---
type: "AILabsWhitepaper"
title: "Regulation 1.25 Amendment Failures: Schema Substitution and Procedural Confabulation on CFTC Customer Fund Investment Rules"
slug: "cftc-reg-1-25-2024-customer-funds-investment-failures"
audience: "ai_labs"
regulation_slug: "FCM-DCO-CUSTOMER-FUNDS-INVESTMENTS-REG-1-25-2024"
regulation_id: "1836"
body_id: "CFTC-US-001"
jurisdiction_code: "US"
j_level: "J3"
regulator_short_code: "CFTC"
methodology_version: "v2.3"
substrate_version: 1
generated_at: "2026-06-11T01:39:05.145683+00:00"
published_at: "2026-06-07T08:39:33.721893+00:00"
license: "CC-BY-4.0"
resource: "https://reglegbrief.com/regulators/j3/us/cftc/FCM-DCO-CUSTOMER-FUNDS-INVESTMENTS-REG-1-25-2024/ai-labs/"
timestamp: "2026-06-16T00:00:00+00:00"
---

# Regulation 1.25 Amendment Failures: Schema Substitution and Procedural Confabulation on CFTC Customer Fund Investment Rules

- **Regulation.** [`FCM-DCO-CUSTOMER-FUNDS-INVESTMENTS-REG-1-25-2024`](/okf/regulations/FCM-DCO-CUSTOMER-FUNDS-INVESTMENTS-REG-1-25-2024.md) — Amendments to Regulation 1.25, Permissible Investments of Customer Funds by Futures Commission Merchants and Derivatives Clearing Organizations
- **Regulator.** [`CFTC-US-001`](/okf/bodies/CFTC-US-001.md)
- **Audience.** ai_labs
- **Methodology.** v2.3
- **Generated.** 2026-06-11T01:39:05.145683+00:00

## Executive summary

Both Claude Opus 4.7 and Claude Sonnet 4.6 (each with web search active) failed on the CFTC's 2024 amendments to Regulation 1.25 across the rule's three operative pillars: the size-triggered 50 per cent concentration ceiling under 17 CFR 1.25(b)(3)(ii), the 24-month portfolio DWAM standard under 17 CFR 1.25(b)(3)(iv) with its narrow carve-out set, and the separate March 31, 2025 SIDR compliance anchor. Across five confirmed failures (three from Claude Opus 4.7, two from Claude Sonnet 4.6), the dominant pattern is threshold-trigger elision combined with carve-out inversion: models surface one axis of a multi-condition rule correctly while dropping the axes that actually govern, substitute adjacent asset classes for narrow exclusion sets, and drift from date-certain anchors into generic relative ranges. Every failure is classified as inference_drift. The signal for an AI lab is that for amended regulatory frameworks of this profile (final rule introduces new conditional structure layered on a legacy codification), retrieval is not surfacing the primary rule text at sufficient authority weight to dislodge a trained-schema prior, and generation defaults to a confident schema substitution rather than refusal or hedging.

## Full whitepaper

# Regulation 1.25 Amendment Failures: Threshold-Trigger Elision and Carve-Out Inversion on CFTC Customer Fund Investment Rules

Both Claude Opus 4.7 and Claude Sonnet 4.6, each with web search active, produced confidently wrong reconstructions of the CFTC's 2024 amendments to Regulation 1.25 on the rule's three operative pillars: the size-triggered 50 per cent concentration ceiling, the 24-month portfolio dollar-weighted average maturity (DWAM) standard with its narrow carve-out set, and the separate March 31, 2025 SIDR compliance anchor. Across five confirmed failures on this regulation (three from Claude Opus 4.7 with web search, two from Claude Sonnet 4.6 with web search), every failure is classified as inference_drift against substrate covering 17 CFR 1.25(b)(3)(ii), 17 CFR 1.25(b)(3)(iv), and the operative section of the Commodity Exchange Act at 7 USC 6d. The structural significance is that these are not retrieval misses on obscure content; they are over-confident confabulations on the most decision-critical parameters of a compliance rule, exactly the content a regulated firm's treasury or compliance team would query a model to confirm.

## When This Affects an AI Lab

Futures commission merchants and derivatives clearing organizations subject to CFTC Regulation 1.25 manage billions in customer segregated funds. The 2024 amendments restructure which instruments are permitted, impose new concentration limits with size-conditioned tiers, set a portfolio-level DWAM ceiling with a narrow carve-out set, and establish a separate compliance date for SIDR and customer risk disclosure updates. Treasury, compliance, legal, and fintech teams at FCMs and DCOs are exactly the user population that treats frontier models as a fast path to regulatory clarity, asking directly about permissible investment limits, maturity constraints, and deadline calendars before updating investment policies. A model that reconstructs plausible-but-wrong parameters with high apparent confidence is not a neutral retrieval miss; it is an active misdirection event at the precise moment a practitioner is making a compliance decision.

The downstream harm vector is concrete. An FCM treasurer who queries a model to confirm concentration limits, receives a confident flat-percentage answer with no tier, and updates an investment policy on that basis has violated a specific provision of the rule. The lab that deployed the model sits inside that causal chain. At scale across the FCM and DCO community (a few hundred regulated entities), systematic confabulation on a rule with this profile creates both reputational exposure for the lab and a pattern of misuse-adjacent harm that red-team coverage should have flagged before deployment.

The structural features of this regulation make it a high-probability failure surface for any model relying on trained knowledge rather than live retrieval of primary regulatory text. The rule is a 2024 amendment to a long-standing 2000-era framework, documented as a Federal Register notice layered on top of existing CFTC Part 1 codification; the key numeric provisions (the $1B fund AUM threshold, the $25B management-company threshold, the 24-month DWAM ceiling, and the March 31 2025 SIDR deadline) do not appear in high-volume secondary sources that models train on at the frequency the primary rule text warrants. The compliance deadlines are staggered in a way that requires distinguishing between two separate regimes in the same rule, a pattern that tends to collapse to a single generalised answer when a model is working from schema rather than retrieved text.

## Aggregate Impact

| Model | Configuration | Failure count | Dominant error pattern |
|---|---|---|---|
| Claude Opus 4.7 | Web search enabled | 3 | Trained-schema substitution for rule-specific numeric structure |
| Claude Sonnet 4.6 | Web search enabled | 2 | Trained-schema substitution on concentration tier and no-standard answer on DWAM |

Claude Opus 4.7 with web search produced three confirmed failures across the regulation's most operationally consequential provisions. The three share a coherent failure shape: the model reconstructed a plausible rule schema from training and delivered it as the rule's text, overwriting the actual numeric structure with a generalised version. On the concentration limit question, the model asserted that thresholds apply uniformly regardless of fund or management company size, directly contradicting the rule's explicit two-condition tier. On the DWAM exclusion question, the model swapped U.S. Treasury repurchase agreements into the carve-out set in place of the regulator's actual exclusion list (government MMFs, Treasury ETFs, foreign sovereign debt). On the SIDR compliance question, the model drifted to a relative range (roughly six months to a year after the effective date) rather than the rule's date certain of March 31 2025.

Claude Sonnet 4.6 with web search failed on the same concentration question as Opus 4.7 and in a structurally identical way: it reported no size-based tier and described an unrelated 10 per cent per-instrument ceiling not present in the final rule. The convergence is notable: two models, different architectures, same web-search configuration, same question, same wrong schema. Sonnet 4.6 additionally returned a no-standard answer to the DWAM question for direct U.S. Treasury obligations, where the 24-month portfolio standard governs by default. Both Sonnet 4.6 failures resolve the underlying questions against trained-schema priors rather than the amended text.

Failures cluster on three surfaces: multi-condition trigger structures in recently amended provisions (the fund-AUM and management-company-AUM triggers), narrow exclusion lists (the DWAM carve-out set), and date-certain compliance anchors (the SIDR deadline). The joint failure pattern signals that for regulations fitting this profile (a 2024 amendment to a multi-decade legacy framework, with key numeric provisions introduced in the final rule text rather than carried over from prior versions), web search is not providing sufficient signal to override trained-schema responses. The model is retrieving, but not retrieving the right document at sufficient specificity to dislodge a confident prior.

## Findings

### Finding 1: Claude Opus 4.7 with web search

- **Question (paraphrased to protect IP):** Concentration limits: tiered size-triggered ceiling dropped (Opus 4.7).
- **AI's failure mode:** AI dropped a size-trigger axis and presented uniform limits as governing.
- **Diagnosis:** Asserted final rule did not adopt tiered or FCM-size-based thresholds; the 50 per cent ceiling actually keys to fund assets at $1B and management-company AUM at $25B.
- **Citation ID:** RLB-F-US-CFTC-FCM-DCO-CUSTOMER-FUNDS-INVESTMENTS-REG-1-25-2024-Q001-Opus47.
- **Cited source(s):** Federal Register final rule notice for 17 CFR 1.25 (2024 amendments); CFTC.gov press release; 7 USC 6d (Commodity Exchange Act).

### Finding 2: Claude Sonnet 4.6 with web search

- **Question (paraphrased to protect IP):** Concentration limits: trigger elision plus fabricated tier (Sonnet 4.6).
- **AI's failure mode:** AI negated the FCM-size axis (correctly) while fabricating an unrelated 10 per cent per-fund tier and dropping the actual fund-asset and management-company-asset triggers.
- **Diagnosis:** Stated no size-based tier applies and described a 10 per cent per-instrument ceiling not present in the final rule; the regulator's text keys the 50 per cent ceiling to fund AUM and management-company AUM.
- **Citation ID:** RLB-F-US-CFTC-FCM-DCO-CUSTOMER-FUNDS-INVESTMENTS-REG-1-25-2024-Q001-Sonnet46.
- **Cited source(s):** Federal Register final rule notice for 17 CFR 1.25 (2024 amendments); CFTC.gov press release; 7 USC 6d (Commodity Exchange Act).

### Finding 3: Claude Opus 4.7 with web search

- **Question (paraphrased to protect IP):** DWAM exclusion inverted: Treasury repos swapped in for actual carve-outs (Opus 4.7).
- **AI's failure mode:** AI swapped the rule's carve-out asset classes for an adjacent unrelated class.
- **Diagnosis:** Asserted U.S. Treasury repos are excluded from the 24-month portfolio DWAM; the actual carve-out set is government money market funds, Treasury ETFs, and foreign sovereign debt.
- **Citation ID:** RLB-F-US-CFTC-FCM-DCO-CUSTOMER-FUNDS-INVESTMENTS-REG-1-25-2024-Q002-Opus47.
- **Cited source(s):** Federal Register final rule notice for 17 CFR 1.25 (2024 amendments); CFTC.gov press release; 7 USC 6d (Commodity Exchange Act).

### Finding 4: Claude Sonnet 4.6 with web search

- **Question (paraphrased to protect IP):** DWAM no-standard answer on direct Treasuries (Sonnet 4.6).
- **AI's failure mode:** AI returned a no-standard answer for an asset class governed by the standard.
- **Diagnosis:** Stated no DWAM standard or maturity cap applies to direct U.S. Treasury obligations; the 24-month portfolio DWAM does apply, with carve-outs only for government MMFs, Treasury ETFs, and foreign sovereign debt.
- **Citation ID:** RLB-F-US-CFTC-FCM-DCO-CUSTOMER-FUNDS-INVESTMENTS-REG-1-25-2024-Q002-Sonnet46.
- **Cited source(s):** Federal Register final rule notice for 17 CFR 1.25 (2024 amendments); CFTC.gov press release; 7 USC 6d (Commodity Exchange Act).

### Finding 5: Claude Opus 4.7 with web search

- **Question (paraphrased to protect IP):** SIDR compliance anchor drifted to relative range (Opus 4.7).
- **AI's failure mode:** AI drifted from a published date certain to a generic relative range.
- **Diagnosis:** Described the SIDR and customer risk disclosure compliance date as roughly six months to a year after the effective date; the regulator's published anchor is March 31, 2025.
- **Citation ID:** RLB-F-US-CFTC-FCM-DCO-CUSTOMER-FUNDS-INVESTMENTS-REG-1-25-2024-Q004-Opus47.
- **Cited source(s):** Federal Register final rule notice for 17 CFR 1.25 (2024 amendments); CFTC.gov press release; 7 USC 6d (Commodity Exchange Act).

## What Your Team Should Do

### Implications for your training data

The dominant failure pattern across both models is schema substitution on recently amended numeric provisions: the model delivers a confident answer shaped by a prior-version or generic regulatory template rather than the amended text's specific numeric structure. For Regulation 1.25, the operative content (the two-condition concentration tier, the maturity calculation carve-outs, and the March 31 2025 SIDR deadline) all exists primarily in the 2024 Federal Register final rule notice. If that notice is underrepresented in the training corpus relative to the volume of secondary commentary (law firm client alerts, trade association summaries, compliance blog posts), the model will weight toward the higher-frequency secondary framing. Training corpus construction for amended regulatory frameworks should distinguish between pre-final-rule commentary and post-final-rule primary text, and should weight the primary rule text commensurately with its authority rather than its web frequency.

### Implications for your post-training logic

On retrieval routing, both models failed on the concentration tier despite web search being active, suggesting the retrieval pipeline ranked secondary summaries above the primary rule text for this query. For regulator-name queries on recent rule amendments, the ranker should apply a source-authority signal that de-weights law-firm client alerts and trade press summaries relative to the Federal Register notice, CFTC.gov press release, and official rule text. A secondary check (where the model has committed to a specific numeric threshold or a specific date) flagging for a verification pass against retrieved primary-source text before finalising the response would catch the class of error where schema reasoning overrides retrieval on high-stakes numeric values.

The DWAM no-standard answer from Sonnet 4.6 is the highest-priority calibration target: any AI output that returns no-standard or no-requirement on a numeric compliance provision should be flagged for explicit verification, not treated as resolution of the question. The SIDR drift is the same pattern in reverse: any compliance date framed as a relative range when the underlying rule documents a date certain should be flagged as a generation pattern to suppress.

### Specific eval / red-team probes RegLeg suggests

- Multi-axis trigger preservation probes: for ceilings keyed to two or more named size triggers, test whether the model preserves all axes or surfaces one axis correctly while dropping the others. Negation answers on the dropped axes are the highest-risk class for the elision failure mode.
- Carve-out exact-set probes: where a numeric standard carries a narrow exclusion list of named asset classes, test whether the model retrieves the specific carved-out set or substitutes superficially-similar adjacent classes.
- Default-application probes: where a portfolio-level standard applies to an asset class by default and carries a narrow carve-out list that does not include that class, test whether the model applies the standard or returns a no-standard answer suggesting no compliance work is required.
- Date-certain anchor probes: for instruments that document a specific date-certain compliance anchor separate from the general effective date, test whether the model returns the published date or drifts into a generic relative formulation.
- Conditional-ceiling decomposition probes: where a percentage ceiling activates only when multiple conditions are simultaneously satisfied, test whether the model decomposes the conditional structure or flattens it into an unconditional percentage limit.

## How RLB Can Partner With Your Lab

RegLeg Brief documents nuanced model failures on regulatory content across a portfolio of regulators and rule types: the kind of failures that do not surface in standard capability evals because they require knowing what the rule actually says in its final amended form. The failure modes catalogued on this regulation include: threshold-trigger elision on multi-condition ceilings, carve-out inversion on narrow exclusion sets, no-standard answers on governed asset classes, and date-certain drift to relative-range placeholders. These failure shapes are structurally reproducible across regulatory content of this type and are not addressable by general-purpose benchmark improvement.

We can support your team's model improvement work in concrete ways. We generate targeted correction pairs per failure mode, derived from the authoritative regulatory text, formatted for direct ingestion into a training-data pipeline. We offer embedded eval partnership against a defined regulator portfolio, with regression monitoring on previously documented failure modes so you can verify that a fix for one pattern did not resurface another. For capability launches that touch derivatives, futures clearing, or customer-funds regulatory content, we can run pre-release evaluation cycles to flag failure shapes before they reach the regulated firms that are your customers.

To scope a partnership for refining your models against these failure modes, start a technical conversation with us at reglegbrief.com.


## Related concepts

- Regulation: [FCM-DCO-CUSTOMER-FUNDS-INVESTMENTS-REG-1-25-2024](/okf/regulations/FCM-DCO-CUSTOMER-FUNDS-INVESTMENTS-REG-1-25-2024.md)
- Regulator: [CFTC-US-001](/okf/bodies/CFTC-US-001.md)
- Methodology: [v2.3](/okf/methodology.md)