms discussed in the Proposal, several asset
classes included in Commission regulation 1.25 no longer qualify as
Permitted Investments.\312\ In particular, as discussed in section
III.A.1. of the Proposal, the range of MMFs whose securities qualify as
Permitted Investments has contracted, as only interests in Permitted
Government MMFs currently meet the eligibility criteria of Commission
regulation 1.25.\313\ In addition, as discussed in section III.A.4. of
the Proposal, commercial paper and corporate notes and bonds no longer
qualify as Permitted Investments with the expiration of the TLGP.\314\
---------------------------------------------------------------------------

\312\ Proposal at 81248.
\313\ Proposal at 81241-81242.
\314\ Proposal at 81253.
---------------------------------------------------------------------------

The Commission also noted the increased demand for high quality
collateral, including for assets that currently qualify as Permitted
Investments under Commission regulation 1.25, resulting from certain
regulatory reforms.\315\ As an example, the Commission discussed the
regulatory framework for swaps, adopted in the aftermath of the 2008
financial crisis through the Dodd-Frank Wall Street Reform and Consumer
Protection Act. The Commission remarked that the framework requires,
among other things, the clearing of certain swaps or the margining of
certain uncleared swaps, thus requiring market participants dealing in
swaps to post margin to clearinghouses, or post and collect margin with
swap counterparties, in specified forms of liquid collateral.\316\ The
Commission inferred that these margining requirements might be driving
an increased demand for assets that currently qualify as Permitted
Investments.\317\
---------------------------------------------------------------------------

\315\ Proposal at 81248.
\316\ Id.
\317\ Id.
---------------------------------------------------------------------------

In the Proposal, the Commission expressed its preliminary belief
that expanding the range of available Permitted Investments to include
interests in ETFs that meet specified conditions would provide FCMs and
DCOs with greater flexibility and opportunities for capital efficiency
in the investment of Customer Funds, without unacceptably increasing
risk to customers.\318\ The Commission also expressed its belief that
the proposed addition of interests in ETFs as Permitted Investments
under Commission regulation 1.25(a) would foster innovation and promote
competition in the ETF market and the financial services industry more
generally.\319\ The Commission also considered that CME accepts shares
of short-term U.S. Treasury ETFs as performance bond for clearing
members to margin customer and proprietary trades, noting that
interests in U.S. Treasury ETFs that qualify as Permitted Investments
could ultimately be pledged by FCMs as margin collateral.\320\
Consistent with existing regulatory limitations on customer risk
associated with the investment of Customer Funds by FCMs and DCOs,
under the terms of the Proposal, FCMs and DCOs would be financially
responsible for bearing any loss on an investment of Customer Funds in
a U.S.

[[Page 7832]]

Treasury ETF.\321\ Thus, to ensure compliance with the requirements
applicable to other Permitted Investments as well as the general
objectives of Commission regulation 1.25 to preserve principal and
maintain liquidity of Permitted Investments, the Commission proposed to
impose certain conditions on ETFs \322\ for their interests to qualify
as Permitted Investments (``Qualified ETF''), as discussed below.
---------------------------------------------------------------------------

\318\ Id.
\319\ Id.
\320\ Proposal at 81249 and CME Advisory Notice, Modifications
to Schedule of Acceptable Performance Bond--Addition of Short-Term
U.S. Treasury ETFs (Aug. 2, 2022) (``2022 CME Advisory Notice''),
available at https://www.cmegroup.com/notices/clearing/2022/08/Chadv22-293.pdf (acceptable ETFs must track a U.S. Treasury index
and must have a minimum 80 percent investment in U.S. Treasury
securities with a time to maturity of 1 year or less).
\321\ Commission regulation 1.29(b) (an FCM or DCO, as
applicable, shall bear sole responsibility for any losses resulting
from the investment of futures customer funds in Permitted
Investments) and Commission regulations 22.2(e)(1) and 30.7(i) (an
FCM shall bear sole responsibility for any losses resulting from the
investment of Cleared Swaps Customer Collateral and 30.7 funds,
respectively, in Permitted Investments). As further discussed in
section IV.C. of this preamble, the Commission is also adopting an
amendment to Commission regulation 22.3(d) to clarify that DCOs are
financially responsible for investments of Cleared Swaps Customer
Collateral in Permitted Investments.
\322\ Proposal at 81249-81253.
---------------------------------------------------------------------------

Given the similarities between ETFs investing primarily in short-
term U.S. Treasury securities and MMFs whose interests already qualify
as Permitted Investments,\323\ the Commission preliminarily determined
to impose all pertinent requirements applicable to MMFs under
Commission regulation 1.25(a) to such ETFs, subject to certain
modifications to address the unique characteristics of the ETFs.\324\
In particular, consistent with Commission regulation 1.25(c), which
sets forth provisions for MMFs whose interests qualify as Permitted
Investments, the Proposal would require that a Qualified ETF be an
investment company that is registered under the Investment Company Act
of 1940 with the SEC and holds itself out to investors as an ETF under
SEC Rule 6c-11.\325\ Additionally, the ETF would be required to be
sponsored by a federally regulated financial institution, a section
3(a)(6) bank,\326\ an investment adviser registered under the
Investment Advisers Act of 1940, or a domestic branch of a foreign bank
insured by the FDIC.\327\
---------------------------------------------------------------------------

\323\ Proposal at 81249.
\324\ Proposal at 81249.
\325\ Proposal at 81249 and proposed Commission regulation
1.25(c)(1).
\326\ For a definition of section 3(a)(6) bank, see supra note
52.
\327\ Proposal at 81249 and proposed Commission regulation
1.25(c)(2), as applying to Qualified ETFs per proposed introductory
text of paragraph (c) of Commission regulation 1.25.
---------------------------------------------------------------------------

In addition, the Commission proposed to limit Qualified ETFs to
funds that are passively managed and that seek 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.\328\ The Commission further proposed to require that the
securities comprising the short-term U.S. Treasury index represent at
least 95 percent of the ETF's investment portfolio.\329\ In that
regard, the Commission noted that pursuant to SEC requirements, certain
registered investment companies, including ETFs, must adopt a policy to
invest at least 80 percent of the value of their assets in accordance
with the investment focus suggested by the fund's name.\330\ The
Commission, however, preliminarily concluded that a stricter standard
of 95 percent should to help ensure that FCMs and DCOs invest Customer
Funds in accordance with Commission regulation 1.25's general
objectives of preserving principal and maintaining liquidity.\331\
---------------------------------------------------------------------------

\328\ Proposed Commission regulation 1.25(a)(1)(vi).
\329\ Proposal at 81294 and proposed Commission regulation
1.25(c)(8)(ii).
\330\ Proposal at 81249.
\331\ Id.
---------------------------------------------------------------------------

The Commission further proposed, consistent with the current
requirements applicable to interests in MMFs, to prohibit the agreement
governing an FCM's or DCO's acquisition and holding of interests in
Qualified ETFs from containing provisions that would prevent the
pledging of the Qualified ETF's shares.\332\ The proposed amendments
would also require FCMs and DCOs to maintain confirmations relating to
their purchase of interests in a Qualified ETF in their records in
accordance with Commission regulation 1.31, and document the ownership
of the interests (by book-entry or otherwise) in the FCMs' and DCOs'
custody accounts in accordance with Commission regulation 1.26.\333\
FCMs and DCOs would additionally be required to obtain the
acknowledgment letter required by Commission regulation 1.26 from an
entity that has substantial control over the ETF interests purchased
with Customer Funds and that has the knowledge and authority to
facilitate redemption and payment or transfer of the Customer
Funds.\334\
---------------------------------------------------------------------------

\332\ Proposal at 81250 and paragraph (c)(6) of Commission
regulation 1.25 as applying to Qualified ETFs per proposed revised
introductory text of paragraph (c) of Commission regulation 1.25.
\333\ Paragraph (c)(3) of Commission regulation 1.25 as applying
to Qualified ETFs per proposed revised introductory text of
paragraph (c) of Commission regulation 1.25.
\334\ Proposal at 81250.
---------------------------------------------------------------------------

Also, under the terms of the Proposal, a Qualified ETF would be
required to compute the NAV by 9 a.m. of the business day following
each business day and make it available to FCMs or DCOs, as applicable,
by that time.\335\ In addition, the Qualified ETF would be legally
obligated to redeem its interests and make payment in satisfaction of
the interests by the business day following a redemption request.\336\
The Proposal also provided that FCMs or DCOs, as applicable, would be
required to retain documentation demonstrating compliance with this
requirement.\337\ Because Commission regulation 1.25(c)(5)(ii)
currently provides an exception to the next-day redemption obligation
for MMFs for defined extraordinary circumstances, such as the non-
routine closures of the Fedwire or applicable Federal Reserve Banks,
and any period during which the SEC by order restricts redemptions for
the protection of security holders in the fund, the Commission sought
comments on whether these redemption exceptions should be extended to
Qualified ETFs.\338\
---------------------------------------------------------------------------

\335\ Paragraph (c)(4) of Commission regulation 1.25 as applying
to Qualified ETFs per proposed revised introductory text of
paragraph (c) of Commission regulation 1.25. The proposed
requirement was intended to allow for the valuation of the Qualified
ETF's investment portfolio to be available by 9 a.m. of the business
day following an investment in the ETF, so that the valuation is
available in time for FCMs to perform their daily segregation
calculations, which are required to be completed by noon each
business day, reflecting balances as of the close of business on the
previous business day. 2000 Permitted Investments Amendment at
78003.
\336\ Paragraph (c)(5)(i) of Commission regulation 1.25 as
applying to Qualified ETFs per proposed revised introductory text of
paragraph (c) of Commission regulation 1.25.
\337\ Id.
\338\ Proposal at 81253, Question 11.
---------------------------------------------------------------------------

The Commission also proposed several conditions specific to
Qualified ETFs. Specifically, articulating concerns related to
compliance with the Customer Funds segregation requirements and
Commission regulation 1.25(b)(1) liquidity standards, the Commission
proposed to require an FCM or DCO that invests Customer Funds in the
shares of a Qualified ETF to be an authorized participant of the
ETF.\339\ The Commission reasoned that if an FCM or DCO had to purchase
or redeem Qualified ETF shares through an intermediated transaction
involving a third-party authorized participant, the FCM or DCO would
have to transfer Customer Funds out of a segregated account maintained
in compliance with section 4d of the Act or part 30 of Commission's
regulations, which would

[[Page 7833]]

introduce risk that the account could be undersegregated.\340\ The
Commission also expressed concern that the transfer of Customer Funds
to the authorized participant might be in contravention of Commission
regulations that provide that Customer Funds may only be deposited with
a bank or trust company, a DCO, or another FCM.\341\ The Commission was
further concerned that relying on a third-party authorized participant
could protract redemptions, thus violating the requirement in
Commission regulation 1.25(b)(1) that Permitted Investments have the
ability to be converted into cash within one business day without
material discount in value.\342\ The Commission requested comment on
whether there were alternative approaches to requiring FCMs or DCOs to
be authorized participants that could address or mitigate the
Commission's concerns regarding the segregation of Customer Funds
during the purchase and redemption process.\343\
---------------------------------------------------------------------------

\339\ Proposal at 81251 and proposed paragraph (c)(8) of
Commission regulation 1.25.
\340\ Proposal at 81250-81251. As a result of the transfer of
Customer Funds to the authorized participant, the customer
segregated account might not be fully funded, potentially violating
Commission regulations that require FCMs to maintain, at all times,
in the segregated account, money, securities and property in an
amount that is at least sufficient in the aggregate to cover their
total obligations to all customers. Id. at 81251 and 17 CFR 1.20(a),
17 CFR 22.2(f), and 17 CFR 30.7(a).
\341\ Proposal at 81251 and 17 CFR 1.20(b), 17 CFR 22.2(b), and
17 CFR 30.7(b). The Commission noted that with respect to 30.7
customer funds, Commission regulation 30.7(b) also permits funds to
be deposited with the clearing organization of any foreign board of
trade, a member of any foreign board of trade, or such member's or
clearing organization's designated depositories. 17 CFR 30.7(b).
\342\ Proposal at 81251.
\343\ Proposal at 81252, Question 9.
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Given the time limits for the redemption and liquidation of
Permitted Investments in Commission regulation 1.25, the Commission
also proposed that Qualified ETFs be required to redeem their shares in
cash because in-cash redemptions could allow for a more expeditious
liquidation of the shares as compared to in-kind redemptions.\344\ The
Commission also proposed to require, as a condition for qualification
as a Permitted Investment, that Qualified ETFs be acceptable by a DCO
as performance bond from clearing members to margin customer
trades.\345\
---------------------------------------------------------------------------

\344\ Proposal at 81251 and proposed Commission regulation
1.25(c)(8)(i).
\345\ Proposal at 81251 and proposed Commission regulation
1.25(c)(8)(iii).
---------------------------------------------------------------------------

b. Comments
The Commission received ten comments in support of the addition of
Qualified ETFs to the list of Permitted Investments.\346\ No commenters
opposed the addition of Qualified ETFs.
---------------------------------------------------------------------------

\346\ AIMA at p. 2; BlackRock at p. 2; CCP Global at p. 3; FIA/
CME Joint Letter at p. 11; ICI at p. 2; Invesco at p. 2; MFA at p.
5; Nodal at p. 2; SIFMA AMG at p. 3; SSGA at p. 2.
---------------------------------------------------------------------------

Some commenters expressed their belief that investments in
Qualified ETFs are generally safe, short-term investments consistent
with the objectives of Commission regulation 1.25 regarding preserving
principal and maintaining liquidity of Customer Funds.\347\ Commenters
also stated that the inclusion of U.S. Treasury ETFs would provide FCMs
and DCOs the opportunity to diversify their investments.\348\ SIFMA AMG
asserted that at the time of the Commission's last review of Permitted
Investments in 2011, the U.S. Treasury ETF market was not well
developed, but that at present, it ``provides several options'' that
would meet the standards for Permitted Investments under Commission
regulation 1.25.\349\ Commenters also highlighted the similarity in
characteristics between U.S. Treasury ETF securities and other
instruments that currently qualify as Permitted Investments.\350\ In
particular, Invesco noted that ``customers will continue to be
safeguarded because Treasury ETFs' underlying holdings are comprised of
a sub-set of the same high-quality liquid instruments that are
otherwise permitted under the Commodity Exchange Act and Regulation
1.25.'' \351\ Consistent with statements made in the Invesco
Petition,\352\ commenters also asserted that investments by FCMs and
DCOs in Qualified ETFs would be operationally efficient and cost-
effective, because FCMs and DCOs would have the opportunity to invest
in an ETF holding a portfolio of U.S. Treasury securities instead of
investing directly in the individual U.S. Treasury securities.\353\
Several commenters also stated that the design and characteristics of
ETFs, such as price and investment holdings transparency, as well as
intra-day trading and liquidity, present additional features that make
short-term U.S. Treasury ETFs efficient vehicles for investment of
Customer Funds.\354\
---------------------------------------------------------------------------

\347\ CCP Global at pp. 3-4; ICI at pp. 2-6; Invesco at pp. 2-3.
\348\ AIMA at p. 2; BlackRock at p. 2; CCP Global at p. 3; FIA/
CME Joint Letter at p. 2; ICI at p. 2; SIFMA AMG at pp. 3-4; SSGA at
p. 2; WFE at p. 5.
\349\ SIFMA AMG at pp. 3-4.
\350\ Invesco at p. 2; SIFMA AMG at p. 3; SSGA at p. 2; WFE at
p. 5.
\351\ Invesco at p. 2.
\352\ Id. at p. 11. The Invesco Petition asserts that U.S.
Treasury ETFs eliminate operational challenges and certain expenses
that FCMs and DCOs would experience by directly investing in U.S.
Treasury securities, including managing and reinvesting interest
payments, periodically rolling positions, and maintaining multiple
CUSIPs, requiring professionals to manage the duration, yield, and
liquidity of portfolio securities.
\353\ SIFMA AMG at p. 4; Invesco at p. 2 (n. 4).
\354\ BlackRock at p. 3; CCP Global at p. 3; Invesco at p. 2;
SIFMA AMG at p. 5; SSGA at p. 2.
---------------------------------------------------------------------------

On the other hand, commenters expressed concerns regarding some of
the proposed conditions for investing in ETFs and urged the Commission
to reconsider them. Several commenters expressed reservations or
opposed the proposed requirement that FCMs and DCOs be authorized
participants.\355\ Some commenters stated that this requirement
deviates from existing ETF market structure and would unnecessarily
limit the FCMs and DCOs that could invest in Qualified ETFs.\356\ In
particular, WFE posited that the requirement ``would severely limit the
parties that could invest in [Qualified] ETFs to'' entities that are
registered as broker-dealers and authorized participants, criteria that
DCOs do not satisfy.\357\ Similarly, ICI questioned whether DCOs could
even become authorized participants,\358\ and raised potential
operational challenges associated with FCMs and DCOs becoming
authorized participants.\359\ ICI explained that although many FCMs are
authorized participants, some FCMs may take the view that becoming an
authorized participant is not consistent with their business model, or
they may otherwise not want to take on the additional regulatory,
compliance, and operational costs associated with becoming an
authorized participant.\360\
---------------------------------------------------------------------------

\355\ AIMA at p. 2; BlackRock at p. 2 and pp. 4-5; CCP Global at
p. 3; FIA/CME Joint Letter at pp. 11-13; ICI at pp. 3-4; Invesco at
pp. 3-5; SIFMA AMG at pp. 5-7; SSGA at p.2; WFE at p. 5.
\356\ BlackRock at p. 2; CCP Global at p. 3; FIA/CME Joint
Letter at pp. 14-15; ICI at p. 3; Invesco at p. 3; SSGA at p.2; WFE
at p. 5.
\357\ WFE at p. 5.
\358\ ICI at p. 3.
\359\ Id.
\360\ Id.
---------------------------------------------------------------------------

Commenters further asserted that the Commission's concerns
regarding compliance with the Customer Funds segregation requirements
and the prompt liquidation of the Qualified ETF shares could be
effectively addressed through existing market practices.\361\
Commenters had several suggestions for alternative arrangements. The
majority of commenters opposing the requirement that FCMs and DCOs be
authorized participants advocated for the Commission to allow for
transactions to occur on a delivery-versus-payment (``DVP'') basis via
an authorized participant acting as an agent for the FCM or DCO
(``Authorized

[[Page 7834]]

Participant Agency Model'').\362\ Through the Authorized Participant
Agency Model, the FCMs and DCOs would have access to the primary
market, without being an authorized participant themselves, pursuant to
an agreement with other authorized participants that would transact as
agents on their behalf.\363\ According to the commenters, the
Authorized Participant Agency Model would allow FCMs and DCOs to access
an ETF's primary market on the same terms as if they were authorized
participants themselves and receive the benefits associated therewith
(e.g., same day or next-day settlement and transacting at NAV).\364\ As
explained in the Invesco comment letter, when operating on a DVP basis
through the Authorized Participant Agency Model, the FCM or DCO would
not, in the case of a redemption, transfer Qualified ETF shares to the
Qualified ETF (through the authorized participant) until cash is
received by such FCM or DCO.\365\ In the case of a creation
transaction, cash would not be transferred by the FCM or DCO to the
Qualified ETF (through the authorized participant) until the Qualified
ETF shares are received.\366\ Invesco further stated that at no time
would Customer Funds (either cash or Qualified ETF shares) be in the
custody of any entity outside of the applicable FCM's or DCO's
segregated Customer Funds depository.\367\ Further, under the
Authorized Participant Agency Model, the redemption or creation would
occur at NAV and settle within a day.\368\ Several commenters also
noted that this DVP process would be similar to what is applicable to
repurchase agreements currently allowed under CFTC regulations.\369\
Finally, AIMA suggested allowing the DCOs to provide a letter of credit
to an ETF and the ETF would agree to pay a penalty for late
redemptions.\370\ ICI also stated that market-based solutions, such as
providing letters of credit to the authorized participant could resolve
potential exposure concerns that an authorized participant could have
if it engages in redemption transactions before receiving the ETF
shares.\371\ Another alternative commenters suggested was to allow FCMs
and DCOs to transact on the secondary market, again on a DVP
basis.\372\ SIFMA AMG stated that recent changes in SEC regulations,
effective in May 2024, shorten the standard settlement cycle for most
institutional securities transactions from two business days after the
trade date (T+2) to one (T+1).\373\ Thus, SIFMA AMG asserted that as
long as transactions are done on a DVP basis, secondary market
transactions to sell Qualified ETF shares should be permitted.\374\
---------------------------------------------------------------------------

\361\ SIFMA AMG at p. 6.
\362\ CCP Global at p. 3, Invesco at p. 4; FIA/CME Joint Letter
at pp. 13-15; BlackRock at p. 4; ICI at pp. 3-4; SIFMA AMG at pp. 2,
5-7; SSGA at p. 2.
\363\ Invesco at p. 4.
\364\ Id.
\365\ Id.
\366\ Id.
\367\ Id.
\368\ Id.
\369\ Invesco at p. 4; SIFMA AMG at p. 6 (noting that pursuant
to Commission regulation 1.25(d)(9), a repurchase agreement that is
a Permitted Investment must provide for the transfer of securities
or cash on a DVP basis to a customer segregated account.).
\370\ AIMA at p. 2.
\371\ ICI at p. 4.
\372\ BlackRock at pp. 4-5; CCP Global at p. 3; FIA/CME Joint
Letter at pp. 14-15; SIFMA AMG at pp. 2-3, 5-6; SSGA at p. 2.
\373\ SIFMA AMG at p. 6; see also Shortening the Securities
Transaction Settlement Cycle, 88 FR 13872 (March 6, 2023).
\374\ SIFMA AMG at p. 6.
---------------------------------------------------------------------------

With regard to the proposed requirement that Qualified ETFs be
required to redeem their shares in cash, commenters largely advocated
that the Commission allow Qualified ETFs to redeem in kind as well as
in cash.\375\ Specifically, BlackRock recommended that the Commission
revise the condition to allow for redemptions in cash or in kind with a
same day settlement (T+0) option.\376\ BlackRock argued that in-kind
redemptions are standard for many ETFs as they provide an efficient way
for portfolio managers to execute changes in an ETF's portfolio.\377\
ICI echoed BlackRock's recommendation and stated that in-kind
redemptions can offer investors more efficient tax treatment.\378\ ICI
explained that an ETF's ability to redeem in kind permits it to defer
tax realization for remaining shareholders in the ETF, thus reducing
capital gains payments and related distributions, as compared to
redeeming shares for cash.\379\ ICI argued that requiring ETFs to
redeem in cash would not only potentially reduce the benefits of
deferred tax treatment to a Treasury ETF's shareholders, but may limit
the potential universe of Qualified ETFs, thus reducing diversification
opportunities for FCMs and DCOs.\380\ ICI further asserted that several
ETFs, including several Treasury ETFs, have a T+0 redemption cycle,
which allows for delivery of in-kind securities on the day of the trade
so that securities can be sold the next business day.\381\ ICI asserted
that the ability to redeem at a T+0 settlement cycle would satisfy the
Commission's concerns regarding next day liquidation of the underlying
U.S. Treasury securities.\382\ Further, FIA and CME stated that
allowing in-kind redemptions is at times more advantageous given that
U.S. Treasury securities themselves are a highly liquid
investment.\383\ Additionally, FIA and CME noted that requiring cash
redemptions ``could potentially cause an inequitable first-mover
advantage; liquidation of a significant portion of the fund to meet a
redemption could cause a drop in the value of the underlying assets and
in turn of the shares of the fund.'' \384\
---------------------------------------------------------------------------

\375\ BlackRock at pp. 2, 5; FIA/CME Joint Letter at pp. 12-13;
ICI at pp. 4-5; MFA at pp. 5-6; SIFMA AMG at pp. 7-8; SSGA at p. 3.
\376\ BlackRock at pp. 2, 5. BlackRock further noted that the
SEC recognized the benefits of in-kind redemptions in SEC Rule 6c-
11, stating ``ETFs that meet redemptions in cash may maintain larger
cash positions to meet redemption obligations, potentially resulting
in cash drag on the ETF's performance. The use of cash baskets also
may be less tax-efficient than using in-kind baskets to satisfy
redemptions, and may result in additional transaction costs for the
purchase and sale of portfolio holdings.'' Id. at p. 5.
\377\ Id.
\378\ ICI at pp. 4-5.
\379\ Id. at p. 4.
\380\ Id.
\381\ Id. See also AIMA at p. 2; BlackRock at p. 2.
\382\ ICI at p. 4.
\383\ FIA/CME Joint Letter at pp. 12-13. See also WFE at p. 6.
\384\ Id.
---------------------------------------------------------------------------

Asserting that in-kind redemptions are a key feature of a U.S.
Treasury ETF's pricing mechanism, SIFMA AMG raised concerns that an in-
cash redemption mandate could potentially distort the price of a
Qualified ETF.\385\ SIFMA AMG argued that, as a result, an FCM or DCO
may be subject to a settlement price that is not at the fund's NAV
(i.e., not its fair value).\386\ SIFMA AMG also noted that some DCOs
accept U.S. Treasury securities as margin and an FCM might want to have
the option to redeem shares in kind to post such securities with the
clearinghouse or to return U.S. Treasury collateral to customers.\387\
Further, according to SIFMA AMG's understanding, when an authorized
participant makes an in-kind redemption request, whether for itself or
on behalf of another market participant with whom it has an agency
arrangement, a Qualified ETF is able to complete settlement within one
business day.\388\ Finally, SIFMA AMG asserted that in-kind redemptions
also avoid certain transaction fees, keeping cost lower for
investors.\389\
---------------------------------------------------------------------------

\385\ SIFMA AMG at pp. 7-8.
\386\ Id. at p. 8.
\387\ SIFMA AMG at pp. 7-8.
\388\ Id.
\389\ Id. at p. 8.
---------------------------------------------------------------------------

Several commenters also criticized the condition that DCOs accept
the interest in the Qualified ETF as

[[Page 7835]]

performance bond.\390\ Among them, FIA and CME observed that CME is the
only DCO that currently accepts U.S. Treasury ETFs as collateral, and
that if CME were to modify or cease its acceptance of such ETFs, the
change would be disruptive to FCMs.\391\ FIA and CME cautioned that the
Commission should not conflate the standards governing collateral
acceptability at DCOs with the requirements for Permitted
Investments.\392\ Consistent with these concerns, other commenters
argued that DCOs and FCMs have their own risk management policies,
which consider the institution's unique characteristics and specific
risk management needs.\393\ SIFMA AMG further asserted that using a
DCO's initial margin standards as a proxy for determining whether a
U.S. Treasury ETF is a safe investment instrument for Customer Funds is
not appropriate.\394\ In this regard, SIFMA AMG argued that the
Commission should rely instead on factors that address the preservation
of principal and liquidity already specified in Commission regulation
1.25. They further asserted that using a DCO's performance bond
criteria as a gatekeeper unnecessarily constrains the diversification
determination that should be made by each FCM or DCO using factors set
out in Commission regulation 1.25.\395\
---------------------------------------------------------------------------

\390\ Blackrock at p. 6; WFE at p. 6; FIA/CME at p. 13; SIFMA
AMG at p. 7; CCP Global at p. 3-4.
\391\ FIA/CME Joint Letter at p. 13.
\392\ FIA/CME Joint Letter at p. 13 (referencing Commission
regulation 39.13(g)(10), which provides that DCOs must limit the
assets they accept as initial margin to those that have minimal
credit, market, liquidity risk, and Commission regulation 39.33,
which provides that DCOs' financial resources may include highly
marketable collateral, including high quality, liquid, general
obligations of a sovereign nation provided that these assets are
readily available and convertible into cash pursuant to prearranged
and highly reliable funding arrangements under extreme but plausible
market conditions); CCP Global at p. 4.
\393\ CCP Global at p. 4; SIFMA AMG at p. 7.
\394\ SIFMA AMG at p. 7.
\395\ Id.
---------------------------------------------------------------------------

Commenters also generally opposed the proposed condition that
Qualified ETFs invest at least 95 percent of their portfolio in
securities comprising the short-term U.S. Treasury index that the fund
is designed to track, suggesting instead that the Commission adopt an
80 percent threshold requirement, which is consistent with current
market conventions.\396\ ICI pointed out that many ETFs, including
certain Treasury ETFs, have adopted an 80 percent investment policy
pursuant to SEC Rule 35d-1 under the Investment Company Act of 1940
(``SEC Rule 35d-1''), which requires a fund to have adopted a ``policy
to invest, under normal circumstances, at least 80% of the value of its
assets in investments in accordance with the investment focus that the
fund's name suggests.'' \397\ CCP Global and WFE stated that the
proposed condition was unnecessarily punitive.\398\ WFE added that the
proposed 95 percent threshold could cause funds to deviate from their
index.\399\ Conversely, although they did not oppose the Commission's
95 percent portfolio threshold requirement, BlackRock and ICI requested
clarification on the impacts of this increased threshold on the ETF's
stated investment policies and associated documentation.\400\ BlackRock
and ICI asked if the Commission were to adopt the proposed 95 percent
portfolio threshold, that the Commission clarify that an investment
requirement would be satisfied by funds that maintain investments
meeting the specified threshold, even if the fund's prospectus permits
the fund to hold securities outside of the threshold.\401\ ICI stated
that if the 95 percent threshold was adopted as a fundamental
investment policy, changing the investment policy would require a
shareholder proxy vote, which is costly and burdensome to obtain.\402\
Therefore, ICI recommended that the Commission confirm that it is
establishing a portfolio test for a Qualified ETF, which would not
require the Treasury ETFs to change any existing investment policies or
associated disclosures.\403\ ICI also requested that cash be allowed to
satisfy the threshold requirement set in addition to eligible U.S.
Treasury securities.\404\ FIA and CME noted, however, that FCMs and
DCOs rely on the composition thresholds stated in funds' prospectus
terms in conducting due diligence of investments and expressed concerns
that there may not be industry-wide amendments to prospectus terms in
response to the 95 percent threshold requirement.\405\ WFE also
recommended that the Commission clarify the steps that would be taken
in the situation where a percentage threshold requirement is breached
and an FCM or DCO is expected to divest from the fund.\406\
---------------------------------------------------------------------------

\396\ AIMA at p. 3; CCP Global at p. 3; MFA at p. 5; FIA/CME
Joint Letter at p. 12; WFE at p.6.
\397\ ICI at p. 5; see also 17 CFR 270.35d-1.
\398\ CCP Global at p. 3; WFE at p. 6.
\399\ WFE at p. 6.
\400\ BlackRock at p. 3; ICI at p. 5.
\401\ BlackRock at p. 3; see also ICI at p. 6.
\402\ ICI at p. 5.
\403\ ICI at p. 6.
\404\ ICI at p. 5; see also BlackRock at p. 2; CCP Global at p.
3; FIA/CME Joint Letter at p. 12 (note 58); WFE at p. 6.
\405\ FIA/CME Joint Letter at p. 12.
\406\ WFE at p. 6.
---------------------------------------------------------------------------

In addition, five commenters requested that the Commission revise
the portfolio composition requirements to allow for additional
investments.\407\ Specifically, commenters recommended that in addition
to short-term U.S. Treasury securities, the Commission allow Qualified
ETFs to invest in certain repurchase agreements, cash, and ``cash
equivalents,'' including MMFs.\408\ Three commenters asserted that the
revision would provide appropriate flexibility, while preserving the
high quality and liquid nature of the ETF.\409\ Arguing that the
Commission should align the Qualified ETF's portfolio requirements with
the requirements applicable to Permitted Government MMFs, a few
commenters also requested that the Commission allow Qualified ETFs to
invest in short-term securities issued by U.S. government agencies that
are fully guaranteed as to principal and interest by the U.S.
government.\410\
---------------------------------------------------------------------------

\407\ BlackRock at pp. 2-3; CCP Global at p. 3; FIA/CME Joint
Letter at pp. 11-12; MFA at p. 5; WFE at p 6.
\408\ BlackRock at p. 3 (arguing that the Commission should
expand the eligible underlying investments to align them with those
allowed for Permitted Government MMFs, i.e., cash, government
securities, and/or repurchase agreements that are fully
collateralized); CCP Global at p 3 (arguing that the Commission
should allow Qualified ETFs to invest in U.S. Treasury securities,
cash, Repurchase Transactions collateralized in U.S. Treasury
securities, and U.S. Treasury MMFs); FIA/CME Joint Letter at p. 12
(recommending that the Commission allow a Qualified ETF to invest in
securities with a maximum remaining maturity of 12 months or less
issued or guaranteed by the U.S. Treasury, including securities
issued by U.S. government agencies that are backed by the full faith
and credit of the U.S. government, as well as government MMFs, 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 (as defined under SEC Rule 2a-7) with a
remaining term to final maturity of 12 months or less); MFA at p. 5
(arguing that the Commission should allow Qualified ETFs to invest
in securities with a maximum remaining maturity of less than 12
months issued or guaranteed by the U.S. Treasury, including short-
term securities issued by U.S. government agencies that are backed
by the full faith and credit of the U.S. government, government
MMFs, 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).
\409\ BlackRock at p. 3; FIA/CME Joint Letter at p. 12; WFE at
p. 6.
\410\ BlackRock at p. 3; FIA/CME Joint Letter at p. 11; MFA at
p. 5.
---------------------------------------------------------------------------

In connection with the proposed requirement that FCMs and DCOs
obtain the acknowledgement letter required by Commission regulation
1.26 from an ``entity with substantial control over the

[[Page 7836]]

ETF interests,'' \411\ FIA and CME requested clarification regarding
the appropriate signatory to the letter. FIA and CME noted that the
entity with substantial control over the ETF interests may differ
depending on whether the Final Rule requires FCMs and DCOs to be
authorized participants.\412\ Specifically, FIA and CME noted that if,
in referring to the ``depository acting as custodian for the ETF
interests,'' the Commission intends to refer to the custodian of the
Qualified ETF, such depository is likely not the entity with
substantial control over the Qualified ETF interests given that it will
not have a record of the FCM's or DCO's interests in the Qualified ETF
and the ``depository's role, including in effecting purchase/
redemption/transfer transactions, will be at the direction of the
Qualified ETF.'' \413\
---------------------------------------------------------------------------

\411\ Proposal at 81250 and proposed Commission regulation
1.25(c)(3).
\412\ FIA/CME Joint Letter at p. 15.
\413\ Id. at pp. 15-16.
---------------------------------------------------------------------------

Finally, in response to the Commission's question whether there are
any extraordinary circumstances, similar to the events listed in
Commission regulation 1.25(c)(5)(ii) with respect to MMFs, that may
justify an exception to the proposed next-day redemption requirement
with regard to Qualified ETFs, three commenters recommended that the
redemption exceptions for MMFs be made available for Treasury
ETFs.\414\ FIA and CME argued that Qualified ETFs and Permitted
Government MMFs have comparable credit, market, and liquidity risk and
therefore should be subject to the same regulatory treatment of
extraordinary circumstances in which redemptions could be
postponed.\415\ ICI also supported exceptions to the next-day
redemption requirement for ETFs and noted that many ETFs include
disclosure in their registration statements regarding the ability to
suspend redemption and payment consistent with section 22(e) of the
Investment Company Act of 1940.\416\
---------------------------------------------------------------------------

\414\ ICI at p. 6 (focusing on the circumstances specified in
section 22(e) of the Investment Company Act of 1940); FIA/CME Joint
Letter at p. 18; SSGA at p. 3.
\415\ FIA/CME Joint Letter at p. 18.
\416\ ICI at p. 6. ICI further stated that since section 22(e)
of the Investment Company Act of 1940 applies to ETFs as well as
MMFs, the redemption exemptions under Commission regulation
1.25(c)(5)(ii), which are consistent with, and expand upon, the
exceptions listed in section 22(e), should also apply to ETFs. Id.;
see also section 22(e) of the Investment Company Act of 1940, 15
U.S.C. 80a-22(e) (restricting investment companies from suspending
the right of redemption or postponing the date of payment or
satisfaction upon redemption of any redeemable security, for more
than seven days, except in certain enumerated circumstances
including New York Stock Exchange closures outside of customary
week-end and holiday closings or periods when trading on the New
York Stock Exchange is restricted).
---------------------------------------------------------------------------

c. Discussion
After considering the comments received, the Commission is adopting
the proposed addition of interests in Qualified ETFs to the list of
Permitted Investments, subject to certain modifications discussed
below. The Commission reiterates that the inclusion of Qualified ETFs
as a Permitted Investment should foster innovation and promote
competition in the ETF market and the financial services industry more
generally. Further, the addition of Qualified ETFs should also foster
diversification in the investment of Customer Funds through a new type
of financial instrument that allows FCMs and DCOs to purchase a type of
collateral (i.e., U.S. Treasury securities) that is already a Permitted
Investment without having to acquire the securities directly or through
an MMF. That is, the Commission agrees with commenters that by allowing
FCMs and DCOs to invest Customer Funds in Qualified ETFs, the
Commission would provide FCMs and DCOs with an efficient means for
investing indirectly in Permitted Investments, specifically U.S.
Treasury securities, while allowing FCMs and DCOs to reduce the
expenses and resources required to manage individual, direct
investments in such instruments.\417\ Further, because Qualified ETFs
would be required to meet the conditions discussed below, Qualified
ETFs would be comparable to Permitted Government MMFs whose interests
currently qualify as Permitted Investments under Commission regulation
1.25(a).\418\
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\417\ Invesco at p. 2; SIFMA AMG at p. 4.
\418\ SEC Rule 2a-7, which applies to MMFs, restricts the types
of investments in which MMFs can invest their assets, limits the
terms of the investments, and imposes liquidity requirements with
respect to the investments, among other things. 17 CFR 270.2a-
7(d)(2) (providing that MMFs must limit their portfolio investments
to U.S. dollar-dominated securities that at the time of acquisition
are eligible securities), 17 CFR 270.2a-7(d)(1) (limiting the terms
of maturity of MMFs' investments), and 17 CFR 270.2a-7(d)(4)
(providing that MMFs must hold securities that are sufficiently
liquid to meet reasonably foreseeable shareholder redemptions and
setting forth other liquidity requirements). Although SEC Rule 2a-7
does not apply to ETFs, as described below, this Final Rule admits
as a Permitted Investment only ETFs providing investors with
substantial protections that are comparable, though not identical,
to those afforded to MMF investors.
---------------------------------------------------------------------------

In response to the comments received, the Commission has determined
to revise the requirement that an FCM or DCO be an authorized
participant in order to invest Customer Funds in Qualified ETFs.\419\
Instead, under the terms of the Final Rule, an FCM or DCO would be able
to invest Customer Funds in interests of a Qualified ETF either as an
authorized participant of the Qualified ETF or by entering into an
agency agreement with an authorized participant, whereby the authorized
participant would transact with the ETF on behalf of the FCM or DCO. In
both instances, the transactions must take place on a DVP basis, such
that no Customer Funds are transferred out of the segregated customer
accounts maintained in compliance with section 4d of the Act and/or
part 30 of the Commission's regulations until property of equal or
greater value is deposited in the customer segregated accounts.
---------------------------------------------------------------------------

\419\ Proposal at 81252 and proposed Commission regulation
1.25(c)(8).
---------------------------------------------------------------------------

The Commission understands that generally the process of
transacting on a DVP basis through an authorized participant acting on
behalf of an FCM or DCO would function as follows. In the case of a
creation transaction, the authorized participant would use its
proprietary funds to acquire a creation basket of U.S. Treasury
securities before placing an order with the Qualified ETFs for the
purchase of creation units. Upon receipt of the Qualified ETF shares,
the authorized participant would transfer such shares to the FCM's or
DCO's customer segregated accounts and receive payment from the FCM or
DCO customer segregated account on a DVP basis. Under no circumstances
would the authorized participant receive payment of Customer Funds from
the FCM or DCO until the authorized participant has transferred the
Qualified ETF interests to the FCM's or DCO's customer segregated
accounts.
In the case of a redemption transaction, the authorized participant
would either pre-fund the redemption with the FCM or DCO (i.e.,
transfer proprietary cash funds to the FCM's or DCO's customer
segregated accounts prior to the transfer of the Qualified ETF shares
from the customer segregated accounts to the authorized participant) or
post cash collateral with the fund to obtain U.S. Treasury securities
prior to receiving the Qualified ETF shares from the FCM or DCO and
then transferring the shares to the fund. The authorized participant
would receive a fee from the FCM or DCO for the service. For the
process to comply with the Commission's segregation requirements, the
fee may not be paid with Customer Funds. In addition, although the
authorized participant would be acting as an agent of the FCM or DCO,
the ETF would not hold the FCM or DCO

[[Page 7837]]

accountable for any failure of the authorized participant to perform
its obligations to the ETF.\420\ The Commission has addressed the
concern of commenters who requested an alternative to the proposed
requirement that the FCM or DCO be an authorized participant in the
revisions from the Proposal discussed above that enable an FCM or DCO
to invest Customer Funds in interests of a Qualified ETF through an
agency agreement with an authorized participant.
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\420\ The Commission's understanding on this matter is based on
representations made by ICI and Invesco during a conversation with
Commission staff on August 5, 2024, during which ICI and Invesco
further explained the statements in their comment letters. In its
comment letter, ICI noted that market-based solutions, such as
submitting letters of credit to the authorized participant ``could
resolve potential exposure concerns that an [authorized participant]
could have if engaging in redemption transactions before receiving
the ETF shares.'' ICI at p.3. Additionally, one other commenter,
AIMA, suggested permitting a DCO to submit a letter of credit to the
ETF in lieu of requiring a DCO to become an authorized participant.
AIMA at p. 2. During a conversation with Commission staff on August
5, 2024, however, ICI represented that the submission of letters of
credit is not a common business practice.
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Moreover, regardless of the exact process used by FCMs and DCOs to
transact with an authorized participant, for the transaction to be
compliant with Commission regulations, the FCM or DCO must ensure that:
(i) all Commission segregation requirements are met throughout the
process; (ii) the transaction occurs on a DVP basis; (iii) no fees and/
or other costs associated with the transaction are charged to the
customer segregated accounts; and (iv) no person, including, but not
limited to, the ETF or the authorized participant has any claim over
Customer Funds held by the FCM or DCO.
Eliminating the requirement that FCMs and DCOs be authorized
participants from the Final Rule should expand the opportunity to
invest Customer Funds in Qualified ETFs beyond those FCMs and DCOs that
have the resources to become authorized participants. This change
addresses concerns raised by commenters that requiring FCMs and DCOs to
be authorized participants would unfairly favor the limited number of
FCMs that are already authorized participants and disadvantage DCOs
that may not meet the criteria of an authorized participant.\421\
Further, as noted by commenters, some FCMs may not want to incur the
regulatory, compliance, and operational costs associated with becoming
an authorized participant.\422\ In addition to these costs, which some
FCMs may find excessive, commenters asserted that there are ``potential
operational burdens and registration requirements for becoming an
authorized participant [that] may outweigh the potential benefits of
investing customer funds in ETFs.'' \423\ The Commission is persuaded
by commenters that the stated challenges to becoming an authorized
participant may burden FCMs and DCOs so substantially that they are
unable to take advantage of Qualified ETFs as an investment option.
Thus, removing the requirement that FCMs and DCOs be authorized
participants should provide an opportunity for all FCMs and DCOs,
regardless of their size or specific business model, to invest Customer
Funds in Qualified ETFs if the FCMs and DCOs determine that such
investment is consistent with their risk-management policies.
---------------------------------------------------------------------------

\421\ WFE at p. 5; ICI at p. 3.
\422\ ICI at p. 3 (n. 8).
\423\ BlackRock at p. 5.
---------------------------------------------------------------------------

As noted above, several commenters requested that the Commission
also allow FCMs and DCOs to invest Customer Funds in shares of
Qualified ETFs via secondary market transactions on a DVP basis.\424\
The Commission understands that the changes to the standard settlement
cycle of certain broker-dealer transactions, including transactions in
ETFs, that became effective in May 2024,\425\ may allow liquidation of
Qualified ETF shares to occur on the secondary market in compliance
with Commission regulation 1.25's general liquidity requirement, which
provides that Permitted Investments must have the ability to be
converted into cash within one business day without material discount
in value.\426\ Commenters also noted that there has been substantial
growth in the secondary ETF market, which has made pricing differences
from the primary market minimal.\427\ The Commission has also observed
that individual Treasury bills, when purchased on the secondary market,
may have a wider bid-ask spread when compared to Treasury ETF
shares.\428\ Therefore, the Commission has determined not to restrict
FCMs and DCOs from investing Customer Funds in shares of Qualified ETFS
by buying and selling such shares on the secondary market, provided
such transactions are transacted in compliance with the Commission's
segregation requirements, and consistent with Commission regulation
1.25's liquidity requirements, as well as all other applicable
provisions.\429\ The Commission also notes, as further discussed in
section IV.C. of this preamble, that the Final Rule provides that FCMs
would be subject to a 6 percent capital charge on investments in
Qualified ETF shares that do not comprise a full creation unit.\430\
---------------------------------------------------------------------------

\424\ BlackRock at pp. 4-5; CCP Global at p. 3; SSGA at p. 2;
SIFMA AMG at pp. 2-3, 5-6; FIA/CME Joint Letter at pp. 14-15.
\425\ Shortening the Securities Transaction Settlement Cycle, 88
FR 13872 (March 6, 2023).
\426\ 17 CFR 1.25(b)(1).
\427\ FIA/CME Joint Letter at p. 15; CCP Global at p. 3.
\428\ The Commission reviewed Bloomberg data from five ETFs:
iShares Short Treasury Bond ETF (SHV); SPDR Bloomberg 1-3 Month T-
Bill ETF (BIL); iShares 0-3 Month Treasury Bond ETF (SGOV); Goldman
Sachs Access Treasury 0-1 Year ETF (GBIL); and Invesco Short Term
Treasury ETF (TBLL).
\429\ An FCM or DCO is required to manage the purchase and sale
of Qualified ETF shares on the secondary market consistent with the
Commission's segregation requirements, particularly the requirement
to ensure that the firm is not undersegregated at any point in time.
In this respect, an FCM or DCO may elect to use proprietary funds to
purchase Qualified ETF shares and subsequently transfer the shares
to a customer segregated account. Alternatively, to the extent that
an FCM or DCO holds funds in customer segregated accounts in excess
of the total amount owed to customers (including any applicable
residual interest requirements), the FCM or DCO may withdraw such
funds and use such funds to purchase shares of Qualified ETFs.
Furthermore, an FCM or DCO liquidating Qualified ETF shares that are
held in customer segregated accounts must ensure that the removal of
such shares does not result in the customer accounts becoming
undersegregated (including any applicable residual interest
requirements). Alternatively, the FCM or DCO must transfer
proprietary cash or other Permitted Investments into customer
segregated accounts in an amount equal or greater than the fair
market value of the Qualified ETF Shares prior to the removal of the
shares from the customer segregated accounts.
\430\ See Letter titled Net Capital Treatment of Certain U.S.
Treasury Exchange-Traded Funds, issued by the Division of Trading
and Markets to Ms. Kris Dailey, Vice President, Risk Oversight &
Operational Regulations, Financial Industry Regulatory Authority,
June 2, 2022 (``SEC ETF Letter''). The SEC ETF Letter is available
at the SEC's website: https://www.sec.gov/divisions/marketreg/mr-noaction/2022/finra-060222-15c3-1.pdf.
---------------------------------------------------------------------------

In adopting the Final Rule, the Commission has also determined to
modify the proposed requirement that FCMs and DCOs redeem Qualified
ETFs in cash. The Commission understands that ETFs typically redeem
interests in kind, although they may also redeem in cash or both in
kind and in cash. As discussed above, the Commission proposed to
require that Qualified ETFs redeem their shares within one business day
following the submission of the redemption request to help ensure a
more expeditious liquidation of the Qualified ETF shares, consistent
with the time limit for redemptions applicable to MMFs under Commission
regulation 1.25(c)(5) and the general liquidity requirement in
Commission regulation 1.25(b)(1).\431\ The

[[Page 7838]]

Commission has considered the comments asserting that redemptions in
kind can satisfy the liquidity requirements imposed by Commission
regulation 1.25.\432\ Specifically, the Commission has considered
arguments that short-term U.S. Treasury ETFs may commit to redeem
shares on the same business day of the redemption request, thus
allowing FCMs and DCOs to liquidate the underlying U.S. Treasury
securities within one business day, as required by Commission
regulation 1.25.\433\ The Commission, however, understands that such
redemption timeframe may be conditioned upon the fund receiving the
redemption request before a certain cut-off time during the business
day.\434\ In addition, liquidation of the underlying U.S. Treasury
securities may be delayed during periods of market turmoil. Such delay
may, in particular, hinder the FCM's ability to return Customer Funds
to customers or to post variation margin to the clearing house. To
ensure that FCMs and DCOs are able to liquidate an investment in a
Qualified ETF within the timeframe mandated by Commission regulation
1.25, the Commission has determined to require FCMs and DCOs that are
not authorized participants to redeem Qualified ETF shares in cash
within one business day of the redemption request. To that effect, an
FCM DCO conducting the redemption through an authorized participant
acting as the FCM's or DCO's agent must ensure that its contractual
agreement with the authorized participant requires the authorized
participant to transfer cash to the customer segregated account of the
FCM or DCO, on a DVP basis, within one business day of the redemption
request. For FCMs that are authorized participants of the Qualified
ETF, the Commission has determined to allow such FCMs to redeem
Qualified ETF shares in kind, provided that the FCM has the operational
ability to convert the instruments received pursuant to the redemption
into cash within one business day of the redemption request. The
Commission is making this determination based on the understanding that
FCMs that qualify as authorized participants are securities brokers or
dealers that have the operational capacity and arrangements in place to
convert the U.S. Treasury securities received upon redemption into cash
in a timely manner. The Commission believes that such policy, where the
FCM or DCO is obligated to have the necessary contractual agreements in
place to redeem Qualified ETF shares in cash or to swiftly convert U.S.
Treasury securities into cash, as applicable, but the Qualified ETFs
preserve the possibility to redeem in kind, should resolve commenters'
concerns that applying an in-cash redemption condition to the ETF would
limit the potential universe of ETFs that qualify as a Permitted
Investment.\435\ It should also resolve other commenters' concerns
discussed above that requiring an ETF to redeem in cash might cause an
inequitable first-mover advantage.\436\
---------------------------------------------------------------------------

\431\ Proposal at 81251.
\432\ BlackRock at pp. 2,5; ICI at pp. 4-5; MFA at pp. 5-6; SSGA
at p. 3; SIFMA AMG at pp. 7-8; FIA/CME Joint Letter at pp. 12-13.
\433\ ICI at p. 4; AIMA at p. 2; BlackRock at p. 5; Invesco at
p. 4; see also Invesco Petition at p. 6.
\434\ Invesco Petition at p. 6 (noting that an U.S. Treasury ETF
generally offers and redeems shares with settlement on the same day
(if creation or redemption orders are received before 12:00 p.m.
Eastern time) or the next business day (if creation or redemption
orders are received on or after 12:00 p.m. Eastern time) at the NAV
next calculated in creation units in exchange for the deposit or
delivery of a basket of securities).
\435\ ICI at p. 4.
\436\ FIA/CME Joint Letter at pp. 12-13.
---------------------------------------------------------------------------

Further, following consideration of comments received, the
Commission has determined not to adopt, as a condition for
qualification as a Permitted Investment, the proposed requirement that
Qualified ETFs be acceptable by a DCO as performance bond from clearing
members to margin customer trades. In making this determination, the
Commission acknowledges the views of various commenters that the
standards for DCO collateral acceptability and the standards for
Permitted Investments should not be conflated.\437\ Specifically,
Commission regulation 1.25(b) requires that an FCM or DCO ``manage the
permitted investments consistent with the objectives of preserving
principal and maintaining liquidity.'' \438\ By comparison, Commission
regulation 39.13(g)(10) requires DCOs to ``limit the assets it accept
as initial margin to those that have minimal credit, market, and
liquidity risk.'' \439\ Although there are similarities between these
requirements, the Commission confirms that an FCM's or DCO's investment
choices for Permitted Investments of Customer Funds should be governed
by the standards set forth in Commission regulation 1.25. The
Commission also recognizes the potential unintended consequences for
FCMs if CME--currently the only DCO that accepts short-term U.S.
Treasury ETFs as a performance bond--changes its collateral
acceptability policy and stops accepting such ETFs, particularly if the
change in policy is unrelated to the safety and liquidity of the
collateral instrument.\440\
---------------------------------------------------------------------------

\437\ CCP Global at p. 4; FIA/CME Joint Letter at p. 13; SIFMA
AMG at p. 7.
\438\ 17 CFR 1.25(b).
\439\ 17 CFR 39.13(g)(10). Further, 17 CFR 39.33(c)(3)(E) allows
DCO's financial resources to include highly marketable collateral,
including high quality, liquid, general obligations of a sovereign
nation that must be readily available and convertible into cash
pursuant to prearranged and highly reliable funding arrangements,
even in extreme but plausible market conditions.
\440\ FIA/CME Joint Letter at p. 13.
---------------------------------------------------------------------------

The Commission is also adopting with some changes the requirement
that the Qualified ETF invest at least 95 percent of its assets in
eligible securities comprising the short-term U.S. Treasury index whose
performance the fund seeks to replicate and cash. In the Final Rule,
eligible short-term securities are defined as 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. In response to
comments, the Commission did not intend to limit the amount of cash
that Qualified ETFs hold and is therefore adjusting the requirement to
clarify that cash is an eligible underlying asset for purposes of the
95 percent threshold.\441\ The Commission understands that many ETFs,
including certain U.S. Treasury ETFs, have adopted an investment policy
consistent with SEC Rule 35d-1,\442\ which requires that certain
registered investment companies, including ETFs, adopt a policy to
invest at least 80 percent of the value of their assets in accordance
with the investment focus suggested by the fund's name.\443\ The
Commission, however, has determined to maintain a stricter standard
than an 80 percent minimum in order to help ensure that FCMs and DCOs
invest Customer Funds in accordance with Commission regulation 1.25's
general objectives of preserving principal and maintaining liquidity.
---------------------------------------------------------------------------

\441\ ICI at p. 5; FIA/CME Joint Letter at p. 12 (note 58); CCP
Global at p. 3; WFE at p. 6; BlackRock at p. 2.
\442\ AIMA at p. 3; MFA at p. 5; FIA/CME Joint Letter at p. 12;
CCP Global at p. 3; ICI at p. 5.
\443\ SEC Rule 35d-1 under the Investment Company Act of 1940
(indicating that a fund name suggesting that the fund focuses its
investments in a particular type of investments or in investments in
a particular industry would be a materially deceptive and misleading
name unless the fund has adopted a policy to invest, under normal
circumstances, at least 80 percent of the value of its assets in the
particular type of investments or in investments in the particular
industry suggested by the fund's name). 17 CFR 270.35d-1.
---------------------------------------------------------------------------

The Commission acknowledges commenters' concerns regarding the
potential burdens and costs associated with changing the fund's
fundamental investment policy to reflect the adoption of a 95 percent
portfolio

[[Page 7839]]

threshold.\444\ Therefore, the Commission is clarifying that a U.S.
Treasury ETF meets the 95 percent portfolio threshold requirement if
the fund effectively invests 95 percent or more of its assets in
eligible securities and cash, even if the fund's registration statement
sets a lower threshold. However, to ensure that a U.S. Treasury ETF
meets the conditions for qualification as a Permitted Investment, FCMs
and DCOs must verify that the fund satisfies the 95 percent threshold
requirement. Thus, FCMs and DCOs are required to monitor the Qualified
ETF's portfolio and should do so on a monthly basis, consistent with
existing regulations applicable to FCMs to submit monthly financial
reports within 17 business days after the end of each month,\445\
particularly in the absence of registration statement language
reflecting the fund's commitment to adhere to the 95 percent threshold
requirement.
---------------------------------------------------------------------------

\444\ BlackRock at p. 3; ICI at p. 5.
\445\ 17 CFR 1.10(b)(1).
---------------------------------------------------------------------------

Further, the Commission confirms that, under the Final Rule, if the
aggregate of the ETF's cash holdings and assets invested in eligible
securities comprising the short-term U.S. Treasury index falls below 95
percent of the fund's total assets, the FCM or DCO is not permitted to
make additional investments of Customer Funds in the Qualified ETF.
Rather, as the Commission stated in the Proposal, the FCM or DCO should
take reasonable actions to divest interests in the fund, while managing
Customer Funds in a manner consistent with Commission regulation 1.25's
general objectives of preserving principal and maintaining
liquidity.\446\ In response to a comment requesting further
clarification on the actions to be taken should a threshold breach by
the fund occur,\447\ the Commission confirms, as discussed in the
Proposal, that depending on the market conditions, such actions may
include taking steps to progressively reduce the amount of Customer
Funds invested in Qualified ETFs rather than immediately divesting the
full amount of the investments in a potentially volatile market.\448\
---------------------------------------------------------------------------

\446\ Proposal at 81249-81250.
\447\ WFE at p. 6.
\448\ Proposal at 81249-81250.
---------------------------------------------------------------------------

In addition, the Commission has determined to maintain the scope of
eligible underlying instruments to be included in the 95 percent
threshold to 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, and cash. In response to comments advocating that the scope
of Qualified ETFs be expanded to funds that invest in certain short-
term U.S. agency obligations,\449\ the Commission acknowledges that the
universe of short-term U.S. agency obligations that are fully and
unconditionally guaranteed as to the timely payment of principal and
interest by the U.S. Department of the Treasury is limited and that
securities issued by U.S. government-sponsored enterprises do not fall
into this category. The Commission, however, declines to expand the
scope of eligible underlying instruments included in the 95 percent
threshold to U.S. agency obligations that are not unconditionally
guaranteed by the U.S. Department of the Treasury, because such
obligations present different liquidity characteristics than U.S.
Treasury securities. Given that many U.S. agency obligations are also
mortgage-backed securities, they have structural features that produce
less predictable cashflow and additional risks than U.S. Treasury
securities.\450\ The Commission is adopting the 95 percent threshold
requirement as proposed.\451\
---------------------------------------------------------------------------

\449\ BlackRock at p. 3 (arguing that the Commission should
expand the eligible underlying investments to align them with those
allowed for Permitted Government MMFs, i.e., cash, government
securities, and/or repurchase agreements that are fully
collateralized); CCP Global at p 3 (arguing that the Commission
should allow Qualified ETFs to invest in U.S. Treasury securities,
cash, Repurchase Transactions collateralized in U.S. Treasury
securities, and U.S. Treasury MMFs); FIA/CME Joint Letter at p. 12
(recommending that the Commission allow a Qualified ETF to invest in
securities with a maximum remaining maturity of 12 months or less
issued or guaranteed by the U.S. Treasury, including securities
issued by U.S. government agencies that are backed by the full faith
and credit of the U.S. government, as well as government MMFs, 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 (as defined under SEC Rule 2a-7) with a
remaining term to final maturity of 12 months or less); MFA at p. 5
(arguing that the Commission should allow Qualified ETFs to invest
in securities with a maximum remaining maturity of less than 12
months issued or guaranteed by the U.S. Treasury, including short-
term securities issued by U.S. government agencies that are backed
by the full faith and credit of the U.S. government, government
MMFs, 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).
\450\ Federal Reserve Bank of New York, Staff Report: Mortgage
Backed Securities, No. 1001 February 2022 available at https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr1001.pdf.
\451\ Also, as discussed in section IV.C. of this preamble, FCMs
will be required to determine capital charges for Qualified ETF
shares based on SEC staff guidance. The SEC ETF Letter only applies
to certain ETFs, specifically those that invest ``solely in cash and
government securities that are eligible securities under paragraph
(a)(11) of SEC Rule 2a-7, 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 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.'' SEC ETF
Letter, available at: https://www.sec.gov/divisions/marketreg/mr-noaction/2022/finra-060222-15c3-1.pdf. The portfolio composition of
an ETF that invests a portion of its assets in short-term U.S.
agency obligations that are unconditionally guaranteed as to the
timely payment of principal and interest by the U.S. Department of
the Treasury should not differ materially from that of an ETF that
invests solely in U.S. Treasury securities and cash. Therefore, the
Commission requires that FCMs determine capital charges for
Qualified ETFs whose portfolio includes U.S. agency obligations that
are unconditionally guaranteed as to the timely payment of principal
and interest by the U.S. Department of the Treasury based on the SEC
ETF Letter.
---------------------------------------------------------------------------

In consideration of comments received,\452\ the Commission is not
adopting the proposed revision to Commission regulation 1.25(c)(5)(ii)
that would have precluded Qualified ETFs from postponing redemption and
payment under the circumstances enumerated in that paragraph. As a
result of this modification, Qualified ETFs will also be able to rely
on Commission regulation 1.25(c)(5)(ii), as applicable. Specifically,
the exception provided under Commission regulation 1.25(c)(5)(ii)(A)
relates to a non-routine closure of the Fedwire or applicable Federal
Reserve Banks and, under the Final Rule, will be extended to Qualified
ETFs in addition to Government MMFs. Next-day redemption exceptions
detailed at Commission regulation 1.25(c)(5)(ii)(B)-(D) correspond to
exceptions provided in section 22(e) of the Investment Company Act and
therefore apply to registered investment companies generally. As a
result, because Qualified ETFs will be required to be investment
companies registered under the Investment Company Act of 1940, these
exceptions will also apply to Qualified ETFs. The exception in
Commission regulation 1.25(c)(5)(ii)(E) refers to periods during which
the SEC has by rule or regulation deemed that trading should be
restricted or that an emergency exists. This exception could
potentially apply to all registered investment companies and will apply
to Qualified ETFs. Finally, the exception in Commission regulation
1.25(c)(5)(ii)(F) refers to the condition of SEC Rule 22e-3,\453\ which
is only

[[Page 7840]]

applicable to MMFs, and will not apply to Qualified ETFs.
---------------------------------------------------------------------------

\452\ FIA/CME Joint Letter at p. 18; ICI at p. 6; SSGA at p. 3.
\453\ Section 22(e) of the Investment Company Act of 1940,
codified at 15 U.S.C. 80a-22(e), restricts investment companies from
suspending the right of redemption or postponing the date of payment
or satisfaction upon redemption of any redeemable security, for more
than seven days, except in certain enumerated circumstances
including New York Stock Exchange closures outside of customary
week-end and holiday closings or periods when trading on the New
York Stock Exchange is restricted. Section 22(e)(3) allows the SEC
to define, by order, additional circumstances, during which
redemptions may be restricted ``for the protection of security
holders of the company.'' 15 U.S.C. 80a-22(e)(3).
---------------------------------------------------------------------------

The Commission has determined not to adopt the proposed requirement
that FCMs and DCOs obtain the acknowledgment letter required by
Commission regulation 1.26 from an entity that has substantial control
over the ETF interests purchased with Customer Funds and that has
knowledge and authority to facilitate redemption and payment or
transfer of the Customer Funds. Under the terms of the Final Rule, FCMs
and DCOs will instead be required to obtain the acknowledgement letter
mandated by Commission regulation 1.20, as required for any investment
of Customer Funds in Permitted Investments except Permitted Government
MMFs. This change from the Proposal is based on the Commission's
understanding that, unlike MMF shares that may be held directly with
the fund or its affiliate, Qualified ETFs shares will be held with a
depository.\454\ The deletion of this proposed requirement also
addresses FIA's and CME's comment about the lack of clarity with
respect to the ``entity that has substantial control'' over the
Qualified ETF, from which the acknowledgement letter would have to be
obtained.\455\
---------------------------------------------------------------------------

\454\ The Commission's understanding on this matter is based on
an email from Kevin Ercoline, Associate General Counsel, ICI, to
Commission staff, dated August 15, 2024, ICI Email 20240913,
available at https://comments.cftc.gov/PublicComments/ViewExParte.aspx?id=1826&SearchText=. As explained in the August 15,
2024 email, it is common practice that an FCM or DCO purchases ETF
shares and custodies them with the FCM's or DCO's custodian.
\455\ FIA/CME Joint Letter at p. 15.
---------------------------------------------------------------------------

The Commission is adopting the remaining conditions for Qualified
ETF eligibility set forth in the Proposal as proposed without change.
That is, under the terms of the Final Rule, an FCM or DCO that acquires
and holds interests in Qualified ETFs may not enter into an agreement
that would prevent it from pledging the Qualified ETF's shares. FCMs
and DCOs must also maintain confirmations relating to their purchase of
interests in a Qualified ETF in their records.
Additionally, the NAV for the Qualified ETF must be computed by 9
a.m. of the business day following each business day and made available
to FCMs or DCOs, as applicable, by that time.\456\ This requirement is
intended to allow for the valuation of the Qualified ETF's investment
portfolio to be available by 9 a.m. the business day following an
investment in the ETF, so that the valuation is available in time for
FCMs to perform their daily segregation calculations, which are
required to be completed by noon each business day, reflecting balances
as of the close of business on the previous business day.\457\
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\456\ Paragraph (c)(4) of Commission regulation 1.25 as applying
to Qualified ETFs per proposed revised introductory text of
paragraph (c) of Commission regulation 1.25.
\457\ 2000 Permitted Investments Amendment at 78003.
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Further, the Qualified ETF must be legally obligated to redeem its
interests and make payment in satisfaction of the interests by the
business day following a redemption request.\458\ As discussed above,
limiting Qualified ETFs to funds that track the performance of a
published short-term U.S. Treasury security index should facilitate
redemptions of Qualified ETFs' shares being completed within one
business day, consistent with Commission regulations 1.25(c)(5)(i) and
1.25(b)(1).\459\
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\458\ Paragraph (c)(5)(i) of Commission regulation 1.25 as
applying to Qualified ETFs per proposed revised introductory text of
paragraph (c) of Commission regulation 1.25.
\459\ See 17 CFR 1.25(c)(5) (MMFs must be legally obligated to
redeem their interests and to make payment in satisfaction of the
interests by the business day following a redemption request) and 17
CFR 1.25(b)(1) (Permitted Investments must be ``highly liquid'' such
that the investments have the ability to be converted into cash
within one business day without material discount in value).
---------------------------------------------------------------------------

The Commission is adding paragraph (v) to Commission regulation
1.25(a)(1), as redesignated to accommodate other amendments to the list
of Permitted Investments pursuant to the Final Rule, to add the
interests of Qualified ETFs (U.S. Treasury exchange-traded funds) to
the list of Permitted Investments under Commission regulation 1.25. The
Commission is adopting further conforming changes throughout Commission
regulation 1.25. As discussed above, the Final Rule provides for the
replacement of ``money market mutual fund'' or ``money market mutual
funds'' with ``government money market fund'' or ``government money
market funds'' throughout Commission regulation 1.25. The Commission is
inserting next to the term ``government money market fund'' or
``government money market funds,'' the term ``U.S. Treasury exchange-
traded fund'' or ``U.S. Treasury exchange-traded funds,'' as
appropriate, preceded by an appropriate conjunction (i.e., ``or'' or
``and''), as necessary.
The Commission is revising Commission regulation 1.25(c)(1) to
incorporate the condition as set forth in the Proposal that a Qualified
ETF must be an investment company that is registered under the
Investment Company Act of 1940 with the SEC and holds itself out to
investors as an ETF under SEC Rule 6c-11.\460\
---------------------------------------------------------------------------

\460\ Proposed Commission regulation 1.25(c)(1).
---------------------------------------------------------------------------

Consistent with the Proposal, the Commission is also adding a new
paragraph (8) to Commission regulation 1.25(c) to incorporate the
requirement that investments of Customer Funds in Qualified ETFs occur
on a DVP basis. In a modification from the Proposal, however, new
Commission regulation 1.25(c)(8) does not specify that Qualified ETF
interests must be redeemable by the FCM or DCO ``in its capacity of an
authorized participant.'' The Commission is also not specifying the
ETF's interests must be ``redeemable in cash'' but rather that the FCM
or DCO must have the necessary contractual arrangements in place to
liquidate the ETF shares in cash in compliance with Commission
regulation 1.25's liquidity requirements. New Commission regulation
1.25(c)(8) provides that an FCM or DCO transacting with a Qualified ETF
through an authorized participant must redeem interests in the
Qualified ETF in cash, whereas an FCM that is an authorized participant
of the Qualified ETF may redeem interests in the Qualified ETF in kind,
provided the FCM is able to convert the U.S. Treasury securities
received pursuant to the redemption in cash within one business day of
the redemption request.
To account for the possibility that, as part of their investment
strategy and within the limits of applicable SEC rules, Qualified ETFs
may engage in derivatives transactions, the Commission is adopting the
revision set forth in the Proposal to amend Commission regulation
1.25(b)(2)(i) to indicate that the prohibition of investments
containing embedded derivatives does not apply to Qualified ETFs.
The Commission is also adopting the revision set forth in the
Proposal to amend Commission regulation 1.25(b)(4)(i), which provides
that, except for investments in MMFs, the dollar-weighted average time-
to-maturity of an FCM's or DCO's portfolio of Permitted Investments, as
computed under SEC Rule 2a-7, may not exceed 24 months. The amendment
revises Commission regulation 1.25(b)(4)(i) to exclude Qualified ETFs
from the

[[Page 7841]]

calculation of the dollar-weighted average time-to-maturity of the
portfolio of Permitted Investments.\461\ The Commission is implementing
this change because interests in Qualified ETFs do not have maturity
dates as the Qualified ETF manages the rolling of maturing U.S.
Treasury securities into new investments.
---------------------------------------------------------------------------

\461\ Revised Commission regulation 1.25(b)(4)(i).
---------------------------------------------------------------------------

4. Investments in Commercial Paper and Corporate Notes or Corporate
Bonds
Commission regulation 1.25(b) currently provides that FCMs and DCOs
may invest Customer Funds in commercial paper, corporate notes, and
corporates bonds that are guaranteed under the TLGP administered by the
FDIC. The TLGP program, however, expired in 2012.\462\ Therefore,
commercial paper, corporate notes, and corporate bonds have not been
Permitted Investments for more than a decade. To address the
termination of the TLGP, the Commission proposed to remove commercial
paper, corporate notes, and corporate bonds from the list of Permitted
Investments in Commission regulation 1.25.\463\
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\462\ Temporary Liquidity Guarantee Program, available at
https://www.fdic.gov/Regulations/resources/tlgp/index.html (``Under
the [Debt Guarantee Program], the FDIC guaranteed in full, through
maturity or June 30, 2012, whichever came first, the senior
unsecured debt issued by a participating entity between October 14,
2008, and June 30, 2009. In 2009, the issuance period was extended
through October 31, 2009. The FDIC's guarantee on each debt
instrument was also extended in 2009 to the earlier of the stated
maturity date of the debt or December 31, 2012.'').
\463\ Proposal at 81253.
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The Commission received three comments supporting the removal of
commercial paper, corporate notes, and corporate bonds as Permitted
Investments.\464\ No commenters opposed the proposed revisions. FIA,
CME, and MFA, expressed general support for the removal of commercial
paper, corporate notes, and corporate bonds from the list of Permitted
Investments.\465\ AIMA commented that the removal of commercial paper,
corporate notes, and corporate bonds from the list of Permitted
Investments, along with the other proposed changes, would
``appropriately update the list of permitted investments in line with
sound risk management practices, allow DCOs and FCMs greater
flexibility to manage risks and reduce currency and concentration
risk.'' \466\
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\464\ AIMA at p. 2; FIA/CME Joint Letter at p. 20; MFA at p.7.
\465\ FIA/CME Joint Letter at p. 20; MFA at p. 7.
\466\ AIMA at p. 2.
---------------------------------------------------------------------------

The Commission has considered the comments received and has
determined to amend the list of Permitted Investments by revising
Commission regulation 1.25(a)(1) to eliminate commercial paper,
corporate notes, and corporate bonds as proposed, because these
instruments have not been Permitted Investments since the expiration of
the TLGP in 2012.\467\
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\467\ In light of the Proposal's proposed elimination of
commercial paper, corporate notes, and corporate bonds from the list
of Permitted Investments, the FIA/CME Joint Letter suggested a
technical amendment to remove paragraph (b)(2)(vi) from Commission
regulation 1.25, which sets forth conditions that commercial paper,
corporate notes, and corporate bonds must satisfy to be Permitted
Investments. FIA/CME Joint Letter at p. 21. The Proposal included
the deletion of current Commission regulation 1.25(b)(2)(vi), and
the Commission is deleting current paragraph (b)(2)(vi) as proposed.
Proposal at 81273.
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5. Investments in Permitted Investments With Adjustable Rates of
Interest
Commission regulation 1.25(b)(2)(iv)(A) currently provides that
Permitted Investments may contain variable or floating interest rates
provided, among other things, that: (i) the interest payments on
variable rate securities correlate closely, 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, the one-month or three-
month LIBOR, or the interest rate of any fixed rate instrument that is
a listed Permitted Investment under Commission regulation 1.25(a);
\468\ and (ii) the interest rate, in any period, on floating rate
securities is 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, the one-month or
three-month LIBOR,\469\ or the interest rate of any fixed rate
instrument that is a listed Permitted Investment under Commission
regulation 1.25(a).\470\
---------------------------------------------------------------------------

\468\ 17 CFR 1.25(b)(2)(iv)(A)(1).
\469\ For simplicity, subsequent references to ``one-month or
three-month LIBOR rate'' will be referred to as ``LIBOR'' unless
otherwise required by the context of the discussion.
\470\ 17 CFR 1.25(b)(2)(iv)(A)(2).
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LIBOR had commonly been used as a reference rate in various
commercial and financial contracts, including corporate and municipal
bonds, commercial loans, floating rate mortgages, asset-backed
securities, consumer loans, and interest rate swaps and other
derivatives.\471\ After a loss of confidence in LIBOR as a reliable
benchmark following a number of enforcement actions concerning attempts
to manipulate the benchmark,\472\ the U.K. Financial Conduct Authority
(``UK FCA'') announced on March 5, 2021 that LIBOR would cease to be
published and would effectively be discontinued.\473\
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\471\ Proposal at 81253-81254. See also, Staff Statement on
LIBOR Transition, SEC Division of Corporation Finance, Division of
Investment Management, Division of Trading and Markets, and Office
of the Chief Accountant (July 12, 2019), available at https://www.sec.gov/news/public-statement/libor-transition.
\472\ See e.g., In re Barclays PLC, CFTC Docket No. 12-25 (June
27, 2012); In re UBS AG, CFTC Docket No. 13-09 (Dec. 19, 2012).
\473\ See generally CFTC Staff Letter No. 21-26, Revised No-
Action Positions to Facilitate an Orderly Transition of Swaps from
Inter-Bank Offered Rates to Alternative Benchmarks (Dec. 20, 2021)
(``Staff Letter 21-26'') available at the Commission's website: .
The UK FCA, which regulates ICE Benchmark Administration Limited,
the administrator of ICE LIBOR, confirmed that LIBOR would either
cease to be provided by any administrator or would no longer be
representative for the 1-week and 2-month U.S. dollar LIBOR
settings, immediately after December 31, 2021, and for all other
U.S. dollar LIBOR settings immediately after June 30, 2023).
---------------------------------------------------------------------------

Prior to the UK FCA announcement, the Federal Reserve Bank of New
York had convened the Alternative Reference Rate Committee (``ARRC'')
in 2014 to identify best practices for U.S. alternative reference rates
as well as best practices for contract robustness, to develop an
adoption plan, and to create an implementation plan with metrics of
success and a timeline.\474\ In June 2017, the ARRC identified SOFR, a
broad Treasury repurchase agreements financing rate, as the preferred
alternative benchmark to U.S. dollar LIBOR for certain new U.S. dollar
derivatives and financial contracts.\475\ SOFR is a broad measure of
the cost of borrowing cash overnight collateralized by U.S. Treasury
securities in the Repurchase Transaction market used by financial
institutions, governments, and corporations.\476\ SOFR is calculated as
a volume-weighted median of transaction-level triparty repo data
collected from the Bank of New York Mellon as well as data on bilateral
U.S. Treasury Repurchase Transactions cleared through the Fixed Income
Clearing Corporation.\477\ The Federal Reserve Bank of New York
(``FRBNY''), in cooperation with the U.S. Office of Financial Research,
publishes SOFR by 8:00 a.m. each business day.\478\
---------------------------------------------------------------------------

\474\ Staff Letter 21-26 at p. 3.
\475\ ARRC, ``The ARRC Selects a Broad Repo Rate as its
Preferred Alternative Reference Rate,'' June 22, 2017, available at
https://www.newyorkfed.org/medialibrary/microsites/arrc/files/2017/ARRC-press-release-Jun-22-2017.pdf.
\476\ See Secured Overnight Financing Rate Data, published by
the Federal Reserve Bank of New York (``FRBNY'') and available at
https://apps.newyorkfed.org/markets/autorates/sof.
\477\ Id.
\478\ See Additional Information about the Treasury Repo
Reference Rates, published by the FRBNY and available at https://www.newyorkfed.org/markets/treasury-repo-reference-rates-information.
---------------------------------------------------------------------------

In response to the anticipated termination of the publication of
LIBOR

[[Page 7842]]

and the increasing acceptance and use of SOFR as a benchmark interest
rate, MPD issued Staff Letter 21-02 on January 4, 2021.\479\ Staff
Letter 21-02 provides that MPD would not recommend enforcement action
to the Commission if an FCM invested Customer Funds in Permitted
Investments that contain adjustable interest rates benchmarked to SOFR.
Staff Letter 21-02 was a time-limited no-action position that was to
expire on December 31, 2022. MPD and DCR, however, issued a joint
letter on December 23, 2022, Staff Letter 22-21, extending the
effective date of the no-action position to December 31, 2024, and
expanding the scope of the no-action position to include Permitted
Investments made by DCOs.\480\ Due to the transition from LIBOR to
SOFR, the Commission proposed to amend Commission regulation
1.25(b)(2)(iv)(A) by replacing LIBOR with SOFR as a permitted benchmark
for Permitted Investments that contain an adjustable rate of interest.
The Commission also requested comment on whether it should consider
other additional interest rates beyond SOFR as permitted benchmarks for
adjustable rate securities under Commission Regulation 1.25.\481\
---------------------------------------------------------------------------

\479\ CFTC Staff Letter 21-02.
\480\ CFTC Staff Letter 22-21.
\481\ Proposal at p. 81254, Question 15.
---------------------------------------------------------------------------

The Commission received three comments regarding the proposed
transition to SOFR, and all three comments supported the proposed
amendment to replace LIBOR with SOFR as a permitted benchmark for
adjustable rate securities under Commission regulation
1.25(b)(2)(iv)(A).\482\ In addition to supporting the addition of SOFR,
FIA, CME, and MFA also recommended that the Commission amend Commission
regulation 1.25 to permit FCMs and DCOs to invest Customer Funds in
adjustable rate securities that reference SONIA, [euro]STR, TONAR, and
COBRA, to the extent that an FCM or DCO has balances owed to customers
denominated in GBP, EUR, JPY, or CAD, respectively.\483\ In support of
its recommendation, the FIA/CME Joint Letter states that these
additional alternative reference rates have been selected by public/
private-sector working groups, similar to the ARRC, formed by the Bank
of England (SONIA), the European Central Bank ([euro]STR), the Bank of
Japan (TONAR), and the Bank of Canada (COBRA), in connection with the
transition away from LIBOR rates in these currencies.\484\
---------------------------------------------------------------------------

\482\ MFA at pp. 2, 7; FIA/CME Joint Letter at p. 20; SIFMA AMG
at p. 12.
\483\ MFA at p. 7; FIA/CME Joint Letter at p. 20.
\484\ FIA/CME Joint Letter at p. 20.
---------------------------------------------------------------------------

The Commission has considered the comments received and upon
further consideration is adopting the proposed revision to Commission
regulation 1.25(b)(2)(iv)(A)(1) and (2) subject to a clarification
regarding the SOFR rates that qualify as acceptable benchmarks. The
Final Rule specifies that adjustable rate securities may reference the
overnight, 1-month, 3-month, and 6-month SOFR rate published by the
FRBNY. The Final Rule also permits adjustable rate securities to be
benchmarked to the CME Term SOFR Rate published by the CME Group
Benchmark Administration Limited.\485\ The CME Term SOFR Rate is
computed by the CME Group Benchmark Administration Limited based on
SOFR futures contracts traded on the CME. The FRBNY and CME Group
Benchmark Administration Limited published SOFR rates are reliable
reference rates as they are calculated in a transparent manner based on
actual trading activity in the overnight or futures markets and subject
to regulatory oversight. The replacement of LIBOR with SOFR advances
the objective of Commission regulation 1.25 of preserving principal and
maintaining liquidity by requiring the use of reliable benchmarks in
the qualification of adjustable rate securities as Permitted
Investments.
---------------------------------------------------------------------------

\485\ CME Group Benchmark Administration Limited is registered
benchmark administrator, authorized and supervised by the UK FCA.
CME Term SOFR Rates provide an indication of the forward-looking
measurement of overnight SOFR, based on market expectations implied
from derivatives markets. See generally CME's web page on CME Term
SOFR Rates available at https://www.cmegroup.com/market-data/cme-group-benchmark-administration/term-sofr.html.
---------------------------------------------------------------------------

The Commission has decided not to adopt the additional alternative
rates suggested by the commenters. At this time, the Commission has not
observed any investment instruments that would qualify as Permitted
Investments using these alternative reference rates. Furthermore, as
discussed above and in the Proposal, the Commission has performed an
extensive review of SOFR and has followed the work of the ARRC in
developing SOFR. It has not, however, engaged in a similar review of
the additional alternative reference rates at this time.
To give effect to the adoption of SOFR as a permitted benchmark for
Permitted Investments with an adjustable rate of interest, paragraphs
(b)(2)(iv)(A)(1) and (2) of Commission regulation 1.25 are amended by
replacing the phrase ``one-month or three-month LIBOR rate'' with the
phrase ``Secured Overnight Financing Rate.'' \486\ These amendments are
consistent with the Commission's intent of providing FCMs and DCOs with
a certain degree of flexibility in selecting Permitted Investments with
adjustable rates of interest, and align with the evolution of the
market.\487\
---------------------------------------------------------------------------

\486\ Final Commission regulation 1.25(b)(2)(iv)(A)(1) and (2).
\487\ 2005 Permitted Investments Amendment at 28192 (it is
appropriate to afford latitude in establishing benchmarks for
Permitted Investments to enable FCMs and DCOs to more readily
respond to changes in the market).
---------------------------------------------------------------------------

6. Investments in Certificates of Deposit Issued by Banks
Commission regulation 1.25(a)(1)(iv) currently permits, subject to
certain conditions, FCMs and DCOs to invest Customer Funds in
certificates of deposit (``CDs'') issued by a section 3(a)(6) bank or a
domestic branch of a foreign bank that carries deposits insured by the
FDIC (``bank CDs''). To qualify as a Permitted Investment under
Commission regulation 1.25, a bank CD must be redeemable at the issuing
bank within one business day, with any penalty for early withdrawal
limited to accrued interest earned according to the terms of the bank
CD agreement.\488\
---------------------------------------------------------------------------

\488\ Commission regulation 1.25(b)(2)(v); 17 CFR 1.25(b)(2)(v).
---------------------------------------------------------------------------

As stated in the Proposal, the Commission's experience has been
that FCMs and DCOs have not elected bank CDs as an investment option
for Customer Funds.\489\ In connection with the Proposal, Commission
staff reviewed SIDR Reports filed by FCMs for the period September 15,
2022 through February 15, 2023 and noted no FCMs reporting investments
of Customer Funds in bank CDs.\490\
---------------------------------------------------------------------------

\489\ Proposal at 81254-81255. Although FCMs have not
communicated a specific reason for the lack of investments in bank
CDs, the Commission understands that few, if any, bank CDs meet the
requirements in Commission regulation 1.25(b)(v) that the CD is
redeemable at the issuing bank within one business day, with any
penalty for early withdrawal limited to any accrued interest earned
according to its written terms. 17 CFR 1.25(b)(v).
\490\ Proposal at 81254-81255. Commission regulations 1.32(f),
22.2(g)(5), and 30.7(l)(5) require each FCM to submit a SIDR Report
to the Commission and the FCM's designated self-regulatory
organization (``DSRO'') listing the names of all banks, trust
companies, FCMs, DCOs, and any other depositories or custodians
holding futures customer funds, Cleared Swaps Customer Collateral,
or 30.7 customer funds, respectively. FCMs are further required to
include the total amount invested in each of the Permitted
Investments in the SIDR Report. FCMs are required to submit the SIDR
Report as of the 15th day of each month (or the next business day if
the 15th day of the month is not a business day) and the last
business day of the month. 17 CFR 1.32(f), 17 CFR 22.2(g)(5), and 17
CFR 30.7(l)(5). The Commission is also revising the SIDR Report to
reflect the revisions to the list of Permitted Investments adopted
by the Commission under this rulemaking. See section IV.D. for a
discussion of the final amendments to the SIDR Report.
With respect to an FCM, a DSRO is the self-regulatory
organization that has been delegated the responsibility under a
formal plan approved by the Commission pursuant to Commission
Regulation 1.52 to monitor and examine the FCM for compliance with
Commission and self-regulatory organization minimum financial and
related financial reporting requirements. 17 CFR 1.52.

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[[Page 7843]]

In the Proposal, the Commission requested comment on whether
Commission regulation 1.25 should be amended by removing bank CDs from
the list of Permitted Investments given the historical lack of usage by
FCMs and DCOs.\491\ Specifically, the Commission requested comment on
whether the elimination of bank CDs as a Permitted Investment would
have a material adverse impact on FCMs' and DCOs' ability to invest
Customer Funds.\492\ The Commission also requested comment regarding
whether there were provisions of Commission regulation 1.25, or other
legal or operational issues, that hinder or prevent FCMs and DCOs from
investing Customer Funds in bank CDs.\493\ The Commission also
requested comment on whether FCMs and DCOs may elect to invest Customer
Funds in bank CDs with the current rising interest rate environment for
bank deposits and bank CDs.\494\ In addition, the Commission requested
comment on what factors it should consider before removing bank CDs
from the list of Permitted Investments.\495\ Lastly, the Commission
stated that based on the comments received, and the Commission's
further consideration of this issue, it may determine to revise the
list of Permitted Investments by removing bank CDs in the final
rulemaking.\496\
---------------------------------------------------------------------------

\491\ Id.
\492\ Proposal at 81255, Question 17.
\493\ Id., Questions 18 and 19.
\494\ Id., Question 20.
\495\ Id., Question 21.
\496\ Id. In the Proposal, the Commission also detailed the
additional conforming amendments that it would make to Commission
regulations to reflect the potential elimination of bank CDs from
Commission regulation 1.25(a)(1). Proposal at 81255.
---------------------------------------------------------------------------

Three comments responded to the Commission's request for comment on
this subject.\497\ Two commenters supported the removal of bank CDs as
Permitted Investments. FIA and CME stated in their joint letter that
bank CDs should be removed from the list of Permitted Investments as
they are not aware of the recent use of bank CDs as a Permitted
Investment, nor has any FIA member stated that it foresees investing
Customer Funds in bank CDs.\498\ Nodal also supported the removal of
bank CDs from the list of Permitted Investments, noting that from a
risk perspective, bank CDs replace, but do not materially mitigate,
counterparty risk faced by FCMs and DCOs with respect to direct bank
deposits.\499\ ICE stated, however, that it did not believe that it
would be beneficial to remove bank CDs as Permitted Investments even if
the use of such investments by FCMs and DCOs is currently limited.\500\
---------------------------------------------------------------------------

\497\ FIA/CME Joint Letter at p. 20; Nodal pp. 3-4; ICE at p. 4.
\498\ FIA/CME Joint Letter at p. 20.
\499\ FIA/CME Joint Letter at p. 20; Nodal at pp. 3-4.
\500\ ICE at p. 4.
---------------------------------------------------------------------------

The Commission has considered the comments received and is removing
bank CDs from the list of Permitted Investments in Commission
regulation 1.25(a)(1) as proposed. The Commission adopted bank CDs as a
Permitted Investment in 2000.\501\ Since its adoption, the Commission
has not observed any material use of bank CDs as an investment
instrument for Customer Funds. Although ICE stated that it did not
believe that it was beneficial to remove bank CDs, the lack of use of
bank CDs suggests that FCMs and DCOs do not view bank CDs as viable
investments for Customer Funds. Furthermore, the FIA/CME Joint Letter
states that no FIA member has indicated that it foresees investing
Customer Funds in bank CDs.\502\
---------------------------------------------------------------------------

\501\ Proposal at 81237.
\502\ FIA/CME Joint Letter at p. 20.
---------------------------------------------------------------------------

The Commission is therefore deleting paragraph (a)(1)(iv) of
Commission regulation 1.25 and redesignating paragraphs (i) through
(vii) of Commission regulation 1.25(a)(1) to reflect the removal of
bank CDs from the revised list of Permitted Investments. In addition,
the Commission is deleting paragraph (b)(2)(v) of Commission regulation
1.25, which sets forth restrictions on the features of permitted bank
CDs, and is revising and/or deleting, as appropriate in light of other
amendments, paragraphs (b)(3)(i)(C) and (b)(3)(ii)(B) of Commission
regulation 1.25, which set forth asset-based and issuer-based
concentration limits for certain instruments currently included in the
list of Permitted Investments, to reflect the elimination of bank CDs
from that list. The Commission is also making conforming amendments to
Commission regulations 1.32(f)(3), 22.2(g)(5), and 30.7(l)(5), which
define the content of the SIDR Reports described in section IV.D. of
this preamble, to reflect the removal of bank CDs from the list of
Permitted Investments in Commission regulation 1.25. Finally, the
Commission has deleted the requirement for an FCM to report the
balances invested in bank CDs in the SIDR Report.

B. Asset-Based and Issuer-Based Concentration Limits for Permitted
Investments

a. Proposal
Commission regulation 1.25(b)(3) establishes asset-based and
issuer-based concentration limits for an FCM's or DCO's investment of
Customer Funds in Permitted Investments.\503\ The asset-based and
issuer-based concentration limits are set at the same levels for
investments of futures customer funds, Cleared Swaps Customer
Collateral, and 30.7 customer funds.\504\ An FCM or DCO is also
required to calculate the asset-based and issuer-based concentration
limits separately for futures customer funds, Cleared Swaps Customer
Collateral, and 30.7 customer funds based on the total amount of funds
held by the FCM or DCO in each respective segregation
classification.\505\
---------------------------------------------------------------------------

\503\ 17 CFR 1.25(b)(3).
\504\ The asset-based and issuer-based concentration limits for
futures customer funds are set forth in Commission regulation
1.25(b)(3). With respect to 30.7 customer funds, Commission
regulation 30.7(h)(1) provides that an FCM may invest 30.7 customer
funds subject to, and in compliance with, the terms and conditions
of Commission regulation 1.25, which includes the asset-based and
issuer-based concentration limits. 17 CFR 30.7(h)(1). With respect
to Cleared Swaps Customer Collateral, Commission regulations
22.2(e)(1) and 22.3(d) provide that an FCM or DCO, respectively, may
invest Cleared Swaps Customer Collateral in accordance with
Commission regulation 1.25, which includes the asset-based and
issuer-based concentration limits. 17 CFR 22.2(e)(1) and 17 CFR
22.3(d).
\505\ 2011 Permitted Investments Amendment at 78787
(concentration limits are to be calculated on a customer-segregation
origin by customer-segregation origin basis, i.e., based on separate
segregation account classes).
---------------------------------------------------------------------------

As explained in the Proposal, an FCM or DCO is currently permitted
to directly invest futures customer funds, Cleared Swaps Customer
Collateral, and 30.7 customer funds in each of the Permitted
Investments up to the following asset-based limits: (i) U.S. government
securities--100 percent; (ii) U.S. agency obligations--50 percent;
(iii) for each investment asset class of bank CDs, commercial paper,
and corporate notes and bonds--25 percent; and (iv) municipal
securities--10 percent.\506\
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\506\ Proposal at 81255-81259; Commission regulation
1.25(b)(3)(i)(A)-(D); 17 CFR 1.25(b)(3)(i)(A)-(D). The term ``U.S.
government securities'' refers to general obligations of the U.S.
and obligations fully guaranteed as to principal and interest by the
U.S. See 17 CFR 1.25(a)(1)(i).
---------------------------------------------------------------------------

With respect to MMFs, an FCM or DCO may currently invest up to 100
percent of the total futures customer funds, Cleared Swaps Customer
Collateral, and 30.7 customer funds that it holds in MMFs that invest
only in U.S. government securities, provided

[[Page 7844]]

that the size of the funds' portfolio is at least $1 billion and the
funds' management company has at least $25 billion of assets under
management.\507\ If a fund has less than $1 billion of assets under
management, or if the manager of the fund has less than $25 billion of
assets under management, the FCM or DCO may invest up to 10 percent of
its total futures customer funds, Cleared Swaps Customer Collateral,
and 30.7 customer funds in the fund.\508\ For Prime MMFs, an FCM or DCO
may invest up to 50 percent of the total futures customer funds,
Cleared Swaps Customer Collateral, and 30.7 customer funds in such
MMFs; however, the asset-based concentration is limited to 10 percent
if a fund has less than $1 billion in assets under management or if the
fund's manager has less than $25 billion of assets under
management.\509\
---------------------------------------------------------------------------

\507\ 17 CFR 1.25(b)(3)(i)(E).
\508\ 17 CFR 1.25(b)(3)(i)(G).
\509\ 17 CFR 1.25(b)(3)(i)(F) and (G).
---------------------------------------------------------------------------

With respect to issuer-based concentration limits, an FCM or DCO is
permitted to invest up to 100 percent of the total futures customer
funds, Cleared Swaps Customer Collateral, and 30.7 customer funds that
it holds in U.S. government securities.\510\ An FCM or DCO also may
invest futures customer funds, Cleared Swaps Customer Collateral, and
30.7 customer funds directly in qualifying Permitted Investments, other
than U.S. government securities, subject to the following issuer-based
concentration limits: (i) obligations of any single issuer of U.S.
agency obligations--25 percent; (ii) obligations of any single issuer
of municipal securities, bank CDs, commercial paper, or corporate notes
or bonds--5 percent.\511\
---------------------------------------------------------------------------

\510\ See 17 CFR 1.25(b)(3)(ii), which excludes U.S. government
securities from the issuer-based concentration limits. See also 2011
Permitted Investments Amendment at 78788.
\511\ 17 CFR 1.25(b)(3)(ii)(A) and (B).
---------------------------------------------------------------------------

With respect to MMFs, an FCM or DCO may invest up to 100 percent of
the total futures customer funds, Cleared Swaps Customer Collateral,
and 30.7 customer funds in a single MMF that invests only in U.S.
government securities.\512\ With respect to MMFs that maintain
investment portfolios that hold instruments other than U.S. government
securities, an FCM or DCO is subject to the following issuer-based
concentration limits: (i) interest in any single MMF family may not
exceed 25 percent of customer funds held; and (ii) interest in any
individual MMF may not exceed 10 percent of customer funds held.\513\
---------------------------------------------------------------------------

\512\ See 17 CFR 1.25(b)(3)(ii), which excludes MMFs that invest
only in U.S. government securities from the issuer-based
concentration limits.
\513\ 17 CFR 1.25(b)(3)(ii)(C) and (D).
---------------------------------------------------------------------------

The Commission proposed to amend the asset-based and issuer-based
concentration limits in Commission regulation 1.25(b)(3) to reflect the
proposed revisions to the list of Permitted Investments discussed in
the Proposal and to adjust the limits based on the Commission's
experience administering Commission regulation 1.25.\514\ As discussed
in section IV.A.1. of this preamble, the Commission proposed to limit
the scope of MMFs whose interests qualify as Permitted Investments to
Permitted Government MMFs. Under the Proposal, a Permitted Government
MMF would be 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 fully
collateralized.\515\ The scope of underlying instruments in which a
Permitted Government MMF would be allowed to invest is 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 interest of imposing a
simple and consistent approach to concentration limits, the Commission
proposed to establish 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 funds
account classes of futures customer funds, Cleared Swaps Customer
Collateral, and 30.7 customer funds.\516\ The proposed asset-based
concentration limits are 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.\517\
---------------------------------------------------------------------------

\514\ Proposal at 81255-81259.
\515\ Proposal at 81241 and 81256.
\516\ Proposed Commission regulation 1.25(b)(3)(i)(E).
\517\ 17 CFR 1.25(b)(3)(i)(B).
---------------------------------------------------------------------------

The Commission also proposed to maintain the current 10 percent
asset-based concentration limit on investments in MMFs that hold less
than $1 billion in assets or have a management company with less than
$25 billion in assets under management.\518\ For purposes of clarity,
the Commission proposed to delete the conjunction ``and'' in that
provision to indicate that the fund size threshold and the management
company size threshold are to be construed as alternative prongs
triggering the 10 percent limit.
---------------------------------------------------------------------------

\518\ Proposed Commission regulation 1.25(b)(3)(i)(F).
---------------------------------------------------------------------------

In addition, to mitigate the potential risks arising from
concentration in any particular fund or family of funds, the Commission
proposed issuer-based concentration limits for investments in Permitted
Government MMFs. Specifically, the Commission proposed to limit
investments of Customer Funds in any single family of Permitted
Government MMFs to 25 percent and investments of Customer Funds in any
individual Permitted Government MMFs to 5 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.\519\
---------------------------------------------------------------------------

\519\ Proposed Commission regulations 1.25(b)(3)(ii)(C) and (D),
respectively.
---------------------------------------------------------------------------

Further, as part of the proposed amendments to the concentration
limits in Commission regulation 1.25,\520\ the Commission proposed to
revise the asset-based and issuer-based concentration limits set forth
in paragraphs (b)(3)(i)(F) and (b)(3)(ii)(C) and (D), respectively, to
reflect the removal of Prime MMFs from the list of Permitted
Investments.
---------------------------------------------------------------------------

\520\ See discussion in section IV.B. of this preamble.
---------------------------------------------------------------------------

As discussed in section IV.A.3. of this preamble, the Commission is
adding Qualified ETFs to the list of Permitted Investments.\521\ The
Commission proposed to impose conditions on Qualified ETFs that are
substantially similar to the conditions that are imposed on Permitted
Government MMFs whose interests qualify as Permitted Investments.\522\
Given the similarity of the terms that would apply to Permitted
Government MMFs and Qualified ETFs under the Proposal, and the
comparable credit, market, and liquidity risk associated with these

[[Page 7845]]

types of funds, the Commission preliminarily determined that it would
be appropriate for Qualified ETFs to have the same asset-based and
issuer-based concentration limits as those proposed for Permitted
Government MMFs.
---------------------------------------------------------------------------

\521\ Proposed Commission regulation 1.25(a)(1)(vi).
\522\ See section IV.A.3. of this preamble.
---------------------------------------------------------------------------

Under the Proposal, an FCM's or DCO's investment of Customer Funds
in Qualified ETFs with at least $1 billion in assets and whose
management company manages at least $25 billion in assets would be
limited to an asset-based concentration limit of 50 percent of total
funds held in each of the segregated account classes of futures
customer funds, Cleared Swaps Customer Collateral, and 30.7 customer
funds.\523\ The Commission also proposed to extend the current 10
percent asset-based concentration limit for investments in MMFs that
hold less than $1 billion in assets or whose management company manages
less than $25 billion in assets under management to Qualified ETFs. In
addition, to mitigate the potential risks arising from concentration in
any particular fund or family of funds, the Commission proposed to
limit investments of Customer Funds in any single family of Qualified
ETFs to 25 percent and investments of Customer Funds in any individual
Qualified ETF to 5 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.\524\ Because there may be
at least five U.S. Treasury ETFs that could potentially qualify as
Permitted Investments, the Commission preliminarily believed that the
proposed issuer-based concentration limits would not be overly
restrictive.\525\
---------------------------------------------------------------------------

\523\ Proposed Commission regulation 1.25(b)(3)(i)(E).
\524\ Proposed Commission regulations 1.25(b)(3)(ii)(C) and (D).
These limits are the same for both Permitted Government MMFs and
Qualified ETFs.
\525\ 2022 CME Advisory Notice, supra note 320 (announcing that
CME has added five Short-Term U.S. Treasury ETFs to the list of
accepted margin collateral). The five ETFs added by the CME would
meet the proposed condition of being accepted as performance bond by
a DCO. For purposes of clarity, FCMs and DCOs would need to assess
ETFs' eligibility in light of all applicable conditions.
---------------------------------------------------------------------------

The Commission also proposed revisions to the asset-based and
issuer-based concentration limits to remove limits on commercial paper,
and corporate notes and bonds, given that the Commission proposed to
eliminate these instruments from the list of Permitted
Investments.\526\ The Commission stated that if bank CDs were removed
from the list of Permitted Investments based on public feedback, the
Commission would eliminate the asset-based and issuer-based
concentration limits for these instruments as well.\527\
---------------------------------------------------------------------------

\526\ Proposed Commission regulation 1.25(b)(3)(i)(C) (removing
commercial paper and corporate notes and bonds from the 25 percent
asset-based concentration limit); proposed Commission regulation
1.25(b)(3)(ii)(B) (removing commercial paper and corporate notes and
bonds from the 5 percent issuer-based concentration limit).
\527\ Proposal at 81257-81258.
---------------------------------------------------------------------------

Finally, the Commission proposed to expand the types of investments
that would qualify as Permitted Investments to include Specified
Foreign Sovereign Debt. However, the Commission did not propose asset-
based or issuer-based concentration limits on an FCM's or DCO's
investments in Specified Foreign Sovereign Debt. Among other
considerations, the Commission noted, in the Proposal, that proposed
Commission regulation 1.25(a)(1)(vii), which permits 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, is expected to effectively
limit the amount of Customer Funds that an FCM or DCO may invest in
Specified Foreign Sovereign Debt.
The concentration limits in Commission regulation 1.25 are minimum
requirements.\528\ As discussed in the Proposal, pursuant to Commission
regulation 1.11, an FCM is required to monitor and manage market,
credit, liquidity, foreign currency, legal, operational, settlement,
segregation, capital, and any other applicable risks associated with
its activity, as part of the FCM's risk management program.\529\ If,
based on its independent risk assessment, an FCM determines that
stricter concentration limits with respect to Permitted Investments of
Customer Funds are appropriate, the FCM is required to implement such
stricter limits, in accordance with Commission regulation 1.11.
Similarly, Commission regulation 39.13(g)(10) requires a DCO to limit
the assets it accepts as initial margin to those that have minimal
credit, market, and liquidity risks, whereas Commission regulation
39.13(g)(13) requires the DCO to apply appropriate limitations or
charges on the concentration of assets posted as initial margin, as
necessary, to ensure its ability to liquidate such assets quickly with
minimal adverse price effects.
---------------------------------------------------------------------------

\528\ Proposal at 81258. The Commission has stated in prior
rulemakings that FCMs are expected to carefully evaluate the
appropriateness of each permitted investment in terms of its
investment objectives and compliance with the time-to-maturity,
concentration limits, and other requirements of Rule 1.25. 2005
Permitted Investments Amendment at 28192. As noted in other parts of
this preamble, the Commission has adopted Commission regulation 1.11
to require FCMs to establish a risk management program that
considers risks posed by affiliates, all lines of business of the
FCM, and all other trading activity engaged in by the FCM. See supra
note 126, section IV.A.2.c, and section IV.B.a. DCOs are subject to
similar risk management requirements as laid out in Commission
regulation 39.13.
\529\ 17 CFR 1.11.
---------------------------------------------------------------------------

In addition, if as a result of market events or extraneous
circumstances, such as a change in an MMF's size, the FCM or DCO
inadvertently breaches the concentration thresholds, the FCM or DCO
would be expected to undertake prompt actions to restore compliance
with the concentration limits, while managing the investments of
Customer Funds in a manner consistent with the general objectives of
preserving principal and maintaining liquidity. Depending on the market
conditions, such actions may include taking steps to progressively
reduce the amount of Customer Funds invested in a particular asset
class instead of immediately divesting the full portfolio of
investments in a potentially volatile market.
b. Comments
The Commission requested comment on all aspects of its Proposal
relating to concentration limits, including the proposed asset-based
and issuer-based concentration limits for Permitted Government MMFs and
Qualified ETFs. The Commission received nine comments addressing
concentration limits.\530\ Eurex and WFE supported the Commission's
decision not to impose asset-based or issuer-based concentration limits
on Specified Foreign Sovereign Debt, citing consistency with the 2018
Order.\531\ A number of other commenters, however, recommended changes
to the asset-based and issuer-based concentration limits for Permitted
Government MMFs and Qualified ETFs proposed by the Commission as
discussed below.\532\
---------------------------------------------------------------------------

\530\ AIMA at pp. 2-3; BlackRock at p. 7; Eurex at pp. 2-3;
Federated Hermes at pp. 1-3; ICI at pp. 2, 6-10; Nodal at pp. 2-3;
SIFMA AMG at pp. 2, 8-12, FIA/CME Joint Letter at pp. 16-18; WFE at
p. 4.
\531\ Eurex at p. 2; WFE at p. 5.
\532\ AIMA at pp. 2-3; BlackRock at p. 7; Federated Hermes at
pp. 1-3; ICI at pp. 2, 6-10; Nodal at pp. 2-3; SIFMA AMG at pp. 2,
8-12, FIA/CME Joint Letter at pp. 16-18.
---------------------------------------------------------------------------

Regarding the proposed change of imposing a 50 percent asset-based
concentration limit for all Permitted Government MMFs with at least $1
billion in assets and whose management company manages at least $25
billion in assets, FIA and CME did not support the

[[Page 7846]]

Commission's proposed changes and urged the Commission to keep the
current asset-based limits.\533\ FIA and CME argued that the Commission
should continue to allow investments in ``Treasury-only'' MMFs without
imposing asset-based concentration limits.\534\ These commenters
contended that large Government MMFs invest in high-quality securities,
have stable market value NAVs, have robust liquidity profiles, have
implemented significant cybersecurity safeguards, and operate in a
manner that is consistent with the Commission's customer asset
protection regime.\535\ Thus, FIA and CME asserted that the
Commission's statement in the 2011 Permitted Investments Amendment that
``[i]ndirect investments in Treasuries via a Treasury-only MMMF is
essentially the risk equivalent of a direct investment in Treasuries,
while allowing an FCM or DCO the administrative ease of delegating the
management of its portfolio to a MMMF'' is no less true today than it
was in 2011.\536\ Further, FIA and CME asserted that Government MMFs
``arguably present greater diversification and more resiliency for
investors than government securities themselves in rare instances of
volatility or stress in the government securities market.'' \537\ FIA
and CME also argued that although financial institutions, including
FCMs and DCOs, like all commercial entities, could be targets for
cyber-attacks that may adversely impact normal operating capabilities
and impair an FCM's or DCO's ability to redeem, promptly on demand,
interests in Permitted Government MMFs or Qualified ETFs, FCMs and DCOs
are already ``subject to comprehensive regulatory requirements to
implement policies, procedures, and controls to detect, prevent,
monitor, and mitigate operational risk, including cybersecurity risk.''
\538\ FIA and CME further noted that the Commission has proposed to
augment and reinforce these required policies, procedures, and controls
with a new requirement for FCMs to establish an ``operational
resilience framework.'' \539\ As a result of the existing protections,
FIA and CME believe that the proposed concentration limits are not
well-tailored to the regulatory objectives that the Commission
articulated in the Proposal.\540\ BlackRock also suggested that the
Commission keep the existing asset-based concentration limit framework
because, in their view, the framework is operating as intended.\541\
ICI did not object to the changes to the asset-based concentration
limits proposed for Permitted Government MMFs given their relative risk
and liquidity profiles.\542\
---------------------------------------------------------------------------

\533\ FIA/CME Joint Letter at p. 17.
\534\ Id. Commission regulation 1.25(c) currently excludes from
the concentration limits MMFs investing solely in U.S. government
securities as this term is currently used in Commission regulation
1.25. Because the Commission proposed to defined Permitted
Government MMF by reference to SEC Rule 2a-7 as an MMF that invests
99.5 percent or more of its assets in cash, government securities
(defined in 15 U.S.C. 80a-2(a)(16) to broadly include U.S. Treasury
securities and U.S. agency obligations), and/or Repurchase
Transactions that must be collateralized fully, the scope of
underlying instruments in which a Permitted Government MMF would be
allowed to invest is broader than that of MMFs currently excluded
from the concentration limits. Proposal at 81256.
\535\ FIA/CME Joint Letter at p. 17.
\536\ Id.; 2011 Permitted Investments Amendment at 78796.
\537\ FIA/CME Joint Letter at p. 17.
\538\ Id. at 16 (referencing Commission Regulations 1.11, 39.13,
39.18(b), 160.30, and 162.21).
\539\ Id. (referencing Operational Resilience Framework for
Futures Commission Merchants, Swap Dealers, and Major Swap
Participants, 89 FR 4706 (Jan. 24, 2024)).
\540\ Id. at 17.
\541\ BlackRock at p. 7.
\542\ ICI at p. 8.
---------------------------------------------------------------------------

Regarding the proposed changes to issuer-based concentration
limits, AIMA, Federated Hermes, ICI, and Nodal recommended a 25 percent
single fund concentration limit for both Permitted Government MMFs and
Qualified ETFs, a limit that they asserted would be more consistent
with market practices.\543\ Federated Hermes argued that the proposed 5
percent issuer-based concentration limit per fund for Permitted
Government MMFs was ``unnecessarily restrictive and [an] arbitrary
number.'' \544\ This commenter objected to the proposed limit because,
from their perspective, the proposed limit is not based on meaningful
data and the risks the Commission raises as concerns are already
addressed by SEC Rule 38a-1,\545\ which Federated Hermes summarizes as
requiring registered investment companies, including Permitted
Government MMFs, to adopt and implement written compliance policies and
procedures reasonably designed to prevent violation of the Federal
securities laws. In addition, Federated Hermes, and other commenters,
pointed to the SEC's proposed rule that would require funds to adopt
and implement compliance policies and procedures, and cybersecurity
programs, to detect, respond to, and recover from a cybersecurity
incident, and that are reasonably designed to ensure that a fund can
continue to operate during a cybersecurity event.\546\
---------------------------------------------------------------------------

\543\ AIMA at p. 3; Federated Hermes at p. 1; ICI at pp. 6-7
(arguing that a failure to appropriately calibrate the proposed
concentration limits will result in the reduced utility of Permitted
Government MMFs and Treasury ETFs for many FCMs and DCOs, especially
smaller firms); Nodal at p. 3 (calling for a ``flat limit of 25%''
for both individual and any single family of funds).
\544\ Federated Hermes at p. 1.
\545\ SEC Rule 38a-1 requires registered investment companies to
adopt and implement written policies and procedures reasonably
designed to prevent Federal securities laws violations; obtain
approval by the registered investment company's board of the
policies and procedures of the registered investment company and the
policies and procedures of certain service providers; review the
adequacy of those policies and procedures at least annually; and
designate a chief compliance officer responsible for the
administration of the registered investment company's policies and
procedures. 17 CFR 270.38a-1.
\546\ Federated Hermes at pp. 2-3 (referencing a Federal
Register release, 88 FR 16921 (March 21, 2023), reopening the
comment period for an SEC proposal, Cybersecurity Risk Management
for Investment Advisers, Registered Investment Companies, and
Business Development Companies, 87 FR 13524 (March 9, 2022) (``SEC
Investment Management Cybersecurity Release'').
---------------------------------------------------------------------------

FIA, CME, BlackRock, and SIFMA AMG expressed support for keeping
the current issuer-based concentration limit thresholds of 10 percent
for individual funds, and 25 percent for fund families.\547\ FIA, CME,
and BlackRock contended that these limits are better aligned with
current market structure given that there are few, if any, families of
Permitted Government MMFs and Qualified ETFs that include more than two
individual eligible funds.\548\ Relatedly, Nodal, which was one of the
commenters that supported a 25 percent limit for individual funds,
stated that many fund families only have one Government MMF, which
would result in an effective limit of 5 percent per fund family instead
of the proposed 25 percent.\549\ AIMA echoed this point by noting that
the proposed limits are ``not consistent with market practice given
that there are very few families of eligible MMFs or ETFs that offer
more than two eligible individual funds.'' \550\
---------------------------------------------------------------------------

\547\ FIA/CME Joint Letter at p. 18; BlackRock at p. 7; SIFMA
AMG at p. 10 (n. 35) (referencing the SEC Investment Management
Cybersecurity Release).
\548\ FIA/CME Joint Letter at p. 18.
\549\ Nodal at p. 2.
\550\ AIMA at p. 3. As an alternative, AIMA supports an
individual fund limit of 25 percent. Id.
---------------------------------------------------------------------------

SIFMA AMG also criticized the proposed 5 percent issuer
concentration limit and advocated for keeping the current 10 percent
concentration limit.\551\ SIFMA AMG expressed a general concern about
the use of cybersecurity risk as a justification for a Commission
rulemaking in areas unrelated to cybersecurity, which, in SIFMA AMG's
opinion, could provide

[[Page 7847]]

``an unfounded, unquantifiable precedent for future rulemakings.''
\552\
---------------------------------------------------------------------------

\551\ SIFMA AMG at p. 10.
\552\ Id.
---------------------------------------------------------------------------

SIFMA AMG further noted that ``MMFs and U.S. Treasury ETFs are
sponsored by SEC-registered investment advisers that are subject to
their own cyber safeguards and regulatory obligations.'' \553\ In
particular, SIFMA AMG cited SEC Regulation S-P,\554\ which requires
registered broker-dealers, investment companies, and investment
advisers to ``develop, implement, and maintain written policies and
procedures that address administrative, technical, and physical
safeguards for the protection of customer information,'' \555\ as well
as the SEC Investment Management Cybersecurity Release that was also
cited by other commenters.\556\
---------------------------------------------------------------------------

\553\ Id.
\554\ 17 CFR 248.30.
\555\ 17 CFR 248.30 sets forth regulatory obligations for the
protection of customer information, response programs for
unauthorized access to customer information, and requirements
relating to the disposal of customer information.
\556\ SIFMA AMG at p. 10 (referencing SEC Investment Management
Cybersecurity Release).
---------------------------------------------------------------------------

SIFMA AMG also asserted that the Proposal had not adequately
explained why the proposed 5 percent limit more appropriately addressed
the Commission's concerns over redemption and liquidity risks.\557\
This commenter also asserted that a low issuer-based concentration
limit would require more monitoring by FCMs and DCOs and potentially
increase transaction fees.\558\ Finally, SIFMA AMG noted that only five
Qualified ETFs are currently accepted as performance bond by a DCO
which would mean that only 25 percent of the Customer Funds held by the
FCM or DCO may be invested in a Qualified ETF even though the
concentration limit overall is 50 percent for Qualified ETFs.\559\
SIFMA AMG opined that the Commission should instead allow FCMs and DCOs
to allocate based upon their own risk assessments of the Permitted
Investments in which they choose to invest Customer Funds, subject to
``more appropriate guardrails like the current 10% limit.'' \560\
---------------------------------------------------------------------------

\557\ Id.
\558\ Id.
\559\ Id.
\560\ Id.
---------------------------------------------------------------------------

c. Discussion
After consideration of the comments received, coupled with the
Commission's concerns regarding the safety of Customer Funds, the
Commission has decided to adopt, with one exception described below,
the proposed concentration limits as set forth in the Proposal.
Specifically, the Commission is adopting a single asset-based
concentration limit of 50 percent for all Permitted Government MMFs of
at least $1 billion in assets and whose management company manages at
least $25 billion in assets. For MMFs that hold less than $1 billion in
assets or have a management company with less than $25 billion in
assets under management, the Commission is maintaining the current 10
percent asset-based concentration limit.\561\
---------------------------------------------------------------------------

\561\ As proposed, the Commission is also deleting the
conjunction ``and'' in Commission regulation 1.25(b)(i)(G),
redesignated as Commission regulation 1.25(b)(i)(E) and revised to
reflect other amendments adopted in this Final Rule, to clarify that
the fund size threshold and the management company size threshold
are to be construed as alternative prongs triggering the 10 percent
limit.
---------------------------------------------------------------------------

Regarding issuer-based concentration limits for Permitted
Government MMFs, the Commission is limiting investments of Customer
Funds in any single family of Permitted Government MMFs to 25 percent,
as set forth in the Proposal. With respect to investments of Customer
Funds in any individual Permitted Government MMF, however, the
Commission is increasing the permissible concentration 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. This is a change from the 5 percent that was set forth
in the Proposal.
For Qualified ETFs, the asset-based concentration limits will be
the same as those set forth in this Final Rule for Permitted Government
MMFs. For Qualified ETFs with at least $1 billion in assets and whose
management company manages at least $25 billion in assets, the asset-
based concentration limit will be 50 percent of total funds held in
each of the three categories of Customer Funds. For Qualified ETFs that
hold less than $1 billion in assets or whose management company manages
less than $25 billion in assets under management, the asset-based
concentration limit will be 10 percent. The issuer-based concentration
limit for Qualified ETFs will be 25 percent for a single family of
Qualified ETFs, which is unchanged from the Proposal. With respect to
any individual Qualified ETF, however, consistent with the upward
revision for Permitted Government MMFs, the concentration limit will be
10 percent, rather than 5 percent as set forth in the Proposal.
The new concentration limits are summarized below:

--------------------------------------------------------------------------------------------------------------------------------------------------------
Current concentration limits New concentration limits
Instrument Size --------------------------------------------------------------------------------------------
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 >$1B assets and No limit.............. No limit............. 50%.................. 25% per family 10%
U.S. government securities (i.e., management company per fund.
securities issued or fully with >25B in assets.
guaranteed by the U.S. government).
<$1B assets or 10%................... 10% (de facto limit 10%.................. .....................
management company based on asset-based
with <$25B in assets. limit).

[[Page 7848]]

Government MMFs as defined in SEC >$1B assets and 50%................... 25% per family 10% 50%.................. .....................
Rule 2a-7 (including MMFs whose management company per fund..
portfolio includes U.S. agency with >25B in assets.
obligations and other instruments).
<$1B assets or 10%................... ..................... 10%.................. .....................
management company
with <$25B in assets.
Qualified ETFs..................... >$1B assets and N/A................... N/A.................. 50%.................. 25% per family 10%
management company per fund
with >25B in assets.
<$1B assets or N/A................... N/A.................. 10%.................. .....................
management company
with <$25B in assets.
--------------------------------------------------------------------------------------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

\562\ Proposal at 81258.
\563\ Id. See also Statistical Appendix to the World Economic
Outlook, April 2023, International Monetary Fund, available here:
https://www.imf.org/en/Publications/WEO/Issues/2023/04/11/world-economic-outlook-april-2023.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

\564\ Proposed Commission regulation 1.25(a)(1)(vii).
\565\ Proposed Commission regulation 1.25(f)(3).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\566\ See generally section IV.B.b.
\567\ FIA/CME Joint Letter at p. 17; BlackRock at pp. 2, 7.
---------------------------------------------------------------------------

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

[[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.
---------------------------------------------------------------------------

\568\ 2000 Permitted Investments Amendment at 78010. The 2000
Permitted Investments Amendment provided in paragraph (a)(1)(vii) of
Commission regulation 1.25 that an FCM or DCO could invest in debt
of a foreign sovereign subject to certain conditions, including that
the FCM or DCO had balances owed to customers denominated in that
country's currency.
\569\ Proposed Commission regulation 1.25(c)(3)(i)(D).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\570\ The Commission acknowledges the possibility that FCMs may
make greater use of MMFs going forward and may reconsider the asset-
based concentration levels for such funds, as appropriate, if that
were to occur.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\571\ As discussed previously, FIA and CME in their Joint
Letter, as well as BlackRock and SIFMA AMG, expressed support for
setting the individual fund concentration limit at 10 percent. By
contrast, AIMA, Federated Hermes, ICI, and Nodal advocated for a 25
percent limit for any individual fund.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\572\ Proposal at 81257.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

\573\ Id.
\574\ ICI at p. 9.
\575\ SIFMA AMG at p. 10.
\576\ Id.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

\577\ Federated Hermes at p. 2; ICI at pp. 7-8; SIFMA AMG at p.
11.

---------------------------------------------------------------------------

[[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.
---------------------------------------------------------------------------

\578\ AIMA at p. 3. FIA/CME Joint Letter at p. 18.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

\579\ Proposal at 81259-81260. Specifically, the Commission
stated that: (i) Commission regulation 1.29, 17 CFR 1.29(b),
provides that FCMs or DCOs, as applicable, bear sole responsibility
for any losses resulting from the investment of futures customer
funds and further provides that no investment losses shall be borne
or otherwise allocated to FCM customers or to FCMs clearing customer
accounts at DCOs; (ii) Commission regulation 22.2(e)(1), 17 CFR
22.2(e)(1), provides that FCMs shall bear sole responsibility for
any losses resulting from the investment of Cleared Swaps Customer
Collateral and may not allocate investment losses to Cleared Swaps
Customers of the FCM; and Commission regulation 30.7(i), 17 CFR
30.7(i), provides that FCMs shall bear sole financial responsibility
for any losses resulting from the investment of 30.7 customer funds,
and further provides that no investment losses may be allocated to
the 30.7 customers of the FCM.
\580\ 17 CFR 1.17(c)(5)(v). Although capital charges do not also
apply to DCOs, a DCO is required under Commission regulation
39.11(a)(2) to maintain financial resources sufficient to enable it
to cover its operating costs for a period of at least one year,
calculated on a rolling basis. Potential investment losses would be
included in the DCO's operating costs.
\581\ Commission regulation 1.17(c)(5)(v) provides that an FCM
that invests Customer Funds in Permitted Investments must take a
charge (or deduction) in the amount specified in SEC Rule 15c3-
1(c)(2)(vi) or (vii). 17 CFR 240.15c3-1(c)(2)(vi) and (vii).
\582\ SEC Rule 15c3-1 sets forth minimum capital requirements
for broker-dealers and specifies standardized haircuts to be applied
on the market value of assets held by the broker-dealer for purposes
of calculating the minimum capital requirements. SEC Rule 15c3-
1(c)(2)(vi) details market risk capital charges for securities,
including U.S. Treasury securities, municipal securities, and equity
securities. SEC Rule 15c3-1(c)(2)(vii) imposes a capital charge of
100 percent of the carrying value of any securities that are not
readily marketable.
\583\ 17 CFR 240.15c3-1a. SEC Rule 15c3-1a provides standardized
haircuts for equity options and related positions.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\584\ Final Commission regulation 1.25(a)(1)(vi).
\585\ Final Commission regulation 1.25(f)(1) and (2).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\586\ SEC Rule 15c3-1(c)(2)(vi)(C) provides that the capital
charges on the sovereign debt of Canada is the same as the capital
charges set forth in SEC Rule 15c3-1(c)(2)(vi)(A) for debt
obligations of the U.S., debt obligations fully guaranteed as to
principal and interest by the U.S., or debt obligations of U.S.
agencies. SEC Rule 15c3-1(c)(2)(vi)(A) provides that a broker or
dealer must take a 0.5 percent capital charge on U.S. Treasury and
U.S. agency debt instruments that have a remaining time-to-maturity
of between 3 months and 6 months, and no capital charge on U.S.
Treasury and U.S. agency debt instruments having a remaining time-
to-maturity of less than 3 months.
\587\ SEC Rule 15c3-1(c)(2)(F)(1) specifies the capital charges
for nonconvertible debt securities with a fixed interest rate, fixed
maturity date, and minimal credit risk, which includes the sovereign
debt of France, Germany, Japan, and the United Kingdom.
\588\ Id.
\589\ Proposal at 81259-81260.
---------------------------------------------------------------------------

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

[[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\
---------------------------------------------------------------------------

\590\ Final Commission regulation 1.25(a)(1)(v).
\591\ See generally SEC ETF Letter, available at the SEC's
website: https://www.sec.gov/divisions/marketreg/mr-noaction/2022/finra-060222-15c3-1.pdf.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\592\ 17 CFR 240.15c6-1.
\593\ Proposal at 81260. The Commission proposed to permit
Qualified ETFs as a Permitted Investment provided the FCM or DCO
transacted with the Qualified ETF for the purchase or sale of full
creation or redemption units (i.e., redeemable securities). As the
Proposal did not permit the investment of Customer Funds in
Qualified ETFs in non-creation unit sizes, the Commission did not
explicitly address the 6 percent capital requirement specified in
the SEC ETF Letter.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

\594\ BlackRock at pp. 2, 6-7.
\595\ FIA/CME Joint Letter at p. 11.
\596\ See generally SEC ETF Letter.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

\597\ Proposal at 81260-81261.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\598\ In the Proposal, the Commission stated that if the
Commission eliminated bank CDs as a Permitted Investment in the
final rulemaking, the Commission would also amend Commission
regulations 1.32(f), 22.2(g)(5), and 30.7(l)(5) to remove references
to bank CDs from the SIDR Report template. Proposal at 81261 (n.
264).
\599\ Proposal at 81260-81261.
---------------------------------------------------------------------------

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

[[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\
---------------------------------------------------------------------------

\600\ The Read-only Access Provisions are set forth in
Commission regulation 1.20, appendix A to Commission regulation
1.20, and appendix A to Commission regulation 1.26, for futures
customer funds; Commission regulation 22.5 for Cleared Swaps
Customer Collateral; and Commission regulation 30.7 and appendices E
and F to part 30 of the Commission's regulations for 30.7 customer
funds.
\601\ 2013 Protections of Customer Funds Release at 68509.
\602\ Id. at 68510.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\603\ Commission regulations 1.32 (for futures customer funds),
22.2(g) (for Cleared Swaps Customer Collateral), and 30.7(l) (for
30.7 customer funds) require an FCM to prepare, among other records,
a daily record as of the close of each business detailing the total
amount of funds on deposit in customer segregated accounts and the
total amount of funds owed to customers. The purpose of the daily
record is to demonstrate the FCM's compliance with its obligation to
hold a sufficient amount of funds in segregated accounts to pay the
full account balance of each customer.
\604\ 2013 Protections of Customer Funds Release at 68537 and
68580.
\605\ These appendices are intended to be used by depositories
that accept Customer Funds from FCMs to acknowledge that the funds
belong to the FCM customer and cannot be used to offset obligations
of the FCM.
\606\ 17 CFR 1.20, appendix A; 17 CFR part 30, appendix E.
\607\ 17 CFR 1.26, appendix A; 17 CFR part 30, appendix F.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\608\ 2013 Protections of Customer Funds Release at 68537 and
68592 (noting in footnote 662 that the Commission generally expected
that it would seek to obtain account information from the CME and
NFA automated daily segregation confirmation system and/or from
depositories directly prior to requesting a depository to activate
electronic access).
\609\ Id. at 68512. CME Rule 971.C. provides that in order for
an FCM clearing member's account held at a depository to qualify as
a segregated account for Customer Funds, the FCM clearing member
must provide CME with access to account information, in a form and
manner prescribed by CME, and the depository must allow the FCM
clearing member to provide CME with access to the account
information, in a form and manner prescribed by CME. NFA Financial
Requirements section 4, paragraph (b), provides that each member FCM
must instruct each depository, as required by NFA, holding
segregated Customer Funds to report balances in the FCM's customer
segregated accounts to NFA or a third party designated by NFA in the
form and manner prescribed by NFA. CME and NFA Rules are available
at the following websites: https://www.cmegroup.com, and https://www.nfa.futures.org.
---------------------------------------------------------------------------

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.
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\610\ At the time the Commission issued the 2013 Protections of
Customer Funds Release, CME and NFA had just recently launched their
programs. 2013 Protections of Customer Funds Release at 68512. The
verification programs have developed further in the years that
followed. FCMs report on the daily segregation records total funds
held in segregation with banks, clearing organizations, and net
equities with other FCMs in addition to other balances.
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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\
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\611\ 2013 Protections of Customer Funds Release at 68537 (the
Commission anticipated that the combination of receipt of daily
account balances reported by depositories to CME and NFA and the
Commission's ability to confirm account balances and transactions
directly with depositories via direct communications would reduce
the need to rely upon direct electronic access to account
information at depositories).
\612\ Commission regulations 1.20(d)(5) and (6), 1.26(b),
22.5(a) and (b), and 30.7(d)(5) and (6). 17 CFR 1.20(d), 1.26(b),
22.5, and 30.7(d). For example, Commission regulation 1.20(d)(5)
provides that an FCM must deposit futures customer funds only with a
depository that agrees that accounts may be examined at any
reasonable time by specified Commission or DSRO staff. Commission
regulation 1.20(d)(6) provides that an FCM must deposit futures
customer funds only with a depository that agrees to reply promptly
and directly to any request from specified Commission staff or DSRO
staff for confirmation of account balances or provision of any other
information regarding or related to the FCM's account. Commission
regulation 1.20(d)(5) and (6) further provide that the written
acknowledgment required from the depository must contain the FCM's
authorization to the depository to reply promptly and directly to
the Commission or DSRO without further notice to or consent from the
FCM. Commission regulation 22.5 provides that an FCM must obtain a
written acknowledgment letter in accordance with Commission
regulation 1.20 and Commission regulation 1.26 from each depository
holding Cleared Swaps Customer Collateral, except an acknowledgment
letter is not required of a DCO that has adopted rules providing for
the segregation of Cleared Swaps Customer Collateral.
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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

[[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.
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\613\ Based on information provided by CME, as of March 7, 2023,
FCM registrants maintained over 3,600 active accounts with
approximately 200 banks, other registered FCMs, foreign broker-
dealers, foreign exchanges, and DCOs.
\614\ Depositories often require Commission staff to update
user-IDs and passwords on a regular basis; otherwise, the access is
interrupted and must be reset by the depositories. Some depositories
also require the use of additional security devices beyond user-IDs
and passwords, including key fobs or other forms of multi-factor
authentication.
\615\ Commission staff has not had a regulatory need to attempt
to use read-only access for any FCM's depository accounts since it
was implemented over 10 years ago.
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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\
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\616\ Eurex at p. 3; NFA at p. 2.
\617\ NFA at p. 2.
\618\ Id.
\619\ Id.
\620\ Id.
---------------------------------------------------------------------------

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\
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\621\ Eurex at p. 3.
\622\ Id.
---------------------------------------------------------------------------

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\
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\623\ These amendments also apply to Commission regulation 22.5,
which requires FCMs to obtain an acknowledgment letter from
depositories before depositing Cleared Swaps Customer Collateral
with a depository, in accordance with Commission regulations 1.20
and 1.26. 17 CFR 22.5(a). Commission regulation 22.5(b) further
requires FCMs to adhere to all requirements specified in Commission
regulations 1.20 and 1.26 regarding retaining, permitting access to
filing, or amending the written acknowledgment letters. 17 CFR 22.5.
Separately, the Commission is redesignating appendices A and B
to Commission regulation 1.20 as appendices C and D to part 1, and
appendices A and B to Commission regulation 1.26 as appendices F and
G to part 1, to address a change in the rules of the Office of the
Federal Register regarding the structure of regulatory text to be
codified in the Code of Federal Regulations.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

\624\ Proposal at 81262.
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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

[[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.
---------------------------------------------------------------------------

\625\ 17 CFR 1.55(a). The term ``eligible contract participant''
is defined in section 1a(18) of the CEA and Commission regulation
1.3. 7 U.S.C. 1a(18) and 17 CFR 1.3. The definition covers various
CFTC-regulated entities meeting specified conditions, including swap
dealers, FCMs, and commodity pools with over $5 million in assets
under management, as well as various types of other federally-
regulated financial institutions such as certain banks, broker-
dealers, insurance companies, pension plans, as well as corporations
and other forms of corporate entities with over $10 million in
assets, and individuals with $10 million invested on a discretionary
basis or $5 million invested on a hedging basis. Certain other
exclusions and conditions apply with respect to these various types
of designated entities and individuals.
\626\ Id.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\627\ Final Commission regulation 1.55(b)(6).
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

\628\ 7 U.S.C. 6d(a)(2).
---------------------------------------------------------------------------

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\
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\629\ 7 U.S.C. 6(c). With respect to investments of Cleared
Swaps Customer Collateral and 30.7 customer funds, the Commission
would be acting pursuant to its plenary authority under sections
4d(f) and 4(b) of the Act, respectively, rather than section 4(c). 7
U.S.C. 6d(f)(4) (providing that Cleared Swaps Customer Collateral
may be invested in certain specified investments and in any other
investment that the Commission may by rule or regulation prescribe,
and such investments shall be made in accordance with such rules and
regulations and subject to such conditions as the Commission may
prescribe.) and 7 U.S.C. 6(b)(2)(A) (providing that the Commission
may adopt rules and regulations requiring, among other things, the
safeguarding of customer's funds, by any person located in the U.S.
who engages in foreign futures trading).
\630\ 7 U.S.C. 6(c)(1).
\631\ House Conf. Report No. 102-978, 1992 U.S.C.C.A.N. 3179,
3213.
\632\ 7 U.S.C. 6(c)(1).
---------------------------------------------------------------------------

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®ulatory 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\
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\633\ 7 U.S.C. 6(c)(2).
\634\ Public Law 102-546, 106 Stat. 3590 (1992) and H.R. Conf.
Rep. No. 102-978 (1992). The Conference Report also states that the
reference in section 4(c) to the ``purposes of the Act'' is intended
to ``underscore [the Conferees'] expectation that the Commission
will assess the impact of a proposed exemption on the maintenance of
the integrity and soundness of markets and market participants.''
\635\ 7 U.S.C. 5(b) (providing that it is further the purpose of
the Act to deter and prevent price manipulation or any other
disruptions to market integrity; to ensure the financial integrity
of all transactions subject to the Act and the avoidance of systemic
risk; to protect all market participants from fraudulent or other
abusive sales practices and misuses of customer assets; and to
promote responsible innovation and fair competition among boards of
trade, other markets and market participants.)
---------------------------------------------------------------------------

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

[[Page 7855]]

expansion is, in the Commission's view, consistent with the public
interest and the purposes of the Act.\636\
---------------------------------------------------------------------------

\636\ Proposal at 81264. The analysis did not include a
discussion of section 4(c)(2)(B)'s conditions because the exemption
in this instance does not implicate or affect a futures agreement,
contract, or transaction.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\637\ Investor Advocacy Group Joint Letter at p. 1; Better
Markets at p. 3.
\638\ Better Markets at p. 3.
\639\ Id.
\640\ Investor Advocacy Group Joint Letter at pp. 1-2.
\641\ Better Markets at 4.
\642\ Investor Advocacy Groups Joint Letter at p. 2.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

\643\ Consistent with the Proposal, the analysis does not
include a discussion of section 4(c)(2)(B)'s conditions (i.e., that
the agreement, contract, or transaction will be entered solely
between ``appropriate persons'' and will not have a material adverse
effect on the ability of the Commission or any contract market or
derivatives transaction execution facility to discharge its
regulatory or self-regulatory duties under the Act) because the
exemption in this instance does not implicate or affect a futures
agreement, contract, or transaction.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

\644\ Better Markets at p. 4.
---------------------------------------------------------------------------

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

[[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.
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\645\ 5 U.S.C. 601 et seq.
\646\ 5 U.S.C. 553. The Administrative Procedure Act is found at
5 U.S.C. 500 et seq.
\647\ See 5 U.S.C. 601(2), 603, 604, and 605.
\648\ See 47 FR 18618, 18619 (Apr. 30, 1982) and 66 FR 45604,
45609 (Aug. 29, 2001).
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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\
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\649\ 44 U.S.C. 3501 et seq.
\650\ See 44 U.S.C. 3507(a)(3); 5 CFR 1320.5(a)(3).
\651\ See 44 U.S.C. 3501.
\652\ See 44 U.S.C. 3502(3).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\653\ For the previously approved PRA estimates under OMB
Control No. 3038-0024, see ICR Reference No. 202101-3038-001, at
https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=202207-3038-001. For previously approved PRA estimated under OMB Control No.
3038-0091, see ICR Reference No. 202009-3038-007, at https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=202009-3038-007.

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[[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\
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\654\ The Commission has previously estimated that compliance
with the requirements under Commission regulations 1.32(f) and
1.32(g) to file SIDR reports requires 59 covered FCMs to expend
2,832 burden hours annually. The Commission has estimated that each
FCM will file 24 reports per year requiring approximately 48 burden
hours per respondent. This yields a total of 2,832 burden hours
annually (59 FCM respondents x 48 burden hours annually = 2,832
hours).
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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\
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\655\ An amendment to Commission regulation 22.5 is not
necessary because Commission regulation 22.5 cross-references
Commission regulation 1.26.
\656\ For any Permitted Investment, other than investment in
Permitted Government MMFs, FCMs and DCOs are required to obtain an
acknowledgement letter pursuant to Commission regulations 1.20,
22.5, and 30.7(d). 17 CFR 1.20, 22.5, and 30.7(d).
\657\ The Commission had proposed to add new template
acknowledgment letters modeled on the acknowledgment letter under
Commission regulation 1.26 for MMFs but addressing investments in
Qualified ETFs (proposed appendices H and I to part 1 and proposed
appendix G to part 30). Based on public comments received and
communications with industry representatives, the Commission has
concluded that it is not necessary to provide such new template
acknowledgment letters. Instead, FCMs and DCOs will be able to
follow the process for Permitted Investments other than Permitted
Government MMFs and obtain an acknowledgment letter pursuant to
Commission regulations 1.20, 22.5, and 30.7(d), using the template
under Commission regulation 1.20 (redesignated as appendix C to part
1).
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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.
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\658\ For the definition of ``eligible contract participant,''
see supra note 625.
\659\ The Commission has previously estimated that 59
respondents will incur an annual burden of 20 hours per statement.
Supporting Statement for Revised Information Collections for
Regulations and Forms Pertaining to Financial Integrity of the
Market Place; Margin Requirements for SDs/MSPs (OMB Control 3038-
0024) and Disclosure and Retention of Certain Information Relating
to Cleared Swaps Customer Collateral (OMB Control Number 3038-0091).
---------------------------------------------------------------------------

Also, in connection with the revisions related to the elimination
of the Read-

[[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\
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\660\ The Commission has estimated that 36 covered FCMs incur an
estimated 216 burden hours annually to file required acknowledgment
letters pursuant to Commission regulation 1.20(d). The Commission
has estimated that each respondent will file 3 reports per year
requiring an estimated 2 burden hours per report, for a total of 6
burden hours per respondent. This yields a total of 216 burden hours
annually (36 respondents x 6 burden hours annually = 216 burden
hours). Under Commission regulation 1.26, the Commission has
estimated that 74 covered respondents incur an estimated 111 burden
hours annually to obtain and maintain required acknowledgement forms
(74 respondents x 1.5 hours annually = 111 burden hours). Under
Commission regulation 30.7, the Commission has estimated that 42
covered respondents incur an estimated 252 burden hours annually (42
respondents x 6 burden hours annually = 252 burden hours) and under
Commission regulation 22.5, the Commission has estimated that 78
covered respondents incur an estimated 390 burden hours annually (78
respondents x 5 burden hours annually = 390 burden hours) to obtain
and maintain the required acknowledgment letters.
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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.
---------------------------------------------------------------------------

\661\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\662\ 7 U.S.C. 2(i).
---------------------------------------------------------------------------

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

[[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\
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\663\ Final Commission regulation 1.25(a)(1)(vi).
\664\ Final Commission regulation 1.25(a)(1)(vi)(A) and (B), and
final Commission regulation 1.25(f).
---------------------------------------------------------------------------

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\
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\665\ Commission regulation 1.25(d)(2) currently permits an FCM
and DCO to engage in Repurchase Transactions involving Customer
Funds with counterparties that are: (i) section 3(a)(6) banks; (ii)
a domestic branch of a foreign bank insured by the FDIC; or (iii) a
securities broker or dealer, or a government securities broker or
government securities dealer that is registered with the SEC or that
has filed a notice pursuant to section 15C(a) of the Government
Securities Act of 1986.
\666\ Commission regulation 1.49(a)(1) defines ``money center
country'' as Canada, France, Italy, Germany, Japan, or the United
Kingdom.
\667\ Final Commission regulation 1.25(d)(2).
---------------------------------------------------------------------------

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\
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\668\ Commission regulation 1.25(d)(7) currently permits an FCM
or DCO to hold securities received under Repurchase Transactions in
safekeeping accounts with a section 3(a)(6) bank, a domestic branch
of a foreign bank insured by the Federal Deposit Insurance
Corporation, a Federal Reserve Bank, a DCO, or the Depository Trust
Company in account that complies with Commission regulation 1.26.
\669\ Final Commission regulation 1.25(d)(7).
\670\ Id.
---------------------------------------------------------------------------

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

[[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\
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\671\ Final Commission regulation 1.25(a)(1)(v).
\672\ Final Commission regulation 1.25(c)(1).
\673\ Final Commission regulation 1.25(a)(1)(v).
\674\ Final Commission regulation 1.25(c)(8).
\675\ 17 CFR 1.25(c)(5)(ii). The Commission has determined not
to adopt the proposed revision to Commission regulation
1.25(c)(5)(ii), which would have limited the ability to provide for
the postponement of redemption and payment due to any of the
circumstances listed in that subsection to Government MMFs.
\676\ Id.
\677\ SEC ETF Letter.
\678\ See generally section IV.C. of this preamble for a
discussion of the capital charges on Specified Foreign Sovereign
Debt securities and shares of Qualified ETFs.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

\679\ Joint Petition at p. 3 (citing, as an example of
regulatory requirements, Article 45 of the regulatory technical
standards on requirements for central counterparties (Commission
Delegated Regulation (EU) No. 153/2013) (``CCP RTS''), which
supplements provisions in the EU Market Infrastructure Regulation
(Regulation (EU) No 648/2012) (``EMIR'') governing the investment
policies of EU central counterparties. Per Article 45(2) of the CCP
RTS, not less than 95 percent of cash deposited other than with a
central bank and maintained overnight must be deposited through
arrangements that ensure its collateralization with highly liquid
financial instruments).
---------------------------------------------------------------------------

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

[[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).
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\680\ The terms ``futures account,'' ``Cleared Swaps Customer
Account,'' and ``30.7 account'' are defined in Commission
Regulations 1.3, 22.1, and 30.1, respectively. 17 CFR 1.3, 17 CFR
22.1, and 17 CFR 30.1.
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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.
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\681\ Final Commission regulation 1.25(f).
\682\ Final Commission regulation 1.25(a)(1)(v).
\683\ Final Commission regulation 1.25(c)(8)(ii).
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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.
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\684\ See supra note 43.
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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.

[[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.
---------------------------------------------------------------------------

\685\ See supra note 238 (using one-year sovereign debt
instruments yield data to demonstrate that the price risk of the
Specified Foreign Sovereign Debt instruments is comparable to that
of U.S. government securities), section IV.A.2 (using credit default
swap data to demonstrate that the Specified Foreign Sovereign Debt
instruments have a risk profile comparable to that of U.S.
government securities) and Proposal at 81250 (using yield data to
demonstrate that five ETFs currently available on the market, which
invest in short-term U.S. Treasury securities, are at least as
stable as one-year U.S. Treasury securities).
---------------------------------------------------------------------------

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.

[[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\
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\686\ Separately, as discussed in section VII.C.1. of this
preamble, the Final Rule adds Qualified ETFs to the list of
Permitted Investments and adopts concentration limits for such
Qualified ETFs.
\687\ Although commenters did not provide a specific reason for
the lack of use of bank CDs, the Commission understands that few, if
any, bank CDs meet the requirements in Commission regulation
1.25(b)(v) that the CD is redeemable at the issuing bank within one
business day, with any penalty for early withdrawal limited to any
accrued interest earned according to its written terms. 17 CFR
1.25(b)(v). Thus, eliminating this investment option also aligns
with the decision to eliminate certain government MMFs that elect to
impose liquidity fees to stem redemptions.
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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.
---------------------------------------------------------------------------

\688\ As discussed in section IV.B. of this preamble, the
Commission is deleting the conjunction ``and'' in Commission
regulation 1.25(b)(3)(i)(G), redesignated as Commission regulation
1.25(b)(3)(i)(E) and revised to reflect other amendments adopted in
this Final Rule, to clarify that the fund size threshold and the
management company size threshold are to be construed as alternative
prongs triggering the 10 percent limit.
---------------------------------------------------------------------------

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.

[[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\
---------------------------------------------------------------------------

\689\ 2010 Proposed Permitted Investments Amendment at 67644.
---------------------------------------------------------------------------

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.
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\690\ ICE at p. 4; FIA/CME Joint Letter at pp. 20; Nodal at pp.
3-4. In addition to the Commission's general experience in
overseeing DCOs and FCMs, Commission staff also reviewed how FCMs
invested customer funds as reported in the SIDR Report for the
period September 15, 2022 to February 15, 2023 and observed that no
FCMs reported investing customer funds in bank CDs.
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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\
---------------------------------------------------------------------------

\691\ See 17 CFR 1.25(b)(1).
---------------------------------------------------------------------------

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.
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\692\ SEC 2023 MMF Reforms at 51417 (investors typically view
government MMFs, in contrast to Prime MMFs, as a relatively safe
investment during times of market turmoil). See also Money Market
Fund Reforms, 87 FR 7248 (Feb. 8, 2022) (``SEC 2023 MMF Reforms
Proposing Release'') at 7250. During the 2008 financial crisis there
was a run primarily on institutional Prime MMFs after an MMF ``broke
the buck'' and suspended redemptions, which motivated many fund
sponsors to step in and provide financial support to their funds.
The events led to general turbulence in the financial markets and
contributed to severe dislocations in short-term credit markets. Id.
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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

[[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.
---------------------------------------------------------------------------

\693\ Staff Letter 21-26 at p. 1.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

\694\ 17 CFR 1.25(b)(2)(iv)(A).
\695\ See Staff Letter 21-26 at p. 3.
---------------------------------------------------------------------------

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:

[[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\
---------------------------------------------------------------------------

\696\ The replacement of LIBOR as a benchmark for Permitted
Investments represents another step in the Commission's efforts to
facilitate the transition away from LIBOR, as illustrated by a
recent amendment to the clearing requirements. See generally
Clearing Requirement Determination Under Section 2(h) of the
Commodity Exchange Act for Interest Rate Swaps to Account for the
Transition from LIBOR and Other IBORs to Alternative Reference
Rates, 87 FR 52182 (Aug. 24, 2022) (replacing the requirement to
clear interest rate swaps referencing LIBOR and certain other
interbank offered rates with the requirement to clear interest rate
swaps referencing overnight, nearly risk-free reference rates).
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

\697\ The relevant provisions appear in Commission regulation
1.20, appendix A to Commission regulation 1.20, appendix A to
Commission regulation 1.26, Commission regulation 30.7 and
appendices E and F to part 30 of CFTC's regulations. The amendments
also extend to Commission regulation 22.5, which requires FCMs and
DCOs, before depositing Cleared Swaps Customer Collateral with a
depository, to obtain an acknowledgment letter from each depository
in accordance with Commission regulations 1.20 and 1.26. 17 CFR
22.5(a). Commission regulation 22.5 further requires FCMs and DCOs
to adhere to all requirements specified in Commission regulation
1.20 and 1.26 regarding retaining, permitting access to filing, or
amending the written acknowledgment letters. 17 CFR 22.5(a).
---------------------------------------------------------------------------

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.

[[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\
---------------------------------------------------------------------------

\698\ 7 U.S.C. 19(b).
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

\699\ Proposal at 81273.
---------------------------------------------------------------------------

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

0
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).

Sec. 1.20 [Amended]

0
2. Amend Sec. 1.20 by:
0
a. Removing the cross-reference to ``Appendix A to Sec. 1.20'' and
adding in its place ``appendix C to this part'' in paragraph (d)(2);
0
b. Removing and reserving paragraph (d)(3); and
0
c. Removing the cross-reference to ``Appendix B to Sec. 1.20'' and
adding in its place ``appendix D to this part'' in paragraph
(g)(4)(ii);

Appendices C and D to Part 1

0
3. Further amend Sec. 1.20 by redesignating appendices A and B to
Sec. 1.20 as appendices C and D to part 1, respectively.

0
4. Amend Sec. 1.25 by:
0
a. Revising and republishing the paragraph (a) heading and paragraph
(a)(1) introductory text;
0
b. Removing paragraphs (a)(1)(iv) through (vi);
0
c. Redesignating paragraph (a)(1)(vii) as new paragraph (a)(1)(iv) and
revising it;
0
d. Adding new paragraphs (a)(1)(v) and (a)(1)(vi);
0
e. Revising and republishing paragraph (b) introductory text and the
paragraph (b)(2) heading;
0
f. Revising paragraph (b)(2)(i) introductory text;
0
g. Revising and republishing paragraph (b)(2)(iv)(A) introductory text;
0
h. Revising paragraphs (b)(2)(iv)(A)(1) and (2);
0
i. Removing paragraphs (b)(2)(v) and (vi);
0
j. Republishing the paragraph (b)(3) heading;
0
k. Removing paragraph (b)(3)(i)(C);
0
l. Redesignating paragraphs (b)(3)(i)(D) and (E) as paragraphs
(b)(3)(i)(C) and (D);
0
m. Revising newly redesignated paragraph (b)(3)(i)(D);
0
n. Removing paragraph (b)(3)(i)(F);

[[Page 7868]]

0
o. Redesignating paragraph (b)(3)(i)(G) as (b)(3)(i)(E);
0
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);
0
q. Removing ``The appendix to this section'' and adding in its place
``Appendix E to this part'' in paragraph (c)(7);
0
r. Adding paragraph (c)(8);
0
s. Republishing paragraph (d) introductory text;
0
t. Revising paragraphs (d)(2) and (7); and
0
u. Adding paragraph (f).
The republications, revisions, and additions read as follows:

Sec. 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 Sec.
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

[[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 Sec. 1.49(d)(3) and that is located in
a money center country as the term is defined in Sec. 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 Sec. 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 Sec. 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
Sec. 1.26 at a foreign bank that meets the location and qualification
requirements in Sec. 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

0
5. Section 1.25 is further amended by redesignating the appendix to
Sec. 1.25 as appendix E to part 1.

Sec. 1.26 [Amended]

0
6. Amend Sec. 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.

[[Page 7870]]

------------------------------------------------------------------------
Paragraph Remove Add
------------------------------------------------------------------------
(a)............................. ``money market ``government money
mutual funds''. market funds.''
(b)............................. ``money market ``government money
mutual fund''. market fund.''
(b)............................. ``appendix A or B ``appendix F or G
to this section''. to this part.''
(b)............................. ``appendix A or B ``appendix C or D
to Sec. 1.20''. to this part.''
------------------------------------------------------------------------

Appendices F and G to Part 1

0
7. Section 1.26 is further amended by redesignating appendix A to Sec.
1.26 as appendix F to part 1 and appendix B to Sec. 1.26 as appendix G
to part 1.

0
8. Amend Sec. 1.32 by:
0
a. Removing paragraph (f)(3)(iv);
0
b. Redesignating paragraphs (f)(3)(v) through (vii) as paragraphs
(f)(3)(iv) through (vi); and
0
c. Revising newly redesignated paragraphs (f)(3)(iv) through (vi).
The revisions read as follows:

Sec. 1.32 Reporting of segregated account computation and details
regarding the holding of futures customer funds.

* * * * *
(f) * * *
(3) * * *
(iv) Permitted foreign sovereign debt by country:
(A) Canada;
(B) France;
(C) Germany;
(D) Japan;
(E) United Kingdom;
(v) Interests in U.S. Treasury exchange-traded funds; and
(vi) Interests in government money market funds.
* * * * *

0
9. Amend Sec. 1.55 by revising paragraph (b)(6) to read as follows:

Sec. 1.55 Public disclosures by futures commission merchants.

* * * * *
(b) * * *
(6) 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 (17 CFR 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.
* * * * *

0
10. Revise newly redesignated appendix C to part 1 to read as follows:

Appendix C to Part 1--Futures Commission Merchant Acknowledgment Letter
for CFTC Regulation 1.20 Customer Segregated Account

[Date]
[Name and Address of Bank, Trust Company, Derivatives Clearing
Organization or Futures Commission Merchant]

We refer to the Segregated Account(s) which [Name of Futures
Commission Merchant] (``we'' or ``our'') have opened or will open
with [Name of Bank, Trust Company, Derivatives Clearing Organization
or Futures Commission Merchant] (``you'' or ``your'') entitled:
[Name of Futures Commission Merchant] [if applicable, add ``FCM
Customer Omnibus Account''] CFTC Regulation 1.20 Customer Segregated
Account under sections 4d(a) and 4d(b) of the Commodity Exchange Act
[and, if applicable, ``, Abbreviated as [short title reflected in
the depository's electronic system]'']

Account Number(s): [ ]
(collectively, the ``Account(s)'').

You acknowledge that we have opened or will open the above-
referenced Account(s) for the purpose of depositing, as applicable,
money, securities and other property (collectively the ``Funds'') of
customers who trade commodities, options, swaps, and other products,
as required by Commodity Futures Trading Commission (``CFTC'')
Regulations, including Regulation 1.20, as amended; that the Funds
held by you, hereafter deposited in the Account(s) or accruing to
the credit of the Account(s), will be separately accounted for and
segregated on your books from our own funds and from any other funds
or accounts held by us in accordance with the provisions of the
Commodity Exchange Act, as amended (the ``Act''), and part 1 of the
CFTC's regulations, as amended; and that the Funds must otherwise be
treated in accordance with the provisions of section 4d of the Act
and CFTC regulations thereunder.
Furthermore, you acknowledge and agree that such Funds may not
be used by you or by us to secure or guarantee any obligations that
we might owe to you, and they may not be used by us to secure or
obtain credit from you. You further acknowledge and agree that the
Funds in the Account(s) shall not be subject to any right of offset
or lien for or on account of any indebtedness, obligations or
liabilities we may now or in the future have owing to you. This
prohibition does not affect your right to recover funds advanced in
the form of cash transfers, lines of credit, repurchase agreements
or other similar liquidity arrangements you make in lieu of
liquidating non-cash assets held in the Account(s) or in lieu of
converting cash held in the Account(s) to cash in a different
currency.
In addition, you agree that the Account(s) may be examined at
any reasonable time by the Director of the Market Participants
Division of the CFTC or the Director of the Division of Clearing and
Risk of the CFTC, or any successor divisions, or such Directors'
designees, or an appropriate officer, agent or employee of our
designated self-regulatory organization (``DSRO''), [Name of DSRO],
and this letter constitutes the authorization and direction of the
undersigned on our behalf to permit any such examination to take
place without further notice to or consent from us.
You agree to reply promptly and directly to any request for
confirmation of account balances or provision of any other
information regarding or related to the Account(s) from the Director
of the Market Participants Division of the CFTC or the Director of
the Division of Clearing and Risk of the CFTC, or any successor
divisions, or such Directors' designees, or an appropriate officer,
agent, or employee of [Name of DSRO], acting in its capacity as our
DSRO, and this letter constitutes the authorization and direction of
the undersigned on our behalf to release the requested information
without further notice to or consent from us.
The parties agree that all actions on your part to respond to
the above information request will be made in accordance with, and
subject to, such usual and customary authorization verification and
authentication policies and procedures as may be employed by you to
verify the authority of, and authenticate the identity of, the
individual making any such information request, in order to provide
for the secure transmission and delivery of the requested
information to the appropriate recipient(s). We will not hold you
responsible for acting pursuant to any information request from the
Director of the Market Participants Division of the CFTC or the
Director of the Division of Clearing and Risk of the CFTC, or any
successor divisions, or such Directors' designees, or an appropriate
officer, agent, or employee of [Name of DSRO], acting in its
capacity as our DSRO, upon which you have relied after having taken
measures in accordance with your applicable policies and procedures
to assure that such request was provided to you by an individual
authorized to make such a request.
In the event that we become subject to either a voluntary or
involuntary petition for relief under the U.S. Bankruptcy Code, we
acknowledge that you will have no obligation to release the Funds
held in the Account(s), except upon instruction of the Trustee in
Bankruptcy or pursuant to the Order of the respective U.S.
Bankruptcy Court.
Notwithstanding anything in the foregoing to the contrary,
nothing contained herein

[[Page 7871]]

shall be construed as limiting your right to assert any right of
offset or lien on assets that are not Funds maintained in the
Account(s), or to impose such charges against us or any proprietary
account maintained by us with you. Further, it is understood that
amounts represented by checks, drafts or other items shall not be
considered to be part of the Account(s) until finally collected.
Accordingly, checks, drafts and other items credited to the
Account(s) and subsequently dishonored or otherwise returned to you
or reversed, for any reason, and any claims relating thereto,
including but not limited to claims of alteration or forgery, may be
charged back to the Account(s), and we shall be responsible to you
as a general endorser of all such items whether or not actually so
endorsed.
You may conclusively presume that any withdrawal from the
Account(s) and the balances maintained therein are in conformity
with the Act and CFTC regulations without any further inquiry,
provided that, in the ordinary course of your business as a
depository, you have no notice of or actual knowledge of a potential
violation by us of any provision of the Act or the CFTC regulations
that relates to the segregation of customer funds; and you shall not
in any manner not expressly agreed to herein be responsible to us
for ensuring compliance by us with such provisions of the Act and
CFTC regulations; however, the aforementioned presumption does not
affect any obligation you may otherwise have under the Act or CFTC
regulations.
You may, and are hereby authorized to, obey the order, judgment,
decree or levy of any court of competent jurisdiction or any
governmental agency with jurisdiction, which order, judgment, decree
or levy relates in whole or in part to the Account(s). In any event,
you shall not be liable by reason of any action or omission to act
pursuant to any such order, judgment, decree or levy, to us or to
any other person, firm, association or corporation even if
thereafter any such order, decree, judgment or levy shall be
reversed, modified, set aside or vacated.
The terms of this letter agreement shall remain binding upon the
parties, their successors and assigns and, for the avoidance of
doubt, regardless of a change in the name of either party. This
letter agreement supersedes and replaces any prior agreement between
the parties in connection with the Account(s), including but not
limited to any prior acknowledgment letter agreement, to the extent
that such prior agreement is inconsistent with the terms hereof. In
the event of any conflict between this letter agreement and any
other agreement between the parties in connection with the
Account(s), this letter agreement shall govern with respect to
matters specific to section 4d of the Act and the CFTC's regulations
thereunder, as amended.
This letter agreement shall be governed by and construed in
accordance with the laws of [Insert governing law] without regard to
the principles of choice of law.
Please acknowledge that you agree to abide by the requirements
and conditions set forth above by signing and returning to us the
enclosed copy of this letter agreement, and that you further agree
to provide a copy of this fully executed letter agreement directly
to the CFTC (via electronic means in a format and manner determined
by the CFTC) and to [Name of DSRO], acting in its capacity as our
DSRO. We hereby authorize and direct you to provide such copies
without further notice to or consent from us, no later than three
business days after opening the Account(s) or revising this letter
agreement, as applicable.

[Name of Futures Commission Merchant]
By:
Print Name:
Title:
ACKNOWLEDGED AND AGREED:
[Name of Bank, Trust Company, Derivatives Clearing Organization or
Futures Commission Merchant]
By:
Print Name:
Title:
Contact Information: [Insert phone number and email address]
DATE:

0
11. Revise the heading of newly redesignated appendix E to part 1 to
read as follows:

Appendix E to Part 1--Government Money Market Fund Prospectus
Provisions Acceptable for Compliance with Sec. 1.25(c)(5)

* * * * *

0
12. Revise newly redesignated appendix F to part 1 to read as follows:

Appendix F to Part 1--Futures Commission Merchant Acknowledgment Letter
for CFTC Regulation 1.26 Customer Segregated Government Money Market
Fund Account

[Date]
[Name and Address of Government Money Market Fund]

We propose to invest funds held by [Name of Futures Commission
Merchant] (``we'' or ``our'') on behalf of our customers in shares
of [Name of Government Money Market Fund] (``you'' or ``your'')
under account(s) entitled (or shares issued to):
[Name of Futures Commission Merchant] [if applicable, add ``FCM
Customer Omnibus Account''] CFTC Regulation 1.26 Customer Segregated
Government Money Market Fund Account under sections 4d(a) and 4d(b)
of the Commodity Exchange Act [and, if applicable, ``, Abbreviated
as [short title reflected in the depository's electronic system]'']

Account Number(s): [ ]
(collectively, the ``Account(s)'').

You acknowledge that we are holding these funds, including any
shares issued and amounts accruing in connection therewith
(collectively, the ``Shares''), for the benefit of customers who
trade commodities, options, swaps and other products (``Commodity
Customers''), as required by Commodity Futures Trading Commission
(``CFTC'') Regulation 1.26, as amended; that the Shares held by you,
hereafter deposited in the Account(s) or accruing to the credit of
the Account(s), will be separately accounted for and segregated on
your books from our own funds and from any other funds or accounts
held by us in accordance with the provisions of the Commodity
Exchange Act, as amended (the ``Act''), and part 1 of the CFTC's
regulations, as amended; and that the Shares must otherwise be
treated in accordance with the provisions of section 4d of the Act
and CFTC regulations thereunder.
Furthermore, you acknowledge and agree that the Shares are in a
fund that holds itself out to investors as a government money market
fund, in accordance with 17 CFR 270.2a-7. In addition, you
acknowledge and agree that the Shares are in a fund that does 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).
Furthermore, you acknowledge and agree that such Shares may not
be used by you or by us to secure or guarantee any obligations that
we might owe to you, and they may not be used by us to secure or
obtain credit from you. You further acknowledge and agree that the
Shares in the Account(s) shall not be subject to any right of offset
or lien for or on account of any indebtedness, obligations or
liabilities we may now or in the future have owing to you.
In addition, you agree that the Account(s) may be examined at
any reasonable time by the Director of the Market Participants
Division of the CFTC or the Director of the Division of Clearing and
Risk of the CFTC, or any successor divisions, or such Directors'
designees, or an appropriate officer, agent or employee of our
designated self-regulatory organization (``DSRO''), [Name of DSRO],
and this letter constitutes the authorization and direction of the
undersigned on our behalf to permit any such examination to take
place without further notice to or consent from us.
You agree to reply promptly and directly to any request for
confirmation of account balances or provision of any other account
information regarding or related to the Account(s) from the Director
of the Market Participants Division of the CFTC or the Director of
the Division of Clearing and Risk of the CFTC, or any successor
divisions, or such Directors' designees, or an appropriate officer,
agent, or employee of [Name of DSRO], acting in its capacity as our
DSRO, and this letter constitutes the authorization and direction of
the undersigned on our behalf to release the requested information
without further notice to or consent from us.
The parties agree that all actions on your part to respond to
the above information request will be made in accordance with, and
subject to, such usual and customary authorization verification and
authentication policies and procedures as may be employed by you to
verify the authority of, and authenticate the identity of, the
individual making any such information request, in order to provide
for the secure transmission and delivery of the requested
information to the appropriate recipient(s).
We will not hold you responsible for acting pursuant to any
information request from the Director of the Market Participants
Division of the CFTC or the Director of the Division of Clearing and
Risk of the CFTC, or any successor divisions, or such Directors'

[[Page 7872]]

designees, or an appropriate officer, agent, or employee of [Name of
DSRO], acting in its capacity as our DSRO, upon which you have
relied after having taken measures in accordance with your
applicable policies and procedures to assure that such request was
provided to you by an individual authorized to make such a request.
In the event we become subject to either a voluntary or
involuntary petition for relief under the U.S. Bankruptcy Code, we
acknowledge that you will have no obligation to release the Shares
held in the Account(s), except upon instruction of the Trustee in
Bankruptcy or pursuant to the Order of the respective U.S.
Bankruptcy Court.
Notwithstanding anything in the foregoing to the contrary,
nothing contained herein shall be construed as limiting your right
to assert any right of offset or lien on assets that are not Shares
maintained in the Account(s), or to impose such charges against us
or any proprietary account maintained by us with you. Further, it is
understood that amounts represented by checks, drafts or other items
shall not be considered to be part of the Account(s) until finally
collected. Accordingly, checks, drafts and other items credited to
the Account(s) and subsequently dishonored or otherwise returned to
you or reversed, for any reason and any claims relating thereto,
including but not limited to claims of alteration or forgery, may be
charged back to the Account(s), and we shall be responsible to you
as a general endorser of all such items whether or not actually so
endorsed.
You may conclusively presume that any withdrawal from the
Account(s) and the balances maintained therein are in conformity
with the Act and CFTC regulations without any further inquiry,
provided that, in the ordinary course of your business as a
depository, you have no notice of or actual knowledge of a potential
violation by us of any provision of the Act or the CFTC regulations
that relates to the segregation of customer funds; and you shall not
in any manner not expressly agreed to herein be responsible to us
for ensuring compliance by us with such provisions of the Act and
CFTC regulations; however, the aforementioned presumption does not
affect any obligation you may otherwise have under the Act or CFTC
regulations.
You may, and are hereby authorized to, obey the order, judgment,
decree or levy of any court of competent jurisdiction or any
governmental agency with jurisdiction, which order, judgment, decree
or levy relates in whole or in part to the Account(s). In any event,
you shall not be liable by reason of any action or omission to act
pursuant to such order, judgment, decree or levy, to us or to any
other person, firm, association or corporation even if thereafter
any such order, decree, judgment or levy shall be reversed,
modified, set aside or vacated.
We are permitted to invest customers' funds in government money
market funds pursuant to CFTC Regulation 1.25. That rule sets forth
the following conditions, among others, with respect to any
investment in a government money market fund:
(1) The net asset value of the fund must be computed by 9 a.m.
of the business day following each business day and be made
available to us by that time;
(2) The fund must be legally obligated to redeem an interest in
the fund and make payment in satisfaction thereof by the close of
the business day following the day on which we make a redemption
request except as otherwise specified in CFTC Regulation
1.25(c)(5)(ii); and,
(3) The agreement under which we invest customers' funds must
not contain any provision that would prevent us from pledging or
transferring fund shares.
The terms of this letter agreement shall remain binding upon the
parties, their successors and assigns, and for the avoidance of
doubt, regardless of a change in the name of either party. This
letter agreement supersedes and replaces any prior agreement between
the parties in connection with the Account(s), including but not
limited to any prior acknowledgment letter agreement, to the extent
that such prior agreement is inconsistent with the terms hereof. In
the event of any conflict between this letter agreement and any
other agreement between the parties in connection with the
Account(s), this letter agreement shall govern with respect to
matters specific to section 4d of the Act and the CFTC's regulations
thereunder, as amended.
This letter agreement shall be governed by and construed in
accordance with the laws of [Insert governing law] without regard to
the principles of choice of law.
Please acknowledge that you agree to abide by the requirements
and conditions set forth above by signing and returning to us the
enclosed copy of this letter agreement, and that you further agree
to provide a copy of this fully executed letter agreement directly
to the CFTC (via electronic means in a format and manner determined
by the CFTC) and to [Name of DSRO], acting in its capacity as our
DSRO, in accordance with CFTC Regulation 1.20. We hereby authorize
and direct you to provide such copies without further notice to or
consent from us, no later than three business days after opening the
Account(s) or revising this letter agreement, as applicable.

[Name of Futures Commission Merchant]
By:
Print Name:
Title:
ACKNOWLEDGED AND AGREED:
[Name of Government Money Market Fund]
By:
Print Name:
Title:
Contact Information: [Insert phone number and email address]
Date:

0
13. Revise newly redesignated appendix G to part 1 to read as follows:

Appendix G to Part 1--Derivatives Clearing Organization Acknowledgment
Letter for CFTC Regulation 1.26 Customer Segregated Government Money
Market Fund Account

[Date]
[Name and Address of Government Money Market Fund]

We propose to invest funds held by [Name of Derivatives Clearing
Organization] (``we'' or ``our'') on behalf of customers in shares
of [Name of Government Money Market Fund] (``you'' or ``your'')
under account(s) entitled (or shares issued to):
[Name of Derivatives Clearing Organization] Futures Customer
Omnibus Account, CFTC Regulation 1.26 Customer Segregated Government
Money Market Fund Account under sections 4d(a) and 4d(b) of the
Commodity Exchange Act [and, if applicable, ``, Abbreviated as
[short title reflected in the depository's electronic system]'']

Account Number(s): [ ]
(collectively, the ``Account(s)'').

[[Page 7873]]

by you to verify the authority of, and authenticate the identity of,
the individual making any such information request, in order to
provide for the secure transmission and delivery of the requested
information to the appropriate recipient(s).
We will not hold you responsible for acting pursuant to any
information request from the Director of the Division of Clearing
and Risk of the CFTC or the Director of the Market Participants
Division of the CFTC, or any successor divisions, or such Directors'
designees, upon which you have relied after having taken measures in
accordance with your applicable policies and procedures to assure
that such request was provided to you by an individual authorized to
make such a request.
In the event that we become subject to either a voluntary or
involuntary petition for relief under the U.S. Bankruptcy Code, we
acknowledge that you will have no obligation to release the Shares
held in the Account(s), except upon instruction of the Trustee in
Bankruptcy or pursuant to the Order of the respective U.S.
Bankruptcy Court.
Notwithstanding anything in the foregoing to the contrary,
nothing contained herein shall be construed as limiting your right
to assert any right of offset or lien on assets that are not Shares
maintained in the Account(s), or to impose such charges against us
or any proprietary account maintained by us with you. Further, it is
understood that amounts represented by checks, drafts or other items
shall not be considered to be part of the Account(s) until finally
collected. Accordingly, checks, drafts and other items credited to
the Account(s) and subsequently dishonored or otherwise returned to
you or reversed, for any reason, and any claims relating thereto,
including but not limited to claims of alteration or forgery, may be
charged back to the Account(s), and we shall be responsible to you
as a general endorser of all such items whether or not actually so
endorsed.
You may conclusively presume that any withdrawal from the
Account(s) and the balances maintained therein are in conformity
with the Act and CFTC regulations without any further inquiry,
provided that, in the ordinary course of your business as a
depository, you have no notice of or actual knowledge of a potential
violation by us of any provision of the Act or the CFTC regulations
that relates to the segregation of customer funds; and you shall not
in any manner not expressly agreed to herein be responsible to us
for ensuring compliance by us with such provisions of the Act and
CFTC regulations; however, the aforementioned presumption does not
affect any obligation you may otherwise have under the Act or CFTC
regulations.
You may, and are hereby authorized to, obey the order, judgment,
decree or levy of any court of competent jurisdiction or any
governmental agency with jurisdiction, which order, judgment, decree
or levy relates in whole or in part to the Account(s). In any event,
you shall not be liable by reason of any action or omission to act
pursuant to any such order, judgment, decree or levy, to us or to
any other person, firm, association or corporation even if
thereafter any such order, decree, judgment or levy shall be
reversed, modified, set aside or vacated.
We are permitted to invest customers' funds in government money
market funds pursuant to CFTC Regulation 1.25. That rule sets forth
the following conditions, among others, with respect to any
investment in a government money market fund:
(1) The net asset value of the fund must be computed by 9 a.m.
of the business day following each business day and be made
available to us by that time;
(2) The fund must be legally obligated to redeem an interest in
the fund and make payment in satisfaction thereof by the close of
the business day following the day on which we make a redemption
request except as otherwise specified in CFTC Regulation
1.25(c)(5)(ii); and,
(3) The agreement under which we invest customers' funds must
not contain any provision that would prevent us from pledging or
transferring fund shares.
The terms of this letter agreement shall remain binding upon the
parties, their successors and assigns and, for the avoidance of
doubt, regardless of a change in the name of either party. This
letter agreement supersedes and replaces any prior agreement between
the parties in connection with the Account(s), including but not
limited to any prior acknowledgment letter agreement, to the extent
that such prior agreement is inconsistent with the terms hereof. In
the event of any conflict between this letter agreement and any
other agreement between the parties in connection with the
Account(s), this letter agreement shall govern with respect to
matters specific to section 4d of the Act and the CFTC's regulations
thereunder, as amended.
This letter agreement shall be governed by and construed in
accordance with the laws of [Insert governing law] without regard to
the principles of choice of law.
Please acknowledge that you agree to abide by the requirements
and conditions set forth above by signing and returning to us the
enclosed copy of this letter agreement, and that you further agree
to provide a copy of this fully executed letter agreement directly
to the CFTC (via electronic means in a format and manner determined
by the CFTC) in accordance with CFTC Regulation 1.20. We hereby
authorize and direct you to provide such copy without further notice
to or consent from us, no later than three business days after
opening the Account(s) or revising this letter agreement, as
applicable.

[Name of Derivatives Clearing Organization]
By:
Print Name:
Title:
ACKNOWLEDGED AND AGREED:
[Name of Government Money Market Fund]
By:
Print Name:
Title:
Contact Information: [Insert phone number and email address]
DATE:

PART 22--CLEARED SWAPS

0
14. The authority citation for part 22 continues to read as follows:

Authority: 7 U.S.C. 1a, 6d, 7a-1 as amended by Pub. L. 111-203,
124 Stat. 1376.

0
15. Amend Sec. 22.2 by:
0
a. Removing paragraph (g)(5)(iii)(D);
0
b. Redesignating paragraphs (g)(5)(iii)(E) through (G) as paragraphs
(g)(5)(iii)(D) through (F); and
0
c. Revising newly redesignated paragraphs (g)(5)(iii)(D) through (F) to
read as follows:

Sec. 22.2 Futures Commission Merchants: Treatment of Cleared Swaps
and Associated Cleared Swaps Customer Collateral.

* * * * *
(g) * * *
(5) * * *
(iii) * * *
(D) Permitted foreign sovereign debt by country:
(1) Canada;
(2) France;
(3) Germany;
(4) Japan;
(5) United Kingdom;
(E) Interests in U.S. Treasury exchange-traded funds; and
(F) Interests in government money market funds.
* * * * *

0
16. Amend Sec. 22.3 by revising paragraph (d) to read as follows:

Sec. 22.3 Derivatives clearing organizations: Treatment of cleared
swaps customer collateral.

* * * * *
(d) Exceptions; permitted investments. Notwithstanding the
foregoing and Sec. 22.15, a derivatives clearing organization may
invest the money, securities, or other property constituting Cleared
Swaps Customer Collateral in accordance with Sec. 1.25 of this
chapter. A derivative clearing organization shall bear sole
responsibility for any losses resulting from the investment of Cleared
Swaps Customer Collateral in instruments described in Sec. 1.25 of
this chapter. No investment losses shall be borne or otherwise
allocated to a futures commission merchant.

PART 30--FOREIGN FUTURES AND FOREIGN OPTIONS TRANSACTIONS

0
17. The authority citation for part 30 continues to read as follows:

Authority: 7 U.S.C. 1a, 2, 6, 6c, and 12a, unless otherwise
noted.

0
18. Amend Sec. 30.7 by:
0
a. Revising paragraphs (d)(2) and (3);
0
b. Removing paragraph (l)(5)(iii)(D);
0
c. Redesignating paragraphs (l)(5)(iii)(E) through (G) as paragraphs
(l)(5)(iii)(D) through (F); and
0
d. Revising newly redesignated paragraphs (l)(5)(iii)(D) through (F).

[[Page 7874]]

The revisions read as follows:

Sec. 30.7 Treatment of foreign futures or foreign options secured
amount.

* * * * *
(d) * * *
(2) The written acknowledgment must be in the form as set out in
appendix E to this part; Provided, however, that if the futures
commission merchant invests funds set aside as the foreign futures or
foreign options secured amount in government money market funds as a
permitted investment under paragraph (h) of this section and in
accordance with the terms and conditions of Sec. 1.25(c) of this
chapter, the written acknowledgment with respect to such investment
must be in the form as set out in appendix F to this part.
(3)(i) A futures commission merchant shall deposit 30.7 customer
funds only with a depository that agrees to provide the Director of the
Market Participants Division, or any successor division, or such
Director's designees, with account balance information for 30.7
customer accounts.
(ii) The written acknowledgment must contain the futures commission
merchant's authorization to the depository to provide account balance
information to the Director of the Market Participants Division, or any
successor division, or such Director's designees, without further
notice to or consent from the futures commission merchant.
* * * * *
(l) * * *
(5) * * *
(iii) * * *
(D) Permitted foreign sovereign debt by country:
(1) Canada;
(2) France;
(3) Germany;
(4) Japan;
(5) United Kingdom;
(E) Interests in U.S. Treasury exchange-traded funds; and
(F) Interests in government money market funds.
* * * * *

0
19. Revise appendix E to part 30 to read as follows:

Appendix E to Part 30--Acknowledgment Letter for CFTC Regulation 30.7
Customer Secured Account

[Date]
[Name and Address of Depository]

We refer to the Secured Amount Account(s) which [Name of Futures
Commission Merchant] (``we'' or ``our'') have opened or will open
with [Name of Depository] (``you'' or ``your'') entitled:
[Name of Futures Commission Merchant] [if applicable, add ``FCM
Customer Omnibus Account''] CFTC Regulation 30.7 Customer Secured
Account under section 4(b) of the Commodity Exchange Act [and, if
applicable, ``, Abbreviated as [short title reflected in the
depository's electronic system]'']

Account Number(s): [ ] (collectively, the ``Account(s)'').

You acknowledge that we have opened or will open the above-
referenced Account(s) for the purpose of depositing, as applicable,
money, securities and other property (collectively ``Funds'') of
customers who trade foreign futures and/or foreign options (as such
terms are defined in U.S. Commodity Futures Trading Commission
(``CFTC'') Regulation 30.1, as amended; that the Funds held by you,
hereafter deposited in the Account(s) or accruing to the credit of
the Account(s), will be kept separate and apart and separately
accounted for on your books from our own funds and from any other
funds or accounts held by us, in accordance with the provisions of
the Commodity Exchange Act, as amended (the ``Act''), and part 30 of
the CFTC's regulations, as amended; that the Funds may not be
commingled with our own funds in any proprietary account we maintain
with you; and that the Funds must otherwise be treated in accordance
with the provisions of section 4(b) of the Act and CFTC Regulation
30.7.
Furthermore, you acknowledge and agree that such Funds may not
be used by you or by us to secure or guarantee any obligations that
we might owe to you, and they may not be used by us to secure or
obtain credit from you. You further acknowledge and agree that the
Funds in the Account(s) shall not be subject to any right of offset
or lien for or on account of any indebtedness, obligations or
liabilities we may now or in the future have owing to you. This
prohibition does not affect your right to recover funds advanced in
the form of cash transfers, lines of credit, repurchase agreements
or other similar liquidity arrangements you make in lieu of
liquidating non-cash assets held in the Account(s) or in lieu of
converting cash held in the Account(s) to cash in a different
currency.
In addition, you agree that the Account(s) may be examined at
any reasonable time by the Director of the Market Participants
Division of the CFTC or the Director of the Division of Clearing and
Risk of the CFTC, or any successor divisions, or such Directors'
designees, or an appropriate officer, agent or employee of our
designated self-regulatory organization (``DSRO''), [Name of DSRO],
and this letter constitutes the authorization and direction of the
undersigned on our behalf to permit any such examination to take
place without further notice or consent from us.
You agree to reply promptly and directly to any request for
confirmation of account balances or provision of any other
information regarding or related to the Account(s) from the Director
of the Market Participants Division of the CFTC or the Director of
the Division of Clearing and Risk of the CFTC, or any successor
divisions, or such Directors' designees, or an appropriate officer,
agent, or employee of [Name of DSRO], acting in its capacity as our
DSRO, and this letter constitutes the authorization and direction of
the undersigned on our behalf to release the requested information
without further notice to or consent from us.
The parties agree that all actions on your part to respond to
the above information request will be made in accordance with, and
subject to, such usual and customary authorization verification and
authentication policies and procedures as may be employed by you to
verify the authority of, and authenticate the identity of, the
individual making any such information request, in order to provide
for the secure transmission and delivery of the requested
information to the appropriate recipient(s).
We will not hold you responsible for acting pursuant to any
information request from the Director of the Market Participants
Division of the CFTC or the Director of the Division of Clearing and
Risk of the CFTC, or any successor divisions, or such Directors'
designees, or an appropriate officer, agent, or employee of [Name of
DSRO], acting in its capacity as our DSRO, upon which you have
relied after having taken measures in accordance with your
applicable policies and procedures to assure that such request was
provided to you by an individual authorized to make such a request.
In the event we become subject to either a voluntary or
involuntary petition for relief under the U.S. Bankruptcy Code, we
acknowledge that you will have no obligation to release the Funds
held in the Account(s), except upon instruction of the Trustee in
Bankruptcy or pursuant to the Order of the respective U.S.
Bankruptcy Court.
Notwithstanding anything in the foregoing to the contrary,
nothing contained herein shall be construed as limiting your right
to assert any right of offset or lien on assets that are not 30.7
customer funds maintained in the Account(s), or to impose such
charges against us or any proprietary account maintained by us with
you. Further, it is understood that amounts represented by checks,
drafts or other items shall not be considered to be part of the
Account(s) until finally collected. Accordingly, checks, drafts and
other items credited to the Account(s) and subsequently dishonored
or otherwise returned to you or reversed, for any reason, and any
claims relating thereto, including but not limited to claims of
alteration or forgery, may be charged back to the Account(s), and we
shall be responsible to you as a general endorser of all such items
whether or not actually so endorsed.
You may conclusively presume that any withdrawal from the
Account(s) and the balances maintained therein are in conformity
with the Act and CFTC regulations without any further inquiry,
provided that, in the ordinary course of your business as a
depository, you have no notice of or actual knowledge of a potential
violation by us of any provision of the Act or part 30 of the CFTC
regulations that relates to the holding of customer funds; and you
shall not in any manner not expressly agreed to herein be
responsible to us for ensuring compliance by us with such provisions
of the Act and CFTC regulations; however, the aforementioned
presumption does not affect any obligation you may otherwise have
under the Act or CFTC regulations.

[[Page 7875]]

You may, and are hereby authorized to, obey the order, judgment,
decree or levy of any court of competent jurisdiction or any
governmental agency with jurisdiction, which order, judgment, decree
or levy relates in whole or in part to the Account(s). In any event,
you shall not be liable by reason of any action or omission to act
pursuant to any such order, judgment, decree or levy, to us or to
any other person, firm, association or corporation even if
thereafter any such order, decree, judgment or levy shall be
reversed, modified, set aside or vacated.
The terms of this letter agreement shall remain binding upon the
parties, their successors and assigns and, for the avoidance of
doubt, regardless of a change in the name of either party. This
letter agreement supersedes and replaces any prior agreement between
the parties in connection with the Account(s), including but not
limited to any prior acknowledgment letter agreement, to the extent
that such prior agreement is inconsistent with the terms hereof. In
the event of any conflict between this letter agreement and any
other agreement between the parties in connection with the
Account(s), this letter agreement shall govern with respect to
matters specific to section 4(b) of the Act and the CFTC's
regulations thereunder, as amended.
This letter agreement shall be governed by and construed in
accordance with the laws of [Insert governing law] without regard to
the principles of choice of law.
Please acknowledge that you agree to abide by the requirements
and conditions set forth above by signing and returning to us the
enclosed copy of this letter agreement, and that you further agree
to provide a copy of this fully executed letter agreement directly
to the CFTC (via electronic means in a format and manner determined
by the CFTC) and to [Name of DSRO], acting in its capacity as our
DSRO. We hereby authorize and direct you to provide such copies
without further notice to or consent from us, no later than three
business days after opening the Account(s) or revising this letter
agreement, as applicable.

[Name of Futures Commission Merchant]
By:
Print Name:
Title:
ACKNOWLEDGED AND AGREED:
[Name of Depository]
By:
Print Name:
Title:
Contact Information: [Insert phone number and email address]
DATE:

0
20. Revise appendix F to part 30 to read as follows:

Appendix F to Part 30--Acknowledgment Letter for CFTC Regulation 30.7
Customer Secured Government Money Market Fund Account

[Date]
[Name and Address of Government Money Market Fund]

We propose to invest funds held by [Name of Futures Commission
Merchant] (``we'' or ``our'') on behalf of our customers in shares
of [Name of Government Money Market Fund] (``you'' or ``your'')
under account(s) entitled (or shares issued to):
[Name of Futures Commission Merchant] [if applicable, add ``FCM
Customer Omnibus Account''] CFTC Regulation 30.7 Customer Secured
Government Money Market Fund Account under section 4(b) of the
Commodity Exchange Act [and, if applicable, ``, Abbreviated as
[short title reflected in the depository's electronic system]'']

Account Number(s): [ ]
(collectively, the ``Account(s)'').
You acknowledge that we are holding these funds, including any
shares issued and amounts accruing in connection therewith
(collectively, the ``Shares''), for the benefit of customers who
trade foreign futures and/or foreign options (as such terms are
defined in U.S. Commodity Futures Trading Commission (``CFTC'')
Regulation 30.1, as amended); that the Shares held by you, hereafter
deposited in the Account(s) or accruing to the credit of the
Account(s), will be kept separate and apart and separately accounted
for on your books from our own funds and from any other funds or
accounts held by us in accordance with the provisions of the
Commodity Exchange Act, as amended (the ``Act''), and this part, as
amended; and that the Shares must otherwise be treated in accordance
with the provisions of section 4(b) of the Act and CFTC Regulations
1.25 and 30.7.
Furthermore, you acknowledge and agree that the Shares are in a
fund that holds itself out to investors as a government money market
fund, in accordance with 17 CFR 270.2a-7. In addition, you
acknowledge and agree that the Shares are in a fund that does 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).
Furthermore, you acknowledge and agree that such Shares may not
be used by you or by us to secure or guarantee any obligations that
we might owe to you, and they may not be used by us to secure or
obtain credit from you. You further acknowledge and agree that the
Shares in the Account(s) shall not be subject to any right of offset
or lien for or on account of any indebtedness, obligations or
liabilities we may now or in the future have owing to you.
In addition, you agree that the Account(s) may be examined at
any reasonable time by the Director of the Market Participants
Division of the CFTC or the Director of the Division of Clearing and
Risk of the CFTC, or any successor divisions, or such Directors'
designees, or an appropriate officer, agent or employee of our
designated self-regulatory organization (``DSRO''), [Name of DSRO],
and this letter constitutes the authorization and direction of the
undersigned on our behalf to permit any such examination to take
place without further notice to or consent from us.
You agree to reply promptly and directly to any request for
confirmation of account balances or provision of any other
information regarding or related to the Account(s) from the Director
of the Market Participants Division of the CFTC or the Director of
the Division of Clearing and Risk of the CFTC, or any successor
divisions, or such Directors' designees, or an appropriate officer,
agent, or employee of [Name of DSRO], acting in its capacity as our
DSRO, and this letter constitutes the authorization and direction of
the undersigned on our behalf to release the requested information,
without further notice to or consent from us.
The parties agree that all actions on your part to respond to
the above information request will be made in accordance with, and
subject to, such reasonable and customary authorization verification
and authentication policies and procedures as may be employed by you
to verify the authority of, and authenticate the identity of, the
individual making any such information request, in order to provide
for the secure transmission and delivery of the requested
information to the appropriate recipient(s).
We will not hold you responsible for acting pursuant to any
information request from the Director of the Market Participants
Division of the CFTC or the Director of the Division of Clearing and
Risk of the CFTC, or any successor divisions, or such Directors'
designees, or an appropriate officer, agent, or employee of [Name of
DSRO], acting in its capacity as our DSRO, upon which you have
relied after having taken measures in accordance with your
applicable policies and procedures to assure that such request was
provided to you by an individual authorized to make such a request.
In the event we become subject to either a voluntary or
involuntary petition for relief under the U.S. Bankruptcy Code, we
acknowledge that you will have no obligation to release the Shares
held in the Account(s), except upon instruction of the Trustee in
Bankruptcy or pursuant to the Order of the respective U.S.
Bankruptcy Court.
Notwithstanding anything in the foregoing to the contrary,
nothing contained herein shall be construed as limiting your right
to assert any right of offset or lien on assets that are not Shares
maintained in the Account(s), or to impose such charges against us
or any proprietary account maintained by us with you. Further, it is
understood that amounts represented by checks, drafts or other items
shall not be considered to be part of the Account(s) until finally
collected. Accordingly, checks, drafts and other items credited to
the Account(s) and subsequently dishonored or otherwise returned to
you or reversed, for any reason and any claims relating thereto,
including but not limited to claims of alteration or forgery, may be
charged back to the Account(s), and we shall be responsible to you
as a general endorser of all such items whether or not actually so
endorsed.
You may conclusively presume that any withdrawal from the
Account(s) and the balances maintained therein are in conformity
with the Act and CFTC regulations without any further inquiry,
provided that, in the ordinary course of your business as a
depository, you have no notice of or actual knowledge of a potential
violation by us of any provision of the Act or part 30 of the CFTC
regulations that relates to the holding of customer funds; and you
shall not in any manner not expressly agreed to herein be
responsible to us for ensuring compliance by us with such provisions
of the Act and CFTC regulations; however, the

[[Page 7876]]

aforementioned presumption does not affect any obligation you may
otherwise have under the Act or CFTC regulations.
You may, and are hereby authorized to, obey the order, judgment,
decree or levy of any court of competent jurisdiction or any
governmental agency with jurisdiction, which order, judgment, decree
or levy relates in whole or in part to the Account(s). In any event,
you shall not be liable by reason of any action or omission to act
pursuant to any such order, judgment, decree or levy, to us or to
any other person, firm, association or corporation even if
thereafter any such order, decree, judgment or levy shall be
reversed, modified, set aside or vacated.
We are permitted to invest customers' funds in government money
market funds pursuant to CFTC Regulation 1.25. That rule sets forth
the following conditions, among others, with respect to any
investment in a government money market fund:
(1) The net asset value of the fund must be computed by 9 a.m.
of the business day following each business day and be made
available to us by that time;
(2) The fund must be legally obligated to redeem an interest in
the fund and make payment in satisfaction thereof by the close of
the business day following the day on which we make a redemption
request except as otherwise specified in CFTC Regulation
1.25(c)(5)(ii); and,
(3) The agreement under which we invest customers' funds must
not contain any provision that would prevent us from pledging or
transferring fund shares.
The terms of this letter agreement shall remain binding upon the
parties, their successors and assigns and, for the avoidance of
doubt, regardless of a change in the name of either party. This
letter agreement supersedes and replaces any prior agreement between
the parties in connection with the Account(s), including but not
limited to any prior acknowledgment letter agreement, to the extent
that such prior agreement is inconsistent with the terms hereof. In
the event of any conflict between this letter agreement and any
other agreement between the parties in connection with the
Account(s), this letter agreement shall govern with respect to
matters specific to section 4(b) of the Act and the CFTC's
regulations thereunder, as amended.
This letter agreement shall be governed by and construed in
accordance with the laws of [Insert governing law] without regard to
the principles of choice of law.
Please acknowledge that you agree to abide by the requirements
and conditions set forth above by signing and returning to us the
enclosed copy of this letter agreement, and that you further agree
to provide a copy of this fully executed letter agreement directly
to the CFTC (via electronic means in a format and manner determined
by the CFTC) and to [Name of DSRO], acting in its capacity as our
DSRO. We hereby authorize and direct you to provide such copies
without further notice to or consent from us, no later than three
business days after opening the Account(s) or revising this letter
agreement, as applicable.

Issued in Washington, DC, on December 19, 2024, by the
Commission.
Christopher Kirkpatrick,
Secretary of the Commission.

NOTE: The following appendices will not appear in the Code of
Federal Regulations.

Appendices to Investment of Customer Funds by Futures Commission
Merchants and Derivatives Clearing Organizations--Commission Voting
Summary and Chairman's Statement

Appendix 1--Commission Voting Summary

On this matter, Chairman Behnam and Commissioners Mersinger and
Pham voted in the affirmative. Commissioner Goldsmith Romero voted
in the negative. Commissioner Johnson abstained.

Appendix 2--Statement of Support of Chairman Rostin Behnam

This final rule amending Commission regulations addressing the
investment of Customer Funds (funds deposited by customers to margin
futures, foreign futures, and cleared swap transactions) by futures
commission merchants (FCMs) and derivatives clearing organizations
(DCOs) (the ``Final Rule'') represents responsive and responsible
government action. It preserves core regulatory objectives through
practical application of time-tested standards developed over
decades to promote market resiliency, risk mitigation, and customer
protections.
Financial regulation, unlike legislation, is designed to
transition with and incorporate evolving market realities to
preserve essential flexibilities in response to emerging market
conditions, geopolitics, and economic policy. As with any
principles-based regime, there are always concerns that our hands
will provide no more than a feathery touch in the sway of prevailing
winds. The response is, and always should be, that with our
discretion embedded in statute, any rules or regulations we put
forth are calibrated appropriately to the risks, embody principles
and analyses above the highest levels of scrutiny, and incorporate
prescriptive requirements as appropriate. The Final Rule is no
departure. It further strengthens the Commission's fundamental
customer protection framework aimed at preserving principal and
maintaining liquidity by addressing foreign currency, credit,
insolvency, and operational risks and incentivizing growth and
competition, particularly among FCMs, which may reduce concentration
risk and provide greater and more diverse hedging opportunities for
customers. On this latter point, the Final Rule addresses a
longstanding public interest in encouraging FCM growth and
innovation that can ultimately support competition and customer
access with the added benefit of reducing concentration, and
ultimately, systemic risk,\1\ I am especially pleased to support
this Final Rule.
---------------------------------------------------------------------------

\1\ As explained in section IV.A.2.c. of the Final Rule
preamble, over the last two decades, the number of FCMs has dropped
by almost 64 percent, from 177 to 64. As further demonstrated by
CFTC data, in 2004, there were 100 FCMs holding Customer Funds,
whereas in September 2024, there were only 50, a decrease of 50
percent. This consolidation may be further illustrated by looking at
the top ten firms, which hold 84 percent of Customer Funds. See
CFTC, Financial Data for FCMs (last visited Dec. 6, 2024), https://www.cftc.gov/MarketReports/financialfcmdata/index.htm.
---------------------------------------------------------------------------

Given the Final Rule's detailed and responsive preamble, I see
no need to further reiterate the way the Final Rule modernizes the
list of permitted investments of Customer Funds and creates parity
across CFTC registrants without undermining or weakening any of the
safeguards the Commission has maintained for the protection of
Customer Funds for over a decade. To the extent one could confuse
and conflate the events and bad actors that--to any degree--colored
the Commission's consideration of prior rulemaking and policymaking,
I would again suggest that they engage in a more thorough review of
the Final Rule's surgically directed limitations.
Here, a periodic reassessment of Commission Regulation 1.25 and
consideration of information submitted in two industry petitions
supported the Commission's proposal to amend its rules governing the
safeguarding and investment of Customer Funds by, among other
things, revising the list of permitted investments to add two new
asset classes including certain foreign sovereign debt instruments
issued by Canada, France, Germany, Japan, and the United Kingdom,
and certain short-term Treasury exchange-traded funds (ETFs),
subject to certain restrictions. By finalizing these amendments, our
regulations will now permit FCMs and DCOs to invest Customer Funds
in the same narrowly tailored set of foreign sovereign debt to the
extent that FCMs and DCOs hold balances owed to customers in the
currency of the issuing sovereign and subject to certain
eligibility, credit, and time-to-maturity conditions.
These additions to the list of permitted investments provide an
efficient and effective means to minimize exposure to foreign
currency risk fluctuations by eliminating the multi-step process
exercised by FCMs and DCOs of converting the foreign currencies they
accept from customers to U.S. dollars before investing in permitted
investments (and converting them again when returning the margin
deposits to customers). Permitting Customer Funds to be directly
invested in foreign sovereign debt also eliminates the potential
credit risk associated with holding Customer Funds in unsecured
deposit accounts with commercial banks and the risk that such funds
would be treated as unsecured claims in the event of a foreign
depository facing insolvency.
It would always be easier for a regulator to eschew its duties
and leave in place policies

[[Page 7877]]

and processes put in place during our most challenging eras under
the guise that we can never be nimble enough should circumstances
change abruptly. But, should we not always play to our strengths,
rather than our weaknesses? Our duty as a financial market regulator
is to ensure our ruleset effectuates our mission and supports and
protects the markets and the individuals and entities who use them.
And our strength is in the discretion we have been granted because
we have the expertise and experience to be responsive to market
developments within the larger U.S. and global financial systems,
while always seeking to minimize risk.
I appreciate that commenters reminded us that despite
regulations and an effective enforcement program, there will always
be bad actors whose conduct runs afoul of our expectations. As
detailed in the Final Rule, the Commission has been thoughtful in
evaluating such concerns related to historical events and the market
and other conditions to which they have been ascribed, rightly or
wrongly. The Final Rule reflects such consideration by, among other
things, limiting newly added permitted investments through tightly
circumscribed risk characteristics. To the extent that conclusions
could be drawn in a manner that relies heavily on factors unrelated
to the status of investments permitted under Commission regulations,
it is critical that we focus on the correlations and causation
supported by facts and analyses.
I want to thank Abigail Knauff, and staff in the Market
Participants Division, Division of Clearing and Risk, Office of the
General Counsel, and the Office of the Chief Economist for their
work on the Final Rule.

[FR Doc. 2024-30927 Filed 1-14-25; 4:15 pm]
BILLING CODE 6351-01-P