Draft ICI Letter on CFTC Proposal Restricting Investments of Customer Funds in Money Market Funds; Please Respond by 11/30
[24733]
November 23, 2010
TO: MONEY MARKET FUNDS ADVISORY COMMITTEE No. 63-10MUNICIPAL SECURITIES ADVISORY COMMITTEE No. 49-10
SEC RULES COMMITTEE No. 57-10 RE: DRAFT ICI LETTER ON CFTC PROPOSAL RESTRICTING INVESTMENTS OF CUSTOMER FUNDS IN MONEY MARKET FUNDS; PLEASE RESPOND BY 11/30
As we previously indicated, the Commodity Futures Trading Commission has proposed changes to its regulations regarding the kinds of investments that futures commission merchants (“FCMs”) and derivatives clearing organizations (“DCOs”) are permitted to make with customer funds. [1] CFTC Regulation 1.25 currently provides that FCMs and DCOs holding customer segregated funds may invest those funds in certain “permitted investments,” including money market funds, subject to specified requirements that are designed to minimize exposure to credit, liquidity, and market risks. The proposed amendments would narrow the scope of investment choices and place new limits on certain permitted investments, including money market funds.
ICI has prepared a draft comment letter on the proposal. The draft letter, which is still a work in progress, is attached and briefly summarized below.
Comments are due to the CFTC by December 3, 2010. Please provide any comments on the draft letter to Frances Stadler at frances@ici.org or 202/326-5822 by Tuesday, November 30th.
The draft letter first summarizes the proposed changes to Regulation 1.25. It notes that Regulation 1.25 contains a general prudential standard that requires that all permitted investments be “consistent with the objectives of preserving principal and maintaining liquidity.” It observes that money market funds are uniquely suited for holding customer funds insofar as their investment objectives correspond exactly to the regulation’s prudential standard.
The draft letter refers to ICI’s comment letter on the CFTC’s 2009 advance notice of proposed rulemaking, which described in detail money market fund regulation and its proven success over time, as well as the response of money market funds to the financial crisis in 2008. The letter reviews in some detail the most relevant elements of the SEC’s recent money market fund reforms and states that the cumulative effect of these reforms has been to improve the safety and liquidity of money market funds, making them even more appropriate for holding FCM and DCO customer funds.
The draft letter expresses strong support for continuing to treat money market funds as a permitted investment. In response to a specific request for comment about whether permitted money market fund investments should be limited to Treasury money market funds or funds whose portfolios consist solely of other permitted investments, the draft letter indicates that such limitations would be unduly restrictive. It notes that under the proposed amendments to Regulation 1.25, an FCM or DCO could invest customer funds in a self-managed portfolio of Treasury securities having a weighted average maturity (WAM) of two years and with no restrictions on the final maturity of individual securities. The letter then provides a graph illustrating the relative (and substantially greater) volatility of two-year Treasury notes as compared to the shadow price of a hypothetical prime money market fund that constantly maintains the maximum WAM permitted by Rule 2a-7.
The draft letter points out that the proposed 10 percent asset-based limit on investments in money market funds effectively will force FCMs and DCOs to manage 90 percent of their customer segregated funds themselves. It indicates that the proposed two percent issuer-based limit on investments in any money market fund family may cause FCMs and DCOs to forgo investing in money market funds altogether. The draft letter comments that setting limits that cause FCMs and DCOs to “go it alone,” regardless of the degree of their experience in cash management, cannot help to protect their customers.
With respect to the proposed two percent issuer-based concentration limit on money market fund families, the draft letter explains why such a limit would be ineffective in achieving the goal of greater diversification. The letter further expresses the view that a limit on investments in individual money market funds is unnecessary to accomplish the goal of diversification.
The draft letter supports the proposed modifications to Regulation 1.25(c)(5), which requires money market funds to be legally obligated to redeem an interest and to make payment in satisfaction thereof by the business day following a redemption request. In response to the CFTC’s request for comment, it indicates that proposed changes to the settlement process for triparty repurchase agreements should not disrupt the orderly settlement of fund redemptions.
Frances M. Stadler
Deputy Senior Counsel