The Commodity Futures Trading Commission on Aug. 8 announced several actions intended to address the impact of amendments to money market fund rules adopted by the Securities and Exchange Commission.
Starting in October, money market funds will have the ability, under certain extreme circumstances, to suspend redemptions in order to prevent the risk of investor runs. Although this reform was drafted in response to one of the problems exposed by the 2008 financial crisis, a suspension of redemptions would mean investments in such funds cannot be promptly liquidated. From the CFTC's perspective, that raises the possibility that such an event could result in customers, clearing firms and clearinghouses being unable to access the funds necessary to satisfy margin obligations. That would violate CFTC rules that required customer funds to be invested in highly liquid assets that can be convertible into cash within one business day without a material discount in value.
To address this issue, the CFTC's division of clearing and risk issued a staff interpretation clarifying that clearinghouses cannot hold or accept as initial margin shares in funds that retain the ability to suspend redemptions. Additionally, the CFTC’s division of swap dealer and intermediary oversight issued a no-action letter regarding the use of MMFs by clearinghouses and futures commission merchants. The letter stated that FCMs will not be able to invest customer funds in funds that have the ability to suspend redemptions. However, the letter does allow FCMs to invest their "residual interest" in such accounts. Residual interest refers to funds that FCMs deposit into customer accounts above the amount required to make sure that all obligations are covered.
