CFTC Approves New Rule on Investment of Customer Funds

The Case

At the heart of the statutory and regulatory framework governing transactions in derivatives in the United States is a customer asset protection regime that requires futures commission merchants (FCM) and derivatives clearing organizations (DCO) to hold customer funds in segregation. The Commodity Exchange Act (CEA), and the regulations of the Commodity Futures Trading Commission (CFTC) promulgated thereunder, create what courts have termed a "special statutory trust" over funds deposited by customers to secure futures, foreign futures and cleared swaps held by FCMs and cleared by DCOs (customer funds). 

This means that the rights and duties of FCMs and DCOs with respect to segregated assets are determined by statute and regulation, rather than by general principles of trust law. Last week, the CFTC approved a final rule substantially granting the CME/FIA petition (Final Rule). 

Regulatory Implications

The final rule reflects the CFTC’s focus on preserving customer funds while allowing FCMs and DCOs flexibility to generate yield within defined parameters. 

Key regulatory changes include:

• Expanded Investment Options
  The inclusion of specific foreign sovereign debt, U.S. Treasury ETFs, and government money market funds broadens the scope of permissible low-risk investments.
  
  

• Stricter Limits and Conditions
  Conditions for investments in foreign sovereign debt and ETFs include limits on maturity, concentration, and creditworthiness to mitigate risks.
  
  

• Removal of Certain Instruments
  The exclusion of commercial paper, corporate notes, and corporate bonds highlights the CFTC’s shift toward more conservative investment options.
  
  

• Updated Benchmarks
  The replacement of LIBOR with SOFR aligns with current market standards for adjustable-rate investments.
  
  

• DCO Financial Accountability
  DCOs are explicitly held financially responsible for any losses from investment of customer funds in permitted categories.

Practical Guidance for Firms

To prepare for compliance with the final rule, FCMs and DCOs should take the following steps:

1. Review Investment Portfolios
   Assess current investment portfolios and make necessary adjustments to align with the updated list of permitted investments and concentration limits.
   
   

2. Enhance Risk Monitoring
   Implement or refine monitoring processes to track compliance with maturity, creditworthiness, and concentration thresholds for investments.
   
   

3. Understand ETF Guidelines
   Familiarize relevant teams with the expanded transactional alternatives and specific requirements for U.S. Treasury ETFs.
   
   

4. Address Compliance Deadlines
   Prepare to meet the compliance date for the final rule, 30 days after publication in the Federal Register, and for SIDR Reports by March 31, 2025.