How Rule 1.25 Impacts Professional Investors
Where did MF Global Money Go?
Rule 1.25 is designed to restrict how a Futures Commission Merchant (FCM) can invest segregated client funds.
Often an unknown, when an investment in futures and options is made nothing is bought or sold, the money is placed as a “margin deposit” in the name of the investor on the books of an FCM. The FCM can then invest this money in various interest bearing products such as treasuries, municipal and foreign bonds, among other “low risk” and liquid instruments.
Most significantly rule 1.25 restricts the financial investments in which FCMs can invest segregated account deposits. The rule requires GSE securities to be fully guaranteed by the U.S., makes sure that CDs are non-negotiable, insists that commercial paper, corporate notes is fully guaranteed, The proposed rule change does not impact: treasuries, municipals and money market mutual funds. The rule eliminates investments in foreign sovereign debt entirely, a potential warning sign to which professional investors should note relative to the potential seriousness of the debt crisis. The rule also eliminates in-house transactions, a potential insight into the very specific problems that might be found in the CFTC’s examination of MF Global’s issues.
“Every single day an FCM must file a segregated report. On Friday, prior to the (MF Global bankruptcy) everything was fine, on Monday the bells went off,” according to Russ Wasendorf, Sr., founder of FCM PFGBest.
Speaking on PBS Nightly Business report, Wasendorf, a former NFA board member, offered one potential opinion on the case of the disappearing $600 million: “Something happened in the middle of that time. Futures regulations work just fine. Once the money was transferred it went into a new regulatory environment, probably covered by banking rules, which supersede the regulations of the futures industry.”
Click here to view the CFTC’s proposed changes to rule 1.25.
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While this article is written with balance and accuracy in mind, the content is designed for sophisticated qualified eligible persons. It is not appropriate for all individuals.
Qualified eligible person as defined under the (CFTC) Regulation 4.7., because they are: Registered investment company; Bank; Insurance company; Employee benefit plan with >$5,000,000; Private business development company Organization described in Sec. 501(c)(3) of the Internal Revenue Code with >$5,000,000 in assets; Corporation, trust, partnership with >$5,000,000 not formed to invest in exempt pool; Person with net worth >$1,000,000; Person with net income >$200,000 each of last 2 yrs. or >$300,000 when combined with spouse; Pool, trust separate account, collective trust with >$5,000,000 in assets; User also confirms they meet the following Portfolio Requirement: Own securities with a market value >$2,000,000; Have had on deposit at FCM, in last 6 months, >$200,000 in margin and option premiums; Have combination of securities and FCM deposits. The percentages of required amounts must = 100%.
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