CFTC allows derivatives clearing organizations investments in French and German government debt

The Commission has determined that the restriction on investments of customer funds by DCOs should not apply to Designated Foreign Sovereign Debt. As the Commission previously observed, the ICE DCOs demonstrated that the Designated Foreign Sovereign Debt has credit, liquidity, and volatility characteristics that are comparable to U.S. Government Securities, which are permitted investments under the Act and Regulation 1.25. For example, as evidence of the creditworthiness of France and Germany, the ICE DCOs provided data demonstrating that credit default swap spreads of France and Germany have historically been similar to those of the United States. To demonstrate the liquidity of the markets, the ICE DCOs pointed to, for example, the substantial amount of outstanding marketable French and German debt and the daily transaction value of the repo markets for their debt. And with respect to volatility, the ICE DCOs provided data on daily changes to sovereign debt yields demonstrating that the price stability of French and German debt is comparable to that of U.S. Government Securities.

The Commission also observed that the ICE DCOs demonstrated that investing in the Designated Foreign Sovereign Debt poses less risk to customer funds than the current alternative of holding the funds at a commercial bank, on the basis that exposure to high- quality sovereign debt is preferable to facing the credit risk of commercial banks through unsecured bank demand deposit accounts. While investments through reverse repurchase agreements (as opposed to direct investments) still involve exposure to a commercial counterparty, a DCO would receive the additional benefit of receiving securities as collateral against that counterparty’s credit risk. The ICE DCOs also represented that in the event a securities custodian enters insolvency proceedings, they would have a claim to specific securities rather than a general claim against the assets of the custodian.

Further, the Commission has determined that the exemption is consistent with the public interest and the purposes of the Act, which include ensuring the financial integrity of transactions and avoiding systemic risk.

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