The CFTC approved a final rule that places restrictions on the use of client-money in an open meeting on December 5th. The rule was first proposed over a year ago, but met resistance from the industry and was tabled pending further revisions. The collapse of broker-dealer MF Global, fueled in part by missing client funds, revived interest in the rule.

CFTC Commissioners voted unanimously to pass the rule, which limits how brokers may use margin collected from clients to invest in money markets. It also prohibits the investment of customer funds in foreign sovereign debt and in-house transactions like repurchase agreements. Commission Chairman Gary Gensler called the new rule “critical for the safeguarding of customer money.” “I believe there is an inherent conflict of interest between parts of a firm doing these transactions,” he continued. “This rule is necessary to restore confidence,” added Mark Wetjen, the newest CFTC commissioner.

The MF Rule overturns a Commission policy allowing brokers to invest client funds in in-house transactions. Traditionally, brokers have earned interest income by investing funds from segregated accounts. However, brokers will still be allowed to make third-party deals, invest client funds in U.S. Treasuries, municipal debt, money-market funds and debt of Fannie Mae and Freddie Mac. The rule will go into effect 60 days after it is published to the federal register, and brokers must come into compliance within 180 days.

In addition to the MF Rule, the CFTC voted to  finish rules governing foreign boards of trade. This new regulation will create a registration system for the trading venues if they provide direct access to U.S.-based traders. The Commission also opened a proposal on how exchanges and swap execution facilities (“SEFs”) will make swaps available to public comment. The proposal requires that trading platforms consider volume, market participants, and the number of willing buyers and sellers.

Read more about the CFTC’s MF Rule.

photo credit: striatic