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As US interest rates rose in 2022, the value of bank investments in long-dated and fixed-rate bonds declined. These declines were substantial enough to render many banks economically insolvent.
A critical threshold question is whether (and if so, specifically in what circumstances), in the event segregated customer funds become unavailable or worse unrecoverable e.g., due to a bank failure, an FCM would ever be charged with liability for such customer funds.
<p><span>Commission regulation 1.25 is a seminal provision governing futures commission merchant (“FCM”) and derivatives clearing organization (“DCO”)</span><span> investment of customer funds. The regulation authorizes FCMs and DCOs to investment customer funds in a sensibly limited set of permitted investments consistent with the prudential objectives of preserving customer funds and maintaining liquidity.</span></p>