A press release entitled, "CFTC Seeks Public Comment on a Proposal on Investment of Customer Funds" tells us, "The Commodity Futures Trading Commission ... issued, for public comment, a proposed rule on the Investment of Customer Funds by Futures Commission Merchants and Derivatives Clearing Organizations. The proposal would amend the Commission's regulations governing the safeguarding and investment by futures commission merchants (FCMs) and derivatives clearing organizations of funds held for the benefit of customers engaging in futures, foreign futures, and cleared swaps transactions. The proposed amendments would specifically revise the list of permitted investments in Regulation 1.25 and introduce certain related changes and specifications.... The comment period will be open for 75 days after publication on CFTC.gov, with a closing date of January 17, 2024. Comments must be in writing and may be submitted electronically through the CFTC Comments online process. All comments received will be posted on CFTC.gov."

The "Fact Sheet and Q&A" explains on background, "Commission Regulation 1.25 permits FCMs to invest funds deposited by customers to margin futures, foreign futures, and cleared swap transactions ('Customer Funds') in specified categories of investments. Regulation 1.25 further permits DCOs to invest Customer Funds that FCMs post with the DCOs as margin for their customers' positions in the same specified categories of investments. Regulation 1.25(a)(1) currently lists seven specific investments that FCMs and DCOs may enter into with Customer Funds: (i) obligations of the U.S. and obligations fully guaranteed as to principal and interest by the U.S.; (ii) general obligations of any State or political subdivision of a State; (iii) obligations of any U.S. government corporation or enterprise sponsored by the U.S.; (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'); (vi) corporate notes and bonds fully guaranteed as to principal and interest by the U.S. under the TLGP; and (vii) interests in money market funds ('MMF')."

It continues, "Regulation 1.25(b) requires FCMs and DCOs to manage the permitted investments consistent with the objectives of preserving principal and maintaining liquidity. To this end, the permitted investments must be highly liquid such that the investments may be converted into cash within one business day without material discount in value.... The proposed revision of the scope of permitted MMFs seeks to address the impact of certain reforms to the Securities and Exchange Commission's ('SEC') rules governing MMFs and ensure that permitted MMFs remain consistent with Regulation 1.25's general principles of preserving principal and maintaining liquidity of Customer Funds."

The full CFTC Proposal, "Investment of Customer Funds by Future Commission Merchants and Derivatives Clearing Organizations" describes the "Interests in Money Market Funds," stating, "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. To qualify as a Permitted Investment, a MMF must: (i) be an investment company that is registered with the SEC under the Investment Company Act of 1940 and hold itself out to investors as a MMF in accordance with SEC Rule 2a-7; (ii) be sponsored by a federally-regulated financial institution, a Section 3(a)(6) bank, an investment adviser registered under the Investment Advisers Act of 1940, or a domestic branch of a foreign bank insured by the FDIC; and (iii) compute the net asset value ('NAV') of the fund by 9a.m. of the business day following each business day and make the NAV available to MMF shareholders by that time."

It explains, "The Commission is proposing to amend Regulation 1.25(a)(1)(vii) to limit the scope of MMFs whose interests qualify as Permitted Investments to 'government money market funds,' as defined in SEC Rule 2a-7, in response to two sets of amendments that the SEC adopted to its rules governing MMFs discussed below. 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'.... [A] 'government security' encompasses 'U.S. government securities' and 'U.S. agency obligations' as defined under Regulation 1.25(a)(1)(i) and (iii), respectively."

The Proposal continues, "As noted above, the Commission is proposing to amend Regulation 1.25 to limit the scope of MMFs that qualify as Permitted Investments in response to SEC revisions to its MMF rules. In that regard, in 2014, the SEC amended Rule 2a-7 to permit 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. 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."

It says, "The SEC has recently adopted additional amendments to its MMF rules, including amendments revising the SEC Redemption Provisions discussed above. The SEC MMF Reforms are intended to 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. The events of March 2020 led the SEC to re-evaluate certain aspects of the regulatory framework applicable to MMFs."

The CFTC writes, "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 SEC MMF Reforms, among other things, amend the 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. The SEC MMF Reforms will 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 will 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. Government MMFs will not be required to implement the mandatory liquidity fee but, consistent with the current SEC Redemption Provisions, may choose to rely on the ability to impose discretionary liquidity fees. Such fees, however, are no longer tied to the weekly liquid asset threshold."

They tell us, "The SEC's liquidity fee mechanism is designated 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 believes that the potential imposition of a fee will nonetheless have the effect of reducing the liquidity of such funds and will reduce the principal of an FCM's or DCO's investment in MMF shares. Therefore, consistent with the positions taken in Staff Letter 16-68 and Staff Letter 16-69, the Commission is preliminarily of the view that FCMs and DCOs should be allowed to invest Customer Funds only in MMFs that will not be subject to a liquidity fee (i.e., Government MMFs that do not elect to apply a discretionary liquidity fee)."

The Proposal comments, "Thus, the proposed amendments would remove Prime MMFs and Electing Government MMFs, as participants in such funds may be subject to liquidity fees in certain circumstances. Therefore, the Commission is proposing amendments to Regulation 1.25(a)(1)(vii) that would limit the scope of MMFs whose interests qualify as Permitted Investments to Government MMFs that are not Electing Government MMFs ('Permitted Government MMFs'). 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. The Commission preliminarily believes that the proposed amendment would ensure that FCMs and DCOs invest Customer Funds in instruments that are consistent with the objectives of Regulation 1.25 of preserving principal and maintaining liquidity of the investments."

It adds, "The Commission also notes that the proposed amendments to remove from the scope of Permitted Investments the interests in MMFs whose redemptions may be subject to a liquidity fee would prohibit an FCM from depositing proprietary interests in such MMFs into Customer Funds accounts. 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 and prevent the accounts from becoming under segregated. The securities deposited by FCMs, however, must be Permitted Investments as set forth in Regulation 1.25. 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."

Finally, the Proposal says, "To eliminate MMFs whose redemptions may be subject to a liquidity fee from the scope of Permitted Investments under Regulation 1.25, the Commission proposes to revise Regulation 1.25(a)(1)(vii), which would be redesignated Regulation 1.25(a)(1)(v) to accommodate other amendments to Regulation 1.25(a) discussed in this Proposal, by replacing the term 'money market mutual fund' with the term 'government money market funds as defined in S270.2a-7 of this title, provided that the funds do not elect to be subject to liquidity fees in accordance with S270.2a-7 of this title (government money market fund).' The Commission also proposes to make further conforming changes throughout Regulation 1.25 and the Appendix to Regulation 1.25 by replacing all references to 'money market mutual fund' with 'government money market fund.'"

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