The futures regulator will vote on Monday on a rule that would put tighter limits on how brokerage firms can use customer funds, a measure now-bankrupt MF Global had encouraged the agency to delay.

The Commodity Futures Trading Commission rule would no longer allow a brokerage firm, known as a futures commission merchant, to conduct so-called in-house transactions where it uses customers' funds to make proprietary trades for its own accounts, a process where the firm basically gives a loan to itself.

Transactions between affiliates of a company where the two entities exchange money or funds also would be restricted by the CFTC. Firms would still be able to enter into agreements using customer funds with an external third party.

As recent events have highlighted, the protection and preservation of customer funds is fundamental to our markets, Scott O'Malia, a Republican commissioner, said in prepared remarks.

By limiting investments of customer funds to a subset of instruments that currently have minimal risk, this final rule is a step towards enhancing customer protection, he said.

The measure, which was initially proposed by the CFTC in October 2010, stalled after a lack of support from other commissioners.

Many firms, including MF Global and its former chief executive, Jon Corzine, lobbied against the rule and asked the CFTC to hold back on tightening up the regulation. Any changes, they said, would hurt their firms and customers.

MF Global, which filed for bankruptcy on October 31 after investors got spooked by its large bets on European sovereign debt, is now under investigation for potentially raiding customer funds for the firm's use. Hundreds of millions of dollars in customer money is still unaccounted for.

It is uncertain whether the missing funds would have been protected by this new CFTC rule.

The push to finalize the rule gained momentum after MF Global's collapse.


Currently, futures commission merchants are allowed to engage in internal repurchases, or so-called repo agreements. The transactions allow the firm to take customer funds and invest them in a range of securities, including sovereign debt.

In exchange for using the cash, firms are required to back it up with high-quality collateral such as Treasuries, something it appears MF Global failed to do.

Under the new CFTC rule, in cases where the brokerage firm is allowed to invest customer funds, the agency will permit them to invest in securities such as Treasuries, agency debt, corporate notes and commercial paper. Potentially risky sovereign debt will no longer be permitted.

The CFTC also plans to vote on Monday on a final rule outlining a formal registration system for foreign boards of trade that want to provide access to their system for members in the United States. Currently, there is no formal process, with approval granted by the CFTC through so-called no-action letters.

The regulator also plans to vote on a proposed rule that would detail a process for making a swap available to trade.

The CFTC, which is running behind on implementing rules, has yet to finalize many of the measures to complete a regulatory framework for the previously opaque $600 trillion over-the-counter derivatives market required under last year's Dodd-Frank law.

The regulator so far has finalized 18 rules, but most of the high-profile and controversial rules remain, including end-user exceptions and capital and margin requirements. (Editing by Muralikumar Anantharaman)