Alert May 26, 2009

CFTC Seeks Public Comment on Possible Changes to Regulations for Investment of Customer Funds Deposited with Clearing Organizations and Futures Commission Merchants

The CFTC published a notice in the Federal Register indicating that it is reconsidering the standards that apply to derivatives clearing organizations and futures commissions merchants with respect to the investment of customer segregated funds (e.g., those held as margin) and customer money, securities, and property associated with positions in foreign futures and foreign options (“30.7 funds”).  Current CFTC Rule 1.25 specifies a range of permissible vehicles, including money market funds, for the investment of customer segregated funds.  The investment of 30.7 funds is subject to a less specific fiduciary standard that requires the investment chosen to be at all times liquid and sufficient to cover all obligations to the customer in question; Regulation 1.25 investments are appropriate, as are investments in “any other readily marketable securities.”  The notice cites concern that “the market events of the past year, notably the failures of certain government sponsored enterprises, difficulties encountered by certain money market mutual funds in honoring redemption requests, illiquidity of certain adjustable rate securities, and turmoil in the credit ratings industry, have challenged many of the fundamental assumptions regarding investments.”  The CFTC believes it is an especially appropriate time to review permitted investments for customer segregated funds and 30.7 funds, and is considering significantly revising the scope and character of permitted investments for customer segregated funds and 30.7 funds.  The notice is designed to elicit public comment to inform the CFTC in issuing any proposed amendments to Regulations 1.25 or 30.7.  Comments must be received no later than July 21, 2009.  The CFTC release is available at http://edocket.access.gpo.gov/2009/pdf/E9-12020.pdf.