Chicago Mercantile Exchange Inc.
October 22, 2002
Mr. Jonathan G. Katz
RE: File No. S7-34-02 - Rule 15c3-3; Reserve Requirements for Margin Related to Security Futures Products.
Dear Mr. Katz:
Chicago Mercantile Exchange Inc. ("CME" or "Exchange") is registered with the Commodity Futures Trading Commission ("CFTC") as a designated contract market and a derivatives clearing organization ("DCO"). The Exchange is one of the world's leading exchanges for the trading of futures and options on futures. The Exchange brings together buyers and sellers of derivatives products on our open outcry trading floors and on our electronic trading system, GLOBEX®, and through privately negotiated transactions. The Exchange offers market participants the opportunity to trade futures contracts and options on futures on interest rates, stock indexes, foreign currencies and commodity products. In addition, the clearing function for such products is integrated within the Exchange, so CME is able to guarantee, clear and settle every contract traded through CME.
The Exchange appreciates the opportunity to provide the Securities and Exchange Commission ("SEC" or "Commission") with comments on the proposed amendments to the formula for determining customer reserve requirements of broker-dealers under the Securities Exchange Act of 1934. The proposed amendments are in response to the anticipated trading of securities futures products ("SFP").
CME is in general agreement with the proposed amendments to Rule 15c3-3; however, the range of acceptable collateral in the proposal for debit purposes is too narrow and should be expanded to meet the needs of the broker-dealers and notice registered broker-dealers (hereinafter, notice registered broker-dealers will be included within the definition of "broker-dealer" for purposes of this letter) that clear and carry SFPs.
The Commission's proposed amendments to Rule 15c3-3 delineate how a broker-dealer would calculate its customer reserve requirement in light of enactment of the Commodity Futures Modernization Act of 2000 ("CFMA") and the expected trading of SFPs. Generally, the proposed changes would permit a broker-dealer to include the amount of customer SFP margin required and on deposit at a Clearing Agency or DCO as a "debit" in the Reserve Formula.
A footnote in the Federal Register release discussing the proposed amendments to Rule 15c3-3 states in part:
The collateral that may be posted at OCC as customer options margin includes cash, proprietary qualified securities and letters of credit collateralized by customers' securities.1 The type of collateral acceptable for deposit as customer SFP margin for Reserve Formula calculation purposes should be expanded to reflect the business needs of the broker-dealers that will have the greatest interaction with SFPs transactions.
In December 2000, the CFTC amended CFTC Regulation 1.25 to expand the allowable investments of customer segregated funds by futures commission merchants ("FCMs"). Dually registered broker-dealer/FCMs and FCMs are now able to invest such funds in a variety of instruments including money market mutual funds ("MMMFs") that meet certain requirements. These requirements include the ability of investors to redeem their investment in a MMMF within one business day of a request (absent extraordinary circumstances as approved by the CFTC) and the fund must be registered with the SEC under the Investment Company Act of 1940 ("Act"). The fund must also hold itself out as a MMMF in accordance with Rule 2a-7 of the Act or be exempt from such registration requirements by the CFTC.
The SEC rigorously enforces the requirements of Rule 2a-7 of the Act governing MMMFs. The restrictions placed on quality, maturity and diversity of a MMMF's portfolio by the SEC confirm its objective of minimizing the risk of these investments. Among the requirements the SEC imposes is that 95% of a MMMF's portfolio be invested in securities rated in the highest short-term rating category by a Nationally Recognized Statistical Rating Organization ("NRSRO") and that the dollar-weighted average maturity ("WAM") of the portfolio be less than 90 days. If a MMMF is rated, the NRSROs dictate even more stringent requirements than those mandated by the SEC for an acceptable rating (e.g. 100% of the portfolio be invested in investment grade securities and the WAM be less than 60 days).
Since the amendment of CFTC Regulation 1.25, a number of broker-dealers and FCMs have gradually shifted their futures customer investments from other instruments to MMMFs. Broker-dealers and FCMs have indicated a preference for investments in MMMFs due to:
The widespread use and acceptance of MMMFs as a permissible investment of customer segregated funds by FCMs, combined with the stability of MMMFs, makes them appropriate for debit treatment under the Reserve Formula. CME believes that MMMFs should be included in the type of collateral that may receive debit treatment under the Reserve Formula when posted at a Clearing Agency or DCO as customer SFP margin.
cc: Securities and Exchange Commission
Mr. Harvey Pitt, Chairman
Ms. Cynthia Glassman, Commissioner
Mr. Paul Atkins, Commissioner
Mr. Roel Campos, Commissioner
Mr. Harvey Goldschmid, Commissioner