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CFTC Proposes Amendments to Recordkeeping Rules

Proposed changes would provide permanent relief from compliance with certain recordkeeping requirements and narrow the types of records that must be identifiable by transaction.

The December 2012 amendments to Commodity Futures Trading Commission (CFTC) Rule 1.35 imposed new recordkeeping obligations on various types of entities, including commodity trading advisors (CTAs) and members of a designated contract market (DCM) or swap execution facility (SEF) that are not registered or required to be registered with the CFTC in any capacity, including the requirement to maintain oral communications that lead to the execution of a commodity interest transaction.[1] The December 2012amendments also required that records be searchable and identifiable by particular transaction (i.e., the “form and manner” requirement). Although compliance with the amendments was required on December 21, 2013, CTAs and unregistered DCM and SEF members found it difficult to comply with certain aspects of the rule, including the tape recording requirement and the requirement to make records identifiable by transaction. As a result, the CFTC issued several no-action letters granting relief from these requirements.[2]

On November 3, 2014, the CFTC held an open meeting to consider proposed rule amendments (Rule Amendments) to CFTC Rule 1.35. The Rule Amendments codify the no-action relief for CTAs and unregistered DCM and SEF members. Thus, relief from compliance with the “form and manner” requirement for unregistered DCM and SEF members would become permanent under the Rule Amendments. For all other covered entities, the Rule Amendments would modify the “form and manner” requirement to provide that all records be searchable and all records, with the exception of pre-execution oral and written communications, be identifiable by particular transaction.

Current Requirements and Overview of the Rule Amendments

CFTC Rule 1.35(a) requires futures commission merchants (FCMs), retail foreign exchange dealers, introducing brokers, and members of DCMs or SEFs to “keep full, complete, and systematic records, which include all pertinent data and memoranda, of all transactions relating to its business of dealing in commodity interests and related cash or forward transactions.”[3] Records that are required to be maintained under CFTC Rule 1.35 include:

[A]ll oral and written communications provided or received concerning quotes, solicitations, bids, offers, instructions, trading, and prices that lead to the execution of a transaction in a commodity interest and related cash or forward transactions, whether communicated by telephone, voicemail, facsimile, instant messaging, chat rooms, electronic mail, mobile device, or other digital or electronic media.[4]

CFTC Rule 1.35(a)(1) explicitly carves out certain entities from compliance with the requirement to record oral communications, including commodity pool operators and members of DCMs or SEFs that are not registered or required to be registered with the CFTC in any capacity, among others.[5]

The Rule Amendments would eliminate the requirement that records of pre-execution communications be retained in a manner that allows the records to be identified by a particular transaction. The Rule Amendments would codify the no-action relief that provides relief from compliance with oral communications recordkeeping requirements to CTAs and separate no-action relief that provides relief from compliance with the requirements to retain text messages and to maintain written records that are identifiable and searchable by a particular transaction to DCM and SEF members that are not registered or required to be registered with the CFTC in any capacity.

“Form and Manner” Requirement

Instead of requiring that all records required to be maintained be “identifiable and searchable by transaction” as the current rule requires, the Rule Amendments would stipulate that records of pre-execution communications (oral and written communications that lead to the execution of a transaction in a commodity interest and related cash or forward transaction) do not need to be maintained in a form and manner that allows for identification of a particular transaction. The Rule Amendments would require all records to be searchable. The current relief from compliance with the “form and manner” requirement for unregistered DCM and SEF members would become permanent under the Rule Amendments.

Exclusion of CTAs from Oral Recordkeeping Requirements

The Rule Amendments would codify the no-action relief currently applicable to CTAs[6] and expand upon it. The no-action relief, which provides relief from compliance with the oral communications recordkeeping requirements, currently is applicable to CTAs only with respect to swap transactions. The Rule Amendments would expand the scope by stipulating that a CTA that is a member of a DCM or SEF would not be required to record and maintain oral communications in connection with the execution of all transactions.

Exclusion of Unregistered DCM or SEF Members from Certain Written Recordkeeping Requirements

Currently, unregistered DCM or SEF members are subject to all of the written recordkeeping requirements and excluded from the oral communications recordkeeping requirements. The Rule Amendments would significantly narrow the scope of the written recordkeeping requirements by codifying no-action relief currently applicable to unregistered DCM and SEF members.[7] The Rule Amendments would exclude unregistered DCM and SEF members from the requirements to (1) retain text messages and (2) maintain written records in a form and manner identifiable and searchable by transaction.

Opposition from Commissioner Giancarlo

At the CFTC’s open hearing, Commissioner J. Christopher Giancarlo contended that the Rule Amendments do not go far enough in addressing the rule’s difficulties and that the rule will continue to be overly burdensome. Commissioner Giancarlo faulted the rule’s “imprecise construction and definition in the legal drafting”[8] as the cause of these failures and pointed to specific examples to illustrate his contention.

First, Commissioner Giancarlo stated that CFTC Rule 1.35 identifies the records that must be maintained in accordance with CFTC Rule 1.31, which sets forth requirements for the form and manner in which records must be maintained and produced. However, CFTC Rule 1.35 also contains a “form and manner” requirement—i.e., that the records be “searchable” and identifiable by a particular transaction—that is more burdensome than the form and manner requirement of CFTC Rule 1.31. Second, Commissioner Giancarlo took issue with the lack of a definition for the term “searchable” and questioned whether the term means that “a record of a wire transfer received by an FCM to cover margin for multiple positions be kept in a form and manner that allows for identification of each potential transaction.”[9]

Commissioner Giancarlo asked for comments on the Rule Amendments with particular “emphasis on the intersection between Rule 1.35 and Rule 1.31.”[10]

Comment Period

The Rule Amendments have not yet been published in the Federal Register. Typically, comments on rule proposals must be received by the CFTC within 60 days after the rule proposals are published in the FederalRegister


[1]. Adaptation of Regulations to Incorporate Swaps––Records of Transactions, 77 Fed. Reg. 75,523 (Dec. 21, 2012) (to be codified at 17 C.F.R. pt. 1), available here.

[2]See, e.g., CFTC No-Action Letter No. 13-77 (Dec. 20, 2013),available here; CFTC No-Action Letter No. 14-60 (Apr. 25, 2014),available here; CFTC No-Action Letter No. 14-72 (May 22, 2014),available here.  

[3]. CFTC Rule 1.35(a)(2) defines the term “related cash or forward transactions” to mean “a purchase or sale for immediate or deferred physical shipment or delivery of an asset related to a commodity interest transaction where the commodity interest transaction and the related cash or forward transaction are used to hedge, mitigate the risk of, or offset one another.” 17 C.F.R. § 1.35(a)(2).

[4]. CFTC Rule 1.35(a)(1); 17 C.F.R. § 1.35(a)(1).

[5]. CFTC Rule 1.35(a)(1)(v), (viii); 17 C.F.R. § 1.35(a)(1)(v), (viii).

[6]See, e.g., CFTC No-Action Letter No. 14-60, supra note 2.

[7]See, e.g., CFTC No-Action Letter No. 14-72, supra note 2.

[8]. Opening Statement of Commissioner J. Christopher Giancarlo, Open Meeting on Proposed Rule on Residual Interest Deadline for Futures Commission Merchants, Proposed Rule on Records of Commodity Interest and Related Cash or Forward Transactions, and Proposed Interpretation on Forward Contracts with Embedded Volumetric Optionality (Nov. 3, 2014), available here.

[9]Id.

[10]Id.

Copyright © 2022 by Morgan, Lewis & Bockius LLP. All Rights Reserved.National Law Review, Volume IV, Number 311
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About this Author

Michael Philipp, Morgan Lewis, Securities Attorney
Partner

Michael M. Philipp counsels financial services clients in futures and securities transactions. He also advises them in derivatives regulation, legislation, compliance, and enforcement matters. United States and foreign exchanges and clearing organizations, banks, investment managers, proprietary trading firms, brokerage firms, and end users turn to Michael for guidance in connection with exchange-traded and over-the-counter derivative instruments. He also represents foreign exchanges and clearinghouses in their US offerings of futures and equity options products and...

312.324.1905
Sarah Riddell, Morgan Lewis, regulatory attorney
Associate

Leveraging her experience as a lawyer at the US Commodity Futures Trading Commission (CFTC), Sarah V. Riddell advises domestic and foreign exchanges, derivatives clearing organizations, swap execution facilities, and other financial institutions on a broad range of regulatory matters, including CFTC registration and compliance. While at the CFTC, Sarah worked on Dodd-Frank-related rulemakings and participated in examinations of derivatives clearing organizations, including those designated as systemically important.​

312-324-1154
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