So it only takes half a billion dollars in customer funds to disappear before CFTC takes an action aimed at large FCMs. In the wake of MF Global’s fiasco CFTC has finally decided to reintroduce a rule that will limit the investment of customer funds to many instruments thus ‘enhancing customer protection’. Of course this rule or the much-needed funds segregation rule for forex brokers was much less important to the CFTC and NFA than let’s say FIFO, no-hedging, leverage limitation and guarantee of IBs – because apparently those rules protect American clients more, right? Well wrong, we all saw what this obsessive oversight of smaller forex players over minimal oversight of large banks and FCMs causes. CFTC and its pawn NFA have always chased the smaller, less powerful, brokers instead of chasing the real villains of Wall Street. I imagine this will continue.
Statements of Support by Chairman Gary Gensler
I support the final rule to enhance customer protections regarding where derivatives clearing organizations (DCOs) and futures commission merchants (FCMs) can invest customer funds. I believe that this rule is critical for the safeguarding of customer money.
The Commodity Exchange Act in section 4d(a)(2) prescribes that customer funds can only be placed in a set list of permitted investments. From 2000 to 2005, the Commission granted exemptions to this list, loosening the rules for the investment of customer funds. These exemptions allowed FCMs to invest customer funds in AAA-rated sovereign debt, as well as to lend customer money to another side of the firm through repurchase agreements.
This rule prevents such in-house lending through repurchase agreements. I believe there is an inherent conflict of interest between parts of a firm doing these transactions. The rule also would limit an FCM’s ability to invest customer money in foreign sovereign debt.
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In addition, this rule fulfills a Dodd-Frank requirement that the CFTC remove all reliance on credit ratings from its regulations.
Opening Statement of Commissioner Scott D. O’Malia
I also intend to support the final rule on investment of customer funds. As recent events have highlighted, the protection and preservation of customer funds is fundamental to our markets. By limiting investments of customer funds to a subset of instruments that currently have minimal risk, this final rule is a step towards enhancing customer protection. However, as I emphasized in a statement on MF Global, the Commission must not become complacent. It must take additional action to bolster public confidence in our customer protection regime, including enhancing transparency into the risks that our intermediaries assume.10 I hope that the Commission can develop a notice of proposed rulemaking in the near future to improve transparency into intermediaries on behalf of customers.
Preliminarily, I would like to note that this final rule is markedly more sophisticated than the proposal in the way that it (i) clarifies the scope of prohibitions (e.g., in-house transactions), (ii) evaluates the risks posed by certain instruments (e.g., securities from government-sponsored enterprises and money-market mutual funds), and (iii) adjusts the asset-based and issuer-based concentration limits accordingly. I am pleased that this rule permits greater utilization of money market mutual funds, which would enable intermediaries and DCOs to more easily diversify investments of customer funds. Further, I am pleased that this rule restricts investments in two failed government- sponsored enterprises that remain eligible entirely as a result of federal protection.
My support of the final rule on investment of customer funds is not without reservation. With regard to sovereign debt limitations, I am reminded of my recent discussions in Asia with regulators and market participants. Market participants in both Singapore and Australia had exposure to MF Global and are fighting to secure lost customer funds, just like market participants in the U.S. This fact highlighted the interconnection of our economies and markets. I recognize that foreign sovereign debt can no longer be considered “riskless” investments. But the truth of the matter is – we are all in a global economy together. The coordinated action by the Federal Reserve and five other central banks last week evidences this truth. I am pleased that the final rule states that market participants may petition for exemption, and that the Commission would consider such exemption on a case-by-case basis. While the rule provides no standards for acceptable holdings – even those hedging currency exposure or foreign operational risk in jurisdictions that the greater financial market has deemed safe – I hope that the Commission will act in a timely manner to clarify acceptable practices and debt holdings to minimize disruption to the market.