The Commodity Futures Trading Commission Monday voted out a final rule that would limit a futures commission merchants (FCM) ability to invest customer money in foreign sovereign debt.

The rule, which cleared the CFTC by a 5-0 vote, comes after $600 million in customers securities overseen by securities firm giant MF Global Holdings Inc. disappeared following an ill-timed bet on the European debt markets (see Daily GPI, Nov. 2). The New York-based company, which is being investigated by the agency, filed for bankruptcy on Oct. 31.

From 2000 to 2005 the Commission granted exemptions to the Commodity Exchange Act’s list of permitted investments, loosening the rules for the investment of customer funds, said Chairman Gary Gensler. These exemptions allowed FCMs — which solicit and accept orders to buy or sell futures contracts and options on contracts — to invest customer funds in AAA-rated sovereign debt, as well as to lend customer money to another side of the firm through repurchase agreements.

“This rule prevents such in-house lending through repurchase agreements. I believe there is an inherent conflict of interest between parts of a firm doing these transactions,” Gensler said. “Customers would be better served if they knew how FCMs were investing their money,” Gensler said.

FCMs include many of the brokerages that investors in the futures markets deal with.

Commissioner Bart Chilton questioned whether the agency’s penalty authority was sufficient to deter companies from using customer funds in a “nefarious way.” The agency currently can fine a company, which uses customer funds, $140,000 per violation. “[That] doesn’t seem like much of a deterrent to me,” Chilton said.

But a CFTC staff member noted that the agency also has the option to seek treble damages — three times whatever a company has gained by illegally using customer funds.

By 4-1, with Commissioner Jill Sommers dissenting, the CFTC voted out a proposal that would establish a process for designated contract markets (DCM), or regulated exchanges. and swap execution facilities (SEF) to make a swap “available to trade.” The proposal would require DCMs and SEFs to submit any determination that a swap is available to trade to the CFTC for review. Only after going through this process can a swap be traded.

Before a swap can be considered available to trade, a DCM or SEF must consider several factors, including whether there are ready and willing buyers and sellers; the frequency or size of transactions on DCMs, SEFs or of bilateral transactions; the trading volume on DCMs, SEFs or of bilateral transactions; and whether a DCM’s trading facility or a SEF’s trading system or platform will support trading in the swap.

The Commission also unanimously approved a final rule to implement a registration system for foreign boards of trade seeking to make futures and swaps contracts directly available to U.S. market participants. Among other things, the rule would prevent a trader that has reached its position limits on a swap contract in the United States from trying to gain a greater toehold with a look-alike contract on a foreign exchange, Chilton pointed out.

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