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SPEECHES & TESTIMONY

  • Statement of Commissioner J. Christopher Giancarlo Regarding Final Rule on Records of Commodity Interest and Related Cash or Forward Transactions

    December 18, 2015

    I am pleased to support this final rule that revises Rule 1.35. In the end, after numerous iterations, several comment periods, significant legislative interest from Congress, and months of negotiating, the Commodity Futures Trading Commission (CFTC or Commission) thankfully listened to the concerns of market participants. I am appreciative of the CFTC staff’s diligent work over the past few months to make key revisions to this rule. Fixing this regulation was one of the first issues that I raised with my fellow Commissioners upon my arrival at the CFTC. I believe we have now produced a more workable rule that will not impose needless regulatory costs on America’s agricultural producers, grain elevator operators or energy producers, to name a few.

    As background, the Commission revised long-standing Rule 1.35 in 2012 despite the fact that the Dodd-Frank Act1 contained no mandate to change the CFTC’s recordkeeping rules.2 The revised rule proved to be unworkable. Its publication was followed by requests for no-action relief and a public roundtable at which entities impacted by the rule voiced their inability to tie all communications leading to the execution of a transaction to a particular transaction or transactions. End-user exchange members pointed out that business that was once conducted by telephone had moved to text messaging, so the carve out in the rule for oral communications had little utility. They pointed out that it was simply not technologically feasible to keep pre-trade text messages in a form and manner “identifiable and searchable by transaction.” Further, bipartisan Congressional action on the rule’s unworkable nature made it clear that the Commission should re-open the rule to lessen the burden on market participants not registered with the CFTC.3

    In November 2014, the CFTC did propose changes to Rule 1.35.4 Unfortunately, I could not support that proposal because it did not go far enough in addressing concerns about the feasibility and cost of compliance.5 It continued to contain provisions that were overly burdensome in practice for certain covered entities. For example, the proposal kept 2012 rule revisions that required the keeping of all oral and written records that lead to the execution of a transaction in a commodity interest and related cash or forward transaction, in a form and manner “identifiable and searchable by transaction.”6 This “searchable” requirement also conflicted with the requirements of Commission Rule 1.31, which applies to all books and records required to be kept by the Commodity Exchange Act and Commission regulations.

    Appropriately, the final revisions to Rule 1.35 address many of the issues raised in my year-old dissent. End-user exchange members that are not registered or required to be registered with the Commission now must only keep transaction records, which is a logical and prudent course of regulatory policy. Text messages are also excluded from the recordkeeping requirement for end-users, but communications through internet-based messaging services must be kept on file. I anticipate that this distinction will generate interesting public commentary.7

    Aside from the technical points of the final rule, it is appropriate to comment on the skyrocketing compliance costs associated with trading in American commodity markets. There is an undeniable need for the CFTC to police these markets and root out fraud and abuse. Confidence and trust in our markets is essential so that farmers, manufacturers and other end-users can safely hedge their risks and costs of production. Yet, agricultural intermediaries, particularly small futures commission merchants, are being squeezed by the prolonged environment of low interest rates and increased regulatory burdens. Regulators must always balance the public’s interest in collecting commercial information for use in investigations and enforcement, against costs and burdens placed on American commerce and industry and the jobs they generate. In this protracted period of weak economic growth with an enormous number of Americans out of the workforce, we must scrupulously avoid needless red tape and compliance costs that are invariably passed along through higher costs for everyday items like a loaf of bread or a gallon of gasoline, milk or winter heating oil.

    I believe the final Rule 1.35 generally gets the balance right. Yet, I must give a plain and simple warning: The elimination of unnecessary recordkeeping burdens provided in this final rule will be paradoxically tossed aside for many small market participants if Regulation Automated Trading (Regulation AT) is finalized as proposed.8 Under Regulation AT, many unregistered market participants would be forced to register for the first time with the CFTC as “floor traders” due to the broad definition of “algorithmic trading.”9 As new floor traders, these market participants would then be subject to heighted recordkeeping requirements under Rule 1.35, such as keeping all “written communications provided or received concerning quotes, bids, offers, instructions, trading, and prices that lead to the execution of a transaction.”10 As I said in my statement accompanying the Notice of Proposed Rulemaking for Regulation AT, I encourage market participants to carefully review and consider the compliance and cost consequences of that potential new regulatory regime and compare it to today’s common-sense revisions to Rule 1.35.

    As I have mentioned in the past, I have been fortunate during my time as a Commissioner to visit with agricultural and energy producers and intermediaries in Illinois, Indiana, Iowa, Minnesota, Texas, Louisiana and Kentucky. The common refrain I hear again and again is that Washington does not listen to everyday Americans. It imposes rules and regulations without regard to their obvious impact on ordinary people. Well, I believe this rule benefits from listening to those concerns and is a step in the right direction. I am hopeful that it is an indicator of future action by the CFTC that more readily takes to heart these common concerns in all of our regulatory actions.

    1 Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376 (2010).

    2 See Adaptation of Regulations to Incorporate Swaps-Records of Transactions, 77 FR 75523 (Dec. 21, 2012), available at https://www.gpo.gov/fdsys/pkg/FR-2012-12-21/pdf/2012-30691.pdf.

    3 See H.R. 4413, the Customer Protection and End-User Relief Act, Sec. 353 (113th Congress) and H.R. 2289, the Commodity End-User Relief Act, Sec. 308 (114th Congress).

    4 See Records of Commodity Interest and Related Cash or Forward Transactions, 79 FR 68140 (Nov. 14, 2014), available at http://www.cftc.gov/idc/groups/public/@lrfederalregister/documents/file/2014-26983a.pdf.

    5 See id. at 68147-148 (Dissenting Statement of Commissioner J. Christopher Giancarlo).

    6 See supra note 4.

    7 As finalized, the rule excludes text messages based on SMS and MMS technology, but includes internet-based messaging services such as iPhone messages because they are easier to store and retrieve on computers. While this outcome is puzzling and not technologically neutral, the best manner to ensure compliance with CFTC regulations is education on our rules.

    8 See CFTC Notice of Proposed Rulemaking (3038-AD52), Regulation Automated Trading (Dec. 14, 2015), available at http://www.cftc.gov/idc/groups/public/@newsroom/documents/file/federalregister112415.pdf.

    9 See definition of “Algorithmic Trading” in proposed Commission regulation 1.3(ssss), which is very broad and would appear to capture market participants using off-the-shelf type automated systems or simple excel spreadsheets to automate trading.

    10 Emphasis added; See Commission Rule 1.35(a)(1)(iii) (defining “written pre-trade communications”) and Rule 1.35(a)(2)(ii) (requiring all “floor traders” to keep all “written pre-trade communications”).

    Last Updated: December 18, 2015