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2012-30691

  • Federal Register, Volume 77 Issue 246 (Friday, December 21, 2012)[Federal Register Volume 77, Number 246 (Friday, December 21, 2012)]

    [Rules and Regulations]

    [Pages 75523-75543]

    From the Federal Register Online via the Government Printing Office [www.gpo.gov]

    [FR Doc No: 2012-30691]

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    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Part 1

    RIN 3038-AD53

    Adaptation of Regulations To Incorporate Swaps--Records of

    Transactions

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Final rules.

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    SUMMARY: The Dodd-Frank Wall Street Reform and Consumer Protection Act

    (``Dodd-Frank Act'' or ``DFA'') established a comprehensive new

    statutory framework for swaps and security-based swaps. The Dodd-Frank

    Act repeals some sections of the Commodity Exchange Act (``CEA'' or

    ``Act''), amends others, and adds a number of new provisions. The DFA

    also requires the Commodity Futures Trading Commission (``CFTC'' or

    ``Commission'') to promulgate a number of rules to implement the new

    framework. The Commission has proposed and finalized numerous rules to

    satisfy its obligations under the DFA. This final rulemaking makes

    certain conforming amendments to recordkeeping provisions of

    regulations 1.31 and 1.35(a) to integrate these regulations more fully

    with the new framework created by the Dodd-Frank Act.\1\ This final

    rulemaking requires futures commission merchants (``FCMs''), certain

    introducing brokers (``IBs''), retail foreign exchange dealers

    (``RFEDs'') and certain other registrants

    [[Page 75524]]

    that are members of designated contract markets (``DCMs'') or swap

    execution facilities (``SEFs'') to record all oral 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, whether communicated by telephone,

    voicemail, mobile device, or other digital or electronic media, and to

    keep those records for one year. This final rule also requires FCMs,

    IBs, RFEDs, and all members of a DCM or SEF to record and keep all

    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 or

    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,

    and to keep those written records for five years.

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    \1\ All Commission regulations are in Chapter I of Title 17 of

    the CFR.

    DATES: Effective date: This final rule will become effective on

    February 19, 2013. Compliance date: Each affected entity must comply

    with the oral communications recordkeeping requirement in regulation

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    1.35(a)(1) (17 CFR 1.35(a)(1)) no later than December 21, 2013.

    FOR FURTHER INFORMATION CONTACT: Katherine Driscoll, Associate

    Director, 202-418-5544, kdriscoll@cftc.gov, Elizabeth Miller, Attorney-

    Advisor, 202-418-5450, emiller@cftc.gov, Division of Swap Dealer and

    Intermediary Oversight; Peter A. Kals, Special Counsel, 202-418-5466,

    pkals@cftc.gov, Division of Clearing and Risk; David E. Aron, Counsel,

    202-418-6621, daron@cftc.gov, Office of General Counsel; Alexis Hall-

    Bugg, Attorney-Advisor, 202-418-6711, ahallbugg@cftc.gov, Division of

    Market Oversight, Commodity Futures Trading Commission, Three Lafayette

    Centre, 1151 21st Street NW., Washington, DC 20581.

    SUPPLEMENTARY INFORMATION:

    I. Introduction

    A. The Dodd-Frank Act

    On July 21, 2010, President Obama signed the Dodd-Frank Act into

    law.\2\ Title VII of the Dodd-Frank Act \3\ (``Title VII'') amended the

    CEA \4\ to establish a comprehensive new regulatory framework for swaps

    and security-based swaps. The legislation was enacted, among other

    reasons, to reduce risk, increase transparency, and promote market

    integrity within the financial system by, among other things: (1)

    Providing for the registration and comprehensive regulation of swap

    dealers (``SDs''), security-based swap dealers, major swap participants

    (``MSPs''), and major security-based swap participants; (2) imposing

    clearing and trade execution requirements on swaps and security-based

    swaps, subject to certain exceptions; (3) creating rigorous

    recordkeeping and real-time reporting regimes; and (4) enhancing the

    rulemaking and enforcement authorities of the Commission with respect

    to, among others, all registered entities and intermediaries subject to

    the Commission's oversight.

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    \2\ See Dodd-Frank Wall Street Reform and Consumer Protection

    Act, Public Law 111-203, 124 Stat. 1376 (2010). The text of the

    Dodd-Frank Act is available at http://www.cftc.gov/LawRegulation/OTCDERIVATIVES/index.htm.

    \3\ Pursuant to section 701 of the Dodd-Frank Act, Title VII may

    be cited as the ``Wall Street Transparency and Accountability Act of

    2010.''

    \4\ 7 U.S.C. 1 et seq. (2006).

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    B. Proposed Changes to Regulation 1.35(a)--Records of Transactions

    On June 7, 2011, the Commission published in the Federal Register a

    notice of proposed rulemaking (the ``Proposal'') to apply its

    regulations, regarding the activities of intermediaries and other DCM

    members to the swaps activities of those persons, in conformance with

    the Dodd-Frank Act.\5\ The Proposal provided for a 60-day public

    comment period, which ended on August 8, 2011. The Proposal proposed to

    conform the existing recordkeeping requirements of regulation 1.35(a)

    to the recordkeeping requirements for SDs and MSPs, under what was then

    proposed regulation 23.202(a)(1) and (b)(1),\6\ so that FCMs, IBs,

    RFEDs, and DCM and SEF members would be required to record all oral and

    written communications provided or received concerning quotes,

    solicitations, bids, offers, instructions, trading, and prices, that

    lead to the execution of transactions in a commodity interest \7\ or

    cash commodity, whether communicated by telephone, voicemail,

    facsimile, instant messaging, chat rooms, electronic mail, mobile

    device, or other digital or electronic media. To be consistent with

    what was then proposed regulation 23.202(a) and (b), the Proposal would

    have amended regulation 1.35(a) by requiring that each record be

    maintained in a separate electronic file identifiable by transaction

    and counterparty. On November 2, 2012, the Commission published in the

    Federal Register the Final Adaptation Rule.\8\ The Final Adaptation

    Rule promulgated the vast majority of the amendments that the Proposal

    had introduced. In the Final Adaptation Rule, the Commission stated

    that it would address in a separate release certain of the proposed

    changes to regulation 1.35 (i.e., those enumerated above) and related

    amendments to regulation 1.31.\9\

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    \5\ Adaptation of Regulations to Incorporate Swaps, 76 FR 33066

    (June 7, 2011) (``the Proposal'').

    \6\ See the Proposal, 76 FR at 33067; Reporting, Recordkeeping,

    and Daily Trading Records Requirements for Swap Dealers and Major

    Swap Participants, 76 FR 76666, 76675 (Dec. 9, 2010) (Proposed

    regulation 23.202(a)(1) would have required ``[e]ach swap dealer and

    major swap participant [to] make and keep pre-execution trade

    information, including, at a minimum, records of all oral and

    written communications provided or received concerning quotes,

    solicitations, bids, offers, instructions, trading, and prices, that

    lead to the execution of a swap, whether communicated by telephone,

    voicemail, facsimile, instant messaging, chat rooms, electronic

    mail, mobile device or other digital or electronic media'').

    \7\ The term ``commodity interest'' means: (1) any contract for

    the purchase or sale of a commodity for future delivery; (2) any

    contract, agreement or transaction subject to Commission regulation

    under section 4c or 19 of the Act; (3) any contract, agreement or

    transaction subject to Commission jurisdiction under section 2(c)(2)

    of the Act; and (4) any swap as defined in the Act, by the

    Commission, or jointly by the Commission and the Securities and

    Exchange Commission. See Adaptation of Regulations to Incorporate

    Swaps, 77 FR 66288, 66319 (Nov. 2, 2012) (``Final Adaptation Rule'')

    (to be codified at 17 CFR 1.3(yy)).

    \8\ Final Adaptation Rule, 77 FR 66288.

    \9\ See id., 77 FR at 66288, 66296 n. 59, 66297 n. 63, and 66299

    n. 72.

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    In response to the amendments to regulation 1.35(a) in the

    Proposal, the Commission received 35 comment letters from a variety of

    institutions, including DCMs, agricultural trade associations, and

    agricultural cooperatives.\10\ The Commission has

    [[Page 75525]]

    determined to adopt the Proposal's amendments to regulation 1.35(a),

    with certain modifications, discussed below, which address the comments

    the Commission received. In addition, as part of this final rulemaking,

    the Commission is making certain related modifications to the record

    retention periods set forth in regulation 1.31. Finally, the final

    amendments to regulations 1.31 and 1.35(a) are consistent with the

    Commission's final rules concerning recordkeeping requirements for SDs

    and MSPs (regulations 23.202(a) and (b) and 23.203(b)(2)).\11\

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    \10\ Commenters included: Agribusiness Council of Indiana;

    American Cotton Shippers Association (``ACSA''); Amcot; American

    Feed Industry Association (``AFIA''); American Gas Association;

    American Petroleum Institute; Barclays Capital (``Barclays''); Mr.

    Chris Barnard; Commodity Markets Council (``CMC''); Compliant Phones

    (``Compliant''); Electric Power Supply Association (``EPSA'');

    Electric Utility Trade Associations (National Rural Electric

    Cooperative Association, American Public Power Association, Large

    Public Power Council, and Edison Electric Institute) (``ETA'');

    Encana; Falmouth Farm Supply; The Fertilizer Institute; Futures

    Industry Association(``FIA''); Grain and Feed Association of

    Illinois; Kansas City Board of Trade (``KCBT''); CME Group

    (``CME''); Henderson & Lyman; IntercontinentalExchange, Inc.

    (``ICE''); Land O'Lakes, Inc.; Minneapolis Grain Exchange

    (``MGEX''); Minnesota Grain and Feed Association; National Grain and

    Feed Association (``NGFA''); National Introducing Brokers

    Association (``NIBA''); National Council of Farmer Cooperatives

    (``NCFC''); National Futures Association (``NFA''); Natural Gas

    Supply Association; Ohio Agribusiness Association; Oklahoma Grain

    and Feed Association; Rocky Mountain Agribusiness Association

    (``RMAA''); South Dakota Grain & Feed Association; and Working Group

    of Commercial Energy Firms (``Commercial Energy Working Group'').

    Comments are available in the comment file on www.cftc.gov. In the

    Final Adaptation Rule, the Commission addressed those comments

    unrelated to the proposed changes to regulation 1.35(a) concerning

    records of oral and written communications. See Final Adaptation

    Rule, 77 FR 66288.

    \11\ See Swap Dealer and Major Swap Participant Recordkeeping,

    Reporting, and Duties Rules; Futures Commission Merchant and

    Introducing Broker Conflicts of Interest Rules; and Chief Compliance

    Officer Rules for Swap Dealers, Major Swap Participants, and Futures

    Commission Merchants, 77 FR 20128 (Apr. 3, 2012) (``SD and MSP

    Recordkeeping Final Rule'') (adopting for SDs and MSPs reporting and

    recordkeeping standards now found in 17 CFR 23.201-23.203).

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    II. Oral Communications and Other Recordkeeping Changes in the

    Proposal; Comments Received

    Under the Proposal, FCMs, IBs, RFEDs, and DCM and SEF members \12\

    would be required to record all 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 or cash commodity, whether

    communicated by telephone, voicemail, facsimile, instant messaging,

    chat rooms, electronic mail, mobile device, or other digital or

    electronic media. Comments to these proposed amendments to regulation

    1.35(a) primarily focused on: oral recordkeeping generally; the portion

    of the proposed provisions that would have required all DCM and SEF

    members, including commercial end-users and non-intermediaries, to keep

    records of their cash commodity transactions; and the proposed

    requirement that each record be maintained in a separately identifiable

    electronic file identifiable by transaction and counterparty

    (``tagging'').

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    \12\ A ``member'' is an individual, association, partnership,

    corporation, or trust--(i) owning or holding membership in, or

    admitted to membership representation on, a registered entity; or

    (ii) having trading privileges on a registered entity. See Final

    Adaptation Rule, 77 FR at 66316 (to be codified at 17 CFR 1.3(q)).

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    A. Proposed Requirements To Record Oral Communications and Keep Them in

    Separate Electronic Files Identifiable by Transaction and Counterparty

    1. Comments on Oral Recordkeeping Generally

    Commenters asserted that the proposed requirement for FCMs, IBs,

    RFEDs, and DCM and SEF members to record oral communications that lead

    to the execution of a commodity interest or cash commodity transaction

    was too costly, impossible to satisfy, overly broad, and/or

    unnecessary. ACSA, AFIA, Amcot, EPSA, ICE, and Land O'Lakes commented

    that these proposed amendments were broad and ambiguous.\13\ AFIA, CME,

    EPSA, MGEX, and the Commercial Energy Working Group argued that the

    phrases ``concerning quotes, solicitations, bids'' and ``lead to the

    execution of'' were vague and could encompass a great number of

    communications. Amcot asserted that the overbreadth of the proposed

    amendment would be burdensome for agricultural DCM members given that

    there are a variety of settings, including grower meetings and on-site

    visits, where a DCM member could have a discussion with an agricultural

    producer that leads to a cash commodity or commodity interest

    transaction. Land O'Lakes was unsure whether face-to-face conversations

    would have to be recorded under the proposed requirement. ICE inquired

    as to whether a general conversation about markets would be subject to

    the proposed recording requirement if a transaction occurred later in

    the day. AFIA stated that the risk of an incorrect interpretation would

    fall on local grain producers.

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    \13\ FIA made a similar argument regarding the application of

    the amendment to FCMs.

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    Regarding application of the proposed requirement to telephone

    conversations, Land O'Lakes and MGEX each argued that a DCM member

    might not know in advance of a telephone call whether that call would

    lead to a transaction. MGEX believed that this fact would require a DCM

    member to record all conversations, which they argued would be

    impossible. Land O'Lakes asserted that complying with the proposed

    requirement could involve massive amounts of recording, thereby

    deterring open communication between a DCM member and one of its

    agricultural producers. The Commercial Energy Working Group commented

    that proposed regulation 1.35(a) was too broad in that it could require

    DCM members to record communications of attorneys and other ``middle

    office'' personnel, and not just the communications of traders who are

    directly involved in executing a transaction. CMC argued that the

    Commission has substantially underestimated the considerable costs and

    limited benefits associated with the recordkeeping requirements for DCM

    and SEF members. CME does not believe firms can comply with the

    proposed oral recordkeeping requirements with respect to mobile

    telephones because, they stated, mobile telephone recording technology

    is not well developed in the United States.

    Regarding whether an oral communications recordkeeping requirement

    is necessary, NCFC stated that the proposed requirement to record oral

    communications is not necessary to achieve the Commission's stated goal

    of protecting customers from abusive sales practices. CMC asserted that

    current regulation 1.35(a)'s requirement to maintain written records of

    commodity interest and cash commodity transactions suffices to prevent

    market abuses. Amcot stated that the Commission failed to demonstrate

    the inadequacy of its existing regulations. Henderson & Lyman, NFA, and

    NIBA stated that the oral recordkeeping requirement is unnecessary

    because NFA already requires certain FCMs and IBs with a history of

    sales practice abuses to record calls made by their associated persons.

    Henderson & Lyman stated that the NFA rule and NFA's related guidance

    concerning communications are sufficient and cost-effective.

    NIBA commented that all IBs, or at the very least small IBs, should

    be exempt from the proposed amendments to regulation 1.35(a) because

    the burden on such small entities would be too great. Henderson & Lyman

    similarly commented that the proposed regulation would favor large IBs

    over small IBs. Neither NIBA nor Henderson & Lyman, however, offered a

    definition of ``small IB'' or provided any quantitative or qualitative

    thresholds. Henderson & Lyman stated that it is unnecessary to have an

    oral recording requirement for IBs because most IBs solicit customers

    electronically rather than over the telephone. Henderson & Lyman also

    stated that the focus on IBs was misplaced since misleading

    communications come from marketing firms rather than from IBs. NIBA

    further stated that the proposed amendment would be ineffective in

    compelling IBs to record their calls since those who refuse to do so

    will find a way to circumvent the regulation.

    Falmouth Farm Supply had several concerns with the proposed

    [[Page 75526]]

    amendment, asserting that a grain business-DCM member recording its

    telephone conversations with a farmer-supplier would amount to an

    invasion of privacy and that grain producers do not need the

    Commission's protection. CMC and ICE stated that it would be redundant

    for a DCM or SEF member to comply with proposed regulation 1.35(a)

    because the DCM or SEF member will have to engage an FCM clearing agent

    for each transaction, and the FCM would have to comply with the

    regulation.

    2. Comments on the Proposed ``Tagging'' Requirement

    CME, Barclays, Henderson & Lyman, NGFA, and NIBA stated that it

    would be burdensome to comply with the proposed requirement to maintain

    records as separate electronic files identifiable by counterparty and

    transaction.\14\ FIA commented that the ``separate electronic file

    requirement'' is open-ended and, on its face, impossible to

    achieve.\15\ CME stated that potentially relevant conversations could

    span several days and that it would be difficult to link conversations

    to transactions. Therefore, CME commented, FCMs and IBs should only be

    required to record and identify conversations immediately preceding an

    order. FIA stated that a customer may decide to enter an order with an

    FCM at any time, even if that was not the original purpose of the call.

    According to FIA, this aspect of the futures business means that an FCM

    would have to record all of its telephone calls to comply with proposed

    regulation 1.35(a) and this would be difficult if not impossible.

    Moreover, FIA stated that compliance would be impossible because one

    could argue that any conversation pertains to a particular transaction.

    Like CME, Barclays stated that the tagging requirement is vague,

    potentially requiring an FCM to tag every communication that could ever

    lead to a transaction. Barclays stated that it would be particularly

    challenging to tag a telephone call when the firm is telephoned by a

    counterparty; when parties discuss a transaction that the firm did not

    originally anticipate; or when multiple transactions are discussed

    during a particular call. According to Barclays, there is no technology

    to automatically tag communications, so the firm would have to manually

    tag over 2.4 billion electronic communications it sends and receives

    every year. Barclays also stated that it is not aware of any

    commercially available technology that would allow entities to tag

    their telephone recordings by transactions and counterparty. Other

    commenters expressed similar concern regarding the reliability and

    availability of technological solutions for the proposed tagging

    requirement. The Commercial Energy Working Group stated that, in lieu

    of an accurate and commercially available software solution, manual

    identification and retrieval of oral records would require as many as

    three to five analysts and one to two additional technical support

    personnel to support transactions for a small or modest-sized end-user

    commodity business and that the total cost to a commodity business is

    likely to be in excess of $1 million annually.

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    \14\ NGFA's letter was supported by the other Grain and Feed

    Associations, the Agribusiness Associations, Land O' Lakes, and

    NCFC.

    \15\ ACSA generally supported FIA's comment letter.

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    According to Barclays, an FCM should be permitted to maintain

    records in any manner so long as it is able to respond to Commission

    inquiries in a timely and comprehensive fashion. The Commercial Energy

    Working Group commented that a firm should only have to identify

    communications as pertaining to a particular transaction if the

    Commission requests that information. Moreover, the Commercial Energy

    Working Group stated that it is unlikely that the Commission will

    request such information, so DCM members should not have a general

    obligation to tag conversations.\16\ The Commercial Energy Working

    Group urged the Commission to allow market participants to make their

    records searchable by transaction at the time the Commission requests

    the records rather than require that all records be maintained on a

    transaction-by-transaction basis in real-time.

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    \16\ API generally supported the Commercial Energy Working

    Group's comment letter.

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    MGEX sought clarification as to whether the requirement in proposed

    regulation 1.35(a) to maintain ``each transaction record in a separate

    electronic file identifiable by transaction and counterparty'' requires

    a file to be kept for each counterparty and for each transaction or

    whether it suffices to keep one transaction file that is indexed by

    counterparty and transaction. MGEX also stated that it would be

    duplicative for a firm to keep records of both written and oral

    communications if they contained substantially the same content.

    3. Commenters' Suggested Revisions to the Oral Communications

    Requirement

    Commenters made suggestions about how the Commission should revise

    the Proposal to limit the burden. NGFA suggested that if the Commission

    adopts the proposed oral recordkeeping requirement, it should give FCMs

    and IBs a generous compliance timetable and flexible implementation

    options, particularly for smaller firms. CME, FIA, and MGEX asserted

    that firms should only be required ``reasonably'' to comply with oral

    recordkeeping requirements. MGEX suggested that a DCM member should

    only be required reasonably to link a conversation to an executed

    transaction. Barclays highlighted that the United Kingdom Financial

    Services Authority (``FSA'') adopted a reasonableness standard for

    compliance with its mobile telephone conversation recording

    requirement.\17\ CME stated that a reasonableness standard is necessary

    because of limited technology, particularly a lack of reliable search

    mechanisms. According to CME, one way a firm should be able to comply

    would be by having a policy prohibiting the use of mobile telephones to

    solicit or accept orders. CME commented that the Commission fails to

    provide evidence that the Proposal would be less effective with such a

    ``reasonableness'' standard than without it. CME stated that only firm-

    provided landline and mobile telephones should be covered by the rule

    as that would make the proposal consistent with foreign regulatory

    regimes. ETA stated that the Commission fails to justify aligning its

    recordkeeping requirements with those of other countries. CMC commented

    that the Proposal's reference to the fact that 80% of large U.K.

    financial services firms were already recording their traders'

    telephone calls prior to the FSA's enactment of its voice recordkeeping

    requirement is irrelevant to the burden that the Proposal would impose

    on agricultural enterprises who are DCM members trading for their own

    accounts and not on behalf of customers. FIA sought confirmation that

    an FCM, IB, or other DCM or SEF member can satisfy the recordkeeping

    requirements under regulation 1.35(a) by relying on record retention

    performed by a DCM or SEF.

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    \17\ In November 2011, the FSA rule requiring taping of mobile

    telephones became effective. Under the rule, a firm is required,

    ``to take reasonable steps to record relevant conversations, and

    keep a copy of relevant electronic communications, made with, sent

    from or received on equipment: (1) Provided by the firm to an

    employee or contractor; or (2) the use of which by an employee or

    contractor has been sanctioned or permitted by the firm.'' See

    Financial Services Authority, Conduct of Business Sourcebook,

    Section 11.8 Recording telephone conversations and electronic

    communications (June 2012, Release 126, 11.8.2).

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    [[Page 75527]]

    NFA recognized that audio recordings have been very useful to the

    Commission in enforcement proceedings and stated that only those firms

    that choose to record calls should have to maintain their recordings.

    Acknowledging that some FCMs currently record their telephone calls,

    FIA commented that, to the extent they do, recording is limited to

    dedicated order desks and only required to be stored for no more than a

    few days or weeks. FIA and MGEX asserted that the technology available

    to comply with the Proposal was ``uncertain at best'' and, therefore,

    the Proposal should be considered further in the context of available

    technology and then re-proposed in a separate release.

    EPSA suggested that a separate rulemaking should be published to

    address changes to regulation 1.35(a) to give affected parties

    reasonable notice. Amcot, Henderson & Lyman, and ICE asserted that the

    Commission has not considered existing state and federal wiretapping

    law and privacy laws in proposing these new requirements.

    B. Proposed Requirement for All Members of a DCM or SEF To Record Oral

    and Written Communications Leading to the Execution of Cash Commodity

    Transactions

    Three DCMs joined various agricultural and energy sector trade

    organizations in opposing the Commission's proposed requirement to keep

    oral communications, and existing requirement to keep written

    communications, regarding cash market transactions on members of a DCM

    or SEF who are non-financial entities and commercial end-users, and who

    do not have customers.\18\ These commenters pointed out that including

    a DCM member's cash transactions would require compliance by hundreds,

    if not thousands, of agricultural and energy firms, including many who

    do not have customers and do not themselves enter into futures or

    swaps.\19\ EPSA and the Commercial Energy Working Group stated that

    many of the affected entities in the energy sector would be small

    entities that likely are unaware of the Proposal. Commenters asserted

    that the requirement amounted to unauthorized regulation of the cash

    market, which they asserted has always been carved out of the

    Commission's jurisdiction.\20\ Commenters also stated that the Dodd-

    Frank Act did not intend for the Commission to subject cash commodity

    transactions to new recordkeeping requirements.\21\

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    \18\ Commenters included ACSA, the Agribusiness Associations,

    Amcot, CMC, Falmouth Farm Supply, the Grain and Feed Associations,

    Land O'Lakes, NCFC, AGA, API, EPSA, ETA, the Commercial Energy

    Working Group, ICE, KCBT, TFI, and MGEX.

    \19\ In related commentary, the Commercial Energy Working Group

    asked the Commission to clarify that the definition of ``member'' in

    the final rule covers only those people holding equity interests in

    a DCM that permit such holder to submit orders directly on the DCM's

    floor (or an electronic equivalent).

    \20\ Commenters included Agribusiness Council of Indiana;

    Agribusiness Association of Ohio; EPSA; Grain and Feed Association

    of Illinois; KCBT; Land `O Lakes; Minnesota Grain and Feed

    Association; NCFC; NGFA; Oklahoma Grain and Feed Association; RMAA;

    and the Commercial Energy Working Group.

    \21\ Commenters included Amcot; CME; EPSA; FIA; and NCFC.

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    The Grain and Feed Association of Illinois, the Oklahoma Grain and

    Feed Association, NCFC, and NGFA opposed the proposed revisions on the

    grounds that the employees of a grain elevator that is a DCM member

    would have to record calls and preserve emails with farmer producers

    from whom they buy grain for cash and, thus, hundreds of employees of

    grain storage and processing facilities would be significantly

    burdened. As a result, these commenters stated, a grain elevator that

    is a DCM member would be disadvantaged as compared to a grain elevator

    that is not a DCM member as the non-member would not be burdened by the

    compliance costs associated with proposed regulation 1.35(a). KCBT

    asserted that this creates a discriminatory regulatory structure.

    According to ICE, this outcome would deter firms from hedging

    commercial risk on a DCM or SEF, thereby defeating the Dodd-Frank Act's

    transparency objectives. NGFA and its affiliates argued that burdening

    facilities owned by companies that are DCM members with the new rules

    would create a bifurcation of the cash grain marketplace into

    facilities required to comply with new recordkeeping requirements and

    facilities owned and operated by companies who are not DCM members and,

    therefore, not required to comply. KCBT stated that their rules (and

    the rules of other DCMs) require that operators of registered delivery

    warehouses be members, further stating that the regulatory

    disincentives created by the application of proposed regulation 1.35(a)

    to all DCM member cash transactions could affect not only DCM

    expertise, but deliverable supplies and convergence. According to KCBT,

    should DCM commercial members operating delivery warehouses decide to

    withdraw from membership because of proposed regulation 1.35(a),

    deliverable supplies would be negatively impacted and there would be

    fewer deliverable supplies to foster convergence at delivery.

    Amcot stated that neither it nor its members should be subject to

    the proposed amendments because they do not transact with the public.

    Similarly, the Commercial Energy Working Group commented that end-users

    (i.e., DCM or SEF members trading for themselves) should not have to

    comply with proposed regulation 1.35(a) because they do not trade for

    customers and, therefore, pose minimal systemic risk. EPSA stated that

    regulation 1.35(a) was never intended to burden end-users.

    Several commenters objected to the Commission's regulation of

    records of cash commodity transactions. KCBT stated that it did not

    believe the Commission ever intended for regulation 1.35(a) to apply to

    cash and cash forward transactions outside of those directly relating

    to a regulated futures or swaps transaction. KCBT further stated that

    it has always interpreted regulation 1.35(a) to cover only those

    transactions for which a DCM member is acting as an agent for a

    customer. Thus, according to KCBT, the only DCM members (who were not

    otherwise FCMs or IBs) who would be required to comply would be floor

    brokers (``FBs''); DCM members who trade for themselves would not be

    covered. KCBT stated that it has also understood the ``related cash

    transactions'' referenced by regulation 1.35(a) to refer only to those

    transactions involving an exchange of a futures transaction for a

    physical commodity.

    The Commercial Energy Working Group asserted that, under the

    proposed amendments to regulation 1.35(a), many of the entities that

    transact on ICE, for example, would now be required to maintain records

    pursuant to Commission rules without consideration of whether the

    market users handle customer orders, which would be a departure from

    the past for members of contract markets that are not FCMs, IBs, or

    present on a trading floor. As a general matter, FIA argued that these

    proposed amendments to regulation 1.35(a) are not necessary to

    implement the Dodd-Frank Act and, therefore, they run counter to the

    guiding principles set out in President Obama's January 2011 Executive

    Order 13563, Improving Rulemaking and Regulatory Review.

    ACSA, CMC, FIA, Henderson & Lyman, ICE, NFA, and NIBA stated that

    the proposed amendments were inconsistent with the Commission's

    proposed recordkeeping requirements for SDs and MSPs because they would

    require FCMs, RFEDs, IBs, and members

    [[Page 75528]]

    of a DCM or SEF to record voice communications regardless of any other

    recordkeeping requirement that captures the same information.

    C. Relationship Between Regulations 1.31 and 1.35(a)

    Amcot stated that it would be burdensome for its farmer-owned

    cotton marketing cooperative members to retain recordings of telephone

    calls for five years as the Commission proposed. CME commented that

    conversations should only be retained for six months after the

    execution of a transaction. FIA commented that the Commission failed to

    provide a justification for requiring that a swap record be maintained

    for the life of the swap plus five years. In contrast to other

    commenters, Mr. Chris Barnard asserted that all records should be kept

    indefinitely and scanned after two years, arguing that there is no

    technological or practical reason to limit the record retention period.

    Mr. Barnard specifically commented that records of voice communications

    also should be kept indefinitely. To support the asserted usefulness of

    such records, Mr. Barnard cited a 2009 IOSCO report stating that

    telephone records could benefit enforcement investigations.\22\

    ---------------------------------------------------------------------------

    \22\ http://www.iosco.org/news/pdf/IOSCONEWS137.pdf.

    ---------------------------------------------------------------------------

    III. Final Rules

    The markets subject to the jurisdiction of the Commission have

    undergone a significant transformation over the last few decades, and

    particularly in the last few years. Technological advances have

    contributed to a tremendous growth in trading volume as well as the

    number and type of market participants, including significant numbers

    of retail customers that invest in the commodity markets through a

    variety of means. Markets are also more interconnected than ever

    before, with order flow distributed across multiple trading centers.

    These changes require the Commission to adapt, and these final rules

    are part of that adaptation.

    The overarching purpose of the Commission's final rules is to

    promote market integrity and protect customers. Requiring the recording

    and retention of oral communications will serve as a disincentive for

    covered entities to make fraudulent or misleading communications to

    their customers over the telephone and could serve as a meaningful

    deterrent against violations such as trading ahead of customer orders

    by providing a record of the time that a customer's telephone order is

    received. When the perspectives of the commenters are combined with the

    Commission's own experiences regulating the markets subject to its

    jurisdiction, a common theme emerges: The collection of and access to

    searchable records, both oral and written, are indispensable tools the

    Commission needs to ensure market integrity and protect customers.

    Currently, many of the market participants that will be subject to the

    final rules have such records by way of their business needs or other

    regulatory requirements. Some commenters have urged the Commission to

    rely on currently available information and not require more. While

    existing information aids the Commission in discharging its regulatory

    responsibility, the Commission believes current recordkeeping,

    particularly in the area of oral recordkeeping, is limited, to varying

    degrees, in availability, scope and effectiveness.

    The final rules will significantly advance the Commission's efforts

    to detect and deter abusive, disruptive, fraudulent and manipulative

    acts and practices that seriously harm market integrity and customers.

    In addition, the information that will be required as a result of this

    rulemaking will benefit the Commission in its market analysis efforts,

    such as investigating and preparing market reconstructions and

    understanding causes of unusual market activity. Further, the

    requirement that records be kept current and readily available

    facilitates the timely pursuit of potential violations, which can be

    important in seeking to freeze and recover any profits received from

    illegal activity.

    Notwithstanding the important policy and practical reasons for the

    final rules, the Commission shares many of the commenters' concerns

    regarding costs and the availability of relevant technology. Therefore,

    as discussed below, the Commission is adopting alternatives to the

    Proposal where doing so would achieve the Commission's objectives and

    the benefits of promoting market integrity and protecting customers

    albeit at lower cost. The Commission is also significantly extending

    the amount of time entities have to come into compliance with the final

    rule requiring the recording of oral communications. In so doing, the

    entities subject to this rulemaking are afforded the same amount of

    time as SDs and MSPs to come into compliance with analogous

    requirements in regulations 23.202(a)(1) and (b)(1).

    Regarding oral communications, in response to commenters' concerns

    that the scope of the new requirement was too broad, the new

    requirement to record oral communications will be limited to those oral

    communications that lead to a transaction in a commodity interest. As

    proposed, the oral communications recordkeeping requirement would have

    applied to commodity interest and cash commodity transactions. In

    response to comments asserting that the cost of implementing and

    maintaining an oral communication recording system would be overly

    burdensome for small entities and the commercial end-user, non-

    intermediary members of a DCM or SEF, the Commission has determined to

    exclude from the new requirement to record oral communications: Small

    IBs\23\; the oral communications of an FB who is a member of a DCM or

    SEF that do not lead to the purchase or sale for any person other than

    the FB of any commodity for future delivery, security futures product,

    swap, or commodity option authorized under section 4c of the Act; and

    certain members of a DCM or SEF, including floor traders (``FTs''),\24\

    commodity pool operators

    [[Page 75529]]

    (``CPOs''), SDs, MSPs,\25\ and members that are not registered or

    required to be registered with the Commission in any capacity. As

    proposed, the oral communications recording requirement would have

    applied to FCMs, RFEDs, all IBs and all members of a DCM or SEF. These

    exclusions are based on the Commission's experience that such entities

    are either unlikely to or prohibited from having a customer interface

    or an effect on market integrity. For example, while a Small IB takes

    customer orders, they generally do not execute those orders, meaning

    that they lack a direct market interface that could affect market

    integrity. Further, as defined herein, a Small IB is unlikely to

    generate the volume of market activity that the Commission would expect

    could affect the integrity of the markets. Conversely, where an FT

    could affect market integrity, they are prohibited from accepting

    customer funds and are therefore excluded by the limiting principle of

    customer protection.

    ---------------------------------------------------------------------------

    \23\ Final regulation 1.35(a) excludes from the oral

    communications recordkeeping requirement any IB that has generated,

    over the preceding three years, $5 million or less in aggregate

    gross revenues from its activities as an IB (``Small IB''). All

    other IBs with aggregate gross revenue exceeding $5 million will be

    referred to as ``non-Small IBs.'' The Commission has previously

    determined this to be an appropriate definition of a small IB. In

    connection with regulation 1.71 (Conflicts of Interest Policies and

    Procedures by Futures Commission Merchants and Introducing Brokers),

    the Commission provided a separate regulatory standard for small

    IBs, based on this definition, to lessen the compliance burden

    imposed by the conflicts of interest requirements on such firms. See

    SD and MSP Recordkeeping Final Rule, 77 FR at 20148. In that rule,

    the Commission found that ``Section 4d(c) of the Act mandates the

    establishment of `appropriate informational partitions' within FCMs

    and IBs, and all such firms are bound by that statutory

    requirement,'' and. It concluded that ``the size of an IB plays a

    significant role in determining the appropriateness of such

    partitions.'' Id. at 70149. Applying this new standard for IBs to

    the instant final rulemaking, the Commission estimates that with

    respect to IBs, limiting the scope of final regulation 1.35(a) to

    IBs that are not small excludes more than 95% of IBs from the

    regulation 1.35 oral communications recordkeeping requirement

    adopted in this release. Thus, at present, the Commission expects

    that no more than approximately 75 IBs will be subject to the final

    oral recordkeeping requirements of regulation 1.35.

    \24\ The Commission notes that certain FTs, although excluded

    from the oral communications requirement in regulation 1.35(a), will

    be required to record their oral communications concerning swap

    transactions and their related cash and forward transactions,

    pursuant to regulation 23.202(a)(1) and (b)(1). Pursuant to

    regulation 23.200(i), a related cash or forward transaction means a

    purchase or sale for immediate or deferred physical shipment or

    delivery of an asset related to a swap where the swap and the

    related cash or forward transaction are used to hedge, mitigate the

    risk of, or offset one another. See SD and MSP Recordkeeping Final

    Rule, 77 FR at 20202. The recently finalized definition of SD

    (regulation 1.3(ggg)(iv)(H)) requires certain FTs who deal in swaps

    to comply with regulation 23.202, as well as certain other

    regulations in part 23, notwithstanding the fact that such FTs are

    not required to register as SDs. See 17 CFR 1.3(ggg)(iv)(H), as

    finalized by the Commission in Further Definition of ``Swap

    Dealer,'' ``Security-Based Swap Dealer,'' ``Major Swap

    Participant,'' ``Major Security-Based Swap Participant'' and

    ``Eligible Contract Participant,'' 77 FR 30596 (May 23, 2012).

    \25\ As noted above, SDs and MSPs are subject to the oral

    communications recording requirement in Part 23. See SD and MSP

    Recordkeeping Final Rule, 77 FR at 20148 (to be codified at 17 CFR

    23.202(a)(1) and (b)(1)). SDs and MSPs that are also registered in a

    capacity covered by the oral communications recording requirement in

    regulation 1.35(a) would be subject to the recording requirements in

    both rules.

    ---------------------------------------------------------------------------

    While seeking to mitigate the costs of compliance for smaller

    entities without compromising the Commission's objectives, the

    Commission is not exempting Small IBs and other excluded participants

    from the requirement to keep written records of covered information,

    for example, given or received by telephone. For example, if a Small IB

    receives a customer's order over the telephone, then the Small IB would

    not be required to record the telephone call under the new provision in

    regulation 1.35(a), but the Small IB would be required to keep a

    written record of the order under both the existing requirement in

    regulation 1.35(a) to keep and maintain records of ``all orders

    (filled, unfilled, or cancelled)'' and the new requirement in

    regulation 1.35(a) to keep records of ``instructions'' to place orders.

    Therefore, although this rulemaking's definition of Small IB will

    exclude most IBs from the requirement to record oral communications,

    the Commission believes it can continue to promote market integrity and

    protect customers because the same IBs will continue to be required to

    keep written records under regulation 1.35(a). In addition, because

    many of an IB's oral communications leading to a commodity interest

    transaction are conducted with FCMs, those oral communications would be

    recorded by the FCM.

    The Commission has also considered whether FBs should be treated

    similarly to IBs in drawing a distinction between large and small

    entities.\26\ The Commission does not believe any similar distinction

    is warranted. As Congress recognized by creating separate categories of

    registrants, FBs and IBs perform different functions. While both

    receive orders, an FB executes orders,\27\ and an IB transmits orders

    for execution.\28\ Because FBs execute orders and can direct the manner

    of the same without an intermediary, they can have a significant impact

    on the integrity of the market.\29\ When an IB solicits or receives

    order information from a customer through an oral communication, it

    then will often communicate that information either to an FCM or FB.

    Under the regulation as adopted, the FCM or FB would have to record the

    oral communication with the IB. By contrast, an FB may have covered

    communications with a customer who is not itself subject to a recording

    requirement. The need for recording oral communications with FBs has

    been independently recognized by several DCMs.\30\ DCM rules requiring

    FBs to record oral communications do not make distinctions based on an

    FB's size.

    ---------------------------------------------------------------------------

    \26\ Regarding FBs, KCBT stated that, ``it has always understood

    1.35(a) to apply to members of DCMs * * * in order to capture and

    monitor the activities of DCM members * * * dealing with customers

    as agent for such transactions, namely registered FBs.''

    \27\ An FB generally is defined in section 1a(22)(A) of the CEA,

    7 U.S.C. 1a(22)(A), as: Any person--(--(i) who, in or surrounding

    any pit, ring, post, or other place provided by a contract market

    for the meeting of persons similarly engaged, shall purchase or sell

    for any other person--(I) any commodity for future delivery,

    security futures product, or swap; or (II) any commodity option

    authorized under section 4c of the CEA; or (ii) who is registered

    with the Commission as an FB.

    \28\ An IB generally is defined in section 1a(31)(A) of the CEA,

    7 U.S.C. 1a(31)(A), as: Any person (except an individual who elects

    to be and is registered as an associated person of a futures

    commission merchant) (i) who--(I) is engaged in soliciting or in

    accepting orders for--(aa) the purchase or sale of any commodity for

    future delivery, security futures product, or swap; (bb) any

    agreement, contract, or transaction described in section

    2(c)(2)(C)(i) or section 2(c)(2)(D)(i); (cc) any commodity option

    authorized under section 4c; or (dd) any leverage transaction

    authorized under section 19; and (II) does not accept any money,

    securities, or property (or extend credit in lieu thereof) to

    margin, guarantee, or secure any trades or contracts that result or

    may result therefrom; or (ii) who is registered with the Commission

    as an IB. See 7 U.S.C. 1a(31)(B).

    \29\ See, e.g., In re DiPlacido, [2007-2009 Transfer Binder]

    Comm. Fut. L. Rep. (CCH) ] 30,970 at 62,484 (CFTC Nov. 5, 2008),

    summary affirmance, 364 Fed. Appx. 657 (2d Cir. 2009), cert. denied,

    130 S.Ct. 1883 (2010) (records of FB's oral communications with

    customer admitted as evidence in case concerning manipulation of

    price of NYMEX electricity futures contracts).

    \30\ For instance, CME Rule 536.G, Telephone Recordings, states:

    Unless specifically exempted by the Market Regulation Department

    or designated Exchange staff, all headset communications must be

    voice recorded by the member or member firm authorized to use the

    headset and all such recordings must be maintained for a minimum of

    10 business days following the day on which the recording is made.

    Members and member firms are permitted to utilize their own

    recording devices, provided that the devices meet reasonable

    standards with respect to quality and reliability. Alternatively,

    members and member firms may utilize an Exchange administered voice

    recording system for a fee.

    CME Rulebook, Chapter 5 Trading Qualifications and Practices,

    Rule 536 Recordkeeping Requirements for Pit, Globex, and Negotiated

    Trades.

    ---------------------------------------------------------------------------

    To address commenter concerns that the proposed rule would capture

    the oral communications of certain members of DCMs who currently are

    registered as FBs, but are solely trading for their own accounts, i.e.,

    acting as FTs.,\31\ the Commission has determined to limit an FB's

    obligation to record its oral communications under regulation 1.35(a)

    to those oral communications that lead to the purchase or sale for any

    person other than the FB of any commodity for future delivery, security

    futures product, swap, or commodity option authorized under section 4c

    of the CEA. In this way, a registered FB operating as an FT (i.e., not

    handling customer orders) will be treated the same as an FT under the

    final rules.\32\

    ---------------------------------------------------------------------------

    \31\ An FT generally is defined in section 1a(23)(A) of the CEA,

    7 U.S.C. 1a(23)(A), as: Any person--(i) who, in or surrounding any

    pit, ring, post, or other place provided by a contract market for

    the meeting of persons similarly engaged, purchases or sells solely

    for such person's own account--(I) any commodity for future

    delivery, security futures product, or swap; or (II) any commodity

    option authorized under section 4c of the CEA; or (ii) who is

    registered with the Commission as an FT.

    \32\ See 17 CFR 3.4(a).

    ---------------------------------------------------------------------------

    In determining the applicability of the final rules to another

    group of market participants that are DCM members, commodity trading

    advisors (``CTAs''), the Commission has considered measures to again

    tailor the oral communications recordkeeping requirements for CTAs to

    mitigate the costs of compliance while achieving the twin objectives of

    promoting market integrity and protecting customers. The Commission has

    reduced the impact on CTAs by: Limiting the oral communications

    recordkeeping requirement to commodity interest transactions (i.e., not

    adopting the

    [[Page 75530]]

    proposal to include cash commodity transactions); reducing the record

    retention period for all records of oral communications from 5 years to

    1 year; permitting covered persons to contract with other Commission

    registrants to retain the required records (provided that the records

    retained by the contractor registrant are the same records, thus

    allowing covered persons to avoid retaining the same records as other

    Commission registrants); and removing the tagging requirement.\33\

    ---------------------------------------------------------------------------

    \33\ The Commission considered drawing a revenues-based

    threshold for CTAs. However, given that CTAs do not have a capital

    requirement it is not possible for the Commission to readily

    determine the sizes of all registered CTAs and, therefore, the

    Commission would not be able measure the impact that such a

    threshold would have on CTAs. The Commission also considered, as an

    alternative, limiting the types of oral communications that a CTA

    must record in a similar manner to the way in which it has limited

    the types of oral communications that an FB must record to brokering

    communications. However, the Commission has determined that such a

    limitation is a not a reasonable alternative to having all CTAs who

    are members of a DCM or SEF record all oral communications that lead

    to the execution of a commodity interest transaction. Indeed, the

    limitation for FBs is appropriate for FBs, and not for other

    registration categories, given the current regulatory regime for FBs

    and FTs discussed above.

    ---------------------------------------------------------------------------

    The Commission understands that currently available technology for

    recording oral communications may not be immediately accessible or may

    involve a material cost outlay for an affected entity. However, the

    Commission also anticipates that as the availability of this technology

    increases over time, the costs to use such technology will decline

    accordingly. Accordingly, to further conform regulation 1.35(a) with

    the final recordkeeping rule for SDs and MSPs,\34\ and in response to

    commenter request for a flexible compliance timetable, the Commission

    is adopting a [November 28, 2013] compliance date and regulation

    1.35(a)(4)(i) pursuant to which the Commission may, in its discretion,

    establish an alternative compliance schedule for the requirement to

    record oral communications under regulation 1.35(a)(1). Under new

    regulation 1.35(a)(4)(i), compliance with the requirement to record

    oral communications must be found to be technologically or economically

    impracticable for an affected entity that seeks, in good faith, to

    comply with the requirement. Pursuant to new regulation

    1.35(a)(4)(iii), the Commission delegates to the Director of the

    Division of Swap Dealer and Intermediary Oversight the authority to

    exercise the Commission's discretion under regulation 1.35(a)(4)(i).

    The purpose of new regulation 1.35(a)(4) is to facilitate the ability

    of the Commission to provide a technologically practicable compliance

    schedule for an affected entity that seeks to comply in good faith with

    the oral communications recordkeeping requirements of regulation

    1.35(a)(1). In order to obtain relief under new regulation 1.35(a)(4),

    an affected entity must submit a request to the Commission. An affected

    entity submitting a request for relief must specify the basis in fact

    supporting its claim that compliance with the oral communications

    recordkeeping requirement under regulation 1.35(a)(1) would be

    technologically or economically impracticable. Such a request may

    include a recitation of the specific costs and technical obstacles

    particular to the entity seeking relief and the efforts the entity

    intends to make in order to ensure compliance according to an

    alternative compliance schedule. Relief granted under regulation

    1.35(a)(4) shall not cause an affected entity to be out of compliance

    or deemed in violation of any recordkeeping requirements. Such requests

    for an alternative compliance schedule shall be acted upon within 30

    days from the time such a request is received. If not acted upon within

    the 30-day period, such request will be deemed approved.

    ---------------------------------------------------------------------------

    \34\ See 17 CFR 23.206, as adopted by the Commission in SD and

    MSP Recordkeeping Final Rule.

    ---------------------------------------------------------------------------

    Regarding comments that the proposed amendments to regulation

    1.35(a) were inconsistent with the Commission's proposed recordkeeping

    requirements for SDs and MSPs because they would require FCMs, RFEDs,

    IBs, and members of a DCM or SEF to record voice communications

    regardless of any other recordkeeping requirement that captures the

    same information, the Commission addressed these comments in the final

    recordkeeping rules for SDs and MSPs, clarifying that, to the extent

    pre-execution trade information does not include information

    communicated by telephone, an SD or MSP is under no obligation to

    create recordings of its telephone conversations. If, however, any of

    this pre-execution trade information is communicated by telephone, the

    SD or MSP must record such communications.\35\ This clarification is

    consistent with the requirements under the revision to regulation 1.35

    requiring that all oral communications be recorded regardless of

    whether an audit trail can be established with other types of records.

    In response to commenter inquiry about whether face-to-face

    communications would have to be recorded under the final rule, the

    Commission does not intend for the final rule to require the recording

    of face-to-face conversations that do not occur over electronic,

    digital or other media.

    ---------------------------------------------------------------------------

    \35\ See SD and MSP Recordkeeping Final Rule, 77 FR at 20130.

    ---------------------------------------------------------------------------

    2. Written Communications

    Regarding written communications, the Commission has decided to

    adopt the proposed amendment to regulation 1.35(a) to clarify that the

    existing requirement to keep written records applies to electronic

    written communications such as emails and instant messages, as

    proposed. The Commission considered comments asserting that: The

    requirement to keep ``electronic communications'' should not extend to

    members of a DCM or SEF that do not handle customer orders; regulation

    1.35(a) has never required DCM members to keep records of their

    electronic communications relating to their cash commodity

    transactions; and storing records of electronic communications would be

    overly burdensome for these members. In response, the Commission notes

    that the record retention requirements of existing regulation 1.35, as

    confirmed by the Commission's Division of Market Oversight in 2009,

    include all electronic forms of communication (emails, instant

    messages, and any other form of communication created or transmitted

    electronically).\36\ Thus, contrary to commenter assertions, the

    recordkeeping obligations of regulation 1.35 currently require that all

    DCM members keep electronic

    [[Page 75531]]

    communications. Therefore, the relevant portion of the proposed new

    language (now being adopted by the Commission) ``all * * * written

    communications * * * whether communicated by * * * instant messaging,

    chat rooms, electronic email, mobile device, or other digital or

    electronic media'' does not impose any new requirements on DCM members.

    Instead, the new language clarifies the existing requirement for DCM

    members to maintain electronic communications by enumerating the forms

    of communications that the Commission intends to be covered by the

    rule. In addition, as explained above, the final language relating to

    written communications is consistent with the final recordkeeping rule

    for SDs and MSPs.\37\

    ---------------------------------------------------------------------------

    \36\ See U.S. Commodity Futures Trading Commission, Division of

    Market Oversight, Advisory for Futures Commission Merchants,

    Introducing Brokers, and Members of a Contract Market over

    Compliance with Recordkeeping Requirements, Feb. 5, 2009, (http://www.cftc.gov/ucm/groups/public/@industryoversight/documents/file/recordkeepingdmoadvisory0209.pdf) (footnotes omitted):

    The Division of Market Oversight (``Division'') has become aware

    that there is an industry misunderstanding of the record retention

    requirements of Regulations 1.35 and 1.31 as it relates to

    electronically conveyed records. The Division is issuing this

    Advisory to address any industry misunderstanding of the

    Commission's recordkeeping requirements applicable to futures

    commission merchants (``FCMs''), introducing brokers (``IBs''), and

    members of a designated contract market (``members''). With the

    increased reliance in the futures industry on electronic media and

    the use of personal electronic devices and communications technology

    to facilitate the execution of transactions for both open outcry and

    electronic trading, the Division is issuing this Advisory to correct

    any misunderstandings and to make certain that the individuals and

    entities subject to the Commission's recordkeeping requirements

    maintain all electronic forms of communications, including email,

    instant messages, and any other form of communication created or

    transmitted electronically for all trading.

    \37\ See SD and MSP Recordkeeping Final Rule, 77 FR at 20202-03

    (17 CFR 23.202(a)(1) and (b)(1)).

    ---------------------------------------------------------------------------

    The Commission also has decided to change the proposed language in

    regulation 1.35(a) which would have required an entity to keep records

    of ``all transactions related to its business of dealing in commodity

    interests and cash commodities'' to ``all transactions related to its

    business of dealing in commodity interests \38\ and related cash and

    forward transactions.'' This is different than existing regulation

    1.35, which states ``commodity futures, retail forex transactions,

    commodity options and cash commodities (including currencies).'' \39\

    The final rule defines ``related cash or forward transaction'' as a

    purchase or sale for immediate or deferred physical shipment or

    delivery of an asset related to a commodity interest where the

    commodity interest transaction and the related cash or forward

    transaction are used to hedge, mitigate the risk of, or offset one

    another.\40\ Because a forward is a type of cash transaction already

    covered by existing regulation 1.35, amending regulation 1.35 to apply

    to related forward transactions does not constitute an expansion of the

    scope of existing regulation 1.35.\41\

    ---------------------------------------------------------------------------

    \38\ ``Commodity interest'' includes commodity futures, retail

    forex, commodity options, and swaps. See Final Adaptation Rule, 77

    FR at 66319 (to be codified at 17 CFR 1.3(yy)).

    \39\ 17 CFR 1.35(a). Regulation 1.35(a) has included

    transactions in ``cash commodities'' since as early as 1964:

    Each futures commission merchant and each member of a contract

    market shall keep full, complete, and systematic records, together

    with all pertinent data and memoranda, of all transactions relating

    to his business of dealing in commodity futures and cash commodities

    * * *

    17 CFR 1.35(a) (1964).

    \40\ This definition of ``related cash or forward transaction''

    mirrors the definition of the same term as it applies to swap

    transactions for purposes of certain of an SD's or MSP's

    recordkeeping obligations under Part 23 of the Commission's

    regulations. See SD and MSP Recordkeeping Final Rule, 77 FR at

    20202.

    \41\ The Commission's glossary includes this definition of

    ``forward contract'':

    A cash transaction common in many industries, including

    commodity merchandising, in which a commercial buyer and seller

    agree upon delivery of a specified quality and quantity of goods at

    a specified future date. Terms may be more ``personalized'' than is

    the case with standardized futures contracts (i.e., delivery time

    and amount are as determined between seller and buyer). A price may

    be agreed upon in advance, or there may be agreement that the price

    will be determined at the time of delivery.

    See CFTC Glossary, A Guide to the Language of the Futures

    Industry, at http://www.cftc.gov/ConsumerProtection/EducationCenter/CFTCGlossary/glossary_f.html.

    ---------------------------------------------------------------------------

    To reflect these changes, the Commission also is changing the

    proposed revision to the title of regulation 1.35 from ``Records of

    Commodity Interest and Cash Commodity Transactions'' to ``Records of

    Commodity Interest and Related Cash or Forward Transactions.''

    In response to comments that the requirement to keep transaction

    records in separate files identifiable by transaction and counterparty

    is overbroad, overly burdensome, costly, and/or impossible to achieve,

    the Commission is modifying the Proposal to remove the requirement that

    each transaction be maintained as a separate electronic file. Instead,

    the final rule will require that such records be kept in a form and

    manner identifiable and searchable by transaction. This should be less

    burdensome than the Proposal because it will allow those required to

    comply to maintain searchable databases of the required records without

    the added cost and time needed to compile the required records into

    individual electronic files. It also is consistent with the final

    recordkeeping rule for SDs and MSPs under regulation 23.202.\42\ As the

    Commission noted in the final release for that rulemaking, regulation

    23.202 does not require the raw data to be tagged with transaction and

    counterparty identifiers so long as the recordkeeper can readily access

    and identify records pertaining to a transaction or counterparty by

    running a search of the raw data.\43\ Covered entities will be able to

    comply with this obligation by using any of a number of different

    solutions available, including commercially available products capable

    of conducting speech analytics on recordings from both landlines and

    mobile calls.

    ---------------------------------------------------------------------------

    \42\ See SD and MSP Recordkeeping Final Rule, 77 FR at 20130.

    \43\ Id.

    ---------------------------------------------------------------------------

    FIA requested guidance on whether an FCM, IB, or other DCM or SEF

    member can satisfy the recordkeeping requirements under regulation

    1.35(a) by relying on record retention performed by a DCM or SEF,\44\

    and other commenters similarly requested guidance on whether a covered

    participant can rely on another Commission registrant's records to

    satisfy its recordkeeping obligations. While complying with the final

    rule is the responsibility of the covered participant and the covered

    participant will be liable for failure to comply, depending on the type

    of record and arrangements made for access, covered persons may

    reasonably rely on a DCM, SEF or other Commission registrant to

    maintain certain records on their behalf. For example, a member of a

    DCM or SEF can rely on electronic order routing or order execution

    systems of FCMs, DCMs, or SEFs to record the audit trail information it

    enters into the system in accordance with Commission requirements, if

    the covered person arranges to get access to such records in order to

    satisfy requirements under the regulation. Reliance on another person,

    however, will not relieve a covered person of responsibility for

    compliance with the regulation. Reliance on a third party is only

    appropriate where the records maintained by the third party duplicate

    the information required to be kept by the regulation. For example, if

    an FCM records its telephone calls with a covered IB, the IB need not

    separately record the same calls if the IB and FCM agree that the FCM

    will maintain the record and provide access to the IB. By contrast, if

    a covered IB receives a customer order by telephone and then calls it

    into the FCM, the covered IB must record its telephone call with the

    customer, while the FCM records the call between the IB and FCM. For

    other types of records, like instant messages and emails, it is

    unlikely that covered persons will be able to rely on recordkeeping by

    a third party because the third party recipient will not have a

    complete record of the distribution of the message by the sender.

    ---------------------------------------------------------------------------

    \44\ FIA stated:

    We interpret the Commission's statement to mean that, to the

    extent a DCM or SEF records the relevant conversations of orders

    transmitted for execution by telephone, a Commission registrant that

    transmits such orders may rely on the DCM or SEF and is not required

    to record such conversations and maintain such records separately.

    ---------------------------------------------------------------------------

    The Commission has considered commenter requests to adopt best

    efforts approach to compliance, and require only the recording of

    conversations on firm-provided mobile telephones, not personal devices.

    The Commission declines these requests and reiterates that any

    conversation the content of

    [[Page 75532]]

    which is described under the regulation must be recorded, regardless of

    whether it occurs on a firm-provided or personal phone.\45\ It would be

    contrary to the objectives of ensuring market integrity and customer

    protection to allow circumvention of the rule simply by communicating

    on a personal device lacking recording capability. To be clear, covered

    persons must ensure that covered communications do not occur on

    personal phones that lack recording capability. And while the

    Commission is not adopting any explicit safe harbors, as a matter of

    course, the Commission considers good faith compliance with policies

    and procedures reasonably designed to comply with the oral

    communications recording rule as a mitigating factor when exercising

    its discretion in enforcement actions for violation of the rule.

    ---------------------------------------------------------------------------

    \45\ Significant technological advancements in recent years,

    particularly with respect to the cost of capturing and retaining

    copies of electronic material, including telephone communications,

    have made the prospect of establishing recordkeeping requirements

    for digital and electronic communications more economically feasible

    and systemically prudent. Evidence of these trends was examined in

    March 2008 by the FSA, which studied the issue of mandating the

    recording and retention of voice conversations and electronic

    communications. The FSA issued a Policy Statement detailing its

    findings and ultimately implemented rules relating to the recording

    and retention of such communications, including a recent

    determination that all financial service firms will be required to

    record any relevant communication by employees on their work cell

    phones. Similar rules that mandate recording of certain voice and/or

    telephone conversations have been promulgated by the Hong Kong

    Securities and Futures Commission and by the Autorit[eacute] des

    March[eacute]s Financiers in France and have been recommended by the

    International Organization of Securities Commissions (IOSCO). FSA,

    ``Policy Statement: Telephone Recording: recording of voice

    conversations and electronic communications'' (March 2008).

    ---------------------------------------------------------------------------

    Regarding comments about the existing NFA requirement that NFA

    member firms with more than a certain percentage of disciplined

    associated persons must record all conversations that they have with

    existing and potential customers for two years, the Commission believes

    that the NFA rule has been effective at protecting the markets and the

    public. However, as discussed throughout, the Commission does not view

    its final recording requirement solely as a customer protection rule.

    The amendments adopted by this release are also a means to protect the

    integrity of the markets by aiding the Commission in detecting and

    deterring market abuse, including manipulation and false reporting.\46\

    ---------------------------------------------------------------------------

    \46\ Recorded telephone conversations have been used in a number

    of the Commission's enforcement cases as evidence of market abuse.

    See, e.g., DiPlacido v. CFTC, 364 Fed.Appx. 657 (2d Cir. 2009); In

    re Barclays PLC, CFTC Docket No. 12-25 (June 27, 2012); CFTC v.

    Optiver US LLC, 2012 WL 1632613 (S.D.N.Y. Apr. 19, 2012).

    ---------------------------------------------------------------------------

    The Commission disagrees with commenters who stated that compliance

    with the new recording requirement would be illegal in certain

    jurisdictions.\47\ Federal law does not prohibit a person from

    recording a telephone call where the person recording the call is a

    party to the call or one of the parties to the call has given prior

    consent to being recorded.\48\ While state laws differ regarding the

    ability to record customer telephone conversations, the difference

    exists in the type of consent required to be given before recording can

    occur. For example, some states require the consent of one party to the

    call and others require the consent of all parties to the call.\49\

    Consent can be explicit or implied. A customer will have provided

    consent if, after being notified that the call is being recorded, he or

    she continues with the call.\50\ Therefore, a covered participant will

    in all circumstances be able to comply with this final recording rule

    without violating any other state or federal laws by informing the

    other parties to the call that the call is being recorded.\51\

    ---------------------------------------------------------------------------

    \47\ Commenters included Henderson & Lyman; Amcot; and ICE.

    \48\ See 18 U.S.C. 2511(2)(d) (Interception and disclosure of

    wire, oral, or electronic communications prohibited) (``It shall not

    be unlawful under this chapter for a person not acting under color

    of law to intercept a wire, oral, or electronic communication where

    such person is a party to the communication or where one of the

    parties to the communication has given prior consent to such

    interception unless such communication is intercepted for the

    purpose of committing any criminal or tortious act in violation of

    the Constitution or laws of the United States or of any State.'')

    \49\ For example, under New York state law, only one of the

    parties to the conversation must consent. See NY CLS Penal Sec.

    250.00. Under California and Illinois state laws, all parties to the

    conversation must consent to the recording. See Cal. Pen. Code Sec.

    632; 720 ILCS 5/14-1.

    \50\ See, e.g., Griggs-Ryan v. Smith, 904 F.2d 112,118 (1st Cir.

    1990) (call recipient, previously warned that all incoming calls

    were being recorded, impliedly consented to interception); Kearney

    v. Salomon Smith Barney, Inc., 45 Cal.Rptr.3d 730, 749 (Cal. 2006)

    (business that adequately advises all parties to a telephone call,

    at the outset of the conversation, of its intent to record the call

    would not violate the statute prohibiting the recording of telephone

    conversations without the consent of all parties).

    \51\ Moreover, if a state law were to conflict with the

    recording requirement in regulation 1.35(a), such a law would be

    preempted by regulation 1.35(a).

    ---------------------------------------------------------------------------

    Commenters also focused on the relationship between the proposed

    changes to regulation 1.35(a) and the existing record retention

    obligations of regulation 1.31 (Books and records; keeping and

    inspection). Under regulation 1.31, all books and records required to

    be kept under the Act or by the Commission's regulations must be kept

    for five years from the date thereof and be readily accessible during

    the first two years of the five-year period. Given the proposed

    amendment to regulation 1.35(a) to include a requirement to record all

    oral communications leading to the execution of a commodity interest or

    cash commodity transaction and that all such recordings be retained

    pursuant to regulation 1.31, records of oral communications kept

    pursuant to proposed regulation 1.35(a) would have had to be kept for

    five years.\52\ Concerning the relationship between regulations 1.31

    and 1.35(a), the Commission has determined to adopt a retention period

    of one year for all records of oral communications that lead to the

    execution of a transaction in a commodity interest. This modification

    responds to comments stating that the proposed retention period of five

    years for records of oral communications was too long. This also is

    consistent with the final provision for SD and MSP oral communications

    under new regulation 23.203(b)(2).\53\ In addition, the Commission

    believes that the one-year retention period for records of oral

    communications will enable it to adequately execute its enforcement

    responsibilities under the Act and these regulations, while minimizing

    the storage costs imposed on affected entities.

    ---------------------------------------------------------------------------

    \52\ See 17 CFR 1.31

    \53\ See SD and MSP Recordkeeping Final Rule, 77 FR at 20204

    (Apr. 3, 2012) (``Provided, however, that records of oral

    communications communicated by telephone, voicemail, mobile device,

    or other digital or electronic media pursuant to Sec. 23.202(a)(1)

    and (b)(1) shall be kept for a period of one year.'').

    ---------------------------------------------------------------------------

    In specific response to Amcot's concern that the five-year

    retention period for oral communications would have been too burdensome

    to its farming cooperative members, the Commission notes that, due to

    the adopted revisions to regulation 1.35(a), discussed above, the

    requirement to record oral communications likely will not apply to a

    significant portion, if any, of Amcot's members.\54\ With respect to

    Encana's request for clarification concerning the applicability of

    regulation 1.31 to

    [[Page 75533]]

    commercial end-users, regulation 1.31 applies to all records required

    to be kept by the Act or the Commission's regulations, such as records

    required to be kept under regulations 1.35, 18.05 and 23.202.

    Therefore, Encana's request is better addressed in particular response

    to those other recordkeeping requirements than in a discussion of how

    those records should be kept. In response to CME's comment that

    although the Commission suggests that the retention period for swaps

    applies only to SDs and MSPs, as addressed in proposed regulation

    23.203(b), the proposed amendment to regulation 1.31 is ambiguous in

    that it could be read to apply to all entities, the Commission

    clarifies that the final provision in regulation 1.31 regarding the

    retention period for records of swap transactions is triggered by the

    type of record and not the entity that is required to keep the record.

    Therefore, although regulation 23.203(b) only applies to SDs and MSPs

    with regard to their swap transactions, the final corresponding

    provision in regulation 1.31 applies to anyone who is required by the

    Act or by Commission regulations to keep records of swap or related

    cash or forward transactions.

    ---------------------------------------------------------------------------

    \54\ The obligation to record oral communications under final

    regulation 1.35(a)(1) will not apply to (i) oral communications that

    lead solely to the execution of a related cash or forward

    transaction; (ii) oral communications by an FB that do not lead to

    the purchase or sale for any other person of any commodity for

    future delivery, security futures product, swap, or commodity option

    authorized under section 4c of the Commodity Exchange Act; (iii) an

    IB that has generated over the preceding three years $5 million or

    less in aggregate gross revenues from its activities as an IB; (iv)

    an FT; (v) a CPO; (vi) an SD; (vii) an MSP; or (viii) a DCM or SEF

    member that is not registered or required to be registered with the

    Commission in any capacity.

    ---------------------------------------------------------------------------

    IV. Administrative Compliance

    A. Paperwork Reduction Act

    Regulation 1.35(a) is being amended to provide that certain

    Commission registrants be required to record and keep records of their

    oral communications that lead to the execution of a commodity interest

    transaction and their written communications that lead to the execution

    of a commodity interest or related cash or forward transaction, similar

    to the requirement that SDs and MSPs keep records of their oral and

    written communications that lead to the execution of swaps and related

    cash or forward transactions. Only the oral communications

    recordkeeping amendments impose new information recordkeeping

    requirements. These new requirements constitute a collection of

    information within the meaning of the Paperwork Reduction Act of 1995

    (``PRA'').\55\ Under the PRA, an agency may not conduct or sponsor, and

    a person is not required to respond to, a collection of information

    unless it has been approved by the Office of Management and Budget

    (``OMB'') and displays a currently valid control number.\56\ This

    rulemaking contains new collections of information, which amend the

    existing collection of information set forth in the ``Adaptation of

    Regulations to Incorporate Swaps'' final rule,\57\ OMB Control Number

    3038-0090, to add a new oral communication recordkeeping requirement

    that was not made part of the earlier Final Adaptation Rule. The

    Commission has submitted the Proposal containing the oral communication

    recordkeeping requirements that have been separately addressed in this

    release,\58\ this final rule release, and supporting documentation to

    OMB for review in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11.

    Responses to these information collections will be mandatory.

    ---------------------------------------------------------------------------

    \55\ 44 U.S.C. 3501 et seq.

    \56\ Id.

    \57\ On November 2, 2012, the Commission published in the

    Federal Register the Final Adaptation Rule. The Final Adaptation

    Rule promulgated the vast majority of the amendments that the

    Proposal had introduced. However, in the Final Adaptation Rule, the

    Commission stated that it would address in a separate release

    certain of the proposed changes to regulation 1.35 (i.e., the oral

    communication recordkeeping requirements).

    \58\ See 76 FR 33066, June 7, 2011.

    ---------------------------------------------------------------------------

    With respect to all of the Commission's collections, the Commission

    will protect proprietary information according to the Freedom of

    Information Act and 17 CFR part 145, ``Commission Records and

    Information.'' In addition, section 8(a)(1) of the Act strictly

    prohibits the Commission, unless specifically authorized by the Act,

    from making public ``data and information that would separately

    disclose the business transactions or market positions of any person

    and trade secrets or names of customers.'' The Commission also is

    required to protect certain information contained in a government

    system of records according to the Privacy Act of 1974, 5 U.S.C. 552a.

    1. Information To Be Provided by Reporting Entities/Persons

    a. Amendments to Regulation 1.35 (Records of Commodity Interest and

    Related Cash or Forward Transactions)

    i. Obligation To Develop and Maintain Recordkeeping Policies and

    Controls

    The final amendments to regulation 1.35(a) that require

    recordkeeping related to oral communications will require that each

    FCM, non-Small IB, RFED, and DCM or SEF member that is registered or

    required to be registered with the Commission in any capacity, except

    if registered as an FT, CPO, SD, or MSP, retain all oral communications

    provided or received concerning quotes, solicitations, bids, offers,

    instructions, trading, and prices, that lead to the execution of a

    commodity interest transaction, whether communicated by telephone,

    voicemail, facsimile, instant messaging, chat rooms, electronic mail,

    mobile device or other digital or electronic media. The final

    amendments to regulation 1.35(a) will also apply to FBs who are members

    of a DCM or SEF. However, FBs will only be required to record oral

    communications that lead to the purchase or sale for any person other

    than the FB of any commodity for future delivery, security futures

    product, swap, or commodity option authorized under section 4c of the

    Act.

    In the Proposal, the Commission anticipated that the aforementioned

    registrants may incur certain one-time start-up costs in connection

    with establishing a system to record oral communications. The

    Commission estimated that the cost of procuring systems to record these

    oral communications would be $55,000 for an average large entity that

    does not already have such systems in place, and estimated procurement

    costs of $10,000 for each small firm that does not already have such

    systems in place. Following publication of the Proposal, the Commission

    researched these costs further. As discussed below in the Cost-Benefit

    Considerations, the Commission now estimates that the cost for

    establishing a system to record oral communications on mobile phones

    using a cloud-based solution would be $90 per phone line and that the

    cost for establishing a system to record oral communications on a

    landline using a cloud-based solution would be $50 per phone line. The

    Commission estimates further that a small entity required to comply

    will have 10 phone lines and that a large entity required to comply

    will have 1,000 phone lines. Thus, to figure out the initial cost of

    establishing a system for recording oral communications, an entity will

    have to multiply the number of phone lines by the cost per line ($50

    per landline and $90 per mobile phone). The Commission estimates each

    entity to have 50% landlines and 50% mobile phone lines. Therefore, the

    initial cost for a small firm (10 phone lines) to establish a system

    for recording oral communications would be (5 x $50) + (5 x $90) or

    $700, and the initial cost for a large firm (1,000 phone lines) would

    be (500 x $50) + (500 x $90) or $70,000. For purposes of the PRA, the

    Commission has chosen to use an average initial cost of $35,000.

    Also in the Proposal, the Commission estimated the burden hours

    associated with these start-up costs to be 135 hours for any entity

    that does not already have a system in place. According to research

    referenced in the previous paragraph, the Commission now estimates that

    an entity will not have to spend any time

    [[Page 75534]]

    setting up a cloud-based solution for recording oral communications on

    a mobile phone or landline because the entity will merely have to

    contract for services from an outside vendor. However, an entity will

    spend an estimated range of 1 to 10 hours arranging the services of an

    outside vendor. If the entity chooses to negotiate the vendor's

    contract, the burden hours will be towards the higher end of the range.

    The Commission also estimated in the Proposal that one employee

    from each affected entity would have to devote one hour per trading day

    to ensure the operation of the system to record oral communications.

    Pursuant to the research referred to above, the Commission estimates

    that employees of those entities who will be required to record oral

    communications will not have to spend any time each day to ensure the

    operation of the system because the Commission expects that outside

    vendors would maintain the system.

    ii. Comments Received

    As indicated earlier in this rule, in the Final Adaptation Rule,

    the Commission stated that it would address in a separate release

    certain of the proposed changes to regulation 1.35 and related

    amendments to regulation 1.31.\59\ In response to the amendments to

    regulation 1.35(a) in the Proposal, the Commission received 35 comment

    letters from a variety of institutions, including DCMs, agricultural

    trade associations, and agricultural cooperatives.\60\ The Commission

    has determined to adopt the Proposal's amendments to regulation

    1.35(a), with certain modifications, discussed above, in order to

    address the comments the Commission received. In addition, as part of

    this final rulemaking, the Commission is making certain related

    modifications to the record retention periods set forth in regulation

    1.31. The final rules provide for a retention period of one year for

    all records of oral communications that lead to the execution of a

    transaction in a commodity interest. This modification responds to

    comments stating that the proposed retention period of five years for

    records of oral communications was too long. This also is consistent

    with the final provision for SD and MSP oral communications under new

    regulation 23.203(b)(2).\61\ Moreover, in light of comments stating,

    among other things, that it would be overly burdensome for Small IBs

    and DCM members that do not have customers to comply with the oral

    communications recordkeeping requirement, the Commission decided to

    exclude these market participants from the oral recordkeeping

    amendments to regulation 1.35(a).

    ---------------------------------------------------------------------------

    \59\ See supra section I.B.

    \60\ Comments are available in the comment file on www.cftc.gov.

    \61\ See SD and MSP Recordkeeping Final Rule, 77 FR at 20204

    (``Provided, however, that records of oral communications

    communicated by telephone, voicemail, mobile device, or other

    digital or electronic media pursuant to Sec. 23.202(a)(1) and

    (b)(1) shall be kept for a period of one year.'').

    ---------------------------------------------------------------------------

    B. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') requires that agencies

    consider whether the rules they propose will have a significant

    economic impact on a substantial number of small entities \62\ and, if

    so, provide a regulatory flexibility analysis respecting the

    impact.\63\ The Commission is adopting a substantive rule change to

    regulation 1.35(a). This substantive change would affect FCMs, certain

    IBs,\64\ RFEDs, and any member of a DCM or SEF who is registered or

    required to be registered with the Commission in any capacity other

    than as an FT, CPO, SD, or MSP by requiring them to keep records of all

    oral communications leading to the execution of a commodity interest

    transaction.

    ---------------------------------------------------------------------------

    \62\ The Small Business Administration (SBA) identifies (by

    North American Industry Classification System codes) a small

    business size standard of $7 million or less in annual receipts for

    Subsector 523--Securities, Commodity Contracts, and Other Financial

    Investments and Related Activities. 13 CFR Ch. 1, Sec. 121.201.

    \63\ 5 U.S.C. 601 et seq.

    \64\ See note 2323, supra, for discussion of definition of Small

    IB.

    ---------------------------------------------------------------------------

    1. FCMs and RFEDs

    The Commission has previously determined that registered FCMs and

    RFEDs are not small entities for purposes of the RFA.\65\ Accordingly,

    the Chairman, on behalf of the Commission, hereby certifies pursuant to

    5 U.S.C. 605(b) that the final rules will not have a significant

    economic impact on a substantial number of small entities with respect

    to these entities.

    ---------------------------------------------------------------------------

    \65\ See Policy Statement and Establishment of Definitions of

    ``Small Entities'' for Purposes of the Regulatory Flexibility Act,

    47 FR 18618, 18619 (Apr. 30, 1982) (DCMs, FCMs, and large traders)

    (``RFA Small Entities Definitions''); Opting Out of Segregation, 66

    FR 20740, 20743 (Apr. 25, 2001) (ECPs); Regulation of Off-Exchange

    Retail Foreign Exchange Transactions and Intermediaries, 75 FR

    55410, 55416 (Sept. 19, 2010) (RFEDs) (``Retail Forex Final

    Rules''); and Position Limits for Futures and Swaps; Final Rule and

    Interim Final Rule, 76 FR 71626, 71680 (Nov. 18, 2011) (SEFs).

    ---------------------------------------------------------------------------

    2. IBs

    Regulation 1.35(a) may have a significant economic impact on IBs

    with annual receipts between $5 million and $7 million. The Commission

    provided an initial regulatory flexibility analysis in its proposed

    rulemaking for all IBs, regardless of their size, as the proposed

    rulemaking did not exclude any IBs from the application of the

    requirement to keep records of all oral communications.\66\

    ---------------------------------------------------------------------------

    \66\ See the Proposal, 76 FR at 33079. To the extent that small

    IBs were affected by the proposed rules, the Commission conducted an

    initial regulatory flexibility analysis. These final rules exclude

    Small IBs, as defined above. The final rules have therefore

    significantly reduced the number of IBs affected by regulation

    1.35(a). However, to the extent that certain small IBs, for purposes

    of RFA, may be affected by these rules, the Commission is conducting

    a final regulatory flexibility analysis.

    ---------------------------------------------------------------------------

    As discussed above, this final rule will involve substantive

    changes to regulation 1.35(a), by requiring, among others, non-Small

    IBs to record all oral communications that lead to the execution of a

    commodity interest transaction. As indicated above, the Commission

    provided an initial regulatory flexibility analysis for IBs in the

    Proposal, as required by 5 U.S.C. 603, because the oral recordkeeping

    requirement under regulation 1.35(a), as proposed, may have had a

    significant economic impact on a significant number of small IBs.\67\

    ---------------------------------------------------------------------------

    \67\ See the Proposal, 76 FR at 33079-80.

    ---------------------------------------------------------------------------

    The Commission has never previously determined that IBs, as a

    registrant category, are not ``small entities'' for the purposes of the

    RFA. Instead, historically, the Commission has evaluated within the

    context of a particular regulatory proposal whether all or some

    affected IBs would be considered to be small entities and, if they are

    considered small entities, the economic impact on them of the

    particular regulation. Accordingly, the Commission offers, pursuant to

    5 U.S.C. 604, the following final regulatory flexibility analysis.

    a. A Statement of the Need for, and Objectives of, the Rule

    The primary objective of final regulation 1.35(a) is to increase

    market integrity by requiring IBs with greater than $5 million in total

    aggregate gross revenues over the preceding three years to keep records

    of all oral communications leading to the execution of a commodity

    interest transaction. This rule is necessary for several reasons.

    First, it will protect the integrity of the market as a whole by aiding

    the Commission in detecting and deterring market abuse, including

    manipulation and false reporting. Additionally, it will make

    enforcement investigations more efficient by preserving critical

    evidence that otherwise may be lost to memory lapses

    [[Page 75535]]

    and inconsistent recollections. This, in turn, is expected to increase

    the success of enforcement actions, which will benefit customers,

    regulated entities, and the markets as a whole.\68\ Moreover, it also

    will protect customers from abusive sales practices, protect

    registrants from the risks associated with transactional disputes, and

    allow registrants to follow-up more effectively on customer complaints

    of abuses by their associated persons. Finally, final regulation

    1.35(a) provides regulatory parity of futures and swaps markets because

    the requirements of final regulation 1.35(a) are consistent with

    recently finalized regulations requiring SDs and MSPs to keep records

    of all oral communications leading to the execution of a swap

    transaction or a related cash or forward transaction.\69\

    ---------------------------------------------------------------------------

    \68\ In promulgating its own telephone recording rule, the

    Financial Services Authority issued guidance stating the following

    benefits: ``(i) Recorded communication may increase the probability

    of successful enforcement; (ii) this reduces the expected value to

    be gained from committing market abuse; and (iii) this, in

    principle, leads to increased market confidence and greater price

    efficiency.'' See Financial Services Authority, ``Policy Statement:

    Telephone Recording: Recording of voice conversations and electronic

    communications'' (Mar. 2008).

    \69\ See SD and MSP Recordkeeping Final Rule, 77 FR at 20203-04

    (to be codified at 17 CFR 23.202(a)(1) and (b)(1)).

    ---------------------------------------------------------------------------

    b. A Statement of the Significant Issues Raised by the Public Comments

    in Response to the Initial Regulatory Flexibility Analysis, a Statement

    of the Assessment of the Agency of Such Issues, and a Statement of Any

    Changes Made in the Proposed Rule as a Result of Such Comments

    i. Significant Issues Raised by the Public Comments in Response to the

    Initial Regulatory Flexibility Analysis

    Comments on the proposed amendments to regulation 1.35(a) primarily

    focused on the implications of the proposed oral recordkeeping and

    tagging requirements and, in particular, on the portion of the Proposal

    requiring all DCM and SEF members, including commercial end-users and

    non-intermediaries, to keep records of their cash commodity

    transactions. One theme of the comments was that the proposed oral

    communications recordkeeping and tagging requirements were overly

    burdensome.\70\ Commenters were also concerned that the proposed

    separate electronic file requirement was open-ended, seemingly

    impossible to achieve,\71\ and overly burdensome. Commenters also

    explained that it could be difficult to link conversations occurring

    over several days,\72\ and could require the recording of all

    conversations \73\ because a call might begin unrelated to a covered

    transaction but eventually lead to a covered transaction. Commenters

    sought a reasonableness standard regarding oral recordkeeping and a

    limitation to exclude oral communications on mobile telephones and

    argued that the new oral communications recordkeeping requirement would

    be illegal in certain jurisdictions. Commenters also requested that the

    proposal to record and store oral communications should be reviewed in

    the context of available technology.

    ---------------------------------------------------------------------------

    \70\ See, e.g., comments from Amcot (overbreadthover breadth

    would be burdensome for agricultural DCM members) and NIBA (at the

    very least, small IBs should be exempt from the proposed amendments

    to 1.35(a) because the burden on such small entities would be too

    great).

    \71\ See comment from FIA.

    \72\ See comment from CME.

    \73\ See id.

    ---------------------------------------------------------------------------

    ii. Agency Assessment of Significant Issues Raised by the Public

    Comments in Response to the Initial Regulatory Flexibility Analysis

    The Commission carefully considered the comments, determined that a

    number of concerns and requested alternatives had merit and, as a

    result, made a number of adjustments in response. In response to

    commenters' concerns that the proposed amendments were overly

    burdensome to non-intermediaries' cash agricultural and energy

    transactions, the Commission has limited not only the oral

    recordkeeping requirements of regulation 1.35(a) to commodity interest

    transactions, but also the existing written recordkeeping requirements

    therein to commodity interest and related cash and forward

    transactions.

    Some commenters expressed concerns that the proposed revisions to

    regulation 1.35(a) would be unduly burdensome for small entities and

    DCM and SEF members who are commercial end-users and non-

    intermediaries. In response, the Commission has excluded Small IBs

    (those IBs with less than $5 million in total aggregate gross revenues

    over the preceding three years) from the application of the rules and

    certain DCM and SEF members from the scope of the new requirement to

    record oral communications, namely FTs, CPOs, SDs, and MSPs that would

    have been obligated to comply by virtue of their status as a DCM or SEF

    member.

    Commenters also expressed the view that the requirement to keep

    transaction records in separate files identifiable by transaction and

    counterparty is overbroad, overly burdensome, costly, and/or impossible

    to achieve. In response, the Commission has removed the requirement

    that each transaction be maintained as a separate electronic file. In

    response to a request that covered persons be able to rely on another

    Commission registrant's records to satisfy their recordkeeping

    obligations, the Commission provided for such reliance in the final

    rules, to be applicable only when the records being kept are identical.

    The Commission declined to amend the Proposal in response to

    certain comments. Although commenters sought a reasonableness standard

    regarding oral recordkeeping and a limitation to exclude oral

    communications on mobile telephones, the Commission determined to

    retain the provisions of the Proposal that any covered communication

    must be recorded, whether it occurs on a firm-provided or personal

    device.\74\

    ---------------------------------------------------------------------------

    \74\ As discussed in more detail above, significant

    technological advancements in recent years, particularly with

    respect to the cost of capturing and retaining copies of electronic

    material, including telephone communications, have made the prospect

    of establishing recordkeeping requirements for digital and

    electronic communications more economically feasible and

    systemically prudent.

    ---------------------------------------------------------------------------

    The Commission also has determined not to amend the Proposal in

    response to commenters stating that compliance with the new oral

    communications recordkeeping requirement would be illegal in certain

    jurisdictions. It is not a violation of federal law to record a

    telephone call where the person recording the call is a party to the

    call or one of the parties to the call has given prior consent to being

    recorded.\75\ While state laws differ regarding the ability to record

    customer telephone conversations, the difference is in the type of

    consent to recording required. Therefore, the most a covered

    participant will have to do to comply with the final oral

    communications recording rule without violating any other state or

    federal laws is to obtain the prior consent of the other parties to the

    call to record the conversation. The Commission also notes that DCM

    rules currently require all floor personnel who wear headsets to record

    their conversations, so there is only an incremental burden to the

    entities already subject to those rules, such as FBs.

    ---------------------------------------------------------------------------

    \75\ See 18 U.S.C. 2511(2)(d).

    ---------------------------------------------------------------------------

    iii. Changes Made in the Proposed Rule as a Result of Such Comments

    In response to comments, the Commission incorporated the

    following modifications to the Proposal into final regulation 1.35(a):

    Reduced the scope of the obligation to record oral

    [[Page 75536]]

    communications as proposed by limiting it to commodity interest

    transactions; reduced the retention period for records of oral

    communications leading to a commodity interest transaction from five

    years to one; reduced the scope of persons required to record oral

    communications from FCMs, RFEDs, IBs and all members of a DCM or SEF to

    FCMs, RFEDs, IBs with total aggregate gross revenues of at least $5

    million over the preceding three years, and any member of a DCM or SEF

    registered or required to be registered with the Commission in any

    capacity, other than FTs, CPOs, SDs, and MSPs (although SDs and MSPs

    are required to comply with regulations 23.202(a)(1) and (b)(1) which

    require recordkeeping of certain oral communications, among other

    requirements); eliminated the tagging requirement; and allowed for

    covered persons to rely on the records of another Commission

    registrant, where appropriate (since reliance will not be appropriate

    in all circumstances as discussed in section III above) in complying

    with their recording obligations, while confirming that the covered

    person will be liable for any violation of the regulation.

    iv. Response to ETA Comment Letter

    Among other things, the Proposal stated that, except for the

    proposed revision to regulation 1.35(a) requiring IBs to maintain

    records of voice communications, the Proposal would not have a

    significant economic effect on a substantial number of small entities.

    The Proposal included a Regulatory Flexibility Analysis with respect to

    the proposed requirement that IBs maintain such records. That analysis

    concluded with the determination to treat equally all Commission

    registrants transacting on behalf of customers with respect to keeping

    records of oral communications.

    The ETA commented that the Proposal failed to reflect that the vast

    majority of the ETA's constituents, electrical utilities that the ETA

    believes would be affected by the Proposal, are ``small entities'' and,

    therefore, that an analysis under the RFA was required. The ETA's

    comment letter did not specify which proposed provisions in the instant

    rulemaking would affect its members or into which affected entity

    category or categories its members could fall. Notably, the RFA does

    not obligate the Commission to analyze the indirect effects on persons

    not subject to the rule itself. As the Commission understands, those

    electrical utilities that may be small entities will not be FCMs,

    RFEDs, IBs with annual receipts of over $5 million, or members of a DCM

    or SEF transacting business with customers. Rather, they most likely

    will be end-users of the transactions conducted, the recorded rather

    than the recorders. As such, there will be no direct, significant

    economic impact on these electric utilities. Rather, the impact will be

    imposed on the entities through which they may effect transactions.

    c. A Description of and an Estimate of the Number of Small Entities to

    Which the Rule Will Apply or an Explanation of Why No Such Estimate Is

    Available

    An IB generally \76\ is defined in CEA section 1a(31)(A) as

    follows:

    ---------------------------------------------------------------------------

    \76\ CEA section 1a(31)(B), 7 U.S.C. 1a(31)(B), grants the

    Commission the authority to further define the term IB.

    Any person (except an individual who elects to be and is

    registered as an associated person of a futures commission

    merchant)--

    (i) Who--

    (I) Is engaged in soliciting or in accepting orders for--

    (aa) The purchase or sale of any commodity for future delivery,

    security futures product, or swap;

    (bb) Any agreement, contract, or transaction described in

    section 2(c)(2)(C)(i) or section 2(c)(2)(D)(i);

    (cc) Any commodity option authorized under section 4c; or

    (dd) Any leverage transaction authorized under section 19; and

    (II) Does not accept any money, securities, or property (or

    extend credit in lieu thereof) to margin, guarantee, or secure any

    trades or contracts that result or may result therefrom; or

    (ii) Who is registered with the Commission as an introducing

    broker.\77\

    ---------------------------------------------------------------------------

    \77\ 7 U.S.C. 1a(31)(A).

    As the Commission stated in the initial Regulatory Flexibility

    Analysis, there are an estimated 1,500 IBs registered with the

    Commission at any given time. As of June 30, 2012, there were 1,431

    registered IBs.\78\ The Commission stated in the Proposal's Regulatory

    Flexibility Analysis that a large percentage of registered IBs are

    ``guaranteed'' IBs,\79\ many of which may be small entities.\80\

    However, the Commission estimates that limiting, with respect to IBs,

    the scope of final regulation 1.35(a) to non-Small IBs excludes more

    than 95% of registered IBs from regulation 1.35's oral communications

    recordkeeping requirement. Thus, the Commission expects that no more

    than approximately 75 registered IBs will be subject to the final oral

    recordkeeping requirements of regulation 1.35(a) at any one time.

    ---------------------------------------------------------------------------

    \78\ Source: NFA.

    \79\ A guaranteed IB (``GIB'') is an IB that ``does not have to

    maintain a partic[ul]ar level of net capital but, instead, is

    guaranteed by a particular FCM/RFED and is generally required to

    introduce all its business to that FCM/RFED.'' Independent IBs

    ``must maintain adjusted net capital of at least $45,000 but may

    introduce business to any registered FCM/RFED.'' NFA, What is the

    difference between an independent IB and a guaranteed IB?, available

    at http://www.nfa.futures.org/nfa-faqs/registration_faqs/requirements-for-FCM-IB-applicants/what-is-difference-between-IIB-and-GIB.html last visited Sept. 28, 2012.

    \80\ According to the NFA, as of June 30, 2012, there were 832

    registered GIBs.

    ---------------------------------------------------------------------------

    d. A Description of the Projected Reporting, Recordkeeping, and Other

    Compliance Requirements of the Rule, Including an Estimate of the

    Classes of Small Entities Which Will Be Subject to the Requirement and

    the Type of Professional Skills Necessary for Preparation of the Report

    or Record

    Regulation 1.35(a), as amended, will require, among others, non-

    Small IBs to record all oral communications that lead to the execution

    of a commodity interest transaction.\81\ The regulation is primarily a

    recordkeeping requirement, which will obligate covered IBs that do not

    already do so to record their oral communications \82\ or the oral

    communications of their traders and sales forces. The final rules

    provide for a retention period of one year for all records of oral

    communications that lead to the execution of a transaction in a

    commodity interest. This modification responds to comments stating that

    the proposed retention period of five years for records of oral

    communications was too long. This also is consistent with the final

    provision for SD and MSP oral communications under new regulation

    23.203(b)(2).

    ---------------------------------------------------------------------------

    \81\ The Proposal had required recording of oral communications

    that lead to the execution of a commodity interest and cash

    commodity transaction. See the Proposal, 77 FR at 33091.

    \82\ Covered market participants will be allowed to arrange with

    third parties, including DCMs, SEFs, and FCMs, to have access to the

    DCMs', SEFs', or other Commission registrants' records and, to the

    extent the records are duplicative of what would be required ofby

    the covered entity under the rule, may rely on such records to

    satisfy their own recordkeeping obligations. The Commission

    notesNote, however, that this does not relieve the covered

    participant from liability for compliance failures.

    ---------------------------------------------------------------------------

    [[Page 75537]]

    e. A Description of the Steps the Agency Has Taken To Minimize the

    Significant Economic Impact on Small Entities Consistent With the

    Stated Objectives of Applicable Statutes, Including a Statement of the

    Factual, Policy, and Legal Reasons for Selecting the Alternative

    Adopted in the Final Rule and Why Each One of the Other Significant

    Alternatives to the Rule Considered by the Agency Which Affect the

    Impact on Small Entities Was Rejected

    In connection with adopting the final rules, the Commission

    considered, as alternatives, establishing different compliance or

    reporting requirements that take into account the resources available

    to smaller entities, exempting smaller entities from coverage of the

    disclosure requirements, and clarifying, consolidating, or simplifying

    disclosure for small entities. In response to comments that the

    proposed oral communications recordkeeping requirement would be overly

    burdensome for small IBs, the Commission dramatically scaled back the

    scope of regulation 1.35(a) as it applies to oral recordkeeping by IBs,

    reducing by well more than half the number of IBs expected to be

    subject to the requirement. The Commission further reduced the impact

    on IBs by limiting the oral communications recordkeeping requirement to

    commodity interest transactions from the proposed commodity interest

    and cash commodity transactions.

    Although commenters sought a reasonableness standard regarding oral

    recordkeeping and a limitation to exclude oral communications on mobile

    telephones, the Commission has retained the provisions of the Proposal

    that any covered communication must be recorded, whether it occurs on a

    firm-provided or personal device.\83\ The Commission is, however,

    ameliorating the impact thereof by stating that it will consider good

    faith compliance with policies and procedures reasonably designed to

    comply with the oral communications recording requirement as a

    mitigating factor when exercising its discretion for violations of the

    requirement.

    ---------------------------------------------------------------------------

    \83\ As discussed in more detail above, significant

    technological advancements in recent years, particularly with

    respect to the cost of capturing and retaining copies of electronic

    material, including telephone communications, have made the prospect

    of establishing recordkeeping requirements for digital and

    electronic communications more economically feasible and

    systemically prudent.

    ---------------------------------------------------------------------------

    C. Consideration of Costs and Benefits

    Section 15(a) of the CEA requires the Commission to consider the

    costs and benefits of its actions before promulgating a regulation

    under the CEA or issuing certain orders. Section 15(a) further

    specifies that the costs and benefits shall be evaluated in light of

    the following five broad areas of market and public concern: (1)

    Protection of market participants and the public; (2) efficiency,

    competitiveness and financial integrity of futures markets; (3) price

    discovery; (4) sound risk management practices; and (5) other public

    interest considerations. The Commission considers the costs and

    benefits resulting from its discretionary determinations with respect

    to the section 15(a) factors.

    1. Background

    The markets subject to the jurisdiction of the Commission have

    undergone a significant transformation over the last few decades, and

    particularly in the last few years. Technological advances have

    contributed to a tremendous growth in trading volume in swaps as well

    as other derivatives, including futures, as well as the number and type

    of market participants. Among other notable changes, today's derivative

    markets include significant numbers of retail customers that invest in

    the commodity markets through a variety of means. Markets are also more

    interconnected than ever before, with order flow distributed across

    multiple trading centers. With this interconnectivity comes not only

    positive efficiencies, but also the potential for cross-market

    manipulation that can be difficult to detect and prove without ready

    access to information evincing the intent of those engaged in market

    activity. In addition, the Commission notes that requiring the

    recording and retention of oral communications will serve as a

    disincentive for covered entities to make fraudulent or misleading

    communications to their customers over the telephone and could serve as

    a meaningful deterrent against violations such as trading ahead of

    customer orders by providing a record of the time that a customer's

    telephone order is received.

    In July 2010, Congress passed the Dodd-Frank Act which, among other

    things, establishes a comprehensive regime for the regulation of swaps.

    The Dodd-Frank Act brings swaps under the Commission's jurisdiction and

    obligates the Commission to adopt new regulations related to

    registration and regulation of SDs and MSPs, trade execution and

    clearing requirements, and swap data recordkeeping and real time

    reporting. In section 731 of the Dodd-Frank Act, Congress added CEA

    section 4s to require the registration and regulation of SDs and MSPs

    by the Commission, including the establishment of requirements for SDs

    and MSPs to keep records of swap transactions.\84\

    ---------------------------------------------------------------------------

    \84\ 76 FR 33066.

    ---------------------------------------------------------------------------

    In response to Congress' act of requiring that SDs and MSPs keep

    daily trading records of their swaps, including records of

    communications made by telephone,\85\ and to be consistent with the

    oral communications recordkeeping requirement for SDs and MSPs in

    connection with their swap and related cash and forward

    transactions,\86\ the Commission is exercising its discretion to amend

    its regulations to require FCMs, RFEDs, non-Small IBs (i.e., IBs that

    have generated more than $5 million in aggregate gross revenues over

    the preceding three years) \87\ and members of a DCM or SEF who are

    registered or required to register with the Commission in any capacity

    other than FTs, CPOs, SDs, and MSPs to record all oral communications

    that lead to the execution of a transaction in a commodity interest.

    FBs that are members of a DCM or SEF are required to record all oral

    communications that lead to the purchase or sale for any person other

    than the FB of any commodity for future delivery, security futures

    product, swap, or commodity option authorized under section 4c of the

    Act. In this way, the Commission is affording the other markets subject

    to its jurisdiction the same market integrity and customer protections

    that Congress afforded the swaps markets in the Dodd-Frank Act. The

    Commission recognizes that these benefits are not without cost, and has

    carefully considered both benefits and costs in light of the

    considerations provided in CEA section 15(a) and, where appropriate,

    adopted alternatives to the Proposal that would achieve similar

    benefits as proposed, but at a lower cost.

    ---------------------------------------------------------------------------

    \85\ See 7 U.S.C. 6s(g)(1).

    \86\ See SD and MSP Recordkeeping Final Rule, 77 FR at 20203-04

    (Regulation 23.202(a)(1) and (b)(1)).

    \87\ See note 2323, supra, for discussion of definition of Small

    IB.

    ---------------------------------------------------------------------------

    2. Summary of the Final Rule

    Prior to this amendment, regulation 1.35(a) specified which parties

    are required to keep written records related to commodity futures,

    commodity options, and cash commodities, and what information they are

    required to record. The requirements of regulation 1.35(a) applied to

    FCMs, RFEDs, IBs, and DCM members.

    [[Page 75538]]

    As discussed above, the Commission is adopting a provision

    requiring certain entities to record all oral communications leading to

    the execution of a transaction in a commodity interest. Unlike existing

    regulation 1.35(a), this new provision will apply to FCMs, RFEDs, non-

    Small IBs, and DCM and SEF members that are registered or required to

    be registered with the Commission in any capacity other than as an FT,

    CPO, SD or MSP.

    As described above, the Commission considered adopting an exclusion

    for certain FBs similar to the exclusion for Small IBs, but determined

    to not adopt such an exclusion, in part, because FBs are parties to

    oral communications relating to the means or methods by which a trade

    will be executed. However, the Commission did determine to limit the

    application of the rule to FBs so that an FB will only be required to

    record their oral communications that lead to the purchase or sale for

    any person other than the FB of any commodity for future delivery,

    security futures product, swap, or commodity option authorized under

    section 4c of the CEA. This provision of the final rule addressed

    commenter concerns that the Proposal inappropriately captured the oral

    communications of certain members of DCMs who currently are registered

    as FBs, but are solely trading for their own accounts, i.e., acting as

    FTs. In addition, in response to comments regarding implementation

    challenges associated with oral recordkeeping requirements for SDs and

    MSPs, the Commission is extending the implementation deadline to

    provide these entities with approximately one year to comply following

    the publication of the final rule.\88\ This change provides entities

    subject to regulation 1.35(a) with the same amount of implementation

    time as was made available to SDs and MSPs.\89\ The Commission believes

    that an extended period for implementation is warranted in order to

    ensure that entities subject to this rule have adequate time to address

    the implementation challenges noted by SIFMA, as discussed below.

    ---------------------------------------------------------------------------

    \88\ See letter from SIFMA dated August 10, 2012, Re: Request

    for No-Action Relief: Recordkeeping Requirements under the Internal

    Business Conduct Rules. Available at: [XXXX].

    \89\ See Letter from the Division of Swap Dealer and

    Intermediary Oversight of the CFTC to SIFMA, dated Oct. 29, 2012,

    CFTC Letter No. 12-29. Available at: http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/12-29.pdf.

    ---------------------------------------------------------------------------

    3. Benefits

    By this action, the Commission improves its ability to ensure the

    integrity of all the markets subject to its jurisdiction and that

    customers are similarly protected, whether they be engaged in a swap

    with an SD, or a futures transaction with an FCM.

    As stated above, the markets subject to the jurisdiction of the

    Commission have undergone a significant transformation over the last

    few decades, and particularly in the last few years. Technological

    advances have contributed to a tremendous growth in trading volume as

    well as the number and type of market participants, including

    significant numbers of retail customers that invest in the commodity

    markets through a variety of means. Markets are also more

    interconnected than ever before, with order flow distributed across

    multiple trading centers. This interconnectivity yields important

    benefits but also presents increased risk, including the potential for

    cross-market manipulation where an action in one market is purposefully

    orchestrated to yield a desired outcome in another market. Therefore,

    to ensure that the integrity of the markets and customers are similarly

    protected across all markets subject to the Commission's jurisdiction,

    the Commission must have similar access to information regardless of

    whether the market participant is registered, for example, as an SD or

    an FCM.

    As the Commission explained when adopting similar

    transactional level recordkeeping requirements for SDs and MSPs, the

    Commission believes these recordkeeping requirements will protect

    market participants and promote the integrity of the markets by

    ensuring the existence of an audit trail that includes relevant oral

    communications. A strong audit trail, among other things: Provides a

    basis for efficiently resolving transactional disputes; acts as a

    disincentive to engage in unduly risky, injurious, or illegal conduct

    in that the conduct will be traceable; and in the event such conduct

    does occur, provides a mechanism for policing such conduct, both

    internally as part of a firm's compliance efforts and externally by

    regulators enforcing applicable laws and regulations.

    With respect to the latter-noted benefit--enforcing applicable laws and

    regulations--oral records have proven to be no less, and in some cases

    perhaps more, valuable than written records alone.\90\

    ---------------------------------------------------------------------------

    \90\ See note 4646, supra.

    ---------------------------------------------------------------------------

    By requiring records of all communications leading to a transaction

    in a commodity interest, the public benefits and the financial

    integrity of the markets is protected because additional documentation

    enhances the Commission's ability to detect and enforce rule

    violations, including manipulation and fraud. In particular, records of

    oral communications related to such transactions provide a record of

    the facts and circumstances that give rise to a violation that can be

    used in enforcement proceedings to redress the same. Effective

    enforcement of the Commission's regulations, particularly those

    prohibiting fraud and manipulation, protects market participants and

    the public and promotes the integrity of the markets subject to the

    Commission's jurisdiction.

    Notwithstanding the important, practical benefits of the final

    rules, the Commission has considered commenters' concerns regarding

    costs and product availability.

    4. Costs

    The public comments related to changes to regulation 1.35(a) can be

    broken down into roughly four general categories: Concerns about the

    costs of compliance to firms,\91\ concerns about the feasibility of

    complying with the requirements of the regulation,\92\ concerns about

    market participants choosing to exit the market or of a market

    bifurcation,\93\ and privacy concerns.\94\

    ---------------------------------------------------------------------------

    \91\ See, e.g., FIA; NFA; ICE, Inc.; Hunton and Williams, LLP;

    National Grain and Feed Association, Land O' Lakes; Minneapolis

    Grain Exchange, Inc.; CME Group; Commodity Markets Council;

    Barclay's Capital; Amcot; Grain and Feed Association of Illinois;

    Agribusiness Council of Indiana; Minnesota Grain and Feed

    Association; Agribusiness Association of Iowa; American Petroleum

    Institute; Ohio AgriBusiness Association; American Feed Industry

    Association; South Dakota Grain and Feed Association; Natural Gas

    Supply Association; Commodity Markets Council; Natural Gas Supply

    Association; the Fertilizer Institute; Kansas City Board of Trade;

    Oklahoma Grain and Feed Association; Electric Power Supply

    Association; Henderson & Lyman; Rocky Mountain Agribusiness

    Association; American Cotton Shippers Association.

    \92\ See, e.g., Land O'Lakes; Minneapolis Grain Exchange, Inc.;

    CME Group; Commodity Markets Council.

    \93\ See, e.g., National Grain and Feed Association; Grain and

    Feed Association of Illinois; Agribusiness Council of Indiana;

    Minnesota Grain and Feed Association; Agribusiness Association of

    Iowa; Ohio AgriBusiness Association; American Feed Industry

    Association; Kansas City Board of Trade.

    \94\ See, e.g., Virginia Nobbe; American Feed Industry

    Association; Henderson and Lyman.

    ---------------------------------------------------------------------------

    Commenters cited a broad range of compliance costs associated with

    setting up and maintaining systems to record and tag oral

    communications. One commenter that is a recording technology provider

    stated that it would cost in the range of $50/month to record a

    landline phone or $90/month to record a mobile phone with minimal

    [[Page 75539]]

    fixed setup costs. They also stated that market participants may be

    able to negotiate more favorable rates if they are able to sign longer

    contracts, or if they have a large number of phones and/or landlines

    that need to be recorded. While other commenters did not provide per

    line estimates, they did provide aggregate cost estimates that are

    significantly higher than those cited above.\95\

    ---------------------------------------------------------------------------

    \95\ For example, FIA cited expenditures on the part of several

    of its members of between $300,000-$600,000 to upgrade and maintain

    their landline phones in order to record conversations and estimated

    expenditures of anywhere from $160,000 to $2.5 million to record

    conversations on mobile phones depending on firm size. Further, FIA

    cited a fee of $500,000 to purchase licenses for ``word spotting''

    software to search and retrieve these oral records. The Commercial

    Energy Working Group stated that this compliance with the amended

    regulation 1.35 could cause costs to firms to ``increase

    exponentially'' (they cited an ``unidentified investment bank'' in

    the UK that spent $4.2 million each year to monitor its Blackberry

    phones in response to a similar Financial Services Authority

    mandate).

    ---------------------------------------------------------------------------

    The Commission has considered that the requirement to record and

    maintain records of oral communications that lead to the execution of

    commodity interest transactions will create additional costs for market

    participants subject to the requirements. Those costs include set-up

    costs to implement voice recording technology on both landlines and

    mobile phones, recurring costs (such as a monthly fee per user or per

    phone line to record), and the costs incurred by data storage.

    Commenters estimate that for participants using a so-called ``cloud-

    based solution,'' the monthly fees would be approximately $90/month/

    phone for mobile phones, and approximately $50/month/line for

    landlines. The setup costs, in each case, are estimated to be roughly

    one month's subscription fees or less.\96\ Commenters estimate that

    data storage costs are likely to be approximately $13/month/line.\97\

    ---------------------------------------------------------------------------

    \96\ Compliant Phones.

    \97\ Id.

    ---------------------------------------------------------------------------

    According to commenters, internal recording solutions (i.e., ``non-

    cloud-based solutions'') typically entail more significant

    implementation costs, though those costs are likely to vary widely

    based on existing technology, and particularly on any existing

    recording capabilities, that an entity already has. The Commission does

    not have adequate data to estimate the number of entities that already

    have recording capabilities, or the extent to which such capabilities

    are deployed in parts of the organization that would be impacted by the

    oral recordkeeping requirements in regulation 1.35.

    SIFMA, in response to the final oral recordkeeping requirements for

    SDs and MSPs, noted implementation challenges related to recording

    calls made on both landlines and cell phones, recording calls outside

    the U.S., and the ability to search and retrieve records of calls, and

    requested additional time to address those challenges.\98\

    ---------------------------------------------------------------------------

    \98\ See SD and MSP Recordkeeping Final Rule, 77 FR 20128. Based

    on SIFMA's representations, the Commission determined that relief

    from certain oral recordkeeping requirements for SDs and MSPs is

    warranted to address the issues presented, and granted no-action

    relief to SDs and MSPs until March 31, 2013.

    Among other things, SIFMA stated that implementing systems to

    record landline conversations will require upgrades to data

    retention infrastructure, testing that must occur on nights and

    weekends, and overcoming difficulties obtaining products and

    services. Further, they stated that mobile phone recording

    technology has ``not achieved the levels of stability, performance

    and scalability that would be considered for commercial grade

    products.'' They stated that shipping delays, testing and

    troubleshooting challenges due to different time zones, legal

    requirements, and ``an apparent lack of recording capabilities'' in

    certain countries and uncertainty about what transactions may be

    subject to the requirements would delay efforts to implement

    solutions in foreign offices. And last, they asserted that

    limitations related to caller identification technology and

    associated metadata would prevent SDs and MSPs from rapidly

    implementing solutions that would enable them to search and retrieve

    calls related to specific counterparties or transactions.

    ---------------------------------------------------------------------------

    The Commission, mindful of the fact that the entities subject to

    this rule will likely face some of the same implementation challenges,

    is providing the same amount of time for entities subject to regulation

    1.35(a) to comply as was afforded to SDs and MSPs to comply with

    regulations 23.202(a)(1) and (b)(1). In addition, 1.35(a)(4)(i) permits

    entities seeking to comply in good faith with the oral communications

    recordkeeping requirements of regulation 1.35(a)(1) to submit a request

    for relief if compliance is technologically or economically

    impracticable for an affected entity prior to the compliance deadline.

    The Commission anticipates that the additional time for implementation

    will benefit entities subject to this rule by providing more time to

    address the challenges noted by SIFMA. Moreover, it will create

    opportunities for entities that are subject to this rule to benefit

    from solutions developed by vendors serving SDs and MSPs.

    The Proposal included an additional requirement that transaction

    records be kept in separate electronic files identifiable by

    transaction and counterparty.\99\ In response to comments, the

    Commission is not adopting that requirement, such that firms are not

    required to keep records in separate electronic files. Instead, firms

    are only required to identify and retrieve relevant records upon

    Commission request. Therefore, the cost associated with ``tagging'' of

    oral communication records has been eliminated. Relevant entities,

    however, will need to be able to search and select records related to a

    particular transaction or counterparty when the Commission requests

    them. The Commission expects that this may be done in one of two ways.

    Market participants may use an electronic means of scanning records by

    key word or they may identify key words and concepts in records

    manually by listening to the recordings. In either case, participants

    must be able to identify and retrieve records if they are required to

    do so by the Commission.

    ---------------------------------------------------------------------------

    \99\ With respect to the proposed requirement that entities

    proactively identify which communications relate to specific

    traders, trades, and counterparties and then ``tag'' them as such,

    comments expressed concerns regarding the reliability of

    technological solutions. For instance, the FIA writes, ``We

    understand that two software providers, NICE Actimize and Nexidia,

    offer so-called `word spotting' programs'' but that they believe

    that these programs ``are not foolproof and may identify less than

    50 percent of potentially relevant conversations.'' The Commercial

    Energy Working Group stated that in lieu of an accurate software

    solution, manual identification and retrieval of oral records would

    require ``as many as 3-5 analysts and 1-2 additional technical

    support personnel to support transactions'' for ``a small or modest-

    sized end-user commodity business'' and that ``the total cost to a

    commodity business is likely to be in excess of $1 million

    annually.''

    ---------------------------------------------------------------------------

    If, when recordings are requested by the Commission, an entity

    chooses to assign or hire personnel to listen to recordings and

    identify those being requested, the costs will vary significantly

    depending on the number and length of oral communications that must be

    reviewed. These variables will, in turn, be influenced by a host of

    other factors, including: the number of transactions or counterparties

    for which relevant recordings must be identified; the length of time

    across which specified traders were active or specified trades were

    likely discussed, or the specified counterparties were in contact with

    the entity from whom the recordings are requested; the number of oral

    communications that specified traders or counterparties made during the

    period that may be in question; and the average length of each call.

    The Commission estimates that in such cases, an entity might dedicate

    personnel to spend as little as 50 hours reviewing recordings, or as

    much as 5,000 hours reviewing recordings. The average wage for a

    compliance specialist is $155.96 per hour and therefore the cost for

    manual review, if an entity chooses that option when the

    [[Page 75540]]

    Commission requests records, could range from $7,800 to $780,000.\100\

    ---------------------------------------------------------------------------

    \100\ The average wage for a compliance specialist is $155.96

    [($58,303 per year)/(2,000 hours per year) * 5.35 = $155.96]. For

    the purposes of the Cost Benefit Considerations section, the

    Commission has used wage estimates that are taken from the SIFMA

    ``Report on Management and Professional Earnings in the Securities

    Industry 2011'' because industry participants are likely to be more

    familiar with them. Hourly costs are calculated assuming 2,000 hours

    per year and a multiplier of 5.35 to account for overhead and

    bonuses. All totals calculated on the basis of cost estimates are

    rounded to two significant digits.

    ---------------------------------------------------------------------------

    Alternatively, the Commission is aware that vendors that provide

    recording services are also capable of providing speech analytic search

    capabilities for a set fee. For example, one vendor estimated this cost

    at $40 to $80 per user per month.\101\ According to commenters, other

    entities may choose to acquire speech analytics services that can be

    housed internally rather than on the vendor's servers. Another vendor

    stated that the costs would depend on the number of hours sent through

    the speech analytics device and that initial deployment costs would

    likely range from $160,000 to $1,500,000 for the largest organizations

    with ongoing annual fees that are approximately 18% of the initial cost

    ($29,000--$270,000 per year). Alternatively, small entities can

    implement a desktop solution with the same analytics capabilities. The

    initial license costs approximately $25,000 per user and 18% ongoing

    maintenance fees ($4,500 per year per user).\102\ Another vendor

    estimated that setup costs, including relevant licenses, would range

    from $450,000 for a small entity to $4,000,000 for a large entity, and

    that annual maintenance costs would range from $80,000 to

    $800,000.\103\ These numbers assume that entities do not yet have

    speech analytics services being used in other parts of the company's

    operations that could be expanded to include the oral records required

    under this rule. However, the Commission understands that some of the

    largest financial entities may already be customers of companies that

    provide speech analytics services. As a consequence, the costs for

    those entities may be less than if they were implementing speech

    analytics services de novo.

    ---------------------------------------------------------------------------

    \101\ See Compliant Phones communication.

    \102\ See Nexidia communication.

    \103\ See NICE communication.

    ---------------------------------------------------------------------------

    In response to the Proposal, some commenters expressed concern that

    the imposition of more stringent recordkeeping requirements on DCM

    members could prompt a bifurcation in the markets for certain services

    because of the compliance cost advantage that market participants who

    are not DCM members enjoy.\104\ They suggested that entities that are

    DCM members might stop offering services that make them subject to the

    regulation 1.35 requirements.\105\

    ---------------------------------------------------------------------------

    \104\ Several commenters submitted a form letter addressing this

    point. Entities submitting this letter, with minor modifications in

    some cases, include: National Grain and Feed Association, Grain and

    Feed Association of Illinois, Agribusiness Council of Indiana,

    Minnesota Grain and Feed Association, Agribusiness Association of

    Iowa, Ohio AgriBusiness Association, South Dakota Grain and Feed

    Association, Kansas City Board of Trade, and Oklahoma Grain and Feed

    Association.

    \105\ For instance, the Kansas City Board of Trade writes that

    the operators of delivery warehouses are often required to be DCM

    members and that the added expense of compliance with regulation

    1.35 could cause firms to withdraw from the business of providing

    warehousing services, thereby decreasing market competitiveness.

    ---------------------------------------------------------------------------

    In the Proposal, the Commission proposed to include FCMs, RFEDs,

    IBs, and all DCM and SEF members under the oral recordkeeping

    requirement and also proposed that such recordkeeping requirements

    would apply to all transactions in commodity interests and cash

    commodities. However, in the final rule, the Commission amended

    regulation 1.35(a) such that Small IBs and members of DCMs and SEFs who

    are not otherwise registered or required to be registered with the

    Commission in any capacity, as well as those members registered as FTs,

    CPOs, SDs, and MSPs, are not subject to the oral communication

    recordkeeping requirements under regulation 1.35(a). The limiting

    principle for the determination of which classes of registrants must

    comply with the final rule are, as discussed further above,

    transactions by entities that could affect both market integrity and

    customer protection.

    Finally, some commenters expressed concern that if employees of a

    regulated entity use personal phones (either landline or mobile) for

    business purposes, calls on those lines must be recorded. Commenters

    stated privacy concerns with the same. However, simple solutions to

    protect employee privacy do exist. For example, depending on the

    policies of the firm, it is possible for certain phone numbers to be

    excluded from recording.\106\ Alternatively, the company could

    institute a policy that employees are not to conduct personal business

    on recorded lines.

    ---------------------------------------------------------------------------

    \106\ See Compliant Phones communication.

    ---------------------------------------------------------------------------

    In addition, amendments in this final rule will require SEF members

    to comply with regulation 1.35, and it is likely that some of those

    members will not have been subject to regulation 1.35(a) previously. In

    addition to the costs related to oral communications recordkeeping,

    mentioned above, the Commission estimates that SEF members that are

    newly subject to regulation 1.35(a) will spend additional time each day

    compiling and maintaining transaction records. The Commission estimates

    that the cost of that additional time is $236,000 to $393,000 per

    entity per year.\107\

    ---------------------------------------------------------------------------

    \107\ This is estimated to take 6-10 hours per day (assuming 252

    days per year) of the time of an office services supervisor. The

    average wage for an office services supervisor is $155.96 [($58,303

    per year)/(2,000 hours per year) * 5.35 = $155.96]. $155.95*6*252 =

    235,812.31. $155.95*10*252 = 393,020.52.

    ---------------------------------------------------------------------------

    Also, the amendments in this final rule will require FCMs, RFEDs,

    IBs, and members of DCMs to comply with the regulation 1.35(a)

    recordkeeping requirements for any swap transactions into which they

    enter. The Commission estimates that such entities will spend an

    additional 0.5 hours per swap capturing and maintaining the records

    required under regulation 1.35(a), and therefore estimates that the

    per-swap cost will be $83.00.\108\

    ---------------------------------------------------------------------------

    \108\ This estimates 0.5 hours of time from an office services

    supervisor. The average salary for an office services supervisor is

    $165.25/hour [($61,776 per year)/(2,000 hours per year) * 5.35 =

    $165.25 per hour]. $165.25*0.5 = $82.63.

    ---------------------------------------------------------------------------

    4. Consideration of Alternatives

    As compared to the Proposal, the Commission has limited the range

    of entities that are subject to the oral recordkeeping requirement,

    narrowing it to entities that could affect market integrity and

    customer protection by way of their function as intermediaries for

    other parties. The Commission also has limited the range of

    transactions that are subject to the requirement from commodity

    interest and cash commodity transactions to commodity interest

    transactions. Limiting the range of entities that must record and keep

    oral communications reduces the number of entities that must bear the

    costs of creating and maintaining records required by regulation

    1.35(a). In particular, by excluding from the new regulation 1.35(a)

    oral communications recordkeeping provisions Small IBs and DCM or SEF

    members that are registered as FTs or CPOs, or SDs or MSPs (as SDs and

    MSPs are covered by regulations 23.202(a)(1) and (b)(1)), or neither

    registered nor required to be registered with the Commission in any

    capacity, certain entities such as agricultural cooperatives, energy

    end-users and other smaller entities that may transact on DCMs and SEFs

    on their own behalf, but not on behalf of customers, avoid mandatory

    recordkeeping costs.

    [[Page 75541]]

    As noted above, new regulation 1.35 will not require entities to

    keep records in separate electronic files. Instead, the amendments as

    adopted require only that subject entities be able to identify which

    records relate to specific parties or transactions when requested to do

    so by the Commission. Such requests are infrequent for any one market

    participant, and therefore the costs of complying with them will be far

    less than what would have been the case under the proposed rule.

    As described above, the Commission considered alternatives to

    compliance, including various safe harbors, but determined not to adopt

    them. For example, the Commission has considered, but declines to

    adopt, recommendations that it include a ``reasonableness'' standard

    because such a standard could result in market participants documenting

    policies and procedures but failing to vigorously monitor for

    compliance with the same. The Commission also declines to adopt this

    recommendation as inconsistent with the requirements applicable to SDs

    and MSPs under Part 23 of the Commission's regulations. Rather, the

    Commission determines that it would be more appropriate to consider

    good faith compliance with policies and procedures reasonably designed

    to comply with the oral communications recording rule as a mitigating

    factor when exercising its enforcement discretion with respect to

    violations of the rule.

    5. Consideration of Section 15(a) Factors

    (1) a. Protection of Market Participants and the Public

    The oral recordkeeping requirement in regulation 1.35(a) will

    protect market participants and the public by ensuring the existence of

    an audit trail that includes relevant oral communications. A strong

    audit trail, among other things, provides a basis for resolving

    transactional disputes; acts as a disincentive to engage in unduly

    risky, injurious or illegal conduct in that the conduct will be

    traceable; and in the event such conduct does occur, provides a

    mechanism for policing such conduct, both internally as part of a

    firm's compliance efforts and externally by regulators enforcing

    applicable laws and regulations.

    (2) b. Efficiency, Competitiveness, and Financial Integrity of Futures

    Markets

    Requiring records of all oral communications leading to a

    transaction in a commodity interest promotes the efficiency,

    competitiveness and financial integrity of the markets by increasing

    the Commission's ability to detect and prosecute violations of the Act

    and the Commission's rules related to fraud, manipulation and other

    disruptive trade practices.

    (3) c. Price Discovery

    Neither the Commission nor commenters have identified consequences

    for price discovery that are expected to result from this rule.

    (4) d. Sound Risk Management Practices

    The Commission believes that proper recordkeeping--though likely to

    require initial investment in recordkeeping and other back office

    systems--is essential to risk management because it facilitates an

    entity's awareness of its transactions, positions, trading activity,

    internal operations, and any complaints made against it, among other

    things. Such awareness supports sound internal risk management policies

    and procedures ensuring that decision-makers within affected entities

    are fully informed about the entity's activities and can take steps to

    mitigate and address significant risks faced by the firm. When

    individual market participants engage in sound risk management

    practices the entire market benefits. Accordingly, the Commission

    believes that this final rule, notwithstanding the potential costs

    identified above, will promote the public interest in sound risk

    management.

    (5) e. Other Public Interest Considerations

    The Commission has not identified any other public interest

    considerations that could be impacted by the oral communications

    recordkeeping rule under regulation 1.35(a).

    List of Subjects in 17 CFR Part 1

    Agricultural commodity, Agriculture, Brokers, Committees, Commodity

    futures, Conflicts of interest, Consumer protection, Definitions,

    Designated contract markets, Directors, Major swap participants,

    Minimum financial requirements for intermediaries, Reporting and

    recordkeeping requirements, Swap dealers, Swaps.

    For the reasons stated in the preamble, under the authority of 7

    U.S.C. 1 et seq., the Commodity Futures Trading Commission hereby

    amends Chapter I of Title 17 of the Code of Federal Regulations as set

    forth below:

    PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

    0

    1. The authority citation for part 1 continues to read as follows:

    Authority: 7 U.S.C. 1a, 2, 2a, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g,

    6h, 6i, 6k, 6l, 6m, 6n, 6o, 6p, 6r, 6s, 7, 7a-1, 7a-2, 7b, 7b-3, 8,

    9, 10a, 12, 12a, 12c, 13a, 13a-1, 16, 16a, 19, 21, 23, and 24, as

    amended by Title VII of the Dodd-Frank Wall Street Reform and

    Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376 (2010).

    0

    2. Amend Sec. 1.31 by revising paragraph (a)(1) to read as follows:

    Sec. 1.31 Books and records; keeping and inspection.

    (a)(1) All books and records required to be kept by the Act or by

    these regulations shall be kept in their original form (for paper

    records) or native file format (for electronic records) for a period of

    five years from the date thereof and shall be readily accessible during

    the first 2 years of the 5-year period; Provided, however, That records

    of any swap or related cash or forward transaction shall be kept until

    the termination, maturity, expiration, transfer, assignment, or

    novation date of the transaction and for a period of five years after

    such date. Records of oral communications kept pursuant to Sec. Sec.

    1.35(a) and 23.202(a)(1) and (b)(1) of this chapter shall be kept for a

    period of one year. All such books and records shall be open to

    inspection by any representative of the Commission, or the United

    States Department of Justice. For purposes of this section, native file

    format means an electronic file that exists in the format in which it

    was originally created.

    * * * * *

    0

    3. Amend Sec. 1.35 by revising the section heading and paragraph (a)

    to read as follows:

    Sec. 1.35 Records of commodity interest and related cash or forward

    transactions.

    (a) Futures commission merchants, retail foreign exchange dealers,

    introducing brokers, and members of designated contract markets or swap

    execution facilities. (1) Each futures commission merchant, retail

    foreign exchange dealer, introducing broker, and member of a designated

    contract market or swap execution facility shall 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. Included among such

    records shall be all orders (filled, unfilled, or canceled), trading

    cards, signature cards, street books, journals, ledgers, canceled

    checks, copies of confirmations, copies of statements of purchase and

    sale, and all other records, which have been prepared in the course of

    its business of dealing in commodity

    [[Page 75542]]

    interests and related cash or forward transactions. Among such records

    each member of a designated contract market or swap execution facility

    must retain and produce for inspection are all documents on which trade

    information is originally recorded, whether or not such documents must

    be prepared pursuant to the rules or regulations of either the

    Commission, the designated contract market or the swap execution

    facility. For purposes of this section, such documents are referred to

    as ``original source documents.'' Such records shall be kept in a form

    and manner identifiable and searchable by transaction. Also included

    among the records required to be kept by this paragraph are all 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;

    provided, however, the requirement in this paragraph (a)(1) to record

    oral communications shall not apply to:

    (i) Oral communications that lead solely to the execution of a

    related cash or forward transaction;

    (ii) Oral communications provided or received by a floor broker

    that do not lead to the purchase or sale for any person other than the

    floor broker of any commodity for future delivery, security futures

    product, swap, or commodity option authorized under section 4c of the

    Commodity Exchange Act;

    (iii) An introducing broker that has generated over the preceding

    three years $5 million or less in aggregate gross revenues from its

    activities as an introducing broker;

    (iv) A floor trader;

    (v) A commodity pool operator;

    (vi) A swap dealer;

    (vii) A major swap participant; or

    (viii) A member of a designated contract market or swap execution

    facility that is not registered or required to be registered with the

    Commission in any capacity.

    (2) For purposes of paragraph (a)(1) of this section, ``related

    cash or forward transaction'' means 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.

    (3) Each futures commission merchant, retail foreign exchange

    dealer, introducing broker, and member of a designated contract market

    or swap execution facility shall retain the records required to be kept

    by this section in accordance with the requirements of Sec. 1.31, and

    produce them for inspection and furnish true and correct information

    and reports as to the contents or the meaning thereof, when and as

    requested by an authorized representative of the Commission or the

    United States Department of Justice.

    (4)(i) The Commission may in its discretion establish an

    alternative compliance schedule for the requirement to record oral

    communications under paragraph (a)(1) of this section that is found to

    be technologically or economically impracticable for an affected entity

    that seeks, in good faith, to comply with the requirement to record

    oral communications under paragraph (a)(1) of this section within a

    reasonable time period beyond the date on which compliance by such

    affected entity is otherwise required.

    (ii) A request for an alternative compliance schedule under

    paragraph (a)(4)(i) of this section shall be acted upon within 30 days

    from the time such a request is received, or it shall be deemed

    approved.

    (iii) The Commission hereby delegates to the Director of the

    Division of Swap Dealer and Intermediary Oversight or such other

    employee or employees as the Director may designate from time to time,

    the authority to exercise the discretion. Notwithstanding such

    delegation, in any case in which a Commission employee delegated

    authority under this paragraph believes it appropriate, he or she may

    submit to the Commission for its consideration the question of whether

    an alternative compliance schedule should be established. The

    delegation of authority in this paragraph shall not prohibit the

    Commission, at its election, from exercising the authority set forth in

    paragraph (a)(4)(i) of this section.

    (iv) Relief granted under paragraph (a)(4)(i) of this section shall

    not cause an affected entity to be out of compliance or deemed in

    violation of any recordkeeping requirements.

    * * * * *

    Issued in Washington, DC, on December 17, 2012, by the

    Commission.

    Sauntia S. Warfield,

    Assistant Secretary of the Commission.

    Note: The following appendices will not appear in the Code of

    Federal Regulations.

    Appendices to Adaptation of Regulations To Incorporate Swaps--

    Commission Voting Summary and Statements of Commissioners

    Appendix 1--Commission Voting Summary

    On this matter, Chairman Gensler and Commissioners Sommers,

    Chilton, O'Malia and Wetjen voted in the affirmative; no

    Commissioner voted in the negative.

    Appendix 2--Statement of Chairman Gary Gensler

    I support the final rule to amend 1.31 and 1.35(a) of the

    Commodity Futures Trading Commission's (CFTC) regulations to conform

    them to recordkeeping requirements for swap dealers and major swap

    participants. The rule enhances the Commission's enforcement program

    for the futures market to promote market integrity and protect

    customers.

    These conforming amendments integrate the CFTC's regulations

    with the Dodd-Frank Wall Street Reform and Consumer Protection Act

    (Dodd-Frank Act), which expanded the scope of the Commodity Exchange

    Act to include swaps.

    As proposed, the rule would have required members of a

    designated contract market (DCM) or swap execution facility (SEF) to

    record all oral communications that lead to the execution of a

    transaction in a cash commodity. The Commission received numerous

    comments about the effect of such a requirement on members of the

    agricultural community that trade in cash commodities and are not

    required to be registered with the Commission other than, in some

    cases, as floor traders.

    In consideration of comments, the Commission adopted

    modifications that preserve the rule's purpose without adversely

    affecting the agricultural community. Only those oral communications

    that lead to a transaction in a commodity interest (i.e. a commodity

    futures contract, commodity option contract, foreign exchange

    contract, or swap) will have to be recorded. Furthermore, only FCMs,

    certain introducing brokers (IBs), retail foreign exchange dealers

    (RFEDs), and those members of a DCM or SEF who are registered or

    required to be registered with the Commission (except for floor

    traders, commodity pool operators, swap dealers, major swap

    participants, and floor brokers who trade for themselves) will have

    to record oral communications.

    Market participants that must comply will be required to record

    communications relating to: Quotes, solicitations, bids, offers,

    instructions, trading, and prices that lead to the execution of a

    transaction in a commodity interest. Methods of communication that

    fall under the rule include telephone, voicemail, facsimile, instant

    messaging, electronic mail, mobile device, or other digital or

    electronic media. Thus, the rulemaking also clarifies that the

    existing requirement under regulation 1.35(a) to keep written

    records applies to electronic written communications, such as emails

    and instant messages. Records of oral communications must be kept

    for one year.

    The rule will make enforcement investigations more efficient by

    preserving

    [[Page 75543]]

    critical evidence that otherwise may be lost to memory lapses and

    inconsistent recollections. The Commission will have access to

    evidence of fraud and market manipulation, which is expected to

    increase the success of enforcement actions for the benefit

    customers, market participants and the markets. Moreover, it also

    will protect customers from abusive sales practices, lower the risk

    of transactional disputes and allow registrants to follow-up more

    effectively on customer complaints.

    [FR Doc. 2012-30691 Filed 12-20-12; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: December 21, 2012



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