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2017-01148

  • Federal Register, Volume 82 Issue 12 (Thursday, January 19, 2017)

    [Federal Register Volume 82, Number 12 (Thursday, January 19, 2017)]

    [Proposed Rules]

    [Pages 6356-6367]

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

    [FR Doc No: 2017-01148]

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    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Parts 1 and 23

    RIN 3038-AE36

    Recordkeeping

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Proposed rule.

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    SUMMARY: The Commodity Futures Trading Commission (the ``Commission'')

    is proposing to amend the recordkeeping obligations set forth in

    certain provisions of the Commission's regulations. The proposed

    amendments would permit recordkeepers to leverage advances in

    information technology as a means to reduce costs associated with the

    retention and production of paper and electronic records and to

    decrease the risks of cybersecurity threats, while maintaining

    necessary safeguards to ensure the integrity, availability, and

    accessibility of records required to be kept pursuant to the Commodity

    Exchange Act (the ``CEA'') or Commission regulations. In addition to

    providing recordkeepers with greater flexibility regarding the

    retention and production of regulatory records, the proposed amendments

    would remove the requirements for electronic records to be kept in

    their native file format and for recordkeepers to enter into an

    arrangement with a third-party technical consultant with respect to

    electronically stored information.

    DATES: Comments must be received on or before March 20, 2017.

    ADDRESSES: You may submit comments, identified by RIN 3038-AE36, by any

    of the following methods:

    CFTC Web site: https://comments.cftc.gov. Follow the

    instructions for submitting comments through the Comments Online

    process on the Web site.

    Mail: Christopher Kirkpatrick, Secretary of the

    Commission, Commodity Futures Trading

    [[Page 6357]]

    Commission, Three Lafayette Centre, 1155 21st Street NW., Washington,

    DC 20581.

    Hand Delivery/Courier: Same as Mail, above.

    Federal eRulemaking Portal: http://www.regulations.gov.

    Follow the instructions for submitting comments.

    Please submit your comments using only one method.

    All comments must be submitted in English, or if not, accompanied

    by an English translation. Comments will be posted as received to

    www.cftc.gov. You should submit only information that you wish to make

    available publicly. If you wish the Commission to consider information

    that you believe is exempt from disclosure under the Freedom of

    Information Act (``FOIA''), a petition for confidential treatment of

    the exempt information may be submitted according to the procedures

    established in Sec. 145.9 of the Commission's regulations.\1\

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    \1\ 17 CFR 145.9. Commission regulations referred to herein are

    found at 17 CFR chapter I.

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    The Commission reserves the right, but shall have no obligation, to

    review, pre-screen, filter, redact, refuse or remove any or all of your

    submission from www.cftc.gov that it may deem to be inappropriate for

    publication, such as obscene language. All submissions that have been

    redacted or removed that contain comments on the merits of the

    rulemaking will be retained in the public comment file and will be

    considered as required under the Administrative Procedure Act and other

    applicable laws, and may be accessible under the FOIA.

    FOR FURTHER INFORMATION CONTACT: Eileen T. Flaherty, Director, (202)

    418-5326, eflaherty@cftc.gov; Frank Fisanich, Chief Counsel, (202) 418-

    5949, ffisanich@cftc.gov; Andrew Chapin, Associate Chief Counsel, (202)

    418-5465, achapin@cftc.gov; Katherine Driscoll, Associate Chief

    Counsel, (202) 418-5544, kdriscoll@cftc.gov; C. Barry McCarty, Special

    Counsel, (202) 418-6627, cmccarty@cftc.gov; or Jacob Chachkin, Special

    Counsel, (202) 418-5496, jchachkin@cftc.gov, Division of Swap Dealer

    and Intermediary Oversight, Commodity Futures Trading Commission, 1155

    21st Street NW., Washington, DC 20581.

    SUPPLEMENTARY INFORMATION:

    I. Background

    A. Regulation 1.31 Recordkeeping Requirements

    Commission regulation 1.31 sets forth recordkeeping requirements

    for all books and records required to be kept by the CEA and Commission

    regulations, and implements the Commission's inspection and examination

    authority over such records.\2\ Examination of books and records is one

    of the Commission's principal means of determining compliance with the

    CEA and Commission regulations.\3\

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    \2\ Proposed Rule Requiring that Records Subject to Inspection,

    and Copies Thereof, Be Provided to the Commission, 43 FR 50699 (Oct.

    31, 1978).

    \3\ General Regulations; Inspection of Books and Records, 46 FR

    21-01 (Jan. 2, 1981).

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    Paragraph (a) of Sec. 1.31 describes the general requirement that

    books and records must be kept for five years and be readily accessible

    during the first two years. Different retention periods apply to

    certain oral communications and records of any swap or related cash or

    forward transaction. Paragraph (a) also provides that paper records

    shall be kept in their original form and electronic records in the

    format in which they were originally created (referred to as ``native

    file format''), and defines the inspection and production rights of

    representatives of the Commission and the Department of Justice. In

    particular, Sec. 1.31(a)(2) requires that production shall be made in

    a form specified by any representative of the Commission upon the

    representative's request.

    Paragraph (b) of Sec. 1.31 allows books and records to be stored

    on electronic storage or micrographic media, such as microfiche,

    provided that the recordkeeper complies with various technical

    requirements designed to ensure the integrity, availability, and

    accessibility of the electronically stored information. For example,

    this paragraph provides that any digital storage or medium or system

    must preserve the records exclusively in a non-rewritable, non-erasable

    format, known more commonly as the ``write once, read-many,'' or

    ``WORM'' requirement. In addition, paragraph (b) requires a

    recordkeeper utilizing electronic storage media to develop and maintain

    an audit system to provide accountability over both the initial entry

    and the entry of each change to any original or duplicate record.

    Further, any person who uses only electronic storage media to preserve

    some or all of its required records shall enter into an arrangement

    with a third-party technical consultant (``Technical Consultant'')

    capable of furnishing to the Commission or its representative any

    information stored electronically promptly upon request.

    Paragraph (c) of Sec. 1.31 requires recordkeepers to provide

    notice and a representation to the Commission prior to the initial use

    of an electronic storage system that the electronic storage system

    satisfies the requirements set forth in Sec. 1.31(b). Lastly,

    paragraph (d) of Sec. 1.31 requires certain paper records, such as

    trading cards and documents with written trading information, to be

    maintained in hard-copy for the applicable retention period.

    The Commission recognizes that the most recent substantive

    amendments to Sec. 1.31 were made in 2012 \4\ and, prior to that, in

    1999.\5\ The 2012 Amendment clarified the retention period for records

    of oral communications leading to the execution of any swap or related

    cash or forward transaction for swap dealers and major swap

    participants, and to require that electronic records be retained in

    their native file format. The 1999 Amendment implemented all of the

    technical provisions regarding the use of electronic storage media in

    Sec. 1.31(b) and (c), including the requirement to retain a Technical

    Consultant.

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    \4\ Adaptation of Regulations to Incorporate Swaps, 77 FR 66288

    (Nov. 2, 2012) (the ``2012 Amendment'').

    \5\ Recordkeeping, 64 FR 28735 (May 27, 1999) (the ``1999

    Amendment'').

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    B. Petitions for Rulemaking

    The Commission has received petitions for rulemaking from various

    industry groups requesting that the Commission amend Sec. 1.31.\6\

    Generally, the Petitioners state that certain requirements set forth in

    Sec. 1.31 that were reasonable and prudent when adopted have become

    outdated and irrelevant. Absent any change, the Petitioners stated that

    recordkeepers must choose between accepted electronic distributed

    storage systems, which are essential for disaster recovery and privacy

    protection, and compliance with the letter of the law.

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    \6\ Petition for Rulemaking to Amend 1.31, 4.7(b) and (c), 4.23

    and 4.33, Managed Funds Association, Investment Adviser Association,

    and Alternative Investment Management Association, dated July 21,

    2014, and Petition for Rulemaking to Amend CFTC Regulations

    4.12(c)(3), 4.23 and 4.33 Investment Company Institute, dated March

    11, 2014 (collectively, the ``Petitioners''). Regulations 4.23 and

    4.33 set forth the recordkeeping requirements for commodity pool

    operators (``CPOs'') and commodity trading advisors (``CTAs''),

    respectively. These regulations require CPOs and CTAs to keep

    certain books and records in accordance with Sec. 1.31.

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    Specifically, the Petitioners have requested the following changes

    to Sec. 1.31:

    1. Amend Sec. 1.31(a) to no longer require electronic records to

    be kept in their native file format;

    2. Amend Sec. 1.31(b) to eliminate the WORM requirement for

    electronic records; and

    [[Page 6358]]

    3. Amend Sec. 1.31(b) to eliminate the requirement to enter into

    an agreement with a Technical Consultant.

    With respect to native file format, the Petitioners note that

    programs used to store records electronically routinely become outdated

    and obsolete, and/or are no longer supported by information technology

    manufacturers. As a result, as represented by the Petitioners,

    recordkeepers must bear the burden of retaining these electronic

    records while updating to other, advanced systems for newly created

    records. Accordingly, the Petitioners request that the Commission amend

    Sec. 1.31 in a manner that does not specify the format of any

    particular electronic record, so long as there is demonstrable and

    auditable integrity and fidelity in the preservation of the underlying

    data and contents.

    With respect to the WORM requirement, the Petitioners assert that

    it is based on a concept that was state of the art nearly twenty years

    ago. Records are no longer stored electronically on optical disks or

    CD-ROMs. Currently, state of the art information technology relies on

    storage subject to restricted access and includes storage logs that

    reflect every single change to a file, in addition to archived copies.

    Absent any change, the Petitioners state that recordkeepers will be

    required to maintain dual systems that preserve the WORM requirement

    but also permit them to more properly secure and manage electronic

    records. Accordingly, the Petitioners request that the Commission amend

    Sec. 1.31 to remove the WORM requirement.

    With respect to the Technical Consultant, the Petitioners state

    that the need to retain and train a third-party to serve as a surrogate

    for access and production to electronic records is no longer necessary

    given the in-house technical expertise regarding information technology

    throughout the industry. In addition to the increased costs associated

    with retaining a Technical Consultant, the Petitioners also note that

    providing additional third parties with access to sensitive,

    confidential, and proprietary information greatly increases the risk of

    cybersecurity intrusions. Accordingly, the Petitioners request that the

    Commission amend Sec. 1.31 to remove the requirement to retain a

    Technical Consultant.

    In support of their request, Petitioners note that the Securities

    and Exchange Commission (``SEC'') adopted a recordkeeping rule for

    investment companies and investment advisers consistent with the

    changes they propose.\7\ Rule 204-2(g) under the Investment Advisers

    Act of 1940 sets forth general principles that investment advisers must

    follow when arranging, accessing and reproducing their records. Similar

    provisions apply to the operators of investment companies pursuant to

    Rule 31a-2. In particular, Rule 204-2(g) does not tether advisers to

    any particular format, i.e., native file format, nor does it require

    the use of Technical Consultants. The Petitioners note that in the 1999

    Amendment the Commission expressly stated its intent to track existing

    recordkeeping provisions similar to those adopted by the SEC,\8\ and

    that, more recently in 2013, the Commission acknowledged that there are

    certain advantages to crafting regulations that ``allow the Commission

    to fulfill its regulatory mandate while, at the same time, avoiding

    unnecessary regulatory burdens on dually-regulated [entities] with

    respect to . . . Commission recordkeeping requirements.'' \9\

    Accordingly, the Petitioners request that the Commission amend Sec.

    1.31 in a manner consistent with SEC Rule 204-2(g).

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    \7\ See Electronic Recordkeeping by Investment Companies and

    Investment Advisers, 66 FR 29224 (May 30, 2001). Given that

    intermediaries may engage in both securities and derivatives

    transactions, operators of investment companies may be required to

    register with the Commission as CPOs, and investment advisers

    similarly may be required to register as CTAs.

    \8\ 64 FR at 28735.

    \9\ See Harmonization of Compliance Obligations for Registered

    Investment Companies Required to Register as Commodity Pool

    Operators, 78 FR 52308 at 52309 (Aug. 22, 2013).

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    II. The Proposal

    The Commission noted in the 1999 Amendment the importance of

    conducting an ongoing review of the standards articulated in the

    recordkeeping regulation to ensure that the requirements reflect to the

    extent possible the reality of established technological

    innovation.\10\ At the same time, the Commission recognized the value

    of consultation with the derivatives industry and its participants to

    determine how to best use available information technology that also is

    responsive to the Commission's legitimate need to have access to

    complete and accurate records when necessary.\11\

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    \10\ 64 FR at 28736.

    \11\ Id.

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    As the Petitioners highlighted, the Commission recognizes that

    recordkeeping has evolved significantly in the time since the last

    major revision to Sec. 1.31 in 1999 from a paper-based system to

    electronically stored information systems that leverage computers,

    databases, and even cloud computing. Back then, most records were

    created and maintained on paper, but recordkeepers began to explore

    better ways to store information electronically. Now the paradigm has

    shifted, and most information is produced and stored electronically on

    complex systems tailored to the needs of a given recordkeeper. These

    advances in information technology may have rendered certain technical

    elements of Sec. 1.31 obsolete or outdated.

    Accordingly, the Commission proposes to amend Sec. 1.31 to

    reorganize and update the existing recordkeeping regulation,

    eliminating certain outdated provisions while still maintaining the

    ability of the Commission to examine and inspect required records. The

    Proposal is intended to be technology neutral so as technology develops

    the regulation should withstand such changes. The updates include new

    definitions, deletion of outdated terms, and revision of certain

    provisions to reflect advances in information technology. The

    Commission notes that many of the existing provisions and principles in

    Sec. 1.31 have been retained, albeit in a revised format. The proposed

    regulation is divided into five subsections: (a) Definitions; (b)

    regulatory records policies and procedures; (c) duration of retention;

    (d) form and manner of retention; and (e) inspection and production of

    regulatory records.

    A. Regulation 1.31(a): Definitions

    The Commission proposes to reorganize Sec. 1.31 by revising

    paragraph (a) to define certain terms to be referenced elsewhere within

    the revised regulation. Specifically, the Commission proposes to define

    the terms ``electronic regulatory records'', ``records entity'', and

    ``regulatory records''. The Commission believes that defining these

    terms will provide greater clarity regarding the recordkeeping

    obligations applicable to all persons subject to Sec. 1.31,

    particularly for those obligations related to electronic records.

    For the ease of understanding and applying the proposed amendments

    to Sec. 1.31, the Commission proposes to define ``records entity'' to

    mean ``any person required by the Act or Commission regulations to keep

    regulatory records.'' The Commission notes that numerous Commission

    regulations set forth particular requirements for CEA Section 1a(40)

    ``registered entities''--such as derivatives clearing organizations,

    designated contract markets, swap execution facilities, and swap data

    [[Page 6359]]

    repositories--and for registrants--such as futures commission

    merchants, introducing brokers, CPOs, CTAs, floor brokers, floor

    traders, retail foreign exchange dealers, swap dealers, and major swap

    participants--to keep certain books and records in accordance with

    Sec. 1.31. The Commission notes, however, that certain persons that

    are neither a registered entity nor a registrant may be required to

    keep certain books and records in accordance with Sec. 1.31, as

    well.\12\

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    \12\ For example, Part 18 of the Commission's regulations

    requires every trader who owns, holds or controls a reportable

    futures or option to ``keep books and records showing all details

    concerning all positions and transactions in the commodity swap. . .

    .'' 17 CFR 18.05. Traders are not limited to any Commission

    registrant or registered entity.

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    The Commission also proposes to replace existing references to

    ``books and records'' within Sec. 1.31 with the term ``regulatory

    records'' and to differentiate between electronic and paper regulatory

    records. The Commission proposes to define ``regulatory records'' to

    mean ``all books and records required to be kept by the Act or

    Commission regulations.'' As a subset, the Commission proposes to

    define within Sec. 1.31(a) ``electronic regulatory records'' to mean

    ``all regulatory records other than paper regulatory records

    exclusively created and maintained by a records entity on paper.'' The

    Commission has separately proposed Regulation Automated Trading and

    certain requirements regarding source code and manner of production of

    source code.\13\ This proposal does not address source code or the

    production of source code.

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    \13\ See Supplemental notice of proposed rulemaking, Regulation

    Automated Trading, 81 FR 85334 (Nov. 25, 2016).

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    The Commission recognizes that certain regulatory records are not

    created electronically and that certain records entities may elect not

    to convert any paper regulatory records into an electronic format. By

    differentiating between paper and electronic regulatory records, the

    Commission can better preserve existing recordkeeping obligations

    applicable solely to records entities that do not create anything other

    than paper regulatory records.\14\

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    \14\ Records entities who are currently in compliance with

    current Sec. 1.31 will continue to be in compliance with proposed

    Sec. 1.31, provided that they have written policies and procedures

    that meet the requirements of the Proposal.

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    The Commission also believes that the term ``books and records'' in

    the traditional sense may no longer adequately convey that Sec. 1.31

    recordkeeping obligations extend to all associated electronic data.

    However, contrary to prior revisions to Sec. 1.31 where the Commission

    specifically delineated the types of allowable media for electronic

    records storage,\15\ the Commission believes it is now appropriate to

    focus the recordkeeping obligations on the scope of required records,

    rather than a specific storage medium. Accordingly, the Commission

    proposes to further define the term ``regulatory records'' by adding

    the following descriptive language to include: Any record of any

    correction or other amendment to such books and records, provided that,

    with respect to such books and records stored electronically,

    regulatory records shall also include: (i) All data produced and stored

    electronically that describes, directly or indirectly, the

    characteristics of such books and records, including, without

    limitation, data that describes how, when, and, if relevant, by whom

    such electronically stored information was collected, created,

    accessed, modified, or formatted; and (ii) any data necessary to

    access, search, or display any such books and records.

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    \15\ See 36 FR 22286 (Nov. 24, 1971) (permitted the use of

    microfilm as a medium for maintaining certain records); 58 FR 27458

    (May 10, 1993) (permitted the use of optical disk and CD-ROM); 64 FR

    28735 (May 27, 1999) (permitted the use of other micrographic and

    electronic storage media).

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    The proposed language would more clearly state the existing

    requirement to maintain all prior versions of any regulatory record, no

    matter how modified. This is not a new recordkeeping obligation. Since

    1993 the Commission has required electronic records to be created and

    maintained in a non-erasable, non-rewritable format for the retention

    period.\16\ Because the existing regulation requires electronic records

    be preserved exclusively in a non-rewritable, non-erasable format, it

    follows that each version of an electronic record must be created and

    maintained in a non-erasable, non-rewritable format. Therefore, the

    Commission is confirming that both the initial record and all

    subsequent versions are records within the definition and must be

    created, maintained, accessible, and produced consistent with the

    regulation.\17\

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    \16\ See Sec. 1.31(b)(1)(ii)(A).

    \17\ Each version of a record must be retained for the

    applicable retention period which is based off the most recent

    version. For example, the initial record is created on Day 1 and the

    amended record is created on Year 4, Day 359. The amended record

    resets the retention period clock to Day 1 for both the initial

    record and amended record to ensure a comprehensive audit trail.

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    The proposed language also would clarify that electronically stored

    regulatory records are not limited to the data within a particular

    database or application, for example, but includes the electronic

    information that identifies the manner in which any regulatory record

    is altered. The Commission understands that this information is more

    commonly known as ``metadata,'' and, at its core, is data about data.

    Regardless of the label, the Commission understands that metadata

    generally refers to any hidden text, formatting codes, formulae,

    history, tracking, and other information associated with an electronic

    file or data. Metadata is integral to the Commission's ability to carry

    out both the inspection and investigation functions it is charged with

    under the CEA. To fully understand the data within a database, for

    example, requires knowledge of data relationships, what the information

    represents, and how it was generated. Once properly assembled and

    formatted in the form of a report, data within a database is readily

    understandable.

    The Commission does not find it necessary at this time to define

    specific, technical terms related to information technology and

    electronically stored information, such as metadata or databases, as

    these technical terms may change over time. The Commission believes

    these are terms generally understood by practitioners notwithstanding a

    lack of a universal agreement on exact definitions.

    The Commission notes that the requirement to provide data about

    data is not new. As set forth in current Sec. 1.31(a)(2), production

    of any books and records shall be made ``in a form specified by any

    representative of the Commission.'' For the purpose of facilitating

    production requests pursuant Sec. 1.31(a)(2), the Commission's

    Division of Enforcement has developed and continually updates a

    document entitled ``CFTC Data Delivery Standards.'' \18\ Such standards

    describe the technical requirements for electronic document production

    to the Commission and specifically provides for the production of

    metadata associated with electronic records.

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    \18\ The Commission publishes the CFTC Data Delivery Standards

    on its Web site at: http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/file/enfdatadeliverystandards052716.pdf. The Commission notes that other

    federal agencies, such as the SEC (https://www.sec.gov/divisions/enforce/datadeliverystandards.pdf), the Department of Justice

    (https://www.justice.gov/atr/case-document/file/494686/download) and

    the Department of Treasury Office of Foreign Asset Control (https://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Documents/ofac_data_delivery.pdf) have similar data delivery

    standards.--

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    Finally, the Commission further proposes not to retain within the

    definition section certain definitions in the existing regulation, such

    as ``native

    [[Page 6360]]

    file format'', ``micrographic media'' and ``electronic storage media.''

    The Commission believes that the proposed revisions to Sec. 1.31,

    described in greater detail below, obviate the need to retain these

    defined terms.

    Request for comment: The Commission requests comment from all

    interested parties and the general public regarding the proposed

    definitions in Sec. 1.31(a). The Commission encourages all comments

    including background information, actual market examples, best practice

    principles, and estimates of any asserted costs and expenses. Regarding

    the proposed definitions, the Commission specifically requests comment

    on the following questions:

    Should any of the proposed definitions be revised? If yes,

    please provide alternative suggestions.

    Should any of the proposed definitions be deleted?

    Should any previous definitions proposed for deletion,

    e.g., ``micrographic media,'' be included in the revised regulation?

    Should other definitions be added, such as ``metadata'',

    or ``database'', or ``paper regulatory records''?

    B. Regulation 1.31(b): Regulatory Records Policies and Procedures

    The Commission proposes to revise and re-state in new Sec. 1.31(b)

    ongoing compliance obligations regarding written regulatory records

    policies and procedures currently set forth in Sec. 1.31(b)(3).

    Specifically, the Commission proposes in revised Sec. 1.31(b) to

    require all records entities to establish, maintain, and implement

    written policies and procedures reasonably designed to ensure that the

    records entity complies with its obligations under Sec. 1.31,

    including without limitation, appropriate training of officers and

    personnel of the records entity regarding their responsibility for

    ensuring compliance with the obligations of the records entity under

    this section, and regular monitoring for such compliance.\19\

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    \19\ SEC Rule 204-2(a)(17) requires each investment adviser to

    maintain as part of its recordkeeping obligations, among other

    things, a copy of the adviser's policies and procedures, and any

    records documenting the adviser's annual review of those policies

    and procedures.

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    The Commission believes that the proposed obligations regarding

    written policies and procedures are generally consistent with the

    existing regulation and accepted industry practices. Currently, Sec.

    1.31(b)(3) requires anyone using electronic storage media to develop

    and maintain written operational procedures and controls (an ``audit

    system'') designed to provide accountability over both the initial

    entry of required records to the electronic storage media and the entry

    of each change made to any original or duplicate record maintained on

    the electronic storage media. Moreover, the written operational

    procedures and controls must be made available for examination at all

    times by any representative of the Commission.

    With respect to training, the Commission does not find it necessary

    to prescribe specific requirements regarding the frequency and format

    of any training. Consistent with its approach towards mandatory ethics

    training for registrants, the Commission views the training on written

    policies and procedures as an ongoing responsibility rather than an

    episodic one.\20\ The obligation to remain current on the legal

    requirements regarding compliance with Sec. 1.31 is one that a records

    entity ignores at its peril. The Commission takes a similar view

    towards the proposed obligation for each records entity to monitor

    compliance with the entity's policies and procedures on a ``regular''

    basis.

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    \20\ 66 FR 53510 (Oct. 23, 2001) (``Rules Relating to

    Intermediaries of Commodity Interest Transactions''). With respect

    to mandatory ethics training, the Commission replaced prescriptive

    requirements set forth in Sec. 3.34 with a Statement of Acceptable

    Practices.

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    Request for comment: The Commission requests comment from all

    interested parties and the general public regarding the proposed

    obligations regarding regulatory records policies and procedures in

    proposed Sec. 1.31(b). The Commission encourages all comments

    including background information, actual market examples, best practice

    principles, and estimates of any asserted costs and expenses. Regarding

    the written policies and procedures requirements, the Commission

    specifically requests comment on the following questions:

    Should the training requirement be scaled down, phased-in,

    or eliminated depending on the number of employees, or depending on the

    nature of the entity's business?

    C. Regulation 1.31(c): Duration of Retention

    The Commission proposes to re-state and clarify in revised Sec.

    1.31(c) the existing retention period requirements for categories of

    regulatory records currently set forth in Sec. 1.31(a). Specifically,

    proposed Sec. 1.31(c)(1) would state that a records entity shall keep

    regulatory records of any swap or related cash or forward transaction

    (as defined in Sec. 23.200(i)), other than regulatory records of oral

    communications, from the date the regulatory record was created until

    the termination, maturity, expiration, transfer, assignment, or

    novation date of the transaction and for a period of not less than five

    years after such date. The Commission proposes to incorporate by

    reference the definition of the term ``related cash or forward

    transaction'' in Sec. 23.200(i).

    Similarly, proposed Sec. 1.31(c)(2) would state that a records

    entity that is required to retain oral communications shall keep

    regulatory records of such oral communications for a period of not less

    than one year from the date of such communication. This is consistent

    with the existing standard. The Commission proposes, however, to

    eliminate references to Sec. Sec. 1.35(a) and 23.202(a)(1) and (b)(1)

    with respect to ``oral communications'' as future changes to those

    regulations, or the promulgation of new types of oral communications

    requirements, would require the Commission to contemporaneously amend

    Sec. 1.31. Based on the foregoing proposed amendments, the Commission

    believes that the existing provision in Sec. 23.203(b)(2) regarding

    the retention period of swaps-related information for swap dealers and

    major swap participants is redundant and therefore should be repealed.

    For all other regulatory records not addressed in proposed Sec.

    1.31(c)(1) and (2), proposed Sec. 1.31(c)(3) would require a records

    entity to keep such records for a period of not less than five years

    from the date on which such record was created. However, proposed Sec.

    1.31(c)(4) would retain the existing retention period for regulatory

    records exclusively created and maintained on paper, i.e., records must

    be readily accessible for no less than two years. This standard is

    consistent with the SEC's standard applicable to investment advisers

    and operators of investment companies.\21\ Consistent with this change,

    the Commission proposes to remove the duplicative language from Sec.

    23.203(b)(1).

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    \21\ SEC Rule 204-2(e) states that all books and records shall

    be maintained and preserved in an easily accessible place for a

    period of not less than five years from the end of the fiscal year

    during which the last entry was made on such record, the first two

    years in an appropriate office of the investment adviser. SEC Rule

    31a-2 similarly requires the operator of an investment company to

    retain records for a minimum of six years the first two years in an

    easily accessible place.

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

    Request for comment: The Commission requests comment from all

    interested parties and the general public regarding the proposed

    retention periods in Sec. 1.31(c). The Commission encourages all

    comments including background information, actual market

    [[Page 6361]]

    examples, best practice principles, and estimates of any asserted costs

    and expenses. Regarding the proposed retention periods, the Commission

    specifically requests comment on the following questions:

    Are the proposed recordkeeping retention periods

    appropriate? If not, what modifications to the retention periods should

    be made?

    Given the advances in information technology, such as

    cloud storage, should the Commission extend the standard five year

    retention period?

    Is there a longer or shorter period of retention that

    would be appropriate for some records, and if so please specify which

    records and such time-frames?

    D. Regulation 1.31(d): Form and Manner of Retention

    The Commission proposes to revise Sec. 1.31(d) to describe

    recordkeeping requirements regarding the form and manner in which

    regulatory records are retained by records entities. These proposed

    revisions are designed to ensure the integrity and availability of all

    regulatory records. The Commission is cognizant that other provisions

    of the Act and Commission regulations distinguish between different

    classes of records entities. In particular, the Commission recognizes

    that records entities that are not registered or required to be

    registered with the Commission in any capacity, nor are one of the

    enumerated ``registered entities'' defined in Section 1a(40) of the CEA

    or so required to be registered or designated,\22\ currently are not

    required to comply with the full panoply of recordkeeping

    requirements.\23\ It is the Commission's goal to preserve this

    distinction, especially in those cases where a records entity

    exclusively maintains paper regulatory records.

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

    \22\ Section 1a(40) of the Act defines a ``registered entity''

    to mean: (a) A board of trade designated as a contract market under

    section 5; (b) a derivatives clearing organization registered under

    section 5b; (c) a board of trade designated as a contract market

    under section 5f; (d) a swap execution facility registered under 5h;

    (e) a swap data repository registered under section 21; and (f) with

    respect to a contract that the Commission determines is a

    significant price discovery contract, any electronic trading

    facility on which the contract is executed or traded.

    \23\ For example, part 20 of the Commission's regulations sets

    forth requirements regarding large trader reporting for physical

    commodity swaps. Regulation 20.1 defines a ``reporting entity'' to

    mean a clearing member of a clearing organization or a swap dealer

    in one or more paired swaps or swaptions. Pursuant to Sec. 20.6,

    only clearing organizations and reporting entities must keep all

    books and records in accordance with Sec. 1.31. Any other person

    who exceeds the reportable level in any contract ``shall keep books

    and records . . . in the record retention format that such person

    has developed in the normal course of its business operations.'' All

    books and records kept pursuant to Sec. 20.6, however, shall be

    furnished upon request to any Commission representative.

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

    The Commission proposes to re-state and revise in new Sec. 1.31(d)

    certain requirements for regulatory records currently set forth in

    Sec. 1.31(b)(1) through (3). In doing so, the Commission proposes to

    adopt a general standard in Sec. 1.31(d)(1) to require each records

    entity to retain all regulatory records in a form and manner necessary

    to ensure the records' and recordkeeping systems' authenticity and

    reliability. This general requirement would not distinguish between

    paper and non-paper regulatory records.

    With respect to electronic regulatory records, the Commission

    proposes to set forth in new Sec. 1.31(d)(2)(i) through (iii)

    additional controls for records entities retaining electronic

    regulatory records. In particular, each records entity would be

    required to:

    (A) Have systems that maintain security, signature, chain of

    custody elements, and data as necessary to ensure the authenticity of

    the information contained in regulatory records and to monitor

    compliance with the Act and Commission regulations;

    (B) Have systems that ensure the records entity is able to produce

    regulatory records in accordance with this section, and ensure the

    availability of regulatory records in the event of an emergency or

    other disruption of the records entity's record retention systems; and

    (C) Create and maintain an up-to-date inventory that identifies and

    describes each system that maintains information necessary for

    accessing or producing regulatory records.

    The Commission believes that these requirements are not new and are

    consistent with certain SEC requirements.\24\ Currently, Sec.

    1.31(b)(1)(ii)(B) mandates that electronic storage media verifies

    automatically the quality and accuracy of the storage media recording

    process. Existing rules require any records entity that utilizes

    electronic storage media to organize and maintain an accurate index of

    all information such that the location of any record may be immediately

    ascertained. Among other requirements, existing Sec. 1.31(b)(3)

    requires any records entity that utilizes electronic storage media to

    keep current a copy of the physical and logical format of the

    electronic storage media, the file format of all different information

    types maintained, documentation and information necessary to access

    records and indexes maintained on the electronic media.

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

    \24\ With respect to electronic storage media, SEC Rule 204-

    2(g)(3) requires investment advisers to establish written procedures

    that: (1) Maintain and preserve the records, so as to reasonably

    safeguard them from loss, alteration, or destruction; (2) limit

    access to the records to properly authorized personnel and the SEC;

    and (3) reasonably ensure that any reproduction of a non-electronic

    original record on electronic storage media is complete, true, and

    legible when retrieved. SEC Rule 31a-2(f) sets forth similar

    requirements for the operators of investment companies.

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

    Finally, based on the foregoing proposed amendments, the Commission

    believes that the existing provision in Sec. 1.35(a)(5)(i) regarding

    the form and manner in which records of commodity interest and cash

    forward transactions should be maintained is redundant and therefore

    should be repealed.

    Request for comment: The Commission requests comment from all

    interested parties and the general public regarding the proposed

    standards for form and manner of retention of regulatory records in

    Sec. 1.31(d). The Commission encourages all comments including

    background information, actual market examples, best practice

    principles, and estimates of any asserted costs and expenses. With

    respect to the authenticity and reliability of regulatory records and

    recordkeeping systems, the Commission specifically requests comment on

    the following questions:

    Should the Commission routinely publish guidelines

    regarding the technical standards for electronic regulatory records?

    With respect to potential impacts of the Proposal, the Commission

    specifically requests comment on the following questions:

    Would the Proposal require market participants to change

    their existing recordkeeping procedures under the Proposal? What, if

    any, transition or ongoing costs would result from such changes? Please

    provide details and estimates regarding any asserted costs.

    For entities who maintain digitized copies of paper

    records, what costs or other impacts would result under the Proposal?

    E. Regulation 1.31(e): Inspection and Production of Regulatory Records

    1. Inspection

    The Commission proposes to re-state in revised Sec. 1.31(e)(1) the

    right of inspection of the Commission and the United States Department

    of Justice (``DOJ'') in existing Sec. 1.31(a)(1). Specifically, the

    Commission proposes Sec. 1.31(e)(1) to state that all regulatory

    records shall be open to inspection by any representative of the

    Commission or the DOJ. The Commission previously determined that

    production of records is part of the Commission's inspection

    [[Page 6362]]

    powers.\25\ Accordingly, the Commission has determined to limit

    reference to the DOJ in Sec. 1.31 to a single reference in this

    paragraph. Any requirement for a records entity to produce regulatory

    records extends to DOJ as is currently the requirement.

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

    \25\ See 46 FR 21 (Jan. 3, 1981); see also, CFTC Letter 77-4

    (Apr. 14, 1977).

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

    Request for comment: The Commission requests comment from all

    interested parties and the general public regarding the proposed

    regulations set forth in Sec. 1.31(e)(1). The Commission encourages

    all comments including background information, actual market examples,

    best practice principles, and estimates of any asserted costs and

    expenses.

    2. Production

    The Commission proposes to revise and re-state in new Sec.

    1.31(e)(2) the existing production requirement currently set forth in

    Sec. 1.31(a)(2) and (b). Currently, a records entity is required to

    produce regulatory records in a form specified by any representative of

    the Commission, including the DOJ, upon the representative's request.

    If the requested book or record is stored either on micrographic media

    or electronic storage media, production shall be immediate.\26\

    Otherwise, all copies or originals shall be provided promptly.\27\ The

    Commission proposes to amend this requirement in new Sec. 1.31(e)(i)

    and (ii) to differentiate between the production of paper and

    electronic regulatory records, particularly with respect to the form

    and medium of requested electronic regulatory records.

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

    \26\ See Sec. 1.31(b)(2)(i) and (ii). In addition, persons

    using electronic storage media must be ready at all times to

    provide, and immediately provide at the expense of the person

    required to keep such records, copies of such records on such

    compatible data processing media as defined in Commission regulation

    15.00(d) which any representative of the Commission or the

    Department of Justice may request. Records must use a format and

    coding structure specified in the request. See Sec. 1.31(b)(3)(i).

    \27\ See Sec. 1.31(a)(2).

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

    With respect to the production of regulatory records exclusively

    created and maintained on paper, proposed Sec. 1.31(e)(2) would

    require a records entity to produce such regulatory records promptly

    upon request. With respect to regulatory records other than paper

    regulatory records, proposed Sec. 1.31(e)(3) would set forth the

    process by which a records entity must respond to a request from a

    Commission representative. In particular, Sec. 1.31(e)(3)(i) would

    require a Commission representative to specify a reasonable form and

    medium in which a records entity must produce such regulatory records.

    Proposed Sec. 1.31(e)(3)(ii) would require a records entity, at its

    own expense, to produce such regulatory records in the form and medium

    requested promptly, upon request, unless otherwise directed by the

    Commission representative.

    The Commission recognizes that production, depending on the

    records, may require the records entity to engage multiple employees,

    officers, or directors in order to satisfy the production request,

    depending upon its size and scope. Historically, Commission staff has

    exercised broad discretion regarding production schedules and

    ``typically exhibits flexibility. . . .'' \28\ However, timely

    production is a Commission priority and the proposed ``prompt''

    standard should not be interpreted as sanctioning any unnecessary

    delay. It is the Commission's understanding that most registrants

    maintain records electronically and therefore would be required under

    existing Sec. 1.31 to produce said records immediately, subject to the

    discretion of Commission staff. The prompt production standard is

    therefore consistent with the existing standard. The Commission notes

    that the standard ``promptly upon request'' is also consistent with SEC

    Rule 17a-4 applicable to broker-dealers thereby maintaining a

    harmonized standard for entities that may be dually registered with the

    SEC and the CFTC.\29\

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    \28\ FIA comment regarding proposed amendments to Sec. 1.31. 64

    FR 28735 at 28739 (May 27, 1999).

    \29\ SEC Rule 17a-1 similarly requires national securities

    exchanges and registered clearing agencies to ``promptly furnish''

    records to any representative of the SEC upon request.

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

    In adopting this revised regulation, the Commission is cognizant of

    the need to balance the opportunities for recordkeepers to reduce costs

    and improve efficiencies regarding recordkeeping systems with the

    Commission's need for prompt access to complete and accurate records in

    a format that the Commission can process, i.e., a useable format.\30\

    For the purposes of production, the Commission continues to believe

    that it is not sufficient to simply reduce electronic records to a

    paper format, i.e., printing out data from a database and saving into a

    portable document file, or PDF. This type of production detracts from

    the Commission's ability to properly evaluate the integrity of the

    electronic records by accessing the associated metadata, for example.

    Based upon these principles, the Commission proposes to revise Sec.

    1.31 to permit a records entity that cannot promptly produce electronic

    regulatory records in the form and medium requested by the Commission

    the opportunity to produce records in an alternative manner sufficient

    for the Commission to adequately inspect the records. The ultimate goal

    is not necessarily to obtain records in their ``native file format,''

    but rather in the most useable form and medium.

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

    \30\ See 77 FR at 66298 (referring to the 1999 Amendment).

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

    Finally, the Commission further proposes to adopt new Sec.

    1.31(e)(4) to preserve the existing right of a records entity to

    provide a representative of the Commission with an original regulatory

    record for reproduction by the representative in lieu of a copy

    currently set forth in Sec. 1.31(a)(2). As with the existing

    provision, the Commission proposes to require the Commission

    representative to issue a receipt for the original regulatory record to

    the records entity upon request.

    Request for comment: The Commission requests comment from all

    interested parties and the general public regarding the proposed

    inspection and production of regulatory records in Sec. 1.31(e). The

    Commission encourages all comments including background information,

    actual market examples, best practice principles, and estimates of any

    asserted costs and expenses. Regarding the production of regulatory

    records, the Commission specifically requests comment on the following

    questions:

    Should the Commission impose a different standard with

    respect to the production of paper regulatory records or other

    regulatory records?

    Are there records entities that retain only paper

    regulatory records?

    F. Other Matters

    1. Sec. 1.31(b)(4)--Technical Consultant

    Consistent with the foregoing amendments and in response to the

    Petitioners' request, the Commission proposes to amend Sec.

    1.31(b)(4)(i) to remove the requirement for a records entity to enter

    into an arrangement with a Technical Consultant and provide the

    Technical Consultant with access to and the ability to download

    information from the records entity's electronic storage media to any

    acceptable medium. Further, the Commission proposes to remove the

    requirement set forth in Sec. 1.31(b)(4)(ii) which requires the

    Technical Consultant to file with the Commission an acceptable

    undertaking regarding its ability and willingness to provide the

    Commission and DOJ with access to the information contained on the

    record entity's electronic storage media. The Commission concurs with

    the position taken by Petitioners that the information technology

    expertise within

    [[Page 6363]]

    the derivatives industry obviates the need for the Commission to

    require those records entities electing to store information

    electronically to engage a third party to ensure compliance with all

    applicable electronic recordkeeping obligations. However, to the extent

    that a records entity chose to use a third party or Technical

    Consultant, the records entity would remain responsible for compliance

    with the CEA and Commission regulations thereunder.

    2. Sec. 1.31(c)--Representation to the Commission

    Consistent with the foregoing amendments and in response to the

    Petitioners' request, the Commission proposes to amend Sec. 1.31 by

    removing existing Sec. 1.31(c). This provision requires any person

    utilizing electronic storage media to provide a written representation

    to the Commission prior to the use of the system certifying that the

    system satisfies the requirements in existing paragraph (b)(1)(ii) and,

    where applicable, if the system will be using storage media other than

    optical disk or CD-ROM. Further, the written representation must

    include an affirmation from an individual consistent with Sec.

    1.10(d)(4), i.e., the information provided is true and correct to the

    best knowledge and belief of the affirming individual. The Commission

    believes that the requirement set forth in proposed Sec. 1.31(c)(2)

    regarding written policies and procedures for regulatory records

    obviates the need for any records entity to provide notice to the

    Commission regarding its compliance with Sec. 1.31. Moreover, the

    Commission recognizes that references to optical disks and CD-ROM are

    outdated.

    3. Sec. 1.31(d)--Other Paper Regulatory Records

    Consistent with the foregoing amendments, the Commission proposes

    to amend Sec. 1.31 by removing current Sec. 1.31(d). This provision

    states that certain paper records, such as trading cards and paper

    copies of electronically filed certified forms, must be retained in

    hard-copy for the required time period. The Commission believes that

    revised Sec. 1.31 provides records entities with sufficient

    flexibility on how to retain regulatory records while maintaining the

    Commission's ability to access reliable regulatory information. Having

    eliminated the requirement for a records entity to retain regulatory

    records in a specific form and manner, the Commission believes that

    Sec. 1.31(d) no longer serves any regulatory purpose.

    Request for comment: The Commission requests comment from all

    interested parties and the general public regarding the proposed

    deletion of existing provisions in Sec. 1.31(b)(4), (c) and (d); and

    Sec. 1.35(a)(5)(i). The Commission encourages all comments including

    background information, actual market examples, best practice

    principles, and estimates of any asserted costs and expenses.

    4. Potential Technical Amendments

    In conjunction with the Proposal, the Commission is reviewing its

    regulations for potential technical amendments related to Sec. 1.31,

    including those part 4 regulations cited by Petitioners. This review

    may or may not result in a new proposed rulemaking.

    Request for comment: The Commission requests comment from all

    interested parties and the general public regarding potential technical

    amendments to Commission regulations related to Sec. 1.31. The

    Commission specifically requests comment whether the proposed changes

    to Sec. 1.31 will resolve all outstanding issues regarding compliance

    with part 4 of the Commission's regulations identified by Petitioners.

    The Commission encourages all comments including background

    information, actual market examples, best practice principles, and

    estimates of any asserted costs and expenses.

    III. Related Matters

    A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') \31\ requires Federal

    agencies, in promulgating regulations, to consider whether the rules

    they propose will have a significant economic impact on a substantial

    number of small entities and, if so, to provide a regulatory

    flexibility analysis regarding the economic impact on those entities.

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

    \31\ 5 U.S.C. 601 et seq.

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

    As discussed above, because the Proposal relates to most

    recordkeeping obligations under the CEA and the Commission's

    regulations, it may affect the full spectrum of Commission registrants,

    all persons required to register but not registered with the

    Commission, and certain persons that are neither registered nor

    required to register with the Commission. The Commission has previously

    determined that certain registrants are not small entities for purposes

    of the RFA and, therefore, the requirements of the RFA do not apply to

    those entities.\32\ For other registrants, however, the Commission has

    found it appropriate to consider whether such registrants should be

    deemed small entities for purposes of the RFA on a case-by-case basis,

    in the context of the particular Commission regulation at issue.\33\ As

    certain persons affected by the Proposal, including Commission

    registrants, may be small entities for purposes of the RFA, the

    Commission considered whether this rulemaking would have a significant

    economic impact on any such persons.

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

    \32\ See, e.g., Policy Statement and Establishment of

    Definitions of ``Small Entities'' for Purposes of the Regulatory

    Flexibility Act, 47 FR 18618 (Apr. 30, 1982) (futures commission

    merchants and commodity pool operators); Leverage Transactions, 54

    FR 41068 (Oct. 5, 1989) (leverage transaction merchants); Regulation

    of Off-Exchange Retail Foreign Exchange Transactions and

    Intermediaries, 75 FR 55410, 55416 (Sept. 10, 2010) (retail foreign

    exchange dealers); and Registration of Swap Dealers and Major Swap

    Participants, 77 FR 2613, 2620 (Jan. 19, 2012) (swap dealers and

    major swap participants).

    \33\ See 47 FR at 18620 (commodity trading advisors and floor

    brokers); Registration of Floor Traders; Mandatory Ethics Training

    for Registrants; Suspension of Registrants Charged With Felonies, 58

    FR 19575, 19588 (Apr. 15, 1993) (floor traders); and Introducing

    Brokers and Associated Persons of Introducing Brokers, Commodity

    Trading Advisors and Commodity Pool Operators; Registration and

    Other Regulatory Requirements, 48 FR 35248, 35276 (Aug. 3, 1983)

    (introducing brokers).

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

    As discussed above, the Proposal generally updates and simplifies

    existing Commission regulation 1.31 with new provisions that safeguard

    the same statutory-based principles previously identified by the

    Commission. It accomplishes this by deleting outdated terms and

    revising provisions to reflect advances in information technology,

    allowing records entities to benefit from evolving technological

    developments while maintaining necessary safeguards to ensure the

    reliability of the recordkeeping process.

    The Commission believes that the proposed rules would impose only

    limited additional costs on small entities related to the requirement

    that they establish written recordkeeping policies and procedures.

    However, this new requirement is replacing existing requirements

    applicable to such persons in many cases, including the existing

    similar requirements discussed above to (i) Maintain an audit system

    and (ii) under certain circumstances, retain a Technical Consultant.

    Further, as part of the Proposal, the Commission is proposing to remove

    existing requirements that are expected to lower costs for all records

    entities, including small entities, by removing requirements that

    certain records be kept in paper form.

    In light of the limited scope of the proposed changes and the added

    flexibility and expected cost-savings provided to small entities

    thereby, the Commission does not expect small entities that are records

    entities to incur

    [[Page 6364]]

    new costs, on a net basis, as a result of the Proposal. Consequently,

    the Commission finds that no significant economic impact on small

    entities will result from the Proposal.

    Accordingly, the Chairman, on behalf of the Commission, hereby

    certifies pursuant to 5 U.S.C. 605(b) that the Proposal will not have a

    significant economic impact on a substantial number of small entities.

    B. Paperwork Reduction Act

    1. Background

    The Paperwork Reduction Act of 1995 (``PRA'') \34\ imposes certain

    requirements on Federal agencies (including the Commission) in

    connection with their conducting or sponsoring any collection of

    information as defined by the PRA. The Proposal would result in a

    collection of information within the meaning of the PRA, as discussed

    below. The Commission therefore is submitting the Proposal to the

    Office of Management and Budget (``OMB'') for review.

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

    \34\ 44 U.S.C. 3501 et seq.

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

    The Proposal contains a collection of information for which the

    Commission has previously received a control number from OMB. The title

    for this collection of information is ``Adaptation of Regulations to

    Incorporate Swaps-Records of Transactions, OMB control number 3038-

    0090''.\35\ Collection 3038-0090 is currently in force with its control

    number having been provided by OMB.

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

    \35\ See OMB Control No. 3038-0090, http://www.reginfo.gov/public/do/PRAOMBHistory?ombControlNumber=3038-0090# (last visited

    Sep. 20, 2016).

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

    The responses to the Proposal's collection of information are

    mandatory. An agency may not conduct or sponsor, and a person is not

    required to respond to, a collection of information unless it displays

    a currently valid control number issued by OMB.

    As discussed above, in respect of collections of information, the

    Proposal would replace the existing audit system requirements with a

    requirement that records entities establish written recordkeeping

    policies and procedures. Such changes would result in revisions to

    collection 3038-0090. Therefore, the Commission proposes to revise

    collection 3038-0090 as described below.

    2. Modification of Collection 3038-0090--Recordkeeping Policies and

    Procedures

    The Commission estimates that the Proposal will require

    approximately 15,000 persons to develop and maintain recordkeeping

    policies and procedures. This estimate includes approximately 8,792

    registrants, 15 designated contract markets, 23 swap execution

    facilities, 4 swap data repositories, 15 designated clearing

    organizations, and 3,200 unregistered members of designated contract

    markets or swap execution facilities, with the balance reflecting the

    Commission's estimate of those persons that are required to register

    with the Commission, but have not so registered, and other persons

    neither registered nor required to register with the Commission.\36\

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

    \36\ With respect to registrants and registered entities, these

    numbers are based on the number of such persons so registered with

    the Commission as of November 2, 2016. With respect to the number of

    unregistered members of designated contract markets or swap

    execution facilities, see Agency Information Collection Activities:

    Proposed Collection Revision, Comment Request: Final Rule for

    Records of Commodity Interest and Related Cash or Forward

    Transactions, 80 FR 80327 (Dec. 24, 2015).

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

    Based on the above, the estimated additional hour burden for

    recordkeeping policies and procedures of 150,000 hours is calculated as

    follows:

    Number of affected persons: 15,000.

    Frequency of collection: Annually.

    Estimated annual responses per registrant: 1.

    Estimated aggregate number of annual responses: 15,000.

    Estimated annual hour burden per registrant: 10.\37\

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

    \37\ This burden hour estimate reflects the Commission's

    assumption that many records entities already have policies and

    procedures that, in whole or in part, satisfy the proposed

    recordkeeping policies and procedures requirement.

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

    Estimated aggregate annual hour burden: 150,000 (15,000 registrants

    x 10 hours per registrant).\38\

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

    \38\ The Commission will also submit to OMB revisions to

    Collection 3038-0090 to reflect the Proposal's replacement of the

    audit system requirements in current Commission regulation 1.31.

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

    3. Information Collection Comments

    The Commission invites the public and other Federal agencies to

    comment on any aspect of the proposed information collection

    requirements discussed above. Pursuant to 44 U.S.C. 3506(c)(2)(B), the

    Commission solicits comments in order to: (1) Evaluate whether the

    proposed collection of information is necessary for the proper

    performance of the functions of the Commission, including whether the

    information will have practical utility; (2) evaluate the accuracy of

    the Commission's estimate of the burden of the proposed collection of

    information; (3) determine whether there are ways to enhance the

    quality, utility, and clarity of the information to be collected; and

    (4) minimize the burden of the collection of information on those who

    are to respond, including through the use of automated collection

    techniques or other forms of information technology.

    Comments may be submitted directly to the Office of Information and

    Regulatory Affairs, by fax at (202) 395-6566, or by email at

    OIRAsubmissions@omb.eop.gov. Please provide the Commission with a copy

    of submitted comments so that all comments can be summarized and

    addressed in the final rule preamble. Refer to the ADDRESSES section of

    this notice of proposed rulemaking for comment submission instructions

    to the Commission. A copy of the supporting statements for the

    collection of information discussed above may be obtained by visiting

    www.RegInfo.gov. OMB is required to make a decision concerning the

    collection of information between 30 and 60 days after publication of

    this document in the Federal Register. Therefore, a comment is best

    assured of having its full effect if OMB receives it within 30 days of

    publication.

    C. Cost-Benefit Considerations

    Section 15(a) of the CEA\39\ requires the Commission to consider

    the costs and benefits of its actions before issuing a regulation under

    the CEA. 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: (i) Protection of market participants and the

    public; (ii) efficiency, competitiveness and financial integrity of

    futures markets; (iii) price discovery; (iv) sound risk management

    practices; and (v) other public interest considerations. The Commission

    considers the costs and benefits resulting from its discretionary

    determinations with respect to the Section 15(a) considerations.

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

    \39\ 7 U.S.C. 19(a).

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

    1. Costs

    As discussed above in relation to the RFA, the Proposal generally

    updates and simplifies existing Commission regulation 1.31 by deleting

    outdated terms and revising provisions to reflect advances in

    information technology while safeguarding the statutory-based

    principles previously identified by the Commission. The Commission

    preliminarily believes that the Proposal would impose certain costs on

    records entities. These costs are those necessary to establish and

    maintain required written recordkeeping policies and procedures. The

    Commission believes that these costs will be quite limited. At

    [[Page 6365]]

    the same time, the Commission preliminarily believes that the Proposal

    would also reduce current recordkeeping costs under Commission

    regulation 1.31, because the Proposal would increase flexibility

    provided to records entities and also eliminate certain requirements as

    described above (e.g., removing the requirements to have an audit

    system, to maintain electronic records in limited specified formats,

    and to retain a Technical Consultant).

    2. Benefits

    The Commission is committed to reviewing its regulations to ensure

    they keep pace with technological developments and industry trends, and

    reduce regulatory burden. The Commission believes that the Proposal

    will allow records entities to benefit from evolving technology while

    maintaining necessary safeguards to ensure the reliability of the

    recordkeeping process. By deleting outdated terms and revising

    provisions to reflect advances in information technology, the Proposal

    will allow records entities to utilize a wider range of currently

    available technology than previously allowed and remove requirements

    that the Commission believes are now obsolete, allowing records

    entities to reduce their costs. In addition, the Commission believes

    that the flexibility provided by the Proposal will, without further

    Commission rulemaking, allow records entities to adopt new technologies

    as such technologies evolve, allowing such persons to reduce their

    future costs.

    Moreover, the Commission expects that the added flexibility

    provided by the Proposal will encourage records entities to utilize

    electronic storage rather than maintain paper regulatory records. The

    Commission expects that this conversion will benefit the Commission,

    the DOJ, and the commodity interest industry, generally, by making the

    universe of regulatory records more accessible and searchable.

    In addition, as a result of the Proposal codifying industry

    practices to require recordkeeping policies and procedures and, in

    doing so, providing records entities with an opportunity to examine

    their own recordkeeping practices, the Commission expects that records

    entities may improve the quality of such practices and, thus, the

    accuracy and integrity of their regulatory records.

    3. Section 15(a) Factors

    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. CEA Section 15(a) further

    specifies that the costs and benefits shall be evaluated in light of

    five broad areas of market and public concern: (i) Protection of market

    participants and the public; (ii) efficiency, competitiveness, and

    financial integrity of futures markets; (iii) price discovery; (iv)

    sound risk management practices; and (v) other public interest

    considerations.

    i. Protection of Market Participants and the Public

    The Proposal will continue to protect the public by maintaining

    necessary safeguards to ensure the reliability of the recordkeeping

    process while allowing records entities to benefit from evolving

    technology.

    ii. Efficiency, Competitiveness, and Financial Integrity of Markets

    As discussed above, the Proposal may increase resource allocation

    efficiency by improving the way in which records are maintained.

    Otherwise, the Commission anticipates minimal change to the efficiency,

    competitiveness, and financial integrity of the markets.

    iii. Price Discovery

    The Commission believes that the Proposal may increase confidence

    and participation in the markets for the reasons discussed above.

    Nevertheless, the Commission does not anticipate a significant increase

    in liquidity or a significant improvement in price discovery as a

    result of this rulemaking.

    iv. Sound Risk Management Practices

    By improving recordkeeping policies and procedures, the Proposal

    may encourage records entities to analyze their recordkeeping practices

    and create or update policies and procedures related thereto.

    v. Other Public Interest Considerations

    The Commission has not identified any additional public interest

    considerations.

    4. Request for Comments

    The Commission invites public comment on its cost-benefit

    considerations, including the Section 15(a) factors described above.

    Commenters are also invited to submit any data or other information

    that they may have quantifying or qualifying the costs and benefits of

    the Proposal with their comment letters.

    The Commission specifically seeks comment on the following:

    For those market participants with written operational

    procedures and controls that comply with current Commission regulation

    1.31, what transition costs, if any, will the Proposal's requirement

    for written policies and procedures entail?

    Are there any costs or benefits associated with the

    Proposal that the Commission has not considered in the Proposal? Please

    provide details and estimates regarding any asserted costs or benefits.

    List of Subjects

    17 CFR Part 1

    Commodity futures, Reporting and recordkeeping requirements.

    17 CFR Part 23

    Authority delegations (Government agencies), Commodity futures,

    Reporting and recordkeeping requirements.

    For the reasons stated in the preamble, the Commodity Futures

    Trading Commission proposes to amend 17 CFR chapter I as follows:

    PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

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    1. The authority citation for part 1 continues to read as follows:

    Authority: 7 U.S.C. 1a, 2, 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 (2012).

    0

    2. Revise Sec. 1.31 to read as follows:

    Sec. 1.31 Regulatory records; retention and production.

    (a) Definitions. For purposes of this section:

    Electronic regulatory records means all regulatory records other

    than regulatory records exclusively created and maintained by a records

    entity on paper.

    Records entity means any person required by the Act or Commission

    regulations in this chapter to keep regulatory records.

    Regulatory records means all books and records required to be kept

    by the Act or Commission regulations in this chapter, including any

    record of any correction or other amendment to such books and records,

    provided that, with respect to such books and records stored

    electronically, regulatory records shall also include:

    (i) All data produced and stored electronically that describes,

    directly or indirectly, the characteristics of such books and records,

    including, without limitation, data that describes how, when, and, if

    relevant, by whom such electronically stored information was collected,

    created, accessed, modified, or formatted; and

    [[Page 6366]]

    (ii) Any data necessary to access, search, or display any such

    books and records.

    (b) Regulatory records policies and procedures. Each records entity

    shall establish, maintain, and implement written policies and

    procedures reasonably designed to ensure that the records entity

    complies with its obligations under this section. Such policies and

    procedures shall provide for, without limitation, appropriate training

    of officers and personnel of the records entity regarding their

    responsibility for ensuring compliance with the obligations of the

    records entity under this section, and regular monitoring for such

    compliance.

    (c) Duration of retention. Unless specified elsewhere in the Act or

    Commission regulations in this chapter:

    (1) A records entity shall keep regulatory records of any swap or

    related cash or forward transaction (as defined in Sec. 23.200(i) of

    this chapter), other than regulatory records of oral communications,

    from the date the regulatory record was created until the termination,

    maturity, expiration, transfer, assignment, or novation date of the

    transaction and for a period of not less than five years after such

    date.

    (2) A records entity that is required to retain oral

    communications, shall keep regulatory records of oral communications

    for a period of not less than one year from the date of such

    communication.

    (3) A records entity shall keep each regulatory record other than

    the records described in paragraph (c)(1) or (2) of this section for a

    period of not less than five years from the date on which the record

    was created.

    (4) A records entity shall keep regulatory records exclusively

    created and maintained on paper readily accessible for no less than two

    years. A records entity shall keep electronic regulatory records

    readily accessible for the duration of the required record keeping

    period.

    (d) Form and manner of retention. Unless specified elsewhere in the

    Act or Commission regulations in this chapter, all regulatory records

    must be created and retained by a records entity in accordance with the

    following requirements:

    (1) Generally. Each records entity shall retain regulatory records

    in a form and manner that ensures the authenticity and reliability of

    such regulatory records in accordance with the Act and Commission

    regulations in this chapter.

    (2) Electronic regulatory records. Each records entity maintaining

    electronic regulatory records shall establish appropriate systems and

    controls that ensure the authenticity and reliability of electronic

    regulatory records, including, without limitation:

    (i) Systems that maintain the security, signature, chain of custody

    elements, and data as necessary to ensure the authenticity of the

    information contained in electronic regulatory records and to monitor

    compliance with the Act and Commission regulations in this chapter;

    (ii) Systems that ensure the records entity is able to produce

    electronic regulatory records in accordance with this section, and

    ensure the availability of such regulatory records in the event of an

    emergency or other disruption of the records entity's electronic record

    retention systems; and

    (iii) The creation and maintenance of an up-to-date inventory that

    identifies and describes each system that maintains information

    necessary for accessing or producing electronic regulatory records.

    (e) Inspection and production of regulatory records. Unless

    specified elsewhere in the Act or Commission regulations in this

    chapter, a records entity, at its own expense, must produce or make

    accessible for inspection all regulatory records in accordance with the

    following requirements:

    (1) Inspection. All regulatory records shall be open to inspection

    by any representative of the Commission or the United States Department

    of Justice.

    (2) Production of paper regulatory records. A records entity must

    produce regulatory records exclusively created and maintained on paper

    promptly upon request of a Commission representative.

    (3) Production of electronic regulatory records. (i) A request from

    a Commission representative for electronic regulatory records will

    specify a reasonable form and medium in which a records entity must

    produce such regulatory records.

    (ii) A records entity must produce such regulatory records in the

    form and medium requested promptly, upon request, unless otherwise

    directed by the Commission representative.

    (4) Production of original regulatory records. A records entity may

    provide an original regulatory record for reproduction, which a

    Commission representative may temporarily remove from such entity's

    premises for this purpose. Upon request of the records entity, the

    Commission representative shall issue a receipt for any original

    regulatory record received. At the request of a Commission

    representative, a records entity shall, upon the return thereof, issue

    a receipt for the original regulatory record returned by such

    representative.

    0

    3. In Sec. 1.35, revise paragraph (a)(5) to read as follows:

    Sec. 1.35 Records of commodity interest and related cash or forward

    transactions.

    (a) * * *

    (5) Form and manner. All records required to be kept pursuant to

    paragraphs (a)(1), (2), (3), and (4) of this section, other than pre-

    trade communications, shall be kept in a form and manner that allows

    for the identification of a particular transaction.

    * * * * *

    PART 23--SWAP DEALERS AND MAJOR SWAP PARTICIPANTS

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    4. The authority citation for part 23 continues to read as follows:

    Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6b-1, 6c, 6p, 6r, 6s, 6t,

    9, 9a, 12, 12a, 13b, 13c, 16a, 18, 19, 21.

    Section 23.160 also issued under 7 U.S.C. 2(i); Sec. 721(b),

    Pub. L. 111-203, 124 Stat. 1641 (2010).

    0

    5. In Sec. 23.203, amend paragraph (b) as follows:

    0

    a. Revise paragraph (b)(1); and

    0

    b. Remove and reserve paragraph (b)(2).

    The revisions to read as follows:

    Sec. 23.203 Records; retention and inspection.

    * * * * *

    (b) * * * (1) The records required to be maintained by this chapter

    shall be maintained in accordance with the provisions of Sec. 1.31 of

    this chapter, except as provided in paragraph (b)(3) of this section.

    All such records shall be open to inspection by any representative of

    the Commission, the United States Department of Justice, or any

    applicable prudential regulator. Records relating to swaps defined in

    section 1a(47)(A)(v) shall be open to inspection by any representative

    of the Commission, the United States Department of Justice, the

    Securities and Exchange Commission, or any applicable prudential

    regulator.

    * * * * *

    Issued in Washington, DC, on January 12, 2017, by the

    Commission.

    Christopher J. Kirkpatrick,

    Secretary of the Commission.

    NOTE: The following appendices will not appear in the Code of

    Federal Regulations.

    [[Page 6367]]

    Appendices to Recordkeeping--Commission Voting Summary and Chairman's

    Statement

    Appendix 1--Commission Voting Summary

    On this matter, Chairman Massad and Commissioners Bowen and

    Giancarlo voted in the affirmative. No Commissioner voted in the

    negative.

    Appendix 2--Statement of Chairman Timothy G. Massad

    I have said many times that it is important for the CFTC to ensure

    its rules are up-to-date in light of technological changes, as outdated

    rules can create unnecessary burdens. That is why I'm pleased we are

    unanimously issuing this proposed rulemaking, which is in keeping with

    that goal.

    Today's proposal will modernize recordkeeping and storage

    obligations set forth in CFTC rules, and make them technology neutral.

    By doing so, it will reduce costs for businesses and improve the

    quality of record preservation and production. Among other things, the

    proposal will provide greater flexibility when it comes to how records

    must be retained and produced. In this age where terabytes of storage

    easily fit in one's pocket, our rules should not refer to microfiche or

    require paper records.

    Today's proposal is also an example of how the Commission is

    focusing on issues related to technological change generally in our

    markets. In this regard, there is much talk today about innovations

    that may come from financial technology. While it is the role of the

    private sector to develop innovations, I believe it is our role to

    ensure that the Commission's rules do not stand in the way of their

    potential. Today's proposal is a way to do just that.

    I thank the CFTC staff for their work on this proposal and my

    fellow Commissioners for their support.

    [FR Doc. 2017-01148 Filed 1-18-17; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: January 19, 2017