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CFTC Staff Weighs in on Use of Money Market Funds by its Regulated Entities

Earlier this month, the CFTC issued a rule interpretation and no-action letter finding that the money market rule changes will make these funds ineligible investments for its regulated entities in certain circumstances.  At issue are the SEC’s amendments that will require some funds and permit others to impose redemption restrictions, leading the CFTC to question the liquidity of the funds.  The guidance addresses investments by CFTC regulated entities, including derivatives clearing organizations (DCOs) and future commission merchants (FCMs) in money market funds that will impose redemption restrictions. 

The interpretation and no-action letter find that:

  • The limitation that DCOs accept assets for that “have minimal credit, market, and liquidity risks” coupled with the requirement that DCOs make “on-time payments to members with net gains” prohibit a DCO from accepting shares or holding shares in a prime money market fund (or a government fund that reserves the right to impose redemption restrictions.”
  • FCMs may not invest customer funds in prime money market funds or those government funds that elect to impose redemption restrictions.
  • FCMs, however, may invest their own funds held in segregated accounts that exceed the targeted residual interest amount for each such account.  In addition, there is no concentration limit on the investment of customer funds that is comprised only of US government securities, provided that they do not elect to impose redemption restrictions, the money market funds has more than $5 billion in assets, and the management company of the money market fund has at least $25 billion in assets.