The CFTC on Monday approved restrictions on how brokers can invest customer funds, acting on a delayed rule after as much as $1.2 billion went missing before MF Global Holdings sought Chapter 11 bankruptcy protection.
The Commodity Futures Trading Commission voted 5-0 to limit how brokers invest clients’ money in money market funds, and ban investments in foreign sovereign debt and in-house transactions such as repurchase agreements.
CFTC Commissioner Bart Chilton, one of three Democrats on the five-member panel, pushed for completion of the measure, which he dubbed the “MF rule.” CFTC Chairman Gary Gensler said the regulation is “critical for the safeguarding of customer money” by preventing in-house repurchase transactions.
“I believe there is an inherent conflict of interest between parts of a firm doing these transactions,” Mr. Gensler said at the CFTC meeting in Washington.
The rule will overturn a policy, instituted in 2005, that let brokers invest client funds in in-house transactions. It will ban such trades by brokers, who earn interest income by investing funds from segregated accounts, while allowing third-party deals, according to a CFTC summary.
Brokers will also be permitted to invest client funds in U.S. Treasuries, municipal debt, money-market funds and debt of Fannie Mae and Freddie Mac as long as the two housing finance companies are under the conservatorship of the Federal Housing Finance Agency, according to the summary.
The rule will take effect 60 days after its publication in the Federal Register. Brokers will then be required to comply within 180 days.
Mr. Gensler delayed the rule in July after being lobbied by brokers and their executives including Jon S. Corzine, the former New Jersey governor then serving as MF Global’s chairman and CEO. MF Global, the first Wall Street firm to fail since the Dodd-Frank Act was signed into law last year, filed for Chapter 11 protection on Oct. 31 after making wrong-way bets on European sovereign debt. Mr. Corzine resigned Nov. 4.