The CFTC Division of Swap Dealer and Intermediary Oversight ("DSIO") issued an advisory on the practical implementation of no-action relief for investments in money market funds ("MMFs"), as provided by CFTC No-Action Letter 16-68. The no-action letter allows futures commission merchants ("FCMs") to invest their own funds in excess of their targeted residual interest in MMFs that retain the authority to impose redemption restrictions.

The DSIO explained that as a result of the SEC's final revisions to Investment Company Act Rule 2a-7, which allows MMFs to suspend redemptions or impose liquidity fees during periods of high market stress, FCMs are prohibited from "investing customer funds in such MMFs because such redemption restrictions conflict with CFTC rules that require customer funds to be available for liquidation immediately." In No-Action Letter 16-68, the CFTC granted an exception to this policy to FCMs that invest their own funds in excess of their targeted residual interest.

In response to inquiries concerning the practical application and effect of that policy, the DSIO issued the new advisory, in which it explained that:

  • if an MMF suspends redemptions, then the FCM must take a 100% deduction for such funds from its segregation calculation; and
  • relief granted to an FCM to invest the amount of residual interest that exceeds its targeted residual interest amounts held in customer-segregated accounts in MMFs is limited only to the amount of funds that the FCM otherwise would be permitted to withdraw from the segregated accounts.

Commentary

All firms, particularly regulated firms, that invest in SEC-registered money market funds should ensure that they have procedures in place to distinguish between funds that have the right to suspend redemptions and funds that do not. Firms that invest in the former may have to take material capital charges or face other regulatory and liquidity issues.

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