In its second staff letter of 2021, the Commodity Futures Trading Commission (“CFTC”) Market Participants Division issued a no-action letter explaining that the Market Participants Division will not recommend enforcement action against a futures commission merchant (“FCM”) that invests customer funds in otherwise permitted investments under Regulation 1.25 with an interest rate benchmarked to SOFR. Complying with Regulation 1.25 without this no-action letter would limit FCMs’ investments with an adjustable rate of interest to those: correlating with or at the Federal Funds target or effective rate, prime rate, the three-month Treasury Bill rate, one-month or three-month LIBOR, or the interest rate of a fixed rate instrument that is a permitted investment (e.g., fixed rate Treasury Securities). This CFTC staff no-action letter should give customers and FCMs comfort about using otherwise permitted investments that refer to SOFR rather than LIBOR for an adjustable interest rate. Giving even greater comfort to customers is the CFTC staff’s explicit mention of the requirements in Regulation 1.29. Regulation 1.29 allocates losses for FCM investments of customer funds under Regulation 1.25 to the investing FCM – not to any customers. Again, this staff action comports with the CFTC’s push away from LIBOR and towards other reference rates like SOFR.
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