WASHINGTON - The US Commodity Futures Trading Commission (CFTC) Monday approved a restriction over how brokers can invest client funds after MF Global Holdings Ltd filed for bankruptcy protection.

The restriction, approved in a 5-0 vote, will limit how brokers invest customers' margin in money market funds, and forbid investments in foreign sovereign debt and in-house transactions such as repurchase agreements.

The regulation is critical for safeguarding customer money by preventing in-house repurchase transactions, CFTC Chairman Gary Gensler said.

"I believe there is an inherent conflict of interest between parts of a firm doing these transactions," he said.

Though the new regulation will ban in-house trades by brokers who earn interest income by investing funds from segregated accounts, it still allows third-party deals.

Under the new regulation, brokers will also be permitted to invest client funds in Treasuries, municipal debt, money-market funds and the debts of Fannie Mae and Freddie Mac.

MF Global Holdings filed for bankruptcy protection on October 31 after a disastrous bet on European debt. The US CFTC, Securities and Exchange Commission and Justice Department are investigating as much as $1.2 billion in missing customer funds.

"This rule is necessary to restore confidence," CFTC Commissioner Mark Wetjen said.