Executive Order: Regulatory Freeze Pending Review and the Potential Impacts on CFTC

US President Donald Trump’s executive order directing executive departments and agencies to initiate a regulatory freeze for certain rules that have not taken effect, pending review by the  newly appointed agency head, may impact at least two recently issued final rules by the Commodity Futures Trading Commission: the Investment of Customer Funds Rule and the Separate Accounts Rule.

Futures commission merchants (FCMs) and derivatives clearing organizations (DCOs) should be prepared to alter their implementation timelines and strategies in consideration of the fate of the following rules, as detailed further below:

1. Amendments to the Investment of Customer Funds by Futures Commission Merchants and Derivatives Clearing Organizations (the Investment of Customer Funds Rule);[1] and
2. The Regulations to Address Margin Adequacy and to Account for the Treatment of Separate Accounts by Futures Commission Merchants (the Separate Accounts Rule)[2] (together, the Final Rules).

POTENTIAL IMPACT ON RECENT CFTC FINAL RULES

CFTC Commissioner Caroline D. Pham has been named Acting Chair of the CFTC. As part of the all-agency regulatory freeze, the executive order as applied to the CFTC calls for (1) the immediate withdrawal of any CFTC rule that has been sent to the Office of the Federal Register but has not been published and (2) its subsequent review by Acting Chair Pham (or whomever she delegates), a freeze on any proposals or issuance of any new CFTC rule, and potential postponement of the effective date for any rules that have been published in the Federal Register, or that have been issued but have not taken effect, to review any questions of fact, law, and policy during a 60-day period.[3]

As of the date of the executive order the Final Rules had not been published in the Federal Register and thus the application of the executive order would have called for their immediate withdrawal. However, the Final Rules were subsequently published in the Federal Register the following day.[4] Despite this development, the Final Rules are still subject to the authority granted under the executive order because of their delayed effective dates.

Given that the Final Rules have been published in the Federal Register but have not taken effect, Acting Chair Pham may exercise the option to delay their effective dates and subject the Final Rules to an additional comment period. However, there is a chance Acting Chair Pham may not do so given the history of the rules, that is, as a Commissioner, Acting Chair Pham participated in the CFTC approval process for both Final Rules. She issued a concurring statement with respect to the Separate Accounts Rule.[5] The Investment of Customer Funds Rule was approved via the CFTC’s seriatim process and as such there is no public record of how Acting Chair Pham voted as a Commissioner.

Both Final Rules resulted from significant consideration and industry engagement. The Investment of Customer Funds Rule would amend CFTC regulations that govern the investment of customer funds held by FCMs and DCOs, updating the list of instruments they may use to invest funds held under Commission Regulation 1.25 for the benefit of customers engaging in futures, foreign futures, and cleared swaps transactions.

The amendments proposed and finalized in the Investment of Customer Funds Rule were issued in response to two separate petitions to amend Commission Regulation 1.25.[6] In fact, the CFTC codified substantially all of the major amendments suggested by the Joint Petition and the Invesco Petition (i.e., permitting the investment of FCM and DCO customer funds in certain US Treasury exchange-traded funds and specified foreign sovereign debt).[7]

The Separate Accounts Rule amended CFTC regulations to require that an FCM ensure a customer does not withdraw funds from its account if the balance after the withdrawal would be insufficient to meet the customer’s initial margin requirements and also to permit an FCM to treat the separate accounts of a single customer as accounts of separate entities for purposes of certain CFTC regulations, subject to certain requirements. The Separate Accounts Rule codifies no-action relief that currently runs through mid-2025, and both rules were the result of a multiyear engagement between trade associations and the CFTC to clarify the treatment of separate accounts of customers with respect to their margin obligations.

The Separate Accounts Rule took into consideration several modifications suggested by commenters. Acting Chair Pham, in her capacity as Commissioner at the time, concurred with the rule and indicated she was pleased that it resolved cross-border conflict-of-law issues and a lack of regulatory clarity.[8]

Aside from the Final Rules, there are no other CFTC rules that fall within the parameters of the executive order given that its scope is limited to agency rules and guidance. While there is no indication that Acting Chair Pham will delay the effective date of the Final Rules or open an additional comment period for interested parties, clients should be prepared for any outcome.

Morgan Lewis will continue to monitor any developments and keep clients apprised of any CFTC decision impacting the effective dates or compliance requirements of the Final Rules.

STAY INFORMED

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