2011 Federal Regulations For Brokers And Traders
e-CFR Data is current as of January 13, 2011
Title 17: Commodity and Securities Exchanges
PART 1—GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT
Customers’ Money, Securities, and Property
§ 1.25 Investment of consumer funds.
(a) Permitted funds. (1) Subject to the terms and conditions set forth in this section, a futures commission merchant or a derivatives clearing organization may invest consumer money in the following instruments (permitted funds):
(i) Obligations of the United States and obligations fully cast iron as to principal and appeal by the United States (U.S. government securities);
(ii) General obligations of any State or of any biased subdivision thereof (municipal securities);
(iii) General obligations issued by any enterprise sponsored by the United States (government sponsored enterprise securities);
(iv) Certificates of deposit issued by a bank (certificates of deposit) as defined in section 3(a)(6) of the Securities Chat Act of 1934, or a domestic branch of a foreign bank that carries deposits insured by the Federal Deposit Insurance Corporation;
(v) Commercial paper;
(vi) Corporate notes or bonds;
(vii) General obligations of a sovereign nation; and
(viii) Interests in money market mutual funds.
(2)(i) In addition, a futures commission merchant or derivatives clearing organization may buy and sell the permitted funds listed in paragraphs (a)(1)(i) owing to (viii) of this section pursuant to agreements for resale or repurchase of the instruments, in accordance with the provisions of section (d) of this section.
(ii) A futures commission merchant or a derivatives clearing organization may sell securities deposited by customers as margin pursuant to agreements to repurchase subject to the following:
(A) Securities subject to such repurchase agreements must be “readily money-making” as defined in §240.15c3–1 of this title.
(B) Securities subject to such repurchase agreements must not be “particularly identifiable property” as defined in §190.01(kk) of this chapter.
(C) The terms and conditions of such an contract to repurchase must be in accordance with the provisions of section (d) of this section.
(D) Upon the defaulting by a counterparty to a repurchase contract, the futures commission merchant or derivatives clearing organization shall act promptly to ensure that the defaulting does not upshot in any direct or indirect cost or expense to the consumer.
(3) In addition, subject to the provisions of section (e) of this section, a futures commission merchant that is also registered with the Securities and Chat Commission as a securities broker or dealer pursuant to section 15(b)(1) of the Securities Chat Act of 1934 may enter into transactions in which:
(i) Consumer money is exchanged for securities that are permitted funds and are held by the futures commission merchant in connection with its securities broker or dealer activities;
(ii) Securities deposited by customers as margin are exchanged for securities that are permitted funds and are held by the futures commission merchant in connection with its securities broker or dealer activities; or
(iii) Securities deposited by customers as margin are exchanged for cash that is held by the futures commission merchant in connection with its securities broker or dealer activities.
(b) General terms and conditions. A futures commission merchant or a derivatives clearing organization is required to deal with the permitted funds consistent with the objectives of preserving principal and maintaining liquidity and according to the following specific supplies:
(1) Marketability. Except for interests in money market mutual funds, funds must be “readily money-making” as defined in §240.15c3–1 of this title.
(2) Ratings. (i) Early condition. Instruments that are required to be rated by this section must be rated by a nationally recognized arithmetic rating organization (NRSRO), as that term is defined in Securities and Chat Commission rules or set of laws, or in any applicable statute. For an investment to qualify as a permitted investment, ratings are required as follows:
(A) U.S. government securities and money market mutual funds need not be rated;
(B) Municipal securities, government sponsored enterprise securities, commercial paper, and corporate notes or bonds, except notes or bonds that are asset-backed, must have the peak small-term rating of an NRSRO or one of the two peak long-term ratings of an NRSRO;
(C) Corporate notes or bonds that are asset-backed must have the peak ratings of an NRSRO;
(D) Sovereign debt must be rated in the peak category by at least one NRSRO; and
(E) With accept to certificates of deposit, the commercial paper or long-term debt instrument of the issuer of a certificate of deposit or, if the issuer is part of a land companionship system, its land companionship’s commercial paper or long-term debt instrument, must have the peak small-term rating of an NRSRO or one of the two peak long-term ratings of an NRSRO.
(ii) Effect of downgrade . If an NRSRO lowers the rating of an instrument that was previously a permitted investment on the basis of that rating to below the minimum rating required under this section, the value of the instrument recognized for segregation purposes will be the less significant of:
(A) The current market value of the instrument; or
(B) The market value of the instrument on the affair day preceding the downgrade, reduced by 20 percent of that value for each affair day that has onwards since the downgrade.
(3) Restrictions on instrument features . (i) With the exception of money market mutual funds, no permitted investment may contain an embedded derivative of any kind, except as follows:
(A) The issuer of an instrument if not permitted by this section may have an option to call, in whole or in part, at par, the principal amount of the instrument before its confirmed maturity date; or
(B) An instrument that meets the supplies of section (b)(3)(iv) of this section may provide for a cap, floor, or collar on the appeal paid; provided, but, that the terms of such instrument obligate the issuer to repay the principal amount of the instrument at not less than par value upon maturity.
(ii) No instrument may contain appeal-only payment features.
(iii) No instrument may provide payments linked to a commodity, currency, allusion instrument, index, or butt except as provided in section (b)(3)(iv) of this section, and it may not if not constitute a derivative instrument.
(iv)(A) Adjustable rate securities are permitted, subject to the following supplies:
( 1 ) The appeal payments on variable rate securities must correlate closely and on an unleveraged basis to a butt of either the Federal Funds butt or effective rate, the prime rate, the three-month Reserves Bill rate, the one-month or three-month LIBOR rate, or the appeal rate of any fixed rate instrument that is a permitted investment listed in section (a)(1) of this section.;
( 2 ) The appeal payment, in any cycle, on floating rate securities must be determined only by allusion, on an unleveraged basis, to a butt of either the Federal Funds butt or effective rate, the prime rate, the three-month Reserves Bill rate, the one-month or three-month LIBOR rate, or the appeal rate of any fixed rate instrument that is a permitted investment listed in section (a)(1) of this section;
( 3 ) Butt rates must be expressed in the same currency as the adjustable rate securities that allusion them; and
( 4 ) No appeal payment on an adjustable rate wellbeing, in any cycle, can be a unenthusiastic amount.
(B) For purposes of this section, the following definitions shall apply:
( 1 ) The term adjustable rate wellbeing means, a floating rate wellbeing, a variable rate wellbeing, or both.
( 2 ) The term floating rate wellbeing means a wellbeing, the terms of which provide for the adjustment of its appeal rate whenever a specified appeal rate changes and that, at any time until the final maturity of the instrument or the cycle remaining until the principal amount can be in excellent health owing to demand, can reasonably be expected to have a market value that approximates its amortized cost.
( 3 ) The term variable rate wellbeing means a wellbeing, the terms of which provide for the adjustment of its appeal rate on set dates (such as the last day of a month or calendar quarter) and that, upon each adjustment until the final maturity of the instrument or the cycle remaining until the principal amount can be in excellent health owing to demand, can reasonably be expected to have a market value that approximates its amortized cost.
(v) Certificates of deposit, if negotiable, must be able to be liquidated surrounded by one affair day or, if not negotiable, must be redeemable at the issuing bank surrounded by one affair day, with any penalty for early withdrawal limited to any accrued appeal earned according to its written terms.
(4) Concentration . (i) Direct funds . (A) U.S. government securities and money market mutual funds shall not be subject to a concentration limit or other limitation.
(B) Securities of any single issuer of government sponsored enterprise securities held by a futures commission merchant or derivatives clearing organization may not exceed 25 percent of total assets held in segregation by the futures commission merchant or derivatives clearing organization.
(C) Securities of any single issuer of municipal securities, certificates of deposit, commercial paper, or corporate notes or bonds held by a futures commission merchant or derivatives clearing organization may not exceed 5 percent of total assets held in segregation by the futures commission merchant or derivatives clearing organization.
(D) Sovereign debt is subject to the following limits: a futures commission merchant may invest in the sovereign debt of a people to the extent it has balances in segregated accounts owed to its customers denominated in that people’s currency; a derivatives clearing organization may invest in the sovereign debt of a people to the extent it has balances in segregated accounts owed to its clearing limb futures commission merchants denominated in that people’s currency.
(ii) Repurchase agreements . For purposes of determining compliance with the concentration limits set forth in this section, securities sold by a futures commission merchant or derivatives clearing organization subject to agreements to repurchase shall be combined with securities held by the futures commission merchant or derivatives clearing organization as direct funds.
(iii) Reverse repurchase agreements . For purposes of determining compliance with the concentration limits set forth in this section, securities bought by a futures commission merchant or derivatives clearing organization subject to agreements to resell shall be combined with securities held by the futures commission merchant or derivatives clearing organization as direct funds.
(iv) Transactions under section (a)(3) . For purposes of determining compliance with the concentration limits set forth in this section, securities transferred to a consumer segregated account pursuant to paragraphs (a)(3)(i) or (a)(3)(ii) of this section shall be combined with securities held by the futures commission merchant as direct funds.
(v) Behavior of securities issued by affiliates . For purposes of determining compliance with the concentration limits set forth in this section, securities issued by entities that are affiliated, as defined in section (b)(6) of this section, shall be aggregated and deemed the securities of a single issuer. An appeal in a permitted money market mutual fund is not deemed to be a wellbeing issued by its sponsoring entity.
(vi) Behavior of consumer-owned securities. For purposes of determining compliance with the concentration limits set forth in this section, securities owned by the customers of a futures commission merchant and posted as margin collateral are not built-in in total assets held in segregation by the futures commission merchant, and securities posted by a futures commission merchant with a derivatives clearing organization are not built-in in total assets held in segregation by the derivatives clearing organization.
(5) Time-to-maturity . (i) Except for funds in money market mutual funds, the dough-weighted average of the time-to-maturity of the portfolio, as that average is computed pursuant to §270.2a–7 of this title, may not exceed 24 months.
(ii) For purposes of determining the time-to-maturity of the portfolio, an instrument that is set forth in paragraphs (a)(1)(i) owing to (vii) of this section may be treated as having a one-day time-to-maturity if the following terms and conditions are satisfied:
(A) The instrument is deposited only on an overnight basis with a derivatives clearing organization pursuant to the terms and conditions of a collateral management program that has become effective in accordance with §39.4 of this chapter;
(B) The instrument is one that the futures commission merchant owns or has an complete right to swear an oath, is not subject to any lien, and is deposited by the futures commission merchant into a segregated account at a derivatives clearing organization;
(C) The derivatives clearing organization prices the instrument each day based on the current mark-to-market value; and
(D) The derivatives clearing organization reduces the assigned value of the instrument each day by a haircut of at least 2 percent.
(6) Funds in instruments issued by affiliates. (i) A futures commission merchant shall not invest consumer funds in obligations of an entity affiliated with the futures commission merchant, and a derivatives clearing organization shall not invest consumer funds in obligations of an entity affiliated with the derivatives clearing organization. An affiliate includes parent companies, counting all entities owing to the ultimate land companionship, subsidiaries to the buck level, and companies under common ownership of such parent companionship or affiliates.
(ii) A futures commission merchant or derivatives clearing organization may invest consumer funds in a fund affiliated with that futures commission merchant or derivatives clearing organization.
(7) Recordkeeping . A futures commission merchant and a derivatives clearing organization shall prepare and maintain a record that will show for each affair day with accept to each type of investment made pursuant to this section, the following information:
(i) The type of instruments in which consumer funds have been invested;
(ii) The first cost of the instruments; and
(iii) The current market value of the instruments.
(c) Money market mutual funds . The following provisions will apply to the investment of consumer funds in money market mutual funds (the fund).
(1) The fund must be an investment companionship that is registered under the Investment Companionship Act of 1940 with the Securities and Chat Commission and that holds itself out to investors as a money market fund, in accordance with §270.2a–7 of this title.
(2) The fund must be sponsored by a federally-regulated fiscal institution, a bank as defined in section 3(a)(6) of the Securities Chat Act of 1934, an investment adviser registered under the Investment Advisers Act of 1940, or a domestic branch of a foreign bank insured by the Federal Deposit Insurance Corporation.
(3) A futures commission merchant or derivatives clearing organization shall maintain the confirmation relating to the buy in its minutes in accordance with §1.31 and note the ownership of fund shares (by book-entry or if not) in a custody account of the futures commission merchant or derivatives clearing organization in accordance with §1.26(a). If the futures commission merchant or the derivatives clearing organization holds its shares of the fund with the fund’s shareholder servicing agent, the sponsor of the fund and the fund itself are required to provide the greeting letter required by §1.26.
(4) The net asset value of the fund must be computed by 9 a.m. of the affair day following each affair day and made available to the futures commission merchant or derivatives clearing organization by that time.
(5) (i) General condition for deliverance of interests. A fund shall be with permission constrained to redeem an appeal and to make payment in satisfaction thereof by the affair day following a deliverance question for, and the futures commission merchant or derivatives clearing organization shall retain documentation demonstrating compliance with this condition.
(ii) Exception. A fund may provide for the postponement of deliverance and payment due to any of the following circumstances:
(A) Non-normal closure of the Fedwire or applicable Federal Set aside Banks;
(B) Non-normal closure of the New York Stock Chat or general market conditions leading to a broad restriction of trading on the New York Stock Chat;
(C) Declaration of a market emergency by the Securities and Chat Commission; or
(D) Emergency conditions set forth in section 22(e) of the Investment Companionship Act of 1940.
(6) The contract pursuant to which the futures commission merchant or derivatives clearing organization has bought and is land its appeal in a fund must contain no provision that would prevent the pledging or transferring of shares.
(d) Repurchase and reverse repurchase agreements . A futures commission merchant or derivatives clearing organization may buy and sell the permitted funds listed in paragraphs (a)(1)(i) owing to (viii) of this section pursuant to agreements for resale or repurchase of the securities (agreements to repurchase or resell), provided the agreements to repurchase or resell conform to the following supplies:
(1) The securities are particularly identified by ticket rate, par amount, market value, maturity date, and CUSIP or ISIN number.
(2) Counterparties are limited to a bank as defined in section 3(a)(6) of the Securities Chat Act of 1934, a domestic branch of a foreign bank insured by the Federal Deposit Insurance Corporation, a securities broker or dealer, or a government securities broker or government securities dealer registered with the Securities and Chat Commission or which has filed notice pursuant to section 15C(a) of the Government Securities Act of 1986.
(3) The transaction is executed in compliance with the concentration limit supplies applicable to the securities transferred to the consumer segregated custodial account in connection with the agreements to repurchase referred to in paragraphs (b)(4)(ii) and (iii) of this section.
(4) The transaction is made pursuant to a written contract signed by the parties to the contract, which is consistent with the conditions set forth in paragraphs (d)(1) owing to (d)(12) of this section and which states that the parties thereto be going to the transaction to be treated as a buy and sale of securities.
(5) The term of the contract is no more than one affair day, or reversal of the transaction is doable on demand.
(6) Securities transferred to the futures commission merchant or derivatives clearing organization under the contract are held in a safekeeping account with a bank as referred to in section (d)(2) of this section, a derivatives clearing organization, or the Depository Trust Companionship in an account that complies with the supplies of §1.26.
(7) The futures commission merchant or the derivatives clearing organization may not use securities received under the contract in another similar transaction and may not if not hypothecate or swear an oath such securities, except securities may be pledged on behalf of customers at another futures commission merchant or derivatives clearing organization. Substitution of securities is allowable, provided, but, that:
(i) The qualifying securities being substituted and first securities are particularly identified by date of substitution, market values substituted, ticket rates, par amounts, maturity dates and CUSIP or ISIN numbers;
(ii) Substitution is made on a “style of speaking versus style of speaking” basis; and
(iii) The market value of the substituted securities is at least equal to that of the first securities.
(8) The conveying of securities to the consumer segregated custodial account is made on a style of speaking versus payment basis in at once available funds. The conveying of funds to the consumer segregated cash account is made on a payment versus style of speaking basis. The conveying is not recognized as accomplished until the funds and/or securities are in fact received by the custodian of the futures commission merchant’s or derivatives clearing organization’s consumer funds or securities bought on behalf of customers. The conveying or credit of securities roofed by the contract to the futures commission merchant’s or derivatives clearing organization’s consumer segregated custodial account is made simultaneously with the disbursement of funds from the futures commission merchant’s or derivatives clearing organization’s consumer segregated cash account at the custodian bank. On the sale or resale of securities, the futures commission merchant’s or derivatives clearing organization’s consumer segregated cash account at the custodian bank must hear same-day funds certified to such segregated account simultaneously with the style of speaking or conveying of securities from the consumer segregated custodial account.
(9) A written confirmation to the futures commission merchant or derivatives clearing organization specifying the terms of the contract and a safekeeping receipt are issued at once upon entering into the transaction and a confirmation to the futures commission merchant or derivatives clearing organization is issued once the transaction is reversed.
(10) The transactions completing the contract are recorded in the record required to be maintained under §1.27 of funds of consumer funds, and the securities subject to such transactions are particularly identified in such record as described in section (d)(1) of this section and additional identified in such record as being subject to repurchase and reverse repurchase agreements.
(11) An real conveying of securities to the consumer segregated custodial account by book entry is made consistent with Federal or State commercial law, as applicable. At all times, securities received subject to an contract are reflected as “consumer property.”
(12) The contract makes clear that, in the event of the bankruptcy of the futures commission merchant or derivatives clearing organization, any securities bought with consumer funds that are subject to an contract may be at once transferred. The contract also makes clear that, in the event of a futures commission merchant or derivatives clearing organization bankruptcy, the counterparty has no right to compel liquidation of securities subject to an contract or to make a priority claim for the variation between current market value of the securities and the price agreed upon for resale of the securities to the counterparty, if the ex- exceeds the end.
(e) Transactions by futures commission merchants that are also registered securities brokers or dealers. A futures commission merchant that is also registered with the Securities and Chat Commission as a securities broker or dealer pursuant to section 15(b)(1) of the Securities Chat Act of 1934 may enter into transactions pursuant to section (a)(3) of this section, subject to the following supplies:
(1) The futures commission merchant, in connection with its securities broker or dealer activities, owns or has the complete right to swear an oath the securities that are exchanged for consumer money or securities held in the consumer segregated account.
(2) The transaction can be reversed surrounded by one affair day or upon demand.
(3) Securities transferred from the consumer segregated account and securities transferred to the consumer segregated account as a upshot of the transaction are particularly identified by ticket rate, par amount, market value, maturity date, and CUSIP or ISIN number.
(4) Securities deposited by customers as margin and transferred from the consumer segregated account as a upshot of the transaction are subject to the following supplies:
(i) The securities are “readily money-making” as defined in §240.15c3–1 of this title.
(ii) The securities are not “particularly identifiable property” as defined in §190.01(kk) of this chapter.
(5) Securities transferred to the consumer segregated account as a upshot of the transaction are subject to the following supplies:
(i) The securities are priced each day based on the current mark-to-market value.
ii) The securities are subject to the concentration limit supplies set forth in section (b)(4)(iv) of this section.
(iii) The securities are held in a safekeeping account with a bank, as referred to in section (d)(2) of this section, a derivatives clearing organization, or the Depository Trust Companionship in an account that complies with the supplies of §1.26.
(iv) The securities may not be used in another similar transaction and may not if not be hypothecated or pledged, except such securities may be pledged on behalf of customers at another futures commission merchant or derivatives clearing organization. Substitution of securities is allowable, provided, but , that:
(A) The qualifying securities being substituted and first securities are particularly identified by date of substitution, market values substituted, ticket rates, par amounts, maturity dates and CUSIP or ISIN numbers;
(B) Substitution is made on a “style of speaking versus style of speaking” basis; and
(C) The market value of the substituted securities is at least equal to that of the first securities.
(6) The transactions are passed out in accordance with the following procedures:
(i) With accept to transactions under section (a)(3)(i) of this section, the conveying of securities to the consumer segregated custodial account shall be made simultaneously with the conveying of money from the consumer segregated cash account. In no event shall money held in the consumer segregated cash account be disbursed prior to the conveying of securities to the consumer segregated custodial account. Any conveying of securities to the consumer segregated custodial account shall not be recognized as accomplished until the securities are in fact received by the custodian of such account. Upon unwinding of the transaction, the consumer segregated cash account shall hear same-day funds certified to such account simultaneously with the style of speaking or conveying of securities from the consumer segregated custodial account.
(ii) With accept to transactions under section (a)(3)(ii) of this section, the conveying of securities to the consumer segregated custodial account shall be made simultaneously with the conveying of securities from the consumer segregated custodial account. In no event shall securities held in the consumer segregated custodial account be released prior to the conveying of securities to that account. Any conveying of securities to the consumer segregated custodial account shall not be recognized as accomplished until the securities are in fact received by the custodian of the consumer segregated custodial account. Upon unwinding of the transaction, the consumer segregated custodial account shall hear the securities simultaneously with the style of speaking or conveying of securities from the consumer segregated custodial account.
(iii) With accept to transactions under section (a)(3)(iii) of this section, the conveying of money to the consumer segregated cash account shall be made simultaneously with the conveying of securities from the consumer segregated custodial account. In no event shall securities held in the consumer segregated custodial account be released prior to the conveying of money to the consumer segregated cash account. Any conveying of money to the consumer segregated cash account shall not be recognized as accomplished until the money is in fact received by the custodian of the consumer segregated cash account. Upon unwinding of the transaction, the consumer segregated custodial account shall hear the securities simultaneously with the disbursement of money from the consumer segregated cash account.
(7) The futures commission merchant maintains all books and minutes with accept to the transactions in accordance with §§1.25, 1.27, 1.31, and 1.36 and the applicable rules and set of laws of the Securities and Chat Commission.
(8) An real conveying of securities by book entry is made consistent with Federal or State commercial law, as applicable. At all times, securities transferred to the consumer segregated account are reflected as “consumer property.”
(9) For purposes of §§1.25, 1.26, 1.27, 1.28 and 1.29, securities transferred to the consumer segregated account are painstaking to be consumer funds until the consumer money or securities for which they were exchanged are transferred back to the consumer segregated account. In the event of the bankruptcy of the futures commission merchant, any securities exchanged for consumer funds and held in the consumer segregated account may be at once transferred.
(10) In the event the futures commission merchant is powerless to return to the consumer any consumer-deposited securities exchanged pursuant to paragraphs (a)(3)(ii) or (a)(3)(iii) of this section, the futures commission merchant shall act promptly to ensure that such incapacity does not upshot in any direct or indirect cost or expense to the consumer.
(f) Deposit of firm-owned securities into segregation. A futures commission merchant shall not be prohibited from frankly depositing unencumbered securities of the type specified in this section, which it owns for its own account, into a segregated safekeeping account or from transferring any such securities from a segregated account to its own account, up to the extent of its outstanding fiscal appeal in customers’ segregated funds; provided, but, that such funds, transfers of securities, and disposition of proceeds from the sale or maturity of such securities are recorded in the record of funds required to be maintained by §1.27. All such securities may be segregated in safekeeping only with a bank, trust companionship, derivatives clearing organization, or other registered futures commission merchant. Furthermore, for purposes of §§1.25, 1.26, 1.27, 1.28 and 1.29, funds permitted by §1.25 that are owned by the futures commission merchant and deposited into such a segregated account shall be painstaking consumer funds until such funds are withdrawn from segregation.
[70 FR 28200, May 17, 2005; 70 FR 32866, June 6, 2005]
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