Investments of Customer Regulated Commodity Funds Treatment of Due Bills Unsecured Receivables

Investments of Customer Regulated Commodity Funds Treatment of Due Bills Unsecured Receivables

The Division of Trading and Markets ("Division") has learned that some futures commission merchants ("FCMs") and contract market clearing organizations have sought to invest customers' regulated commodity funds in U.S. Treasury bills, but rather than receiving such bills for safekeeping, have been issued due bills by the bank through which such investments were made.1

Bank officials have advised Commission staff that, when a bank does not have a Treasury bill in the denomination, yield, or the maturity date ordered by the FCM or clearing organization, it will issue a due bill, which is a promise by the bank to obtain and deliver a Treasury bill (or other security) within 24 hours.

Due bills are not a proper investment of customers' regulated commodity funds under Section 4d(2) of the Act and Section 1.25 of the Commission's regulations, and they cannot be considered a part of the FCM's segregated funds. They are also not proper investments of customer funds made pursuant to Sections 32.6(b) (dealer option transactions) and 30.7 (foreign futures/ options transactions) of the Commissions regulations.

Treasury Department Regulation 403.5(b) was intended in part to discourage the practice of issuing due bills.2 The Treasury Department retained this provision in its final rules despite objections from certain commenters to the provision, which was set forth in the Treasury Department's temporary regulations to implement the Government Securities Act of 1986. The Treasury Department noted that "the interests of customer protection also demand that prompt action be taken to obtain the security sold." 52 Fed. Reg. 27910, 27922. The Treasury Department further noted that:

[Our] concern with the practice of issuing due bills is that an entity may take advantage of the practice in a way that might leave a customer without access to either the security or the funds being used to purchase the security. Even though Regulation D [of the Board of Governors of the Federal Reserve System, 12 C.F.R. §204.2(a)(1)(iv) (1987)] permits collateralization of due bills in lieu of reserving against the funds paid for the securities, the Department continues to be concerned that such collateral would not be treated as a security belonging to the customer to whom the due bill was issued. Id.

The Division shares the Treasury Department's concern with respect to the use of due bills. The Division believes that such customer protection concerns are heightened when the intended investments involve futures customer funds, since the restrictions in Section 4d(2) of the Act and the regulations promulgated thereunder regarding customer funds represent one of the cornerstones of customer protection with respect to the commodity futures trading system.

The Division further notes that when an FCM has received a due bill rather than an actual security, the due bill must be treated as a non-current, unsecured receivable pursuant to Section 1.17(c)(2)(ii) of the Commission's regulations (17 C.F.R. §1.17(c)(2)(ii) (1987)). This net capital treatment of due bills applies whether the intended purchase is from funds segregated for the benefit of commodity customers or from non-segregated funds.

FCMs and clearing organizations are hereby advised to review the procedures used in investing customers' commodity funds as well as their own non-segregated funds. They should advise their bankers that, when the bank is unable to deliver immediately the securities intended to be purchased with customers' regulated commodity funds, it should not substitute a due bill, but should instead advise the FCM or clearing organization of its inability to consummate the sale.

The statements made in this Advisory are not rules of the Commodity Futures Trading Commission, nor are they published as bearing the Commission's approval. They represent interpretations and practices followed by the Division in administering the Commodity Exchange Act and the regulations thereunder.

FOR FURTHER INFORMATION CONTACT: Paul H. Bjarnason, Jr., Chief Accountant, Division of Trading and Markets, Commodity Futures Trading Commission, 2033 K Street, N.W., Washington, D.C. 20581. Telephone (202) 254-8955.

Issued in Washington, D.C. on 10th May, 1988 by the Division of Trading and Markets.

¹ Section 4d(2) of the Commodity Exchange Act ("Act") (7 U.S.C. §6d(2) (1982)) and Commission regulation 1.25 (17 C.F.R. §1.25 (1987)) promulgated thereunder allow futures commission merchants and contract market clearing organizations to invest customers' regulated commodity funds only in obligations of the United States, in general obligations of any State or of any political subdivision thereof, or in obligations fully guaranteed as to principal and interest by the United States.

² U.S. Treasury Department regulation 403.5(b) (to be published at 17 C.F.R. §403.5(b) (1988)) provides, in part:

In the event that a financial institution has accepted funds from a customer for the purchase of securities and the financial institution does not initiate the purchase of the specified securities by the close of the next business day after receipt of such customers' funds, the financial institution shall immediately deposit or redeposit the funds in an account belonging to such customer and send the customer notice of such deposit or redeposit.

This regulation was published in the Federal Register implementing regulations under the Government Securities Act of 1986. 52 Fed. Reg. 27910, 27950 (July 24, 1987).