67642 Federal Register / Vol. 75, No.

212 / Wednesday, November 3, 2010 / Proposed Rules

valid OMB Control Number. The OMB of the liquidity requirement, the A. Regulation 1.25
Control Number for this information removal of rating requirements, an B. Regulation 30.7
collection is 2120–0056. Public reporting for expansion of concentration limits C. Advance Notice of Proposed
this collection of information is estimated to Rulemaking
including asset-based, issuer-based, and
be approximately 5 minutes per response, D. The Dodd-Frank Act
including the time for reviewing instructions, counterparty concentration restrictions. II. Discussion of the Proposed Rules
completing and reviewing the collection of It also addresses revisions to the A. Permitted Investments
information. All responses to this collection acknowledgment letter requirement for 1. Government Sponsored Enterprise
of information are mandatory. Comments investment in a money market mutual Securities
concerning the accuracy of this burden and fund (MMMF), revisions to the list of 2. Commercial Paper and Corporate Notes
suggestions for reducing the burden should exceptions to the next-day redemption or Bonds
be directed to the FAA at: 800 Independence requirement for MMMFs, the 3. Foreign Sovereign Debt
Ave., SW., Washington, DC 20591, Attn: 4. In-House Transactions
application of customer segregated
Information Collection Clearance Officer, B. General Terms and Conditions
AES–200. funds investment limitations to 30.7 1. Marketability
funds, the removal of ratings 2. Ratings
Related Information requirements for depositories of 30.7 3. Restrictions on Instrument Features
(h) Refer to Piaggio Aero Industries S.p.A. funds, and the elimination of the option 4. Concentration Limits
Service Bulletin (Mandatory) N.: SB 80–0275, to designate a depository for 30.7 funds. (a) Asset-Based Concentration Limits
Rev. N. 0, dated June 15, 2009, and Piaggio (b) Issuer-Based Concentration Limits
DATES: Comments must be received on
Aero Industries P180–Service Letter No. SL– (c) Counterparty Concentration Limits
80–0202, dated January 30, 2009, for related or before December 3, 2010. C. Money Market Mutual Funds
information. For service information related ADDRESSES: You may submit comments, 1. Acknowledgment Letters
to this AD, contact Piaggio Aero Industries identified by RIN number, by any of the 2. Next-Day Redemption Requirement
S.p.A., Via Cibrario, 4–16154 Genoa, Italy; following methods: D. Repurchase and Reverse Repurchase
phone: +39 010 6481 353; fax: +39 010 6481 • Agency Web site, via its Comments Agreements
881; email: airworthiness@[Link]; Online process: http:// E. Regulation 30.7
Internet: [Link] You 1. Harmonization
[Link]. Follow the
may review copies of the referenced service 2. Ratings
information at the FAA, Small Airplane instructions for submitting comments
3. Designation as a Depository for 30.7
Directorate, 901 Locust, Kansas City, through the Web site. Funds
Missouri 64106. For information on the • Mail: David A. Stawick, Secretary of III. Related Matters
availability of this material at the FAA, call the Commission, Commodity Futures A. Regulatory Flexibility Act
816–329–4148. Trading Commission, Three Lafayette B. Paperwork Reduction Act
Issued in Kansas City, Missouri, on Centre, 1155 21st Street, NW., C. Costs and Benefits of the Proposed Rules
October 28, 2010. Washington, DC 20581. Text of Rules
John Colomy, • Hand Delivery/Courier: Same as I. Background
Acting Manager, Small Airplane Directorate,
mail above.
Aircraft Certification Service. • Federal eRulemaking Portal: http:// A. Regulation 1.25
[Link]. Follow the Under Section 4d(a)(2) of the
[FR Doc. 2010–27723 Filed 11–2–10; 8:45 am]
instructions for submitting comments. Commodity Exchange Act (Act),2 the
BILLING CODE 4910–13–P
All comments must be submitted in investment of customer segregated
English, or if not, accompanied by an funds is limited to obligations of the
English translation. Comments will be United States and obligations fully
COMMODITY FUTURES TRADING posted as received to http://
COMMISSION guaranteed as to principal and interest
[Link]. You should submit only by the United States (U.S. government
information that you wish to make securities), and general obligations of
17 CFR Parts 1 and 30
available publicly. If you wish the any State or of any political subdivision
RIN 3038–AC15 Commission to consider information thereof (municipal securities). Pursuant
that may be exempt from disclosure to authority under Section 4(c) of the
Investment of Customer Funds and under the Freedom of Information Act,
Funds Held in an Account for Foreign Act,3 the Commission substantially
a petition for confidential treatment of expanded the list of permitted
Futures and Foreign Options the exempt information may be
Transactions investments by amending Commission
submitted according to the established Regulation 1.25 4 in December 2000 to
AGENCY: Commodity Futures Trading procedures in CFTC Regulation 145.9.1 permit investments in general
Commission. FOR FURTHER INFORMATION CONTACT: obligations issued by any enterprise
ACTION: Proposed rule. Phyllis P. Dietz, Associate Director, sponsored by the United States
202–418–5449, pdietz@[Link], or Jon (government sponsored enterprise
SUMMARY: The Commodity Futures DeBord, Attorney-Advisor, 202–418– securities or GSE securities), bank
Trading Commission (Commission or 5478, jdebord@[Link], or Division of certificates of deposit (CDs), commercial
CFTC) is proposing to amend its Clearing and Intermediary Oversight, paper, corporate notes,5 general
regulations regarding the investment of Commodity Futures Trading obligations of a sovereign nation, and
customer segregated funds and funds Commission, Three Lafayette Centre, interests in MMMFs.6 In connection
held in an account subject to
srobinson on DSKHWCL6B1PROD with PROPOSALS

1151 21st Street, NW., Washington, DC

Commission Regulation 30.7 (30.7 20581. 27 U.S.C. 6d(a)(2).
funds). Certain amendments reflect the SUPPLEMENTARY INFORMATION:
37 U.S.C. 6(c).
implementation of new statutory 4 17 CFR 1.25.

provisions enacted under Title IX of the Table of Contents 5 This category of permitted investment was later

Dodd-Frank Wall Street Reform and amended to read ‘‘corporate notes or bonds.’’ See 70
I. Background FR 28190, 28197 (May 17, 2005).
Consumer Protection Act. The proposed 6 See 65 FR 77993 (Dec. 13, 2000) (publishing
rules address: Certain changes to the list 1 Commission regulations referred to herein are final rules); and 65 FR 82270 (Dec. 28, 2000)
of permitted investments, a clarification found at 17 CFR Ch. 1. (making technical corrections and accelerating

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 Federal Register / Vol. 75, No. 212 / Wednesday, November 3, 2010 / Proposed Rules 67643

with that expansion, the Commission to a series of questions. As the Division 30.7. The Commission stated that it was
included several provisions intended to was conducting follow-up interviews considering significantly revising the
control exposure to credit, liquidity, and with respondents, the market events of scope and character of permitted
market risks associated with the September 2008 occurred and changed investments for customer segregated
additional investments, e.g., the financial landscape such that much funds and 30.7 funds. In this regard, the
requirements that the investments of the data previously gathered no Commission sought comments,
satisfy specified rating standards and longer reflected current market information, research, and data
concentration limits, and be readily conditions. However, much of that data regarding regulatory requirements that
marketable and subject to prompt remains useful as an indication of how might better safeguard customer
liquidation.7 Regulation 1.25 was implemented in a segregated funds. It also sought
The Commission further modified more stable financial environment, and comments, information, research, and
Regulation 1.25 in 2004 and 2005. In recent events in the economy have data regarding the impact of applying
February 2004, the Commission adopted underscored the importance of the requirements of Regulation 1.25 to
amendments regarding repurchase conducting periodic reassessments and, investments of 30.7 funds.
agreements using customer-deposited as necessary, revising regulatory The Commission received twelve
securities and time-to-maturity policies to strengthen safeguards comment letters in response to the
requirements for securities deposited in designed to minimize risk. ANPR, and it has considered those
connection with certain collateral B. Regulation 30.7 comments in formulating its proposal.15
management programs of derivatives Eleven of the 12 letters supported
clearing organizations (DCOs).8 In May Regulation 30.7 11 governs an FCM’s maintaining the current list of permitted
2005, the Commission adopted treatment of customer money, securities, investments and/or specifically
amendments related to standards for and property associated with positions ensuring that MMMFs remain a
investing in instruments with embedded in foreign futures and foreign options. permitted investment. Five of the letters
derivatives, requirements for adjustable Regulation 30.7 was issued pursuant to were dedicated solely to the topic of
rate securities, concentration limits on the Commission’s plenary authority MMMFs, providing detailed discussions
reverse repurchase agreements, under Section 4(b) of the Act.12 Because of their usefulness to FCMs. Several
transactions by futures commission Congress did not expressly apply the letters addressed issues regarding
merchants (FCMs) that are also limitations of Section 4d of the Act to ratings, liquidity, concentration, and
registered as securities brokers or 30.7 funds, the Commission historically portfolio weighted average time to
dealers (in-house transactions), rating has not subjected those funds to the maturity. The alignment of Regulation
standards and registration requirements investment limitations applicable to 30.7 with Regulation 1.25 was viewed as
for MMMFs, an auditability standard for customer segregated funds. non-controversial.
investment records, and certain The investment guidelines for 30.7
The FIA’s comment letter expressed
technical changes.9 funds are general in nature.13 Although
its view that ‘‘all of the permitted
The Commission has been, and Regulation 1.25 investments offer a safe
investments described in Rule 1.25(a)
continues to be, mindful that customer harbor, the Commission does not
are compatible with the Commission’s
segregated funds must be invested in a currently limit investments of 30.7
objectives of preserving principal and
manner that minimizes their exposure funds to permitted investments under
maintaining liquidity.’’ This opinion
to credit, liquidity, and market risks Regulation 1.25. Appropriate
was echoed by MF Global, Newedge and
both to preserve their availability to depositories for 30.7 funds currently
FC Stone. CME asserted that only ‘‘a
customers and DCOs and to enable include certain financial institutions in
small subset of the complete list of
investments to be quickly converted to the United States, financial institutions
Regulation 1.25 permitted investments
cash at a predictable value in order to in a foreign jurisdiction meeting certain
are actually used by the industry.
avoid systemic risk. Toward these ends, capital and credit rating requirements,
* * *’’ NFA also wrote that investments
Regulation 1.25 establishes a general and any institution not otherwise
in instruments other than U.S.
prudential standard by requiring that all meeting the foregoing criteria, but
government securities and MMMFs are
permitted investments be ‘‘consistent which is designated as a depository
‘‘negligible’’ and recommended that the
with the objectives of preserving upon the request of a customer and the
Commission eliminate asset classes not
principal and maintaining liquidity.’’ 10 approval of the Commission.
‘‘utilized to any material extent.’’
In 2007, the Commission’s Division of C. Advance Notice of Proposed
Clearing and Intermediary Oversight D. The Dodd-Frank Act
Rulemaking
(Division) launched a review of the On July 21, 2010, President Obama
In May 2009, the Commission issued
nature and extent of investments of signed the Dodd-Frank Wall Street
an advance notice of proposed
customer segregated funds and 30.7 Reform and Consumer Protection Act
rulemaking (ANPR) 14 to solicit public
funds (2007 Review) in order to further (Dodd-Frank Act).16 Title IX of the
comment prior to proposing
its understanding of investment
amendments to Regulations 1.25 and
strategies and practices and to assess 15 The Commission received comment letters

whether any changes to the from CME Group Inc. (CME), Crane Data LLC
11 17 CFR 30.7. (Crane), The Dreyfus Corporation (Dreyfus),
Commission’s regulations would be 12 7 U.S.C. 6(b).
FCStone Group Inc. (FCStone), Federated Investors,
appropriate. As part of this review, all 13 See Commission Form 1–FR–FCM Instructions Inc. (Federated), Futures Industry Association
srobinson on DSKHWCL6B1PROD with PROPOSALS

registered DCOs and FCMs carrying at 12–9 (Mar. 2010) (‘‘In investing funds required to (FIA), Investment Company Institute (ICI), MF
customer accounts provided responses be maintained in separate section 30.7 account(s), Global Inc. (MF Global), National Futures
FCMs are bound by their fiduciary obligations to Association (NFA), Newedge USA, LLC (Newedge),
customers and the requirement that the secured and Treasury Strategies, Inc. (TSI). Two letters were
effective date of final rules from February 12, 2001 amount required to be set aside be at all times received from Federated: A July 10, 2009 letter
to December 28, 2000). liquid and sufficient to cover all obligations to such (Federated letter I) and an August 24, 2009 letter.
7 Id.
customers. Regulation 1.25 investments would be 16 See Dodd-Frank Wall Street Reform and
8 69 FR 6140 (Feb. 10, 2004).
appropriate, as would investments in any other Consumer Protection Act, Public Law 111–203, 124
9 70 FR 28190. readily marketable securities.’’). Stat. 1376 (2010). The text of the Dodd-Frank Act
10 17 CFR 1.25(b). 14 74 FR 23962 (May 22, 2009). Continued

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 67644 Federal Register / Vol. 75, No. 212 / Wednesday, November 3, 2010 / Proposed Rules

Dodd-Frank Act 17 was promulgated in issuer-specific concentration limits the list of permitted investments in the
order to increase investor protection, control how much exposure an FCM or event this status changes in the future.
promote transparency and improve DCO has to the credit risk of any one The failure of two GSEs during the
disclosure. investment. The Commission believes financial crisis has moved the
Section 939A of the Dodd-Frank Act that greater diversification can be Commission to view the securities of
obligates federal agencies to review their achieved through instituting two such GSEs as inappropriate for
respective regulations and make additional types of concentration limits. investments of customer funds. In 2008,
appropriate amendments in order to First, asset-based concentration limits, the Federal National Mortgage
decrease reliance on credit ratings. The suggested by the FIA, MF Global and Association (Fannie Mae) and the
Dodd-Frank Act requires the Newedge in their comment letters, Federal Home Loan Mortgage
Commission to conduct this review reduce market risk by limiting how Corporation (Freddie Mac) failed due to
within one year after the date of much of any one class of instrument an problems in the subprime mortgage
enactment.18 The Commission is FCM or DCO can have in its portfolio at market. While Fannie Mae and Freddie
proposing amendments to Regulations any one time. Second, repurchase Mac were bailed out in 2008, the U.S.
1.25 and 30.7 that include removal of agreement counterparty concentration government had no obligation to do so
provisions setting forth credit rating limits serve to cap an FCM or DCO’s and investors cannot rely on another
requirements. Separate rulemakings exposure to the credit risk of a bailout should a GSE fail in the future.
proposed today address the elimination In consideration of the above, the
counterparty.
of credit ratings from Regulations 1.49 Commission proposes to amend
and 4.24 and the removal of Appendix Below, the Commission details its paragraph (a)(1)(iii) of Regulation 1.25
A to Part 40 (which contains a reference proposal to remove government by permitting investments in only those
to credit ratings). sponsored enterprise (GSE) securities U.S. agency obligations that are fully
The Commission is now proposing that are not backed by the full faith and guaranteed as to principal and interest
amendments to Regulations 1.25 and credit of the United States, corporate by the United States.21 The Commission
30.7 and requests comment on all debt obligations not guaranteed by the requests comment on whether GSE
aspects of the proposed rules, as well as United States, general obligations of a securities should remain as permitted
comment on the specific provisions and sovereign nation (foreign sovereign investments under Regulation 1.25,
issues highlighted in the discussion debt), and in-house transactions from either subject to a Federal guarantee
below. In addition, commenters are the list of permitted investments. These requirement or not.
welcome to offer their views regarding proposed changes reflect the position of
the Commission that the safety of a 2. Commercial Paper and Corporate
any other related matters that are raised Notes or Bonds
by the proposed amendments. particular instrument or transaction
must be viewed through the lens of its In order to simplify the regulation by
II. Discussion of the Proposed Rules likely performance during a period of eliminating rarely-used instruments,
market volatility and financial and in light of the credit, liquidity, and
A. Permitted Investments
instability. market risks posed by corporate debt
In proposing amendments to securities, the Commission proposes to
Regulation 1.25, the Commission seeks 1. Government Sponsored Enterprise limit investments in ‘‘commercial
to simplify the regulation and impose Securities paper’’ 22 and ‘‘corporate notes or
requirements that can better ensure the bonds’’ 23 to commercial paper and
preservation of principal and The Commission proposes to amend
paragraph (a)(1)(iii) to expressly add corporate notes or bonds that are
maintenance of liquidity. The federally guaranteed as to principal and
Commission has endeavored to tailor its U.S. government corporation
obligations 19 to GSE securities interest under the Temporary Liquidity
proposal to achieve these goals while Guarantee Program (TLGP) and meet
retaining an appropriate degree of (together, U.S. agency obligations) and
certain other prudential standards.24
investment flexibility and opportunities to add the requirement that the U.S.
for attaining capital efficiency for DCOs agency obligations must be fully 21 Although U.S. Government corporation

and FCMs investing customer guaranteed as to principal and interest obligations backed by the full faith and credit of the
segregated funds. by the United States. GSEs are chartered United States could also be categorized as U.S.
The Commission seeks to simplify by Congress but are privately owned Government securities under Regulation
and operated. Securities issued by GSEs 1.25(a)(1)(i), the Commission is distinguishing them
Regulation 1.25 by narrowing the scope from other government securities, such as Treasury
of investment choices in order to do not have an explicit federal securities, because they cannot be expected to have
eliminate the potential use of guarantee although they are considered the same liquidity even if they satisfy the ‘‘highly
instruments that may pose an by some to have an ‘‘implicit’’ guarantee liquid’’ requirement under proposed. Regulation
due to their federal affiliation.20 1.25(b)(1). See also discussion of concentration
unacceptable level of risk. In their July limits in Section II.B.4. of this notice.
2009 comment letters, both NFA and Obligations of U.S. government 22 Regulation 1.25(a)(1)(v).

CME suggested contracting the scope of corporations, such as the Government 23 Regulation 1.25(a)(1)(vi).

permitted investments by eliminating National Mortgage Association (known 24 Commercial paper would remain available as a

asset classes used negligibly as as Ginnie Mae), are explicitly backed by direct investment for MMMFs and corporate notes
the full faith and credit of the United or bonds would remain available as indirect
investment vehicles. investments for MMMFs by means of a repurchase
The Commission seeks to increase the States. Although the Commission is not
srobinson on DSKHWCL6B1PROD with PROPOSALS

agreement. Additionally, it should be noted that

safety of Regulation 1.25 investments by aware of any GSE securities that have an two commenters suggested expanding the list of
promoting diversification. For example, explicit federal guarantee, it believes permitted investments to include commercial paper
that GSE securities should remain on and corporate notes or bonds guaranteed by foreign
sovereign governments. However, as the
may be accessed at [Link] Commission has determined that foreign sovereign
LawRegulation/OTCDERIVATIVES/[Link]. 19 See 31 U.S.C. 9101 (defining ‘‘government
debt is itself unsuitable as a permitted investment,
17 Pursuant to Section 901 of the Dodd-Frank Act, corporation’’). going forward (explained in more detail below), it
Title IX may be cited as the ‘‘Investor Protection and 20 Frank J. Fabozzi with Steven V. Mann, The follows that corporate debt guaranteed by a foreign
Securities Reform Act of 2010.’’ Handbook of Fixed Income Securities, 242–245 sovereign government would also not be
18 See Section 939A(a) of the Dodd-Frank Act. (McGraw Hill 7th ed. 2005). permissible.

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 Federal Register / Vol. 75, No. 212 / Wednesday, November 3, 2010 / Proposed Rules 67645

Information obtained during the 2007 those guaranteed as to principal and Currently, an FCM or DCO can invest
Review indicated that commercial paper interest under the TLGP and that meet customer funds in foreign sovereign
and corporate notes or bonds were not the criteria set forth in the Division’s debt subject to two limitations: (1) The
widely used by FCMs or DCOs.25 interpretation. As a result of this debt must be rated in the highest
Consistent with this, the NFA states in limitation, paragraph (b)(3)(iv), which category by at least one nationally
its comment letter that most firms invest relates to adjustable rate securities, is norecognized statistical rating organization
about 33 percent of their customer funds longer necessary.27 The Commission (NRSRO) and (2) the FCM or DCO may
in government securities, 10 percent in proposes to delete current paragraph invest in such debt only to the extent it
MMMFs, and the balance maintained in (b)(3)(iv) and replace it with language has balances in segregated accounts
bank accounts or on deposit with a codifying the criteria for federally owed to its customers or its clearing
carrying broker. backed commercial paper and corporate member FCMs, respectively,
In the fall of 2008, the Federal Deposit notes or bonds. Accordingly, the denominated in that country’s currency.
Insurance Corporation (FDIC) created Commission proposes to delete The purpose of permitting investments
the TLGP, which guarantees principal paragraph (b)(3)(i)(B) and amend in foreign sovereign debt is to facilitate
and interest on certain types of paragraph (b)(3)(iii) to remove investments of customer funds in the
corporate debt. Although the TLGP debt references to paragraph (b)(3)(iv). The form of foreign currency without the
securities are backed by the full faith Commission requests comment on the need to convert that foreign currency to
and credit of the U.S. Government and proscription of commercial paper and a U.S. dollar denominated asset, which
therefore pose minimal credit risk to the corporate notes or bonds that are not would increase the FCM or DCO’s
buyer for the period during which the federally guaranteed under the TLGP, exposure to currency risk. An
guarantee is effective, initially there was the liquidity of TLGP debt, and whether investment in the sovereign debt of the
concern as to whether the securities the removal of the requirements for same country that issues the foreign
were readily marketable and sufficiently adjustable rate securities will have any currency would limit the FCM or DCO’s
liquid so that the holders of such unintended or detrimental effects on exposure to sovereign risk, i.e., the risk
securities would be able to liquidate Regulation 1.25 investments. of the sovereign’s default.
them quickly and easily without having Both the lack of investment in foreign
to incur a substantial discount. 3. Foreign Sovereign Debt
sovereign debt and the recent global
In February 2010, having evaluated
The Commission proposes to remove financial volatility have caused the
the growing market for TLGP debt
foreign sovereign debt as a permitted Commission to reevaluate this
securities, the Division issued an
investment in the interests of both provision. First, as noted above, it
interpretative letter concluding that
simplifying the regulation and appears that foreign sovereign debt is
TLGP debt securities are sufficiently
safeguarding customer funds. The 2007 rarely used as an investment tool by
liquid, and might therefore qualify as
Review revealed negligible investment FCMs. Second, the financial crisis has
permitted investments under Regulation
1.25 if they meet the following criteria in foreign sovereign debt 28 and that fact, highlighted the fact that certain
in combination with recent events countries’ debt can exceed an acceptable
in addition to satisfying the pre-existing
requirements imposed by Regulation undermining confidence in the solvency level of risk.
1.25: (1) The size of the issuance is of a number of foreign countries, In consideration of the above, the
greater than $1 billion; (2) the debt supports the Commission’s proposed Commission proposes to remove foreign
security is denominated in U.S. dollars; action. Removal of foreign sovereign sovereign debt as a permitted
and (3) the debt security is guaranteed debt from the list of permitted investment under Regulation 1.25 and
for its entire term.26 investments is not expected to renumber paragraph (a)(1) accordingly.
Although the TLGP expires in 2012, significantly impact FCM and DCO The Commission requests comment on
the Commission believes it is useful to investment strategies for customer whether foreign sovereign debt should
include commercial paper and corporate funds. The Commission notes that, aside remain, to any extent, as a permitted
notes or bonds that are fully guaranteed from general appeals to maintain the investment and, if so, what
as to principal and interest by the current list of permitted investments, requirements or limitations might be
United States as permitted investments only one commenter specifically imposed in order to minimize sovereign
because this would permit continuing addressed foreign sovereign debt.29 risk.
investment in TLGP debt securities, 4. In-House Transactions
27 The original purpose of this paragraph was to
even though the Commission has
proposed to otherwise eliminate set parameters for adjustable rate securities issued The Commission proposes to
by corporations and, to a lesser extent, GSEs. As eliminate in-house transactions
commercial paper and corporate notes proposed, Regulation 1.25 would only permit
or bonds. Therefore, the Commission corporate and GSE securities that had explicit U.S.
permitted under paragraph (a)(3) and
proposes to limit the commercial paper Government guarantees. Therefore, the mechanics subject to the requirements of paragraph
and corporate notes or bonds that can of an adjustable rate component for these (e) of Regulation 1.25. This proposal is
instruments would no longer require oversight for consistent with the Commission’s
qualify as permitted investments to only Regulation 1.25 purposes.
28 The 2007 Review indicated that out of 87 FCM
proposed prohibition on an FCM or
25 The 2007 Review indicated that out of 87 FCM respondents, only three held an investment in DCO entering into a repurchase or
respondents, only nine held commercial paper and foreign sovereign debt at any time during that year. reverse repurchase agreement with a
seven held corporate notes/bonds as direct It should also be noted that only one FCM invested counterparty that is an affiliate of the
srobinson on DSKHWCL6B1PROD with PROPOSALS

investments during the November 30, 2006– in such debt under Regulation 30.7. FCM or DCO.30
December 1, 2007 period. Further, 26 FCM 29 FIA, in its comment letter, recommended
respondents engaged in reverse repurchase expanding investment in foreign sovereign debt In 2005, two commenters
agreements as of December 1, 2007 and none beyond the current rule, which limits an FCM’s recommended that the Commission
received commercial paper or corporate notes or investment in foreign sovereign debt to the amount permit FCMs that are dually registered
bonds in those transactions. of its liabilities to its clients in that foreign
26 Letter from Ananda Radhakrishnan, Director,
as securities brokers or dealers to engage
country’s currency (FIA letter at 5). As the
Division of Clearing and Intermediary Oversight, Commission is prepared to remove foreign
CFTC, to Debra Kokal, Chairman of the Joint Audit sovereign debt entirely, a more detailed analysis of 30 See discussion infra at Section II.D, regarding

Committee (Jan. 15, 2010) (TLGP Letter). this recommendation is unnecessary. proposed Regulation 1.25(d)(3).

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 67646 Federal Register / Vol. 75, No. 212 / Wednesday, November 3, 2010 / Proposed Rules

in in-house transactions.31 At the time, whether changes in the settlement the meaning and application of the
the Commission concluded that in- mechanisms for the tri-party repo ‘‘readily marketable’’ requirement.40
house transactions would allow FCMs market might impact a MMMF’s ability The term ‘‘ready market’’ is borrowed
to realize ‘‘greater capital efficiency’’ and to meet the requirements of Regulation from the Securities and Exchange
further reasoned that ‘‘the substitution of 1.25.36 Commission (SEC) capital rules and is
one permitted investment for another in interpreted by the SEC.41 That standard
an in-house transaction [would] not B. General Terms and Conditions is used in setting appropriate haircuts
present an unacceptable level of risk to FCMs and DCOs may invest customer for the purpose of calculating capital.
the customer segregated account.’’ 32 The funds only in enumerated permitted Although its inclusion in Regulation
Commission therefore amended investments ‘‘consistent with the 1.25 was intended to be a proxy for the
Regulation 1.25 to allow an FCM/ objectives of preserving principal and concept of liquidity, it is not a concept
broker-dealer to enter into transactions maintaining liquidity * * *.’’ 37 In that is otherwise easily applied as a
that are the economic equivalent of a furtherance of this general standard, prudential standard in determining the
repurchase or reverse repurchase paragraph (b) of Regulation 1.25 appropriateness of a debt instrument for
agreement, subject to certain establishes various specific investment of customer funds.
requirements.33 More specifically, an requirements designed to minimize It is the Commission’s view that the
FCM may exchange customer money for ‘‘readily marketable’’ language should be
credit, market, and liquidity risk.
permitted investments held in its eliminated as it creates an overlapping
Among them are a requirement that the
capacity as a broker-dealer, it may and confusing standard when applied in
investment be ‘‘readily marketable,’’ that
exchange customer securities for the context of the express objective of
it meet specified rating requirements,
permitted investments held in its ‘‘maintaining liquidity.’’ While
and that it not exceed specified issuer
capacity as a broker-dealer, and it may ‘‘liquidity’’ and ‘‘ready market’’ appear to
concentration limits. The Commission is
exchange customer securities for cash be interchangeable concepts, they have
proposing to amend these standards to
held in its capacity as a broker-dealer.34 distinctly different origins and uses: The
Recent market events have, however, facilitate the preservation of principal
and maintenance of liquidity by objective of ‘‘maintaining liquidity’’ is to
increased concerns about the ensure that investments can be
concentration of credit risk within the establishing clear, prudential standards
that further investment quality and promptly liquidated in order to meet a
FCM/broker-dealer corporate entity in margin call, pay variation settlement, or
connection with in-house transactions. portfolio diversification. The
Commission notes that an investment return funds to the customer upon
Therefore, consistent with the demand. As noted above, the SEC’s
Commission’s proposal to prohibit that meets the technical requirements of
Regulation 1.25 but does not meet the ‘‘ready market’’ standard is intended for
FCMs from entering into repurchase and a different purpose and is easier to
reverse repurchase agreements with overarching prudential standard cannot
qualify as a permitted investment. apply to exchange traded equity
affiliates, the Commission is proposing securities than debt securities.
to eliminate in-house transactions as 1. Marketability Although Regulation 1.25 requires
permitted investments for customer that investments be consistent with the
funds under paragraph (a)(3) of Regulation 1.25(b)(1) states that objective of maintaining liquidity, the
Regulation 1.25 and rescind paragraph ‘‘[e]xcept for interests in money market Commission has not articulated an
(e), which sets forth the requirements mutual funds, investments must be explanation or a definition of the
for in-house transactions. Accordingly, ‘readily marketable’ as defined in concept of ‘‘liquidity.’’ The Commission
paragraph (f) will be redesignated as § 240.15c3–1 of this title.’’ 38 The therefore proposes to define ‘‘highly
new paragraph (e). Commission proposes to remove the liquid’’ functionally, as having the
The Commission requests comment ‘‘readily marketable’’ requirement from ability to be converted into cash within
on the impact of this proposal on the paragraph (b)(1) and substitute in its one business day, without a material
business practices of FCMs and DCOs. place a ‘‘highly liquid’’ standard.39 The discount in value. This approach
Specifically, the Commission requests Commission did not receive any focuses on outcome rather than process,
that commenters present scenarios in comment letters specifically discussing and the Commission believes it will be
which a repurchase or reverse easier to apply to debt securities than
repurchase agreement with a third party 36 An industry task force recently concluded an
the current ‘‘readily marketable’’
could not be satisfactorily substituted extensive review of the tri-party repo market to standard.
for an in-house transaction. identify ways in which it could be improved. See
An alternative to using a materiality
The Commission requests comment Payments Risk Committee, Task Force on Tri-Party
Repo Infrastructure, [Link] standard in the definition of highly
on any other aspect of the proposed tripartyrepo/task_force_report.html (May 17, 2010). liquid is to employ a more formulaic
changes to paragraph (a) of Regulation In contrast to current practice, under which funds and measurable approach. An example
1.25. In particular, the Commission from maturing repos are available early in the day,
of a calculable standard would be one
solicits comment on whether MMMFs modifications to the settlement arrangements for tri-
party repo transactions may result in payments that provides that an instrument is
should be eliminated as a permitted
occurring later in the day. To the extent that
investment.35 In discussing whether MMMFs invest in tri-party repos, this change could 40 FIA, MF Global and Newedge mentioned
MMMF investments satisfy the overall impact their ability to pay out large amounts of cash marketability in their letters but no significant
objective of preserving principal and early in the day. changes were recommended.
37 Regulation 1.25(b).
maintaining liquidity, the Commission
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41 The term ‘‘ready market’’ is defined, in relevant

38 See 17 CFR 240.15c3–1(c)(11)(i) (SEC
specifically requests comment on part, to ‘‘include a recognized established securities
regulation defining ‘‘ready market’’). market in which there exists independent bona fide
39 Related to this proposed new standard, the offers to buy and sell so that a price reasonably
31 See 70 FR at 28193 (FIA and Lehman Brothers
provision in paragraph (a)(2)(ii)(A) that requires related to the last sales price or current bona fide
supporting in-house transactions). securities subject to repurchase agreements to be competitive bid and offer quotations can be
32 70 FR 5577, 5581 (Feb. 3, 2005).
‘‘ ‘readily marketable’ as defined in § 240.15c–1 of determined for a particular security almost
33 See Regulation 1.25(a)(3) and (e).
this title’’ also would be amended to provide that instantaneously and where payment will be
34 Regulation 1.25(a)(3)(i)–(iii).
securities subject to repurchase agreements must be received in settlement of a sale at such price within
35 MMMFs are discussed in greater detail infra, in ‘‘ ‘highly liquid’ as defined in paragraph (b)(2) of a relatively short time conforming to trade custom.’’
Sections II.B.4 and II.C of this notice. this section.’’ 17 CFR 240.15c3–1(c)(11)(i).

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 Federal Register / Vol. 75, No. 212 / Wednesday, November 3, 2010 / Proposed Rules 67647

highly liquid if there is a reasonable (Investment Company Act).43 In requirements would not absolve FCMs
basis to conclude that, under stable November 2009, the SEC adopted rules and DCOs from investing in safe, highly
financial conditions, the instrument has imposing enhanced disclosure and liquid investments; rather it would shift
the ability to be converted into cash conflict of interest requirements for to FCMs and DCOs more of the
within one business day, without NRSROs.44 The SEC also has opened responsibility to diligently research
greater than a 1 percent haircut off of its comment periods on other proposed their investments.
book value. amendments, including one that would In light of the above analysis, the
The Commission proposes to amend remove references to NRSROs from its Commission proposes to eliminate
paragraph (b)(1) to eliminate the net capital rule.45 paragraph (b)(2) of Regulation 1.25 and
marketability standard and in its place The Dodd-Frank Act contains several renumber the subsequent provisions of
establish a requirement that permitted measures that focus both on decreasing paragraph (b) accordingly.
investments be highly liquid. The reliance on NRSROs and improving the
performance of NRSROs when they 3. Restrictions on Instrument Features
Commission requests comment on
whether the proposed definition of must be relied upon. Section 939 of the Currently, both non-negotiable and
‘‘highly liquid’’ accurately reflects the Dodd-Frank Act mandates the removal negotiable CDs are permitted under
industry’s understanding of that term, of certain references to NRSROs in Regulation 1.25. Paragraph (b)(3)(v)
and whether the term ‘‘material’’ might several statutes,46 and Section 939A details the required redemption features
be replaced with a more precise or, requires all Federal agencies to review of both types of CDs.
perhaps, even calculable standard. The references to NRSROs in their Non-negotiable CDs represent a direct
Commission welcomes comment on the regulations, to remove reliance on credit obligation of the issuing bank to the
ease or difficulty in applying the ratings and, if appropriate, to replace purchaser. The CD is wholly owned by
proposed or alternative ‘‘highly liquid’’ such reliance with other standards of the purchaser until early redemption or
standards. credit-worthiness. the final maturity of the CD. To be
The Commission, therefore, intends to permitted under Regulation 1.25, the
2. Ratings remove credit rating requirements from terms of the CD must allow the
Regulation 1.25.47 Alternative standards purchaser to redeem the CD at the
The Commission proposes to remove
of credit-worthiness are not being issuing bank within one business day,
all rating requirements from Regulation
proposed. Evidence that rating agencies with any penalty for early withdrawal
1.25. This proposal is mandated by
have not reliably gauged the safety of limited to any accrued interest earned.
Section 939A of the Dodd-Frank Act.
debt instruments in the past and the fact Therefore, other than in the event of a
Further, the proposal reflects the
that other Regulation 1.25 proposed bank default, an investor is assured of
Commission’s views that ratings are not
amendments published in this notice the return of its principal.
sufficiently reliable as currently
obviate much of the need for credit Negotiable CDs are considerably
administered, that there is reduced need
ratings, have helped to shape the different than non-negotiable CDs in
for a measure of credit risk given the
Commission’s decision. that they are typically purchased by a
proposed elimination of certain
While some might argue that broker on behalf of a large number of
permitted investments, and that FCMs
imperfect information is better than investors. The large size of the purchase
and DCOs should bear greater
none at all, several factors outweigh the by the broker results in a more favorable
responsibility for understanding and
possible risks associated with removing interest rate for the purchasers, who
evaluating their investments.42
rating requirements. First, eliminating essentially own shares of the negotiable
The original purpose of imposing commercial paper and corporate notes CD. Unlike a non-negotiable CD, the
rating requirements was to mitigate or bonds as permitted investments purchaser of a negotiable CD cannot
credit risk associated with permitted would take away a large class of redeem its interest from the issuing
investments which included potentially risky investments for which bank. Rather, an investor seeking
commercial paper and corporate notes. ratings would be relevant. Second, the redemption prior to a CD’s maturity date
Recent events in the financial markets, issuer concentration limits and must liquidate the CD in the secondary
however, revealed significant proposed asset-based concentration market. Depending on the negotiated CD
weaknesses in the ratings industry. limits should reduce the likelihood that terms (interest rate and duration) and
Eliminating or restricting rating one problem investment would the current economic conditions, the
requirements has been considered by destabilize an entire investment market for a given CD can be illiquid
Congress and regulators with some portfolio. Finally, removing rating and can result in the inability to redeem
frequency during the past two years. within one business day and/or a
This has been motivated, at least in part, 43 See 74 FR 52358 (Oct. 9, 2009) (publishing final
significant loss of principal.
by public sentiment that credit rating rules and proposing additional rule amendments). Therefore, the Commission proposes
44 See 74 FR 63832 (Dec. 4, 2009) (publishing
agencies did not accurately rate debt in to amend paragraph (b)(3)(v) by
final rules and proposing additional rule
the months and years leading up to the amendments). restricting CDs to only those
financial crisis, worsening the financial 45 74 FR at 52377–78 (proposing removal of instruments which can be redeemed at
crisis and increasing investors’ losses. certain references to NRSROs in the SEC’s net the issuing bank within one business
The SEC, in September 2009, adopted capital rules for broker-dealers). day, with any penalty for early
46 Sections 7(b)(1)(E)(i), 28(d) and 28(e) of the
rule amendments that removed withdrawal limited to accrued interest
Federal Deposit Insurance Act (12 U.S.C. 1811 et
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references to NRSROs from a variety of seq.), Section 1319 of the Federal Housing earned according to its written terms.48
SEC rules and forms promulgated under Enterprises Financial Safety and Soundness Act of
the Securities Exchange Act of 1934 and 1992 (12 U.S.C. 4519), Section 6(a)(5)(A)(iv)(I) of 48 While it proposes to eliminate negotiable CDs

from certain rules promulgated under the Investment Company Act of 1940 (15 U.S.C. as an interest bearing vehicle for purposes of
80a–6(a)(5)(A)(iv)(I)), Section 5136A of title LXII of Regulation 1.25, the Commission notes that Section
the Investment Company Act of 1940 the Revised Statutes of the United States (12 U.S.C. 627 of the Dodd-Frank Act removes the prohibition
24a), and Section 3(a) of the Securities Exchange on payments of interest on demand deposits.
42 The Commission received three letters Act of 1934 (15 U.S.C. 78a(3)(a)). Demand deposits which meet Regulation 1.25
regarding rating requirements, but none focused on 47 See infra Section II.E.2 regarding the standards of liquidity may, therefore, be a source of
the question of whether or not to retain ratings. corresponding change in Regulation 30.7. interest income to DCOs and FCMs.

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 67648 Federal Register / Vol. 75, No. 212 / Wednesday, November 3, 2010 / Proposed Rules

4. Concentration Limits and liquidity relative to other permitted the risk profiles of the asset classes are
investments.51 different. The Commission recognizes
Paragraph (b)(4) of Regulation 1.25 U.S. government securities are backed that TLGP debt securities pose no risk
currently sets forth issuer-based by the full faith and credit of the U.S. to principal, unlike bank CDs which are
concentration limits for direct government, are highly liquid, and are subject to the possible default of the
investments, securities subject to the safest of the permitted investments. issuing bank. However, a CD which
repurchase or reverse repurchase As such, the Commission proposes a must be redeemable within one business
agreements, and in-house transactions. 100 percent concentration limit, day under Regulation 1.25(b)(3)(v) could
The Commission proposes to adopt allowing an FCM or DCO to invest all prove to be more liquid than TLGP debt
asset-based concentration limits for of its segregated funds in U.S. securities during a time of market stress.
direct investments and a counterparty government securities.52 The Commission requests comment on
concentration limit for reverse U.S. agency obligations, as proposed, whether there should be differentiation
repurchase agreements in addition to must be fully guaranteed as to principal between asset-based concentration
amending its issuer-based concentration and interest by the United States. The limits for TLGP debt securities and CDs
limits and rescinding concentration Commission views these as sufficiently and, if so, what those different
limits applied to in-house safe but potentially not as liquid as a concentration limits should be.
transactions.49 Treasury security. Because of this Municipal securities are backed by
(a) Asset-based concentration limits. concern, and in the interest of the state or local government that issues
Asset-based concentration limits would promoting diversification, the them, and they have traditionally been
dictate the amount of funds an FCM or Commission proposes a 50 percent viewed as a safe investment. However,
DCO could hold in any one class of concentration limit.53 municipal securities have been volatile
investments, expressed as a percentage The Commission categorizes TLGP and, in some cases, increasingly illiquid
of total assets held in segregation. In debt securities as corporate securities,54 over the past two years. Therefore, the
their comment letters, the FIA, MF which are riskier than U.S. government Commission proposes to apply a 10
Global and Newedge specifically securities. While TLGP debt securities percent concentration limit to
suggested the incorporation of asset- have an explicit FDIC guarantee, which
municipal securities.55
based concentration limits. The provides confidence for TLGP debt
MMMFs have been widely used as an
Commission agrees that such limits investors that they will receive the full
investment for customer segregated
could increase the safety of customer amount of principal and interest in the
funds.56 As discussed in the next
funds by promoting diversification. event of an issuer default, the timing of
section, their portfolio diversification,
Specifically, the Commission such a payment is uncertain.
administrative ease, and heightened
proposes the following asset-based Additionally, while TLGP debt
prudential standards recently imposed
limits in light of its evaluation of credit, securities that meet the Commission’s
by the SEC, continue to make MMMFs
liquidity, and market risk: requirements have a liquid secondary
an attractive investment option.
• No concentration limit (100 market, that might not always be the
However, their volatility during the
percent) for U.S. government securities; case. The Commission therefore
2008 financial crisis, which culminated
proposes to apply a 25 percent
• A 50 percent concentration limit for in one fund ‘‘breaking the buck’’ and
concentration limit for TLGP debt
U.S. agency obligations fully guaranteed many more funds requiring infusions of
securities as well.
as to principal and interest by the CDs are safe for relatively small capital, underscores the fact that
United States; amounts, but the risk increases for larger investments in MMMFs are not without
• A 25 percent concentration limit for sums. The rise in bank failures since risk.57 To mitigate these risks, the
TLGP guaranteed commercial paper and 2008 is a cause for concern with regard Commission proposes to assign a 10
corporate notes or bonds; to CDs because they are FDIC insured to percent concentration limit for
• A 25 percent concentration limit for a maximum of only $250,000. As a MMMFs.58 The Commission believes
non-negotiable CDs; result, the Commission proposes to that this concentration limit is
• A 10 percent concentration limit for apply a 25 percent concentration limit commensurate with the risks posed by
municipal securities; and to CDs. MMMFs. The Commission solicits
comment regarding whether 10 percent
• A 10 percent concentration limit for In evaluating possible asset-based
concentration limits for TLGP debt is an appropriate asset-based
interests in MMMFs.
securities and CDs, the Commission concentration limit for MMMFs. The
Asset-based concentration limits are Commission welcomes opinions on
consistent with the Commission’s determined that the same concentration
limit should apply to both, even though what alternative asset-based
historical view that not all permitted concentration limit might be
investments have identical risk appropriate for MMMFs and, if such
51 The Commission notes that paragraphs
profiles.50 In its efforts to increase the
(b)(4)(ii)–(iii) of Regulation 1.25 would apply to
safety of permitted investments on a both asset-based and issuer-based concentration 55 FIA, MF Global and Newedge each assigned a
portfolio basis, the Commission has limits. Therefore, for the purpose of calculating 25 percent concentration limit to all assets that
decided to assign to each permitted asset-based concentration limits, instruments were not U.S. government securities, GSE securities
investment an asset-based concentration purchased by an FCM or DCO as a result of a or MMMFs. See FIA letter at 3, MF Global letter at
reverse repurchase agreement under paragraph 2, and Newedge letter at 5.
limit that correlates to its level of risk (b)(4)(iii) would be combined with instruments held 56 The 2007 Review indicated that out of 87 FCM
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by the FCM or DCO as direct investments. respondents, 46 had invested customer funds in
49 The Commission is aware that other 52 FIA, MF Global and Newedge each assigned a MMMFs at some point during the November 30,
diversification methods exist or could be devised 100 percent concentration limit to U.S. government 2006–December 1, 2007 period.
(such as the diversification requirements for MMMF securities. See FIA letter at 3, MF Global letter at 57 See 75 FR 10060, 10078 n.234 (Mar. 4, 2010).

investments in CME’s IEF2 collateral management 2, and Newedge letter at 5. 58 FIA recommended a 100 percent concentration
program) and believes that such methods can 53 FIA, MF Global and Newedge each assigned a
limit, Newedge recommended a 50 percent
coexist with the proposed concentration limits. 75 percent concentration limit to GSE securities. concentration limit, and MF Global recommended
50 See 70 FR at 5581 (discussing the relative risk See FIA letter at 3, MF Global letter at 2, and a 25 percent concentration limit for MMMFs. See
profiles of permitted investments in the context of Newedge letter at 5. FIA letter at 3, Newedge letter at 5, and MF Global
repurchase agreements). 54 See TLGP Letter. letter at 2.

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 Federal Register / Vol. 75, No. 212 / Wednesday, November 3, 2010 / Proposed Rules 67649

asset-based concentration limit is higher concentration limits for direct requirements of Regulation 1.25(c)
than 10 percent, what corresponding investments; amend and renumber as might not meet the Regulation 1.25
issuer-based concentration limit should new paragraph (iii) concentration limits objective of preserving principal and
be adopted. for reverse repurchase agreements; maintaining liquidity, particularly
(b) Issuer-based concentration limits. delete the existing paragraph (iv) due to during volatile market conditions.62
The Commission has considered the the Commission’s proposed elimination Lending credence to such concerns, the
current concentration limits and of in-house transactions; renumber as a SEC has estimated that, in order to
proposes to amend its issuer-based new paragraph (iv) the provision avoid breaking the buck, nearly 20
limits for direct investments to include regarding treatment of customer-owned percent of all MMMFs received
a 2 percent limit for an MMMF family securities; and add a new paragraph (v) financial support from their money
of funds, expressed as a percentage of setting forth counterparty concentration managers or affiliates from mid-2007
total assets held in segregation. limits for reverse repurchase through the end of 2008.63
Currently, there is no concentration agreements. In response to the potential risks
limit applied to MMMFs and the The Commission requests comment posed by investments in MMMFs, the
Commission believes that it is prudent on any and all aspects of the proposed Commission is proposing to institute the
to require FCMs and DCOs to diversify concentration limits, including whether concentration limits discussed above.
their MMMF portfolios. The 25 percent asset-based concentration limits are an However, the Commission has decided
issuer-based limitation for GSEs (now effective means for facilitating to refrain from further restricting
U.S. agency obligations) and the 5 investment portfolio diversification and investments in MMMFs at this time.
percent issuer-based limitation for whether there are other methods that The Commission is hopeful that the
municipal securities, commercial paper, should be considered. In addition, the combination of its asset-based
corporate notes or bonds, and CDs will Commission requests comment on limitations, issuer-based limitations
remain in place. whether the proposed concentration applied to a single family of funds, and
(c) Counterparty concentration limits. levels are appropriate for the categories the SEC’s recent MMMF reforms will
Finally, the Commission proposes a of investments to which they are adequately address the risks associated
counterparty concentration limit of 5 assigned and whether there should be with MMMFs.64
percent of total assets held in different standards for FCMs and DCOs. The Commission requests comment
segregation for securities subject to on whether MMMF investments should
reverse repurchase agreements. Under C. Money Market Mutual Funds be limited to Treasury MMMFs,65 or to
Regulation 1.25(b)(4)(iii), concentration The continued use of MMMFs was the those MMMFs that have portfolios
limits for reverse repurchase agreements sole focus of five comment letters,59 a consisting only of permitted
are derived from the concentration substantial focus of one,60 and investments under Regulation 1.25.
limits that would have been assigned to referenced positively by an additional The Commission is proposing two
the underlying securities had the FCM four.61 Taken together, the letters technical amendments to paragraph (c)
or DCO made a direct investment. of Regulation 1.25. First, the
conveyed a consensus that MMMFs are
Therefore, under current rules, an FCM Commission is proposing to clarify the
both safe and administratively efficient.
or DCO could have 100 percent of its acknowledgment letter requirement
In their respective comment letters,
segregated funds subject to one reverse under paragraph (c)(3); and second, the
Federated noted that MMMFs are
repurchase agreement. The obvious Commission is proposing to revise and
subject to the overlapping regulatory
concern in such a scenario is the credit clarify the exceptions to the next-day
regimes overseen by the SEC, and ICI
risk of the counterparty. This credit risk, redemption requirement under
highlighted the quality, liquidity and
while concentrated, is significantly paragraph (c)(5)(ii).
diversity of an MMMF’s holdings.
mitigated by the fact that in exchange 1. Acknowledgment Letters
Further, TSI noted that out of 700–800
for cash, the FCM or DCO is holding
MMMFs, only one failed during the The Commission is proposing to
Regulation 1.25-permissible securities of
September 2008 financial turmoil, a amend Regulation 1.25(c)(3) to clarify
equivalent or greater value. However, a
crisis which Dreyfus likened to a ‘‘1,000
default by the counterparty would put
year flood.’’ 62 See 75 FR at 10078 n.234 (SEC final rulemaking
pressure on the FCM or DCO to convert
While the Commission appreciates adopting amendments to regulations governing
such securities into cash immediately MMMFs, describing the September 2008 run on
the benefits of MMMFs, it also is
and would exacerbate the market risk to MMMFs: ‘‘On September 17, 2008, approximately
cognizant of their risks. Reserve Primary
the FCM or DCO, given that a decrease 25% of prime institutional money market funds
Fund, the September 2008 failure experienced outflows greater than 5% of total
in the value of the security or an
increase in interest rates could result in referenced by TSI, was an MMMF that assets; on September 18, 2008, approximately 30%
satisfied the enumerated requirements of prime institutional money market funds
the FCM or DCO realizing a loss. Even experienced outflows greater than 5%; and on
though the market risk would be of Regulation 1.25 and at one point was September 19, 2008, approximately 22% of prime
mitigated by asset-based and issuer- a $63 billion fund. The Reserve Primary institutional money market funds experienced
based concentration limits, a situation Fund’s breaking the buck called outflows greater than 5%’’).
of this type could seriously jeopardize attention to the risk to principal and 63 See 74 FR 32688, 32693 (July 8, 2009).
64 See 75 FR 10060 (SEC final rulemaking
an FCM or DCO’s overall ability to potential lack of sufficient liquidity of
decreasing the percentage of second tier securities
preserve principal and maintain any MMMF investment. In the wake of (which are securities that do not receive the highest
liquidity with respect to customer the Reserve Primary Fund problem, the rating from an NRSRO or, if unrated, securities that
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funds. Commission has been forced to consider are comparable in quality to securities that do not
the possibility that any number of receive the highest rating from an NRSRO) from 5
In accordance with the above percent to 3 percent, reducing the dollar-weighted
discussion, the Commission proposes to MMMFs that meet the technical average portfolio maturity from 90 days to 60 days,
amend paragraph (b)(4) to add a new 59 See Crane letter, Dreyfus letter, Federated letter
introducing a dollar-weighted average life to
paragraph (i) setting forth asset-based maturity of 120 days, and imposing new daily and
I, ICI letter, and TSI letter. weekly liquidity requirements, among others).
concentration limits for direct 60 See CME letter at 5–6. 65 A ‘‘Treasuries fund’’ must have at least 80
investments; amend and renumber as 61 See FCStone letter at 2, MF Global letter at 2, percent of its assets invested in U.S. treasuries at
new paragraph (ii) issuer-based Newedge letter at 5, and NFA letter at 1. all times, as required by 17 CFR 270.35d–1.

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 67650 Federal Register / Vol. 75, No. 212 / Wednesday, November 3, 2010 / Proposed Rules

the appropriate party to provide an requests comment on whether removal Section 22(e), Rule 22e–3 72 permits
acknowledgment letter where customer of this language helps clarify the intent MMMFs to suspend redemptions and
funds are invested in MMMFs. of Regulation 1.25(c)(3). postpone payment of redemption
Regulation 1.26 requires an FCM or The Commission is accordingly proceeds in order to facilitate an orderly
DCO which invests customer funds in proposing to amend Regulation liquidation of the fund.73 Before Rule
instruments permitted under Regulation 1.25(c)(3) to set forth a functional 22e–3 may be invoked, the fund’s board,
1.25 to create a segregated account at a definition accompanied by specific including a majority of its disinterested
depository for such instruments and to examples. The proposed amendment directors, must determine that the
obtain an acknowledgment letter from would require an FCM or DCO to obtain extent of the deviation between the
the depository. Because interests in the acknowledgment letter required by fund’s amortized cost per share and its
MMMFs generally are not held at a Regulation 1.26 66 from an entity that current net asset value per share may
depository in the first instance, like has substantial control over the fund’s result in material dilution or other
other permitted investments, Regulation assets and has the knowledge and unfair results,74 and the board,
1.25(c)(3) currently provides an authority to facilitate redemption and including a majority of its disinterested
exception to the Regulation 1.26 payment or transfer of the customer directors, must irrevocably approve the
requirement that an acknowledgment segregated funds. The proposed liquidation of the fund.75 In addition,
letter be provided by a depository. language would specify that such an prior to suspending redemption, the
Regulation 1.25(c)(3) requires the entity may include the fund sponsor or fund must notify the SEC of its
‘‘sponsor of the fund and the fund itself’’ investment adviser.67 decision.76
to provide an acknowledgment letter In order to expressly incorporate Rule
when the MMMF shares are held by a 2. Next-Day Redemption Requirement 22e–3 into the permitted exceptions for
fund’s shareholder servicing agent. Regulation 1.25(c) requires that ‘‘[a] purposes of clarity, and to otherwise
The Commission has received a fund shall be legally obligated to redeem clarify the existing exceptions to the
number of inquiries regarding the an interest and to make payment in next-day redemption requirement, the
meaning of this provision and the satisfaction thereof by the business day Commission has decided to amend
definition of ‘‘sponsor,’’ a term that is following a redemption request.’’ 68 This paragraph (c)(5)(ii) of Regulation 1.25 by
not defined in the Investment Company ‘‘next-day redemption’’ requirement is a more closely aligning the language of
Act. While the term is not defined, it is significant feature of Regulation 1.25 that paragraph with the language in
nonetheless used throughout the and is meant to ensure adequate Section 22(e) and specifically including
Investment Company Act and is liquidity.69 Regulation 1.25(c)(5)(ii) lists Rule 22e–3. Section 22(e) will, however,
generally understood to refer to the four exceptions to the next-day continue to be incorporated by reference
entity that organizes the fund. Such an redemption requirement, and so as to provide for any future
entity typically provides seed capital to incorporates by reference the emergency amendment or regulatory actions by the
the investment company and may be an conditions listed in Section 22(e) of the SEC.
affiliated investment adviser or Investment Company Act (Section The Commission will include, as
underwriter to the investment company. 22(e)).70 The Commission has received Appendix A to the rule text, safe harbor
The Commission seeks to clarify that questions from FCMs regarding language that can be used by MMMFs to
the intent of Regulation 1.25(c)(3) is to Regulation 1.25(c)(5), particularly ensure that their prospectuses comply
require an acknowledgment letter from because the exceptions listed in with Regulation 1.25(c)(5). The
a party that has substantial control over paragraph (c)(5)(ii) overlap with some of proposed language tracks the proposed
the fund’s assets and has the knowledge those appearing in Section 22(e). paragraph (c)(5).
and authority to facilitate redemption Recently, as part of its MMMF reform The Commission requests comment
and payment or transfer of the customer initiative, the SEC adopted a rule that on all aspects of its proposed
segregated funds invested in shares of provides the basis for another exception amendments to paragraph (c). The
an MMMF. The Commission has to the next-day redemption Commission seeks comment specifically
concluded that in many circumstances, requirement.71 Promulgated under on any proposed regulatory language
the fund sponsor, the investment that commenters believe requires further
adviser, or fund manager would satisfy 66 In a related proposed rulemaking, the clarification. In addition, commenters
this requirement. To the extent there are Commission has proposed to add a new paragraph are invited to submit views on the
circumstances where an entity such as (c) to Regulation 1.26 which would specifically usefulness and substance of the
the Administrator would be in this govern acknowledgment letters for MMMFs. The
Commission also has proposed a mandatory form of proposed safe harbor language
position, proposed Regulation 1.25(c)(3) acknowledgment letter in proposed Appendix A to contained in proposed Appendix A.
encompasses such an entity. The Regulation 1.26. See 75 FR 47738 (Aug. 9, 2010).
Commission requests comment on 67 A fund sponsor or investment adviser would be D. Repurchase and Reverse Repurchase
whether the proposed standard is identified as appropriate entities to provide an Agreements
appropriate and whether there are other acknowledgment letter, because they would
typically be expected to satisfy the proposed
The Commission proposes to
entities that could serve as examples. standard. However, in any circumstance where the eliminate repurchase and reverse
The Commission is also proposing to fund sponsor or investment adviser does not meet repurchase transactions with affiliate
remove the current language in that standard, the acknowledgment letter would counterparties. This amendment
Regulation 1.25(c)(3) relating to the have to be obtained from another entity that can
meet the regulatory requirement.
forwards the interests of both protecting
issuer of the acknowledgment letter
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68 Regulation 1.25(c)(5)(i).
when the shares of the fund are held by 69 See 70 FR 5585 (noting that ‘‘[t]he Commission Joint Audit Committee (June 3, 2010) (stating that
the fund’s shareholder servicing agent. believes the one-day liquidity requirement for Rule 22e–3 falls within the exceptions to the next-
This revision is designed to eliminate investments in MMMFs is necessary to ensure that day redemption requirement under Regulation
the funding requirements of FCMs will not be 1.25).
any confusion as to whether the 72 17 CFR 270.22e–3.
impeded by a long liquidity time frame.’’).
acknowledgment letter requirement is 70 15 U.S.C. 80a–22(e). 73 See 75 FR at 10088.
applied differently based on the 71 See Letter from Ananda Radhakrishnan, 74 17 CFR 270.22e–3(a)(1).

presence or absence of a shareholder Director, Division of Clearing and Intermediary 75 17 CFR 270.22e–3(a)(2).

servicing agent. The Commission Oversight, CFTC, to Debra Kokal, Chairman of the 76 17 CFT 270.22e–3(a)(3).

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 Federal Register / Vol. 75, No. 212 / Wednesday, November 3, 2010 / Proposed Rules 67651

customer funds as well as establishing by assets owned by the other party, and, funds.81 In addition to adding new
consistency within the regulation, in return, the other party repays the paragraph (g) to Regulation 30.7 to
which would no longer permit in-house cash, plus interest, and its assets are reflect this amendment, the Form 1–FR–
transactions and currently prohibits returned. The similarity of the two FCM instruction manual would be
investments in instruments issued by transactions would seem to require revised accordingly.82
affiliates. similar treatment under Regulation 1.25. The Commission solicits comment on
Repurchase and reverse repurchase Therefore, the Commission proposes applying the requirements of Regulation
transactions were originally included as to amend paragraph (d) by adding new 1.25 to 30.7 funds. In this regard, the
permitted investments to increase the paragraph (3) prohibiting repurchase Commission seeks comment on any
liquidity in the portfolio of segregated and reverse repurchase agreements with differences between customer
funds.77 By entering into repurchase affiliates. Current paragraphs (3) segregated funds and 30.7 funds that
agreements with unaffiliated through (12) will be renumbered as (4) would warrant the continuing
counterparties, FCMs can convert through (13), accordingly. The application of different standards.
securities holdings into cash or Commission seeks comment on its
alternatively supply cash to market 2. Ratings
proposal to eliminate repurchase and
participants in exchange for liquid reverse repurchase transactions with The Commission proposes to remove
securities. In the event that a affiliate counterparties. all rating requirements from Regulation
counterparty receiving cash defaults, the 30.7. This proposal is required by
other party is protected due to its E. Regulation 30.7 Section 939A of the Dodd-Frank Act
holding of the counterparty’s securities. and further reflects the Commission’s
1. Harmonization
Reverse repurchase and repurchase views on the unreliability of ratings as
agreements contribute generally to The Commission proposes to currently administered and its interest
increased market liquidity and are not harmonize Regulation 30.7 with the in aligning Regulation 30.7 with
inconsistent with the required safety of investment limitations of Regulation Regulation 1.25.83
customer funds. 1.25. As noted above, the Commission The only reference to credit ratings in
The benefits of such an arrangement has not previously restricted Regulation 30.7 is in paragraph
are diminished, however, when investments of 30.7 funds to the (c)(1)(ii)(B). Paragraph (c)(1)(ii) permits
repurchase agreements are between permitted investments under Regulation 30.7 funds to be kept in an account with
affiliates. In particular, the 1.25, although Regulation 1.25 a depository outside the United States if
concentration of credit risk increases the limitations can be used as a safe harbor the depository meets any of three
likelihood that the default of one party for such investments.79 The alternative standards: (1) The depository
could exacerbate financial strains and Commission now believes that it is has in excess of $1 billion of regulatory
lead to the default of its affiliate. While appropriate to align the investment capital, (2) the depository or its parent’s
such a scenario would be unexpected in standards of Regulation 30.7 with those ‘‘commercial paper or long-term debt
calm markets, during periods of of Regulation 1.25 because many of the instrument * * * is rated in one of the
financial turbulence such problems are same prudential concerns arise with two highest rating categories by at least
considerably more likely to occur. It respect to both segregated customer one’’ NRSRO, or (3) if it does not meet
should be noted that the actions of funds and 30.7 funds. Such a limitation either of the first two criteria, the
market participants suggest that even should increase the safety of 30.7 funds depository has been permitted to hold
possession and control of liquid and provide clarity for the FCMs, DCOs, 30.7 funds upon the request of a
securities may be insufficient to and designated self-regulatory customer.
alleviate concerns relating to organizations.
transactions with financially troubled The use of the credit rating of the
counterparties.78 The Commission anticipates that the commercial paper or long-term debt of
Further, the interests of consistency of impact of this amendment will be slight, the depository institution is comparable
the regulation weigh in favor of as it appears that using Regulation 1.25 to the standard used to gauge the safety
disallowing repurchase agreements standards in 30.7 investments is a of an issuer of a CD.84 The Commission
between affiliates. Currently, a common industry practice. For example, has viewed credit ratings as unreliable
repurchase agreement between affiliates Newedge commented that the to gauge the safety of an issuer of a CD
is allowed under Regulation 1.25(d), harmonization of Regulations 1.25 and and proposed, in Section II.B.2 of this
while investments in debt instruments 30.7 ‘‘would reflect current market notice, to remove this requirement from
issued by an affiliate—effectively a practice * * *’’ since, in its opinion, Regulation 1.25. The Commission now
collateralized loan between affiliates—is ‘‘* * * many if not most FCMs currently proposes to remove paragraph
prohibited by paragraph (b)(6). A invest Part 30.7 funds in the same (c)(1)(ii)(B) in Regulation 30.7 as it
repurchase agreement is functionally products and transactions in which they views an NRSRO rating as similarly
equivalent to a short-term collateralized invest Rule 1.25 funds.’’ 80 FIA also unreliable to gauge the safety of a
loan. In both transactions, one party noted that its ‘‘member firms generally depository institution for 30.7 funds.
provides cash to another party, secured follow the Rule 1.25 investment This proposal also serves to align
guidelines’’ when investing 30.7
77 65 81 FIA letter at 5.
FR 39008, 39015 (June 22, 2000).
79 See 82 Pending adoption of final amendments to
Commission Form 1–FR–FCM Instructions
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78 See SEC Press Release No. 2008–46, ‘‘Answers

to Frequently Asked Investor Questions Regarding at 12–9 (Mar. 2010) (‘‘In investing funds required to Regulation 30.7, the Commission will revise the
the Bear Stearns Companies, Inc.’’ (Mar. 18, 2008), be maintained in separate section 30.7 account(s), section headed ‘‘Permissible Investments of Part 30
available at [Link] FCMs are bound by their fiduciary obligations to Set-Aside Funds’’ on page 12–9 to align with, and
[Link] (noting that rumors of liquidity customers and the requirement that the secured refer back to, the discussion of Regulation 1.25
problems at Bear Stearns caused their amount required to be set aside be at all times investments on pages 10–7 and 10–8.
counterparties to become concerned, creating a liquid and sufficient to cover all obligations to such 83 See discussion supra Section II.B.2 regarding

‘‘crisis of confidence’’ which led to the customers. Regulation 1.25 investments would be the Commission’s policy decision to remove
counterparties’ ‘‘unwilling[ness] to make secured appropriate, as would investments in any other references to credit ratings from Regulation 1.25
funding available to Bear Stearns on customary readily marketable securities.’’). and other regulations.
terms.’’). 80 Newedge letter at 4. 84 See Regulation 1.25(b)(2)(i)(E).

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 67652 Federal Register / Vol. 75, No. 212 / Wednesday, November 3, 2010 / Proposed Rules

Regulation 30.7 with Regulation 1.25 on DCOs 89 are not small entities for the scope of permitted investments to
the topic of NRSROs. purpose of the RFA. Accordingly, reflect the current economic
The Commission requests comment pursuant to 5 U.S.C. 605(b), the environment. During the prior ten-year
on whether there is a standard or Chairman, on behalf of the Commission, period, starting with the December 2000
measure of solvency and credit- certifies that the proposed rules will not rulemaking, Regulation 1.25 was
worthiness that can be used as an have a significant economic impact on substantially revised and expanded. The
additional test of a bank’s safety. a substantial number of small entities. more restrictive proposals contained
Specifically, the Commission seeks herein are based on the Commission’s
B. Paperwork Reduction Act
comment on whether a leverage ratio or experience over the course of the past
a capital adequacy ratio requirement The Paperwork Reduction Act of 1995 decade and, in particular, since
consistent with or similar to those in the (PRA) imposes certain requirements on September 2008, during which certain
Basel III accords 85 would be an federal agencies (including the permitted investments under Regulation
appropriate additional safeguard for a Commission) in connection with their 1.25 were shown to present potentially
bank or trust company located outside conducting or sponsoring any collection unacceptable levels of risk. In narrowing
the United States. of information as defined by the PRA. the scope of Regulation 1.25 (as to both
The proposed rule amendments do not type and characteristics of permitted
3. Designation as a Depository for 30.7 require a new collection of information investments), the Commission’s primary
Funds on the part of any entities subject to the purpose is to safeguard the funds of
Under Regulation 30.7(c)(1)(ii)(C), a proposed rule amendments. customers and, in so doing, to help ease
bank or trust company that does not Accordingly, for purposes of the PRA, the chain reaction of negative effects
otherwise meet the requirements of the Commission certifies that these that can come about during a financial
paragraph (c)(1)(ii) may still be proposed rule amendments, if crisis in the broader financial
designated as an acceptable depository promulgated in final form, would not marketplace.
by request of its customer and with the impose any new reporting or Costs. With respect to costs, the
approval of the Commission. The recordkeeping requirements. Commission has determined that any
Commission proposes to no longer C. Costs and Benefits of the Proposed costs associated with the proposal are
allow a customer to request that a bank Rules outweighed by its benefits. The
or trust company located outside the Commission recognizes that scaling
Section 15(a) of the CEA 90 requires back on the type and form of permitted
United States be designated as a
the Commission to consider the costs investments could result in certain
depository for 30.7 funds. The
and benefits of its actions before issuing FCMs and DCOs earning less income
Commission has never allowed a bank
a rulemaking under the Act. By its from their investments of customer
or trust company located outside the
terms, section 15(a) does not require the funds. This, in turn, could reduce an
United States to be a depository through
Commission to quantify the costs and FCM or DCO’s overall profits and create
these means, and believes that it is
benefits of a rule or to determine an incentive for them to charge higher
appropriate to require that all
whether the benefits of the rulemaking fees to customers. The Commission
depositories meet the regulatory capital
outweigh its costs; rather, it requires believes, however, that the potential
requirement under paragraph
that the Commission ‘‘consider’’ the loss of income for those FCMs and
(c)(1)(ii)(A).
costs and benefits of its actions. Section DCOs whose investment strategies will
Therefore, the Commission proposes
15(a) further specifies that the costs and be materially affected by the proposed
to amend Regulation 30.7 by deleting
benefits shall be evaluated in light of amendments will be outweighed by the
paragraph (c)(1)(ii)(C). The Commission
five broad areas of market and public reduction in potential risk associated
requests comment on whether an
concern: (1) Protection of market with the current regulatory standards for
exception of any kind to Regulation
participants and the public; (2) permitted investments. To the extent
30.7(c)(1)(ii) is appropriate.
efficiency, competitiveness and that customers may bear the cost of the
III. Related Matters financial integrity of futures markets; (3) proposed changes, the customers will
price discovery; (4) sound risk nonetheless benefit from greater
A. Regulatory Flexibility Act
management practices; and (5) other protection of their funds. Eliminating
The Regulatory Flexibility Act public interest considerations. The the option of a customer to designate,
(RFA) 86 requires federal agencies, in Commission may in its discretion give with the Commission’s permission, a
promulgating rules, to consider the greater weight to any one of the five foreign depository for 30.7 funds would
impact of those rules on small enumerated areas and could in its potentially limit the choices of suitable
businesses. The rule amendments discretion determine that, depositories. However, the presence of
proposed herein will affect FCMs and notwithstanding its costs, a particular alternative depositories would mitigate
DCOs. The Commission has previously rule is necessary or appropriate to any adverse impact. The proposed
established certain definitions of ‘‘small protect the public interest or to amendments would not affect the
entities’’ to be used by the Commission effectuate any of the provisions or efficiency or competitiveness of futures
in evaluating the impact of its rules on accomplish any of the purposes of the markets, and the proposed amendments
small entities in accordance with the Act. will not affect price discovery.
RFA.87 The Commission has previously Summary of proposed requirements. Benefits. With respect to benefits, the
Commission has determined that the
srobinson on DSKHWCL6B1PROD with PROPOSALS

determined that registered FCMs 88 and The proposed rules would facilitate
greater protection of customer funds and proposal will result in several benefits.
85 See Press Release, Basel Committee on Banking
30.7 funds and reduction of systemic First, the risk-reducing nature of the
Supervision, Group of Governors and Heads of risk by establishing stricter prudential proposed amendments would facilitate
Supervision Announces Higher Global Minimum greater financial integrity of FCMs and
Capital Standards (Sept. 12, 2010), [Link] standards for investment of such funds.
press/[Link]. The proposed amendments restrict the DCOs and, as a result, futures markets
86 5 U.S.C. 601 et seq. more generally. Essential to the proper
87 47 FR 18618 (Apr. 30, 1982). 89 66 FR 45604, 45609 (Aug. 29, 2001). functioning of futures markets is the
88 Id. at 18619. 90 7 U.S.C. 19(a). financial integrity of the clearing

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 Federal Register / Vol. 75, No. 212 / Wednesday, November 3, 2010 / Proposed Rules 67653

process, which is dependent upon the Lists of Subjects Insurance Corporation (commercial
immediate availability of sufficient paper);
17 CFR Part 1 (vi) Corporate notes or bonds fully
funds for daily pays and collects and
default management. Brokers, Commodity futures, guaranteed as to principal and interest
Consumer protection, Reporting and by the United States under the
The proposed amendments would recordkeeping requirements. Temporary Liquidity Guarantee Program
also raise the standards for risk as administered by the Federal Deposit
management practices of FCMs and 17 CFR Part 30
Insurance Corporation (corporate notes
DCOs that invest customer funds. They Commodity futures, Consumer or bonds); and
balance the need for investment protection, Currency, Reporting and (vii) Interests in money market mutual
flexibility and capital efficiency with recordkeeping requirements. funds.
the need to preserve principal and In consideration of the foregoing and (2)(i) In addition, a futures
maintain liquidity. In particular, the pursuant to the authority contained in commission merchant or derivatives
proposal both narrows the scope of the Commodity Exchange Act, in clearing organization may buy and sell
permitted investments to only those that particular, Sections 4d, 4(c), and 8a(5) the permitted investments listed in
the Commission considers the safest, thereof, 7 U.S.C. 6d, 6(c) and 12a(5), paragraphs (a)(1)(i) through (vii) of this
and mandates diversification well respectively, the Commission hereby section pursuant to agreements for
beyond previous requirements. The proposes to amend Chapter I of Title 17 resale or repurchase of the instruments,
Commission believes that these of the Code of Federal Regulations as in accordance with the provisions of
structural safeguards will decrease the follows: paragraph (d) of this section.
credit, market, and liquidity risk (ii) A futures commission merchant or
exposures of FCMs and DCOs. PART 1—GENERAL REGULATIONS a derivatives clearing organization may
Moreover, the revised requirements will UNDER THE COMMODITY EXCHANGE sell securities deposited by customers as
more closely align with the investment ACT margin pursuant to agreements to
restrictions contained in Section 4d of repurchase subject to the following:
1. The authority citation for Part 1 is (A) Securities subject to such
the Act. revised to read as follows: repurchase agreements must be ‘‘highly
Also, the Commission recognizes that Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, liquid’’ as defined in paragraph (b)(1) of
many, if not most, FCMs and DCOs are 6d, 6e, 6f, 6g, 6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, this section.
already engaging in sound risk 6p, 7, 7a, 7b, 8, 9, 12, 12a, 12c, 13a, 13a–1, (B) Securities subject to such
management practices and are pursuing 16, 16a, 19, 21, 23, and 24, as amended by repurchase agreements must not be
responsible investment strategies under the Dodd-Frank Wall Street Reform and ‘‘specifically identifiable property’’ as
Consumer Protection Act, Pub. L. 111–203, defined in § 190.01(kk) of this chapter.
the existing regulatory regime. However,
124 Stat. 1376 (2010).
the Commission believes that in an (C) The terms and conditions of such
environment where many of its previous 2. Revise § 1.25 to read as follows: an agreement to repurchase must be in
economic assumptions are called into accordance with the provisions of
§ 1.25 Investment of customer funds.
question, it becomes necessary to paragraph (d) of this section.
(a) Permitted investments. (1) Subject (D) Upon the default by a
establish new bright line requirements
to the terms and conditions set forth in counterparty to a repurchase agreement,
to better ensure proper risk management
this section, a futures commission the futures commission merchant or
in connection with the investment of merchant or a derivatives clearing
customer segregated and 30.7 funds. derivatives clearing organization shall
organization may invest customer act promptly to ensure that the default
The proposed amendments retain an money in the following instruments does not result in any direct or indirect
appropriate degree of flexibility in (permitted investments): cost or expense to the customer.
making investments with customer (i) Obligations of the United States (b) General terms and conditions. A
segregated and 30.7 funds, while and obligations fully guaranteed as to futures commission merchant or a
significantly strengthening the rules that principal and interest by the United derivatives clearing organization is
protect the safety of such funds. In States (U.S. government securities); required to manage the permitted
addition, eliminating the option of a (ii) General obligations of any State or investments consistent with the
customer to designate, with the of any political subdivision thereof objectives of preserving principal and
Commission’s permission, a foreign (municipal securities); maintaining liquidity and according to
depository for 30.7 funds that otherwise (iii) Obligations of any United States the following specific requirements:
would not meet the requirements of government corporation or enterprise (1) Liquidity. Investments must be
Regulation 30.7 both closes a loophole sponsored by the United States ‘‘highly liquid’’ such that they have the
that might have allowed for a less government and fully guaranteed as to ability to be converted into cash within
financially sound depository to hold principal and interest by the United one business day without material
30.7 funds and eliminates the need for States (U.S. agency obligations); discount in value.
the Commission to individually review (iv) Certificates of deposit issued by a (2) Restrictions on instrument
the safety and soundness of foreign bank (certificates of deposit) as defined features. (i) With the exception of
in section 3(a)(6) of the Securities money market mutual funds, no
depositories.
Exchange Act of 1934, or a domestic permitted investment may contain an
srobinson on DSKHWCL6B1PROD with PROPOSALS

Public Comment. The Commission branch of a foreign bank that carries embedded derivative of any kind,
invites public comment on its cost- deposits insured by the Federal Deposit except that the issuer of an instrument
benefit considerations. Commenters are Insurance Corporation; otherwise permitted by this section may
also are invited to submit any data or (v) Commercial paper fully have an option to call, in whole or in
other information that they may have guaranteed as to principal and interest part, at par, the principal amount of the
quantifying or qualifying the costs and by the United States under the instrument before its stated maturity
benefits of the Proposal with their Temporary Liquidity Guarantee Program date; provided, however, that the terms
comment letters. as administered by the Federal Deposit of such instrument obligate the issuer to

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 67654 Federal Register / Vol. 75, No. 212 / Wednesday, November 3, 2010 / Proposed Rules

repay the principal amount of the (C) Interests in any single family of funds, the dollar-weighted average of
instrument at not less than par value money market mutual funds may not the time-to-maturity of the portfolio, as
upon maturity. exceed 2 percent of total assets held in that average is computed pursuant to
(ii) No instrument may contain segregation by the futures commission § 270.2a–7 of this title, may not exceed
interest-only payment features. merchant or derivatives clearing 24 months.
(iii) No instrument may provide organization. (ii) For purposes of determining the
payments linked to a commodity, (D) For purposes of determining time-to-maturity of the portfolio, an
currency, reference instrument, index, compliance with the issuer-based instrument that is set forth in
or benchmark, and it may not otherwise concentration limits set forth in this paragraphs (a)(1)(i) through (vii) of this
constitute a derivative instrument. section, securities issued by entities that section may be treated as having a one-
(iv) Commercial paper and corporate are affiliated, as defined in paragraph day time-to-maturity if the following
notes or bonds must meet the following (b)(5) of this section, shall be aggregated terms and conditions are satisfied:
criteria: and deemed the securities of a single (A) The instrument is deposited solely
(A) The size of the issuance must be issuer. An interest in a permitted money on an overnight basis with a derivatives
greater than $1 billion; market mutual fund is not deemed to be clearing organization pursuant to the
(B) The instrument must be a security issued by its sponsoring terms and conditions of a collateral
denominated in U.S. dollars; and entity. management program that has become
(C) The instrument must be fully (iii) Concentration limits for effective in accordance with § 39.4 of
guaranteed as to principal and interest agreements to repurchase. (A) this chapter;
by the United States for its entire term. Repurchase agreements. For purposes of (B) The instrument is one that the
(v) Certificates of deposit must be determining compliance with the asset- futures commission merchant owns or
redeemable at the issuing bank within based and issuer-based concentration has an unqualified right to pledge, is not
one business day, with any penalty for limits set forth in this section, securities subject to any lien, and is deposited by
early withdrawal limited to any accrued sold by a futures commission merchant the futures commission merchant into a
interest earned according to its written or derivatives clearing organization segregated account at a derivatives
terms. subject to agreements to repurchase clearing organization;
(3) Concentration. (i) Asset-based shall be combined with securities held
concentration limits for direct (C) The derivatives clearing
by the futures commission merchant or
investments. (A) Investments in U.S. organization prices the instrument each
derivatives clearing organization as
government securities shall not be day based on the current mark-to-market
direct investments.
subject to a concentration limit. (B) Reverse repurchase agreements. value; and
(B) Investments in U.S. agency For purposes of determining compliance (D) The derivatives clearing
obligations may not exceed 50 percent with the asset-based and issuer-based organization reduces the assigned value
of the total assets held in segregation by concentration limits set forth in this of the instrument each day by a haircut
the futures commission merchant or section, securities purchased by a of at least 2 percent.
derivatives clearing organization. futures commission merchant or (5) Investments in instruments issued
(C) Investments in each of commercial derivatives clearing organization subject by affiliates. (i) A futures commission
paper, corporate notes or bonds and to agreements to resell shall be merchant shall not invest customer
certificates of deposit may not exceed 25 combined with securities held by the funds in obligations of an entity
percent of the total assets held in futures commission merchant or affiliated with the futures commission
segregation by the futures commission derivatives clearing organization as merchant, and a derivatives clearing
merchant or derivatives clearing direct investments. organization shall not invest customer
organization. (iv) Treatment of customer-owned funds in obligations of an entity
(D) Investments in each of municipal securities. For purposes of determining affiliated with the derivatives clearing
securities and money market mutual compliance with the asset-based and organization. An affiliate includes
funds may not exceed 10 percent of the issuer-based concentration limits set parent companies, including all entities
total assets held in segregation by the forth in this section, securities owned through the ultimate holding company,
futures commission merchant or by the customers of a futures subsidiaries to the lowest level, and
derivatives clearing organization. commission merchant and posted as companies under common ownership of
(ii) Issuer-based concentration limits margin collateral are not included in such parent company or affiliates.
for direct investments. (A) Securities of total assets held in segregation by the (ii) A futures commission merchant or
any single issuer of U.S. agency futures commission merchant, and derivatives clearing organization may
obligations held by a futures securities posted by a futures invest customer funds in a fund
commission merchant of derivatives commission merchant with a derivatives affiliated with that futures commission
clearing organization may not exceed 25 clearing organization are not included merchant or derivatives clearing
percent of total assets held in in total assets held in segregation by the organization.
segregation by the futures commission derivatives clearing organization. (6) Recordkeeping. A futures
merchant or derivatives clearing (v) Counterparty concentration limits. commission merchant and a derivatives
organization. Securities purchased by a futures clearing organization shall prepare and
(B) Securities of any single issuer of commission merchant or derivatives maintain a record that will show for
municipal securities, certificates of clearing organization from a single each business day with respect to each
srobinson on DSKHWCL6B1PROD with PROPOSALS

deposit, commercial paper, or corporate counterparty, subject to an agreement to type of investment made pursuant to
notes or bonds held by a futures resell to that counterparty, shall not this section, the following information:
commission merchant or derivatives exceed 5 percent of total assets held in (i) The type of instruments in which
clearing organization may not exceed 5 segregation by the futures commission customer funds have been invested;
percent of total assets held in merchant or derivatives clearing (ii) The original cost of the
segregation by the futures commission organization. instruments; and
merchant or derivatives clearing (4) Time-to-maturity. (i) Except for (iii) The current market value of the
organization. investments in money market mutual instruments.

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 Federal Register / Vol. 75, No. 212 / Wednesday, November 3, 2010 / Proposed Rules 67655

(c) Money market mutual funds. The (2) During which trading on the New affiliate includes parent companies,
following provisions will apply to the York Stock Exchange is restricted; including all entities through the
investment of customer funds in money (C) For any period during which an ultimate holding company, subsidiaries
market mutual funds (the fund). emergency exists as a result of which: to the lowest level, and companies
(1) The fund must be an investment (1) Disposal by the company of under common ownership of such
company that is registered under the securities owned by it is not reasonably parent company or affiliates.
Investment Company Act of 1940 with practicable; or (4) The transaction is executed in
the Securities and Exchange (2) It is not reasonably practicable for compliance with the concentration limit
Commission and that holds itself out to such company fairly to determine the requirements applicable to the securities
investors as a money market fund, in value of its net assets; transferred to the customer segregated
accordance with § 270.2a–7 of this title. (D) For any period as the Securities custodial account in connection with
(2) The fund must be sponsored by a and Exchange Commission may by the agreements to repurchase referred to
federally-regulated financial institution, order permit for the protection of in paragraphs (b)(3)(iii)(A) and (B) of
a bank as defined in section 3(a)(6) of security holders of the company; this section.
the Securities Exchange Act of 1934, an (E) For any period during which the (5) The transaction is made pursuant
investment adviser registered under the Securities and Exchange Commission to a written agreement signed by the
Investment Advisers Act of 1940, or a has, by rule or regulation, deemed that: parties to the agreement, which is
domestic branch of a foreign bank (1) Trading shall be restricted; or consistent with the conditions set forth
(2) An emergency exists; or in paragraphs (d)(1) through (13) of this
insured by the Federal Deposit (F) For any period during which each
Insurance Corporation. section and which states that the parties
of the conditions of § 270.22e–3(a)(1) thereto intend the transaction to be
(3) A futures commission merchant or through (3) of this title are met.
derivatives clearing organization shall treated as a purchase and sale of
(6) The agreement pursuant to which securities.
maintain the confirmation relating to the futures commission merchant or
the purchase in its records in (6) The term of the agreement is no
derivatives clearing organization has more than one business day, or reversal
accordance with § 1.31 and note the acquired and is holding its interest in a
ownership of fund shares (by book-entry of the transaction is possible on
fund must contain no provision that demand.
or otherwise) in a custody account of would prevent the pledging or (7) Securities transferred to the
the futures commission merchant or transferring of shares. futures commission merchant or
derivatives clearing organization in (7) Appendix A to this section sets derivatives clearing organization under
accordance with § 1.26(c). The futures forth language that will satisfy the the agreement are held in a safekeeping
commission merchant or the derivatives requirements of paragraph (c)(5) of this account with a bank as referred to in
clearing organization shall obtain the section. paragraph (d)(2) of this section, a
acknowledgment letter required by (d) Repurchase and reverse derivatives clearing organization, or the
§ 1.26(c) from an entity that has repurchase agreements. A futures Depository Trust Company in an
substantial control over the fund’s assets commission merchant or derivatives account that complies with the
and has the knowledge and authority to clearing organization may buy and sell requirements of § 1.26.
facilitate redemption and payment or the permitted investments listed in (8) The futures commission merchant
transfer of the customer segregated paragraphs (a)(1)(i) through (vii) of this or the derivatives clearing organization
funds. Such entity may include the fund section pursuant to agreements for may not use securities received under
sponsor or investment adviser. resale or repurchase of the securities the agreement in another similar
(4) The net asset value of the fund (agreements to repurchase or resell), transaction and may not otherwise
must be computed by 9 a.m. of the provided the agreements to repurchase hypothecate or pledge such securities,
business day following each business or resell conform to the following except securities may be pledged on
day and made available to the futures requirements: behalf of customers at another futures
commission merchant or derivatives (1) The securities are specifically commission merchant or derivatives
clearing organization by that time. identified by coupon rate, par amount, clearing organization. Substitution of
(5)(i) General requirement for market value, maturity date, and CUSIP securities is allowed, provided,
redemption of interests. A fund shall be or ISIN number. however, that:
legally obligated to redeem an interest (2) Permitted counterparties are (i) The qualifying securities being
and to make payment in satisfaction limited to a bank as defined in section substituted and original securities are
thereof by the business day following a 3(a)(6) of the Securities Exchange Act of specifically identified by date of
redemption request, and the futures 1934, a domestic branch of a foreign substitution, market values substituted,
commission merchant or derivatives bank insured by the Federal Deposit coupon rates, par amounts, maturity
clearing organization shall retain Insurance Corporation, a securities dates and CUSIP or ISIN numbers;
documentation demonstrating broker or dealer, or a government (ii) Substitution is made on a
compliance with this requirement. securities broker or government ‘‘delivery versus delivery’’ basis; and
(ii) Exception. A fund may provide for securities dealer registered with the (iii) The market value of the
the postponement of redemption and Securities and Exchange Commission or substituted securities is at least equal to
payment due to any of the following which has filed notice pursuant to that of the original securities.
circumstances: section 15C(a) of the Government (9) The transfer of securities to the
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(A) For any period during which there Securities Act of 1986. customer segregated custodial account
is a non-routine closure of the Fedwire (3) A futures commission merchant or is made on a delivery versus payment
or applicable Federal Reserve Banks; derivatives clearing organization shall basis in immediately available funds.
(B) For any period: not enter into an agreement to The transfer of funds to the customer
(1) During which the New York Stock repurchase or resell with a counterparty segregated cash account is made on a
Exchange is closed other than that is an affiliate of the futures payment versus delivery basis. The
customary week-end and holiday commission merchant or derivatives transfer is not recognized as
closings; or clearing organization, respectively. An accomplished until the funds and/or

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 67656 Federal Register / Vol. 75, No. 212 / Wednesday, November 3, 2010 / Proposed Rules

securities are actually received by the and the price agreed upon for resale of f. For any period during which the [Name
custodian of the futures commission the securities to the counterparty, if the of Fund,] as part of a necessary liquidation
merchant’s or derivatives clearing former exceeds the latter. of the fund, has properly postponed and/or
organization’s customer funds or (e) Deposit of firm-owned securities suspended redemption of shares and
securities purchased on behalf of into segregation. A futures commission payment in accordance with federal
customers. The transfer or credit of merchant shall not be prohibited from securities laws.
securities covered by the agreement to directly depositing unencumbered
the futures commission merchant’s or securities of the type specified in this PART 30—FOREIGN FUTURES AND
derivatives clearing organization’s section, which it owns for its own FOREIGN OPTIONS TRANSACTIONS
customer segregated custodial account account, into a segregated safekeeping
is made simultaneously with the account or from transferring any such 3. The authority citation for part 30
disbursement of funds from the futures securities from a segregated account to continues to read as follows:
commission merchant’s or derivatives its own account, up to the extent of its Authority: 7 U.S.C. 1a, 2, 6, 6c, and 12a,
clearing organization’s customer residual financial interest in customers’ unless otherwise noted.
segregated cash account at the custodian segregated funds; provided, however,
bank. On the sale or resale of securities, that such investments, transfers of 4. In § 30.7, revise paragraph (c) and
the futures commission merchant’s or securities, and disposition of proceeds add paragraph (g) to read as follows:
derivatives clearing organization’s from the sale or maturity of such
customer segregated cash account at the securities are recorded in the record of § 30.7 Treatment of foreign futures or
custodian bank must receive same-day investments required to be maintained foreign options secured amount.
funds credited to such segregated by § 1.27. All such securities may be * * * * *
account simultaneously with the segregated in safekeeping only with a
delivery or transfer of securities from (c)(1) The separate account or
bank, trust company, derivatives accounts referred to in paragraph (a) of
the customer segregated custodial clearing organization, or other registered
account. this section must be maintained under
futures commission merchant. an account name that clearly identifies
(10) A written confirmation to the Furthermore, for purposes of §§ 1.25,
futures commission merchant or them as such, with any of the following
1.26, 1.27, 1.28 and 1.29, investments
derivatives clearing organization depositories:
permitted by § 1.25 that are owned by
specifying the terms of the agreement the futures commission merchant and (i) A bank or trust company located in
and a safekeeping receipt are issued the United States;
deposited into such a segregated
immediately upon entering into the
account shall be considered customer (ii) A bank or trust company located
transaction and a confirmation to the
funds until such investments are outside the United States that has in
futures commission merchant or
withdrawn from segregation. excess of $1 billion of regulatory capital;
derivatives clearing organization is
issued once the transaction is reversed. Appendix to § 1.25—Money Market (iii) A futures commission merchant
(11) The transactions effecting the Mutual Fund Prospectus Provisions registered as such with the Commission;
agreement are recorded in the record Acceptable for Compliance With
required to be maintained under § 1.27 (iv) A derivates clearing organization;
Paragraph (c)(5)
of investments of customer funds, and (v) A member of any foreign board of
the securities subject to such Upon receipt of a proper redemption trade; or
transactions are specifically identified request submitted in a timely manner and
(vi) Such member or clearing
in such record as described in paragraph otherwise in accordance with the redemption
procedures set forth in this prospectus, the organization’s designated depositories.
(d)(1) of this section and further
[Name of Fund] will redeem the requested (2) Each futures commission merchant
identified in such record as being
shares and make a payment to you in must obtain and retain in its files for the
subject to repurchase and reverse satisfaction thereof no later than the business
repurchase agreements. period provided in § 1.31 of this chapter
day following the redemption request. The
(12) An actual transfer of securities to [Name of Fund] may postpone and/or an acknowledgment from such
the customer segregated custodial suspend redemption and payment beyond depository that it was informed that
account by book entry is made one business day only as follows: such money, securities or property are
consistent with Federal or State a. For any period during which there is a held for or on behalf of foreign futures
commercial law, as applicable. At all non-routine closure of the Fedwire or and foreign options customers and are
times, securities received subject to an applicable Federal Reserve Banks; being held in accordance with the
agreement are reflected as ‘‘customer b. For any period (1) during which the New
York Stock Exchange is closed other than
provisions of these regulations.
property.’’
(13) The agreement makes clear that, customary week-end and holiday closings or * * * * *
(2) during which trading on the New York (g) Each futures commission merchant
in the event of the bankruptcy of the Stock Exchange is restricted;
futures commission merchant or c. For any period during which an that invests customer funds held in the
derivatives clearing organization, any emergency exists as a result of which (1) account or accounts referred to in
securities purchased with customer disposal of securities owned by the [Name of paragraph (a) of this section must invest
funds that are subject to an agreement Fund] is not reasonably practicable or (2) it such funds pursuant to the requirements
may be immediately transferred. The is not reasonably practicable for the [Name of of § 1.25 of this chapter.
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agreement also makes clear that, in the Fund] to fairly determine the net asset value
of shares of the [Name of Fund]; Issued in Washington, DC, on October 26,
event of a futures commission merchant 2010, by the Commission.
or derivatives clearing organization d. For any period during which the
Securities and Exchange Commission has, by David A. Stawick,
bankruptcy, the counterparty has no rule or regulation, deemed that (1) trading
right to compel liquidation of securities Secretary of the Commission.
shall be restricted or (2) an emergency exists;
subject to an agreement or to make a e. For any period that the Securities and Note: The following statement will not
priority claim for the difference between Exchange Commission, may by order permit appear in the Code of Federal Regulations.
current market value of the securities for your protection; or

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 Federal Register / Vol. 75, No. 212 / Wednesday, November 3, 2010 / Proposed Rules 67657

Statement of Chairman Gary Gensler All comments must be submitted in creating robust recordkeeping and real-
Investment of Customer Funds and English, or if not, accompanied by an time reporting regimes; and (4)
Funds Held in an Account for Foreign English translation. Comments will be enhancing the Commission’s
Futures and Foreign Options posted as received to http:// rulemaking and enforcement authorities
Transactions [Link]. You should submit only with respect to, among others, all
information that you wish to make registered entities and intermediaries
October 26, 2010 available publicly. If you wish the subject to the Commission’s oversight.
I support today’s Commission vote on Commission to consider information In addition, Title VII of the Dodd-
the proposed rulemaking regarding the that is exempt from disclosure under the Frank Act contains expanded and
investment of customer segregated and Freedom of Information Act, a petition clarified authority to prohibit
secured amount funds. This rulemaking for confidential treatment of the exempt manipulative behavior.
fulfills part of the Dodd-Frank Act’s information may be submitted according Section 753 of the Dodd-Frank Act
requirement that the Commission to the established procedures in CFTC amends section 6(c) of the CEA to
remove all reliance on credit ratings Regulation 145.9.1 expand the authority of the Commission
from its regulations. In addition, the The Commission reserves the right, to prohibit fraudulent and manipulative
rule enhances protections regarding but shall have no obligation, to review, behavior. New CEA section 6(c)(1),
where derivatives clearing organizations pre-screen, filter, redact, refuse or which prohibits the use or employment
(DCOs) and futures commission remove any or all of your submission of any manipulative or deceptive device
merchants (FCMs) can invest customer from [Link] that it may deem to or contrivance, requires the Commission
funds. The market events of the last two be inappropriate for publication, such as to promulgate implementing rules
years have underscored the importance obscene language. All submissions that within one year of enactment of the
of prudent investment standards to have been redacted or removed that Dodd-Frank Act. The Commission also
ensure the financial integrity of DCOs contain comments on the merits of the proposes to implement regulations
and FCMs and of maximizing protection rulemaking will be retained in the pursuant to section 6(c)(3) of the CEA
of customer funds. public comment file and will be under its general rulemaking authority
[FR Doc. 2010–27657 Filed 11–2–10; 8:45 am]
considered as required under the in section 8(a)(5) of the CEA.5
BILLING CODE P
Administrative Procedure Act and other Accordingly, the Commission is
applicable laws, and may be accessible proposing rules to address manipulative
under the Freedom of Information Act. behavior. The Commission requests
COMMODITY FUTURES TRADING FOR FURTHER INFORMATION CONTACT: comment on all aspects of the proposed
COMMISSION Robert Pease, Counsel to the Director of rules, as well as comment on the
Enforcement, 202–418–5863, specific provisions and issues
17 CFR Part 180 rpease@[Link] or Mark D. Higgins, highlighted in the discussion below.
RIN Number 3038–AD27 Counsel to the Director of Enforcement,
202–418–5864, mhiggins@[Link], II. Manipulation Under Section 753
Prohibition of Market Manipulation Division of Enforcement, Commodity A. Section 753’s Amendments to the
Futures Trading Commission, Three CEA
AGENCY: Commodity Futures Trading Lafayette Centre, 1151 21st Street, NW.,
Commission. Washington, DC 20581. Section 753 of the Dodd-Frank Act
ACTION: Notice of proposed rulemaking. gives the Commission enhanced ‘‘anti-
I. Background manipulation authority’’ as part of its
SUMMARY: The Commodity Futures On July 21, 2010, President Obama expanded enforcement powers. It does
Trading Commission is proposing rules signed the Dodd-Frank Wall Street so by amending section 6(c) of the CEA
to implement new anti-manipulation Reform and Consumer Protection Act in a number of respects.
authority in section 753 of the Dodd- First, section 753 adds a new
(‘‘Dodd-Frank Act’’).2 Title VII of the
Frank Wall Street Reform and Consumer subsection (c)(1). Subsection (c)(1)
Dodd-Frank Act 3 amended the
Protection Act. The proposed rules broadly prohibits fraud-based
Commodity Exchange Act (‘‘CEA’’) 4 to
expand and codify the Commission’s manipulative schemes as follows:
establish a comprehensive new
authority to prohibit manipulation.
regulatory framework for swaps and It shall be unlawful for any person, directly
DATES: Comments must be received on security-based swaps. The legislation or indirectly, to use or employ, or attempt to
or before January 3, 2011. was enacted to reduce risk, increase use or employ, in connection with any swap,
ADDRESSES: You may submit comments, transparency, and promote market or a contract of sale of any commodity in
identified by RIN number AD27, by any integrity within the financial system by, interstate commerce, or for future delivery on
of the following methods: among other things: (1) Providing for the or subject to the rules of any registered entity,
• Agency Web Site, via its Comments registration and comprehensive any manipulative or deceptive device or
Online process: Comments may be contrivance, in contravention of such rules
regulation of swap dealers and major
submitted to: [Link] and regulations as the Commission shall
swap participants; (2) imposing clearing promulgate by not later than 1 year after the
Follow the instructions for submitting and trade execution requirements on date of enactment of the Dodd-Frank Act,
comments on the Web site. standardized derivative products; (3) provided no rule or regulation promulgated
• Mail: David A. Stawick, Secretary of by the Commission shall require any person
srobinson on DSKHWCL6B1PROD with PROPOSALS

the Commission, Commodity Futures 1 17 CFR 145.9. to disclose to another person nonpublic
Trading Commission, Three Lafayette 2 See Dodd-Frank Wall Street Reform and information that may be material to the
Centre, 1155 21st Street, NW., Consumer Protection Act, Public Law 111–203, 124 market price, rate, or level of the commodity
Washington, DC 20581. Stat. 1376 (2010). The text of the Dodd-Frank Act transaction, except as necessary to make any
• Hand Delivery/Courier: Same as may be accessed at [Link] statement made to the other person in or in
LawRegulation/OTCDERIVATIVES/[Link].
mail above. 3 Pursuant to Section 701 of the Dodd-Frank Act,
connection with the transaction not
• Federal eRulemaking Portal: http:// Title VII may be cited as the ‘‘Wall Street
misleading in any material respect.
[Link]. Follow the Transparency and Accountability Act of 2010.’’
instructions for submitting comments. 4 7 U.S.C. 1 et seq. (2006). 57 U.S.C. 12a(5).

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