Money Market Deposit Accounts and Now Accounts

The Depository Institutions Deregulation Committee ("Committee"), which consists of the Secretary of the Treasury, the Chairman of the Board of Governors of the Federal Reserve System, the Chairman of the Board of Directors of the Federal Deposit Insurance Corporation, the Chairman of the Federal Home Loan Bank Board, the Chairman of the National Credit Union Administration Board, and the Comptroller of the Currency (who is a nonvoting member), has recently adopted regulations concerning NOW accounts and a new type of account denominated as a Money Market Deposit Account ("MMDA"). The Committee acted to implement certain provisions of the Gam-St. Germain Depository Institutions Act of 1982, Pub. L. No. 97-320, 96 Stat. 1469 (1982) which are intended to lessen regulation of banks and savings and loan institutions so that they may compete more effectively with the money market mutual funds.

The Division of Trading and Markets ("Division") has received inquiries as to whether futures commission merchants ("FCMs") may deposit customer funds in an MMDA or in a NOW account and remain in compliance with the Commodity Exchange Act ("Act") and the regulations promulgated thereunder regarding segregation of customer funds. The new MMDA is available to all depositors and an FCM would therefore be able to open an MMDA; however, the Division has concluded that such an account cannot be used for the deposit of customer funds unless it is demonstrated to the Commission that there is a lawful mechanism by which the account holder can obtain such funds immediately upon demand.

The Division's position is based upon the fact that the Committee has imposed a reservation of notice requirement for the MMDA, such that banks and savings and loan institutions must reserve the right to require seven days prior notice of withdrawals or transfers from any MMDA. The Committee stated the following with respect to the reservation of notice requirement in its release adopting final rules for the MMDA:

The Committee imposed a requirement that institutions reserve the right to require seven days prior notice of withdrawals or transfers from the new account. The Committee believes that this is not inconsistent with the previously discussed Congressional intent that the account have no minimum maturity. This is because the Committee did not provide that institutions must require prior notice for transactions or withdrawals. Rather, the Committee merely provided that institutions must reserve the right to require such prior notice. The Committee determined that if an institution chooses to exercise its right to require notice, it must apply that requirement equally to all depositors that maintain the new account.

In establishing a reservation of notice requirement, the Committee noted that a majority of respondents to the Committee's request for comments did not believe that a required reservation of notice was needed and, therefore, did not favor such a requirement. However, under the Investment Company Act of 1940, money market funds may delay redemptions of shares for up to seven days. This is similar to the current regulatory requirement that depository institutions reserve the right to require notice of withdrawals from savings deposits and NOW accounts. Such a reservation requirement distinguishes the new account from demand deposit accounts upon which (under current law) interest may not be paid. For these reasons, and to give institutions a degree of flexibility in unusual circumstances, the Committee established the above-described reservation of notice requirement. Based on experience with savings deposits, it is likely that such a notice requirement will be exercised only under extreme circumstances.1

The Committee determined to impose the reservation of notice requirement even though the Committee recognized that banks and savings and loan institutions would exercise their rights under such a requirement infrequently. The Division is concerned that such a right is likely to be exercised when there is a significant market disruption. In such circumstances, the inability of an FCM to obtain immediate access to the funds in an MMDA could magnify the impact of any market disruption and cause additional repercussions.

With respect to NOW accounts, the Committee has also made such accounts subject to a reservation of notice requirement, so the rationale for not permitting the use of an MMDA for the deposit of customer funds would apply to a NOW account as well.2 The Division further notes that since most FCMs are organized as for profit corporations or partnerships, under current banking restrictions they would, in any event, be unable to hold NOW accounts for any purpose.3

Although it is permissible to deposit customer funds in a bank,4 it has always been the Division's position that customer funds deposited in a bank cannot be restricted in any way, that such funds must be held for the benefit of customers and must be available to the customer and the FCM immediately upon demand.5 Based upon that position, the Division has not allowed customer funds to be deposited in savings accounts since savings accounts are time deposits which are subject to delayed withdrawal if the bank chooses to exercise its reserved right to delay withdrawal.

The essential elements of the system for segregation of customer funds established under Section 4d(2) of the Act and the regulations promulgated thereunder are that customer funds must be separately accounted for by the FCM, that customer funds must not be commingled with the FCM's own funds, and, as stated above, that customer funds must be held for the benefit of customers and must be available to the customer and to the FCM immediately upon demand. An FCM may earn interest on customer funds for its own benefit under certain conditions.6 However, an FCM cannot earn additional interest on customer funds, which would accrue to the benefit of the FCM and not to the benefit of customers, by means of a bank account with restrictions on customer access. This would be inconsistent with the requirements for holding of customer funds in trust for their benefit and cannot be permitted.

As stated in footnote 6, permissible investments of customer funds are set forth in Section 4d(2) of the Act and Regulation 1.25 promulgated thereunder. Section 4d(2) allows customer funds to be "invested in obligations of the United States, in general obligations of any State or of any political subdivision thereof, and in obligations fully guaranteed as to principal and interest by the United States, such investments to be made in accordance with such rules and regulations and subject to such conditions as the Commission may prescribe." Therefore, even if an MMDA or NOW account could be considered to be an investment, it is the Division's position that such accounts would not qualify as permissible investments. In addition, Regulation 1.25 provides that:

No futures commission merchant and no clearing organization shall invest customer funds except 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. Such investments shall be made through an account or accounts used for the deposit of customer funds and proceeds from any sale of such obligations shall be redeposited in such account or accounts.

That regulation provides that an account used for the deposit of customer funds is to be considered as distinct from an investment in government obligations, and that such an account is to be treated as a repository account which must be used to create an audit trail if an FCM decides to engage in permissible investment transactions.

The Division has also concluded that this interpretation raises no question of parity of treatment between the MMDA and NOW accounts on the one hand and money market mutual funds on the other, since none of these vehicles may be used for the deposit of customer funds. The statutory basis for the MMDA is contained in Section 327 of the Garn-St. Germain Depository Institutions Act of 1982, Pub. L. No. 97-320, 96 Stat. 1501 (1982), which provides that the MMDA "shall be directly equivalent to and competitive with money market mutual funds registered with the Securities and Exchange Commission under the Investment Company Act of 1940."7 As the Committee stated in the excerpt cited above regarding the reservation of notice requirement, under the Investment Company Act of 1940 money market mutual funds may delay redemptions of shares for up to seven days. Moreover, a money market mutual fund is not a bank account nor is it guaranteed as to principal and interest by the United States. Therefore, it would not be an appropriate investment of customer funds and an FCM could not legally put customer funds in a money market mutual fund under Section 4d(2) of the Act and the regulations promulgated thereunder. Indeed, if we were to permit the deposit of customer funds in an MMDA or a NOW account but not in a money market mutual fund, we would be creating differences between the uses of such accounts not contemplated by the actions taken to permit banks to compete more favorably with money market mutual funds.

On the basis of the foregoing, we conclude that, at this time, FCMs may not deposit customer funds into NOW accounts or Money Market Deposit Accounts except upon the showing set forth above.

The statements made in this interpretation are not rules or interpretations 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 of Trading and Markets in administering the Commodity Exchange Act and the regulations thereunder.

FOR FURTHER INFORMATION CONTACT: Paul Bjarnason, Chief Accountant, or Lawrence B. Patent, Special Counsel, 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 November 23, 1983, by the Division of Trading and Markets.

³ Federal law and the regulations of various agencies state that NOW accounts may consist of funds in which the entire beneficial interest is held by: (1) one or more individuals, or (2) by an organization which is operated primarily for religious, philanthropic, charitable, educational or other similar purposes and which is not operated for profit, or (3) by the United States, and State, county, municipality or political subdivision thereof, the District of Columbia, the Commonwealth of Puerto Rico, American Samoa, Guam, any territory or possession of the United States, or any political subdivision thereof. Accordingly, deposits in which any beneficial interest is held by a corporation, partnership, association, or other organization that is operated for profit or that is not operated primarily for religious, philanthropic, charitable, educational, fraternal or other similar purposes, or that is not a governmental unit, may not be classified as NOW accounts. 47 Fed. Reg. 56320, 56322 (December 16, 1982). While a sole proprietorship is considered to be an "individual" for this purpose and thereby able to maintain a NOW account (see 12 CFR 217.157(b)(1)(1983) and 46 Fed. Reg. 46898, 46899 (September 23, 1981)), the Division is aware of only three registered FCMs which are organized as sole proprietorships.

⁵ Cf. Administrative Determination No. 29 of the Commodity Exchange Authority ("CEA"), the Commission's predecessor agency, dated September 28, 1937, which stated in pertinent part that "the deposit, by a futures commission merchant, of customers' funds . . . under conditions whereby such funds would not be subject to withdrawal upon demand would be repugnant to the spirit and purpose of the Commodity Exchange Act. All funds deposited in a bank should in all cases be subject to withdrawal on demand."

⁶ The types of investments which FCMs can make with customer funds are limited to those permitted by Section 4d(2) of the Act and Regulation 1.25 promulgated thereunder; Regulation 1.29 permits an FCM to receive and retain as its own any increment or interest resulting from a permissible investment.