DCIO received a request for guidance from the Joint Audit Committee concerning FCM regulatory reporting requirements for investments in a money market mutual fund. The fund had announced that its net asset value per s...

Summary: DCIO received a request for guidance from the Joint Audit Committee concerning FCM regulatory reporting requirements for investments in a money market mutual fund. The fund had announced that its net asset value per share had fallen from $1.00 and that, as permitted by order of the SEC dated September 22, 2008, the fund had suspended redemptions and postponed payments. DCIO advised that until further notice the investments should be reported as of certain dates at the net asset values specified in the letter, and continue to be subject to a 2% deduction when calculating adjusted net capital.

U.S. COMMODITY FUTURES TRADING COMMISSION

Three Lafayette Centre

1155 21st Street, NW, Washington, DC 20581

Telephone: (202) 418-5188

Facsimile: (202) 418-5547

aradhakrishnan@cftc.gov

Division of Clearing and

Intermediary Oversight

Ananda Radhakrishnan

Director

CFTC Letter No. 08-17

September 24, 2008

Other Written Communication

Division of Clearing and Intermediary Oversight

Debra K. Kokal

Director, Audit Department

CME Group

20 S. Wacker Dr.

Chicago, IL 60606

Re: Request for Guidance Regarding CFTC Regulations 1.17,1.20, 1.25, and Part 30

Dear Ms. Kokal:

This is in response to your letter dated September 24, 2008, to the Division of Clearing and

Intermediary Oversight (“Division”) of the Commodity Futures Trading Commission

(“Commission”), written on behalf of the Joint Audit Committee (“JAC”),1 as supplemented by

telephonic communications with Division staff. By your letter, you request guidance concerning

regulatory reporting requirements applicable to futures commission merchants (“FCMs”) with

investments in the Reserve Primary Fund, a regulated money market mutual fund (“MMMF”). We

understand the following information to be relevant to your request

oint Audit Committee (“JAC”),1 as supplemented by

telephonic communications with Division staff. By your letter, you request guidance concerning

regulatory reporting requirements applicable to futures commission merchants (“FCMs”) with

investments in the Reserve Primary Fund, a regulated money market mutual fund (“MMMF”). We

understand the following information to be relevant to your request.

As required by Section 4d(a) of the Commodity Exchange Act

and Commission Regulation 1.20,

FCMs must segregate and separately account for the funds of their commodity and option customers.2

Commission Regulation 1.25 specifies requirements for investments of customer funds, and includes as

“permitted investments” interests in MMMFs that meet the criteria set forth in the regulation. Part 30 of

the Commission’s regulations requires “secured amount” accounts for foreign futures and options

customers as defined in Part 30, and also permits investments in MMMFs. Whether held as investments

for their customers or as proprietary assets of the FCM, CFTC regulations require interests in MMMFs

to be reported at market value, and CFTC Regulation 1.17 further requires a deduction of two percent

(2%) of the total market value when calculating the adjusted net capital of the FCM.

As noted in your letter, the Reserve Primary Fund had issued recent announcements stating that

(1) its net asset value is below $1.00 a share, and (2) an order issued by the Securities and Exchange

1 The JAC is a voluntary, cooperative organization comprised of representatives of the financial surveillance staff of

designated contract markets and the National Futures Association and was formed for the purpose of coordinating the

monitoring and examination of common members of such entities.

2 The Commodity Exchange Act (“Act”) is codified at 7 U.S.C. §1 et seq. (2007). Commission regulations referred to in this

letter may be found at 17 C.F.R. Ch. 1 (2008).

tatives of the financial surveillance staff of

designated contract markets and the National Futures Association and was formed for the purpose of coordinating the

monitoring and examination of common members of such entities.

2 The Commodity Exchange Act (“Act”) is codified at 7 U.S.C. §1 et seq. (2007). Commission regulations referred to in this

letter may be found at 17 C.F.R. Ch. 1 (2008).

2

Commission (“SEC”), dated September 22, 2008, permits the fund to temporarily suspend redemptions

and postpone payments. The SEC order includes a finding that such action is necessary for protection of

the fund’s security holders. The SEC based its determination on representations by the fund, including

those “relating to the current extraordinary market conditions.” Other representations by the fund

include that it will create a plan for the orderly liquidation, which shall be subject to SEC supervision.

In light of the SEC order, you have requested, as Chairman of the JAC, guidance on the

application of Commission regulations to investments in the Reserve Primary Fund. Your request is

made on behalf of any FCM that may hold shares of the fund, either as proprietary assets or as

investments held in accounts governed by Section 4d of the Act or Part 30 of the Commission’s

regulations. As stated in your letter, enabling FCMs to include investments in the fund at a conservative

net asset value would be appropriate in light of current market conditions.

In view of all the facts and circumstances presented, the Division believes that your

request has merit. Accordingly, the Division hereby provides guidance that FCM calculations required

for purposes of compliance with capital, segregation, and secured amount reporting requirements may

include their investments in the Reserve Primary Fund, with the condition that the net asset value be

reduced appropriately in light of currently available information

ivision believes that your

request has merit. Accordingly, the Division hereby provides guidance that FCM calculations required

for purposes of compliance with capital, segregation, and secured amount reporting requirements may

include their investments in the Reserve Primary Fund, with the condition that the net asset value be

reduced appropriately in light of currently available information. Based on such information, Division

staff has determined that FCMs should report their investments in the fund at the following maximum

net asset values, effective as of the following dates:

•

$0.94 as of September 29 and September 30

•

$0.93 as of October 1 and October 2

•

$0.92 as of October 3 and thereafter.3

In addition to applying the net asset values described above, FCMs must continue to apply the

2% capital deduction required by Regulation 1.17. Furthermore, should the Reserve Primary Fund or

the SEC report a lower net asset value at any time, the lower net asset value must be applied instead.

Division staff will continue to monitor developments related to the Reserve Primary Fund and to

provide further guidance in accordance with such developments. The Division further states that this

letter is applicable solely to regulatory reporting requirements with respect to investments in the Reserve

Primary Fund. It does not excuse any FCM from compliance with any other applicable requirements

contained in the Act or in the Commission’s regulations issued thereunder.

This letter is based upon the representations made to the Division to date. Any different,

changed, or omitted material facts or circumstances might render this letter void. Moreover, this letter

represents the position of the Division only and does not necessarily represent the views of the

Commission or those of any other division or office of the Commission. If you have any questions

concerning this correspondence, please contact Thelma Diaz, Associate Director, at (202) 418-5137

hanged, or omitted material facts or circumstances might render this letter void. Moreover, this letter

represents the position of the Division only and does not necessarily represent the views of the

Commission or those of any other division or office of the Commission. If you have any questions

concerning this correspondence, please contact Thelma Diaz, Associate Director, at (202) 418-5137.

Very truly yours,

Ananda Radhakrishnan

Director

3 These net asset values apply to all FCMs, regardless of whether an FCM’s redemption request was made before the 3:00pm

deadline specified in the press release issued by the Reserve Primary Fund on September 16, 2008.