Stradley Ronon Reviews CFTC Rules
Stradley Ronon published a "CFTC Quarterly Review," which included a segment entitled, "Practical Application of No-Action Letter No. 16-68 Regarding Investments in Money Market Mutual Funds." It explains, "In our quarterly alert for the third quarter of 2016, we reported that on August 8, 2016, the CFTC's Division of Clearing and Risk (DCR) and DSIO issued separate interpretative and no-action letters regarding permissible investments in money market funds (MMFs) by derivatives clearing organizations (DCOs) and FCMs following final implementation of the U.S. Securities and Exchange Commission's (SEC) money market reform rules. The August 8 letters stated the CFTC's view that following implementation of the SEC's MMF reform, all prime MMFs and those government MMFs that elect to impose redemption fees and gates (electing government MMFs) no longer meet the necessary redemption and liquidity requirements to serve as permitted investments under CFTC rules that strictly limit the types of instruments in which FCMs and DCOs may invest customer funds, or in which DCOs may hold certain other funds. On October 18, 2016, DSIO issued a follow-up letter providing guidance on these points (the October letter)." The brief adds, "Among other things, the October letter clarified that a prime MMFs or electing government MMF may adjust the CFTC Regulation 1.26 form acknowledgment letter to state that the fund may suspend redemptions or impose liquidity fees consistent with SEC Rule 2a-7. CFTC Letter No. 16-68 provides limited relief to FCMs to invest the amount of residual interest that exceeds their targeted residual interest amounts held in customer segregated accounts in prime MMFs and electing government MMFs. The relief is limited only to the amount of funds that the FCM would otherwise be permitted to withdraw from the segregated accounts. Accordingly, in order to give effect to the relief provided by CFTC Letter No. 16-68, the acknowledgment letter that the FCM executes with the prime or electing government MMF may contain a provision that the fund may suspend redemptions or impose liquidity fees consistent with SEC Rule 2a-7. The prospectus of the prime or electing government MMF also may include a statement that the fund may suspend redemptions or impose liquidity fees consistent with SEC Rule 2a-7. FCMs, however, are not required by CFTC Letter No. 16-68 to obtain new acknowledgment letters for existing prime or electing government MMF accounts. The October letter also outlined how asset-based and issuer-based concentration limits are applied to government MMFs."
