CFTC Adopts Rule 1.49 Authorizing Customer Funds to be Held in Foreign Currencies

Removing a significant impediment to the efficient conduct of international futures activities, the Commodity Futures Trading Commission has adopted rule 1.49, authorizing FCMs and derivatives clearing organizations to hold customer segregated funds in foreign currencies in depositories located either within or outside of the United States. The rule was published in the Federal Register today (68 Fed.Reg. 5545, February 4, 2003). Rule 1.49 replaces Division of Trading and Markets Financial and Segregation Interpretation No. 12, which previously had governed the deposit of customer funds outside of the US.

Reform of the procedures set out in Segregation Interpretation No. 12 has been one of FIA's priorities for several years, and FIA strongly supported adoption of rule 1.49 when it was published for comment. Segregation Interpretation No. 12 was particularly onerous in that, before placing a customer's funds overseas (or holding a foreign customer's funds overseas), an FCM was required to obtain from the customer a signed subordination agreement in the form set forth in the interpretation.

Rule 1.49 eliminates the requirement that an FCM obtain a signed subordination agreement before holding customer funds offshore. Although customer consent is required before any funds may be held in a foreign currency or converted from one currency to another, written consent is not required. Consent is implied when a customer deposits funds with the FCM in a foreign currency or enters into contracts traded on US exchanges that settle or accrue in a foreign currency. If a customer orally instructs an FCM to hold funds in or convert funds to another currency, the FCM must make a record of each such transaction. Foreign currency conversions must also be reflected in the monthly statements that the FCM provides the customer.

The rule prescribes the permissible currencies that an FCM may hold on behalf of a customer as well as the permissible locations of the depositories in which they may be held. The permissible currencies are: (1) the US dollar; (2) the currency in which the funds were deposited by the customer or converted at the customer's request; or (3) the currency in which funds have accrued to the customer as a result of trading in US contracts, to the extent of such accruals. An FCM, without the affirmative consent of the customer, may hold customer funds in any depository located in the US, in any G-7 country or in the country of origin of the currency. (The Euro may be held in any country that is a member of the European Union and that has recognized the Euro as its official currency.) An FCM may hold customer funds in a depository located in another jurisdiction only to the extent authorized by the customer. In no event may an FCM hold customer funds in a restricted country subject to sanctions by the US Treasury's Office of Foreign Assets Control.

Customer funds, whether held within or outside of the US, must be deposited with: (1) a bank or trust company; (2) an FCM; or (3) a derivatives clearing organization. A bank or trust located outside of the US will not be an acceptable depository unless: (a) it has in excess of $1 billion excess regulatory capital or (b) its commercial paper or long term debt instruments, or that of its holding company, is rated in one of the two highest rating categories by at least one nationally recognized statistical rating organization.

Rule 1.49 further provides that an FCM must hold in segregated accounts as of the close of each business day: (1) sufficient US dollars in the US to meet all US dollar obligations to customers; and (2) sufficient obligations in each other currency to meet in obligations in that currency. Notwithstanding this latter requirement, however: (a) US dollars may be held in the US or any G-7 country to meet obligations denominated in any other currency; and (b) funds in any G-7 currency may be held in the US or any G-7 country to meet obligations denominated in currencies other than the US dollar.

Finally, the CFTC has amended Appendix B of the Commission's Part 190 rules to establish distribution procedures in the event of the bankruptcy of an FCM that holds customer funds in one or more foreign currencies.

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