We learned of another recent Comment Letter from the Investment Company Institute from mutual fund news website ignites. The latest missive, entitled, "ICI Letter On CFTC Proposal Restricting Investments Of Customer Funds In Money Market Funds," involves lobbying the CFTC to alter its proposal to restrict money fund investments as collateral. It's written by ICI General Counsel Karrie McMillen and addressed to David Stawick, Secretary at the Commodity Futures Trading Commission and entitled, "Investment of Customer Funds (RIN 3038-AC15)." It says, "The Investment Company Institute appreciates the opportunity to comment on the Commodity Futures Trading Commission's proposed changes to Regulation 1.25 under the Commodity Exchange Act."
ICI explains, "Regulation 1.25 provides that a futures commission merchant (FCM) or derivatives clearing organization holding customer segregated funds may invest those funds in certain 'permitted investments,' subject to specified requirements designed to minimize exposure to credit, liquidity, and market risks. Our comments focus on the proposed changes concerning the treatment of money market funds as a 'permitted investment' for these purposes. As discussed below, ICI strongly believes that money market funds continue to represent investments 'consistent with the objectives of preserving principal and maintaining liquidity,' as required by Regulation 1.25. Indeed, recent enhancements to money market fund regulation make money market funds even more appropriate as 'permitted investments' for FCM or DCO customer funds."
The letter continues, "We further believe that the proposed new limitations on investments in money market funds under Regulation 1.25 are arbitrary and unduly severe. The practical effects of these limitations would be to require FCMs and DCOs to manage the vast majority of a portfolio of permitted investments themselves, and potentially to expose customer funds to greater credit, liquidity and/or price risk. We urge the Commission to reconsider the proposed limitations in light of the actual risks posed by money market funds as compared to the other 'permitted investments.'"
On "Background," the ICI says, "Section 4d(a)(2) of the CEA limits the investment of customer segregated funds to obligations of the United States, obligations fully guaranteed as to principal and interest by the United States, and general obligations of any State or any political subdivision thereof. Regulation 1.25 expands the list of permitted investments to include government sponsored enterprise securities, bank certificates of deposit, commercial paper, corporate notes, general obligations of a sovereign nation, and shares of money market funds. Except for money market funds, these additional permitted investments must also satisfy the certain credit rating requirements."
Finally, they explain, "The Commission now proposes to remove from the investments permitted by Regulation 1.25. GSE securities not backed by the full faith and credit of the United States, corporate debt obligations not guaranteed by the FDIC, foreign sovereign debt, and in-house transactions. The proposed reforms also would seek to promote greater diversification by limiting the customer funds invested in any one class of assets (other than U.S. government securities) and extending 'issuer-based' concentration limits to money market funds and repurchase agreement counterparties. More specifically, with respect to money market funds, the Commission proposes to apply an asset-based concentration limit of 10% of total assets held in segregation. The Commission also proposes to restrict investments in any family of money market funds to 2% of total assets held in segregation. Taken together, these proposed limits would be the most restrictive ones on any class of permitted investments."
