NEW YORK--(BUSINESS WIRE)-- Fitch Ratings believes an amendment to the Commodity Futures Trading Commission's (CFTC) Rule 1.25 will add to existing margin pressure for brokerages. The new guidelines will limit firms' ability to earn spread on customer balances while still maintaining the balance sheet exposure to segregated accounts. In the future, firms will not be able to reap the benefit from higher interest rates (if and when interest rates increase) as their ability to earn spread on balances will be greatly reduced.

The CFTC voted Monday 5-0 to change its Rule 1.25 determining how brokers are allowed to invest customer funds. It is the CFTC's first rule change since the collapse of MF Global Holdings Ltd and amid allegations that the broker used approximately $1.2 billion in customer funds to meet its own financial obligations.

The Securities and Exchange Commission and derivatives regulator CFTC are investigating bankrupt MF Global and are reviewing both accounting treatment and disclosure.

The push for tighter restrictions regarding the rule comes amid pressure for regulators to take more stepson order to ensure greater asset protection. The rule amendment was initially proposed in October of 2010. CFTC Chairman Gary Gensler in July 2011 delayed the rule change following a lobbying campaign led by brokers.

Rule 1.25 giving brokers access to client funds in order to make trades for its own accounts via in-house transactions was established in 2000. The use of client funds was broad-based and allowed brokers to use client cash for repurchase agreements. Repo transactions allow exposure to a number of securities including sovereign debt, which has increased in risk as volatility continues in Europe. Under the new rule, brokers are prohibited from using customer funds for in-house transactions. It also restricts firms from using client cash to invest in foreign sovereign debt and money-market mutual funds.

The rule will go into effect 60 days after its publication in the Federal Register and brokerages will have six months after that to comply. Firms will be able to petition the CFTC for an exemption, which will be handled on a case-by-case basis.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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