retail participants to directly trade and clear event contracts, the CFTC requires that the contracts be “fully-collateralized positions.” 20 A fully-collateralized position is one that is 100% prefunded such that there is no credit exposure (as would exist with respect to a leveraged or margined position). 21
Intermediation and the Impact on Registered Funds
Non-intermediated clearing models create regulatory challenges for registered funds and business development companies (“BDCs”) because of the custodial requirements of the 1940 Act. Section 17(f) of the 1940 Act and the rules thereunder govern the custody and safekeeping of a registered fund’s assets, including collateral pledged to support obligations under derivatives transactions (or the pre-positioning of assets to support future obligations). 22 Section 17(f) generally requires that any registered fund or BDC place and maintain its assets in the custody of a bank, a company which is a member of a national securities exchange or in its own custody. An entity’s status as a DCM or DCO does not necessarily mean that entity is an eligible custodian under the 1940 Act. Under Section 17(f), a registered fund or BDC is prohibited from posting assets with a DCM or DCO that is not such an eligible custodian. Consequently, if a registered fund or BDC was to trade directly on a DCM and was required to place or maintain assets at its associated DCO which is not an eligible custodian, such an arrangement would likely raise concerns under Section 17(f). Rule 17f-6 permits a registered fund or BDC to place and maintain assets at an FCM in amounts necessary to effect the fund’s transactions in commodity options. Pursuant to Rule 17f-6, an FCM may also place and maintain a fund’s assets at another FCM or a DCO, thus enabling registered funds and BDCs to participate in event contract markets through an intermediated model. Given the foregoing restrictions, the removal of non-intermediation conditions by several DCMs has significantly expanded potential market participation by these pooled investment products. Recent developments indicate that the CFTC is continuing to evaluate whether to permit DCMs and DCOs to largely determine their own access models, while maintaining a safe trading environment for retail customers. And while the question of who may access a prediction market, and how, continues to be debated, so does the question of whether certain event contracts are prohibited 20 See Appendix A for, among other things, a list of CFTC staff letters permitting DCMs and DCOs to allow retail participants to directly trade and clear event contracts, as well as descriptions. 21 CFTC Regulation 39.2 defines “fully collateralized position” as “a contract cleared by a derivatives clearing organization that requires the derivatives clearing organization to hold, at all times, funds in the form of the required payment sufficient to cover the maximum possible loss that a party or counterparty could incur upon liquidation or expiration of the contract.” In adopting the definition of fully-collateralized position, the CFTC reasoned that “full collateralization prevents a DCO from being exposed to credit risk stemming from the inability of a clearing member or customer of a clearing member to meet a margin call or a call for additional capital,” indicating that this risk is heightened where the customer is a retail participant. Derivatives Clearing Organization General Provisions and Core Principles, 85 Fed. Reg. 4800, 4804 (Jan. 27, 2020).
22 Section 59 of the 1940 Act applies Section 17(f) and the rules thereunder to BDCs.
March 2026 / Page 8
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