The Commodity Futures Trading Commission proposed an order authorizing three ICE derivatives clearing organizations to invest customer funds in certain euro-denominated sovereign debt instruments issued by France and Germany. The three ICE entities are ICE Clear Credit LLC, ICE Clear US, Inc., and ICE Clear Europe Limited.
The proposed order would also permit the three ICE DCOs to engage in repurchase transactions in the relevant French and German sovereign debt.
Prior to the collapse of MF Global in 2011, such investments were permitted by CFTC rule. However, in 2013, the CFTC amended the relevant rule to prohibit investment of customer funds in non-US sovereign debt. (Click here to access CFTC Rule 1.25(a).)
Under the proposed Order, the CFTC would impose a number of conditions on the ICE DCOs' investment of customer funds in French and German sovereign debt instruments. Among other things, such debt could only be purchased with customers’ euro cash; the two-year credit default spread of the issuing sovereign must be 45 basis points or less at the time of the transaction; and the dollar-weighted average of the time-to-maturity portfolio in each type of approved sovereign debt could not exceed 60 days. Counterparties to ICE DCO entities must be a permitted depository under applicable CFTC rules (click here to access CFTC Rule 1.49(d)(3)) or in another jurisdiction that has adopted the euro as its national currency, or a securities dealer located in a money center country (click here to access CFTC Rule 1.49(a)(1)) that is regulated by a national financial regulator such as the UK Prudential Regulation Authority or Financial Conduct Authority.
The CFTC will accept public comment on its proposed order for the ICE DCOs for 30 days after its publication in the Federal Register.
My View: I have always regarded the CFTC’s prohibition on futures commission merchants and DCOs investing in the qualified sovereign debt of non-US countries as an over-reaction to the collapse of MF Global and an unwise imposition of currency basis risk on such entities. Currently, if clients deposit euros with an FCM or DCO, the entity must first convert such currency to US dollars in order to purchase approved USD-denominated obligations. What the CFTC is proposing for the ICE DCOs is sensible, and includes more than adequate protections for customers. However, this expansion of investment authority should not be restricted to the ICE DCOs. It should be expanded to all DCOs as well as to all FCMs, and be considered for other non-US sovereign debt – as generally recommended by both FIA and CME Group in their Project Kiss submissions to the CFTC in October. (Click here for background in the article “Derivatives Industry Wishes Upon a CFTC KISS Star and Hopes Dreams Come True” in October 8, 2017 edition of Bridging the Week.)