A Layman's Guide to Regulation 1.25

by MarketsReformWiki

By Douglas Ashburn


John Lothian News

Email: dougashburn@johnlothian.com

Commodity Futures Trading Commission (CFTC) Regulation 1.25 - Investment of Customer Funds, has been at the top of the news these past couple of weeks. In the wake of the MF Global bankruptcy scandal, the focus has been on the treatment of customer funds at the failed futures commission merchant/broker-dealer, and its soured investments in European sovereign debt. In the midst of the investigation of MF Global and the search for $1.2 billion in missing customer segregated funds, the CFTC approved its final set of rule changes to Reg. 1.25 related to the Dodd-Frank Act.

While many press stories have gotten it “mostly right” in terms of Reg. 1.25 and MF Global, there is much misinformation floating about. Following is a short primer on Reg. 1.25 - its history, a summary of the new changes, how the rules relate to MF Global, and the future impact of Reg. 1.25 on the FCM community.

History of Regulation 1.25

Before 2000, FCMs and clearing houses were quite limited in where customer excess funds could be invested. Basically, the choices were U.S. Government securities, municipal bonds, or cash. Beginning in December 2000, the CFTC moved to expand the choices of permitted investments. By 2005, the list included obligations of government sponsored entities (“GSE debt”), bank certificates of deposit (CDs), commercial paper, corporate notes, general obligations of a sovereign nation, (“sovereign debt”), and interests in money market mutual funds (MMMFs). Additionally, the 2005 modification permitted FCMs to invest in short-term repurchase agreements, time-to-maturity transactions, and, in the case of firms such as MF Global, who are also registered broker-dealers, certain in-house (“affiliate”) transactions.

The main stipulation was that such investments must, in most cases, possess the highest credit rating from one of the nationally-recognized statistical ratings organizations (NRSROs) such as Fitch, Moody’s or Standard & Poor’s). Additionally, the investments must be “readily marketable” and capable of being promptly liquidated.

In 2007, the commission began conducting a review of Regulation 1.25 and the effects of the changes. The review included meetings and requests for comment from market participants, independent and internal research. As the commission was concluding its review in 2008, a severe financial crisis significantly altered the regulatory landscape. Subsequent to the market turmoil, NRSROs took a lot of heat for their role in the subprime mortgage meltdown. As a result, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 included in its mandates a requirement that regulators create a framework that removes a reliance on credit ratings, in favor of other criteria such as asset concentration limits. The CFTC combined the results of its review with the mandates of Dodd-Frank and submitted a list of proposed changes to Reg. 1.25 at its October 26, 2010 open meeting. The proposals are summarized in a table HERE.

LOADING PDF: If there are any problems, click here to download the file.

Written by:


MarketsReformWiki on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.