2014-26983
[Federal Register Volume 79, Number 220 (Friday, November 14, 2014)]
[Proposed Rules]
[Pages 68140-68148]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-26983]
[[Page 68140]]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 1
RIN 3038-AE23
Records of Commodity Interest and Related Cash or Forward
Transactions
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Commodity Futures Trading Commission (the ``Commission''
or ``CFTC'') is proposing to amend Commission Rule 1.35(a) (the
``Proposal'') to: provide that all records required to be maintained
under this regulation must be searchable; clarify that all records be
kept in a form and manner that allows for identification of a
particular transaction, except that records of oral and written
communications leading to the execution of a transaction in a commodity
interest and related cash or forward transactions are not required to
be kept in a form and manner that allows for identification of a
particular transaction; exclude unregistered members of designated
contract markets (``DCMs'') and swap execution facilities (``SEFs'')
from the requirements to retain text messages and to maintain records
in a particular form and manner; and exclude commodity trading advisors
(``CTAs'') from the oral recordkeeping requirement.
DATES: Comments must be received on or before January 13, 2015.
ADDRESSES: You may submit comments, identified by RIN 3038-AE23, by any
of the following methods:
Agency Web site, via its Comments Online process: http://comments.cftc.gov. Follow the instructions for submitting comments
through the Web site.
Mail: Send to Christopher Kirkpatrick, Secretary of the
Commission, Commodity Futures Trading 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 of these methods.
All comments must be submitted in English, or if not, accompanied
by an English translation. Comments will be posted as received to
http://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, a petition for confidential treatment of
the exempt information may be submitted according to the procedures set
forth in Sec. 145.9 of the Commission's regulations.\1\
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\1\ 17 CFR 145.9. The Commission's regulations are found at 17
CFR Ch. I (2013) and can be accessed through the Commission's Web
site at www.cftc.gov.
_____________________________________-
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 Freedom of Information
Act.
FOR FURTHER INFORMATION CONTACT: Gary Barnett, Director, (202) 418-
6700, [email protected]; Katherine Driscoll, Associate Director, (202)
418-5544, [email protected]; August A. Imholtz III, Special Counsel,
(202) 418-5140, [email protected]; or Lauren Bennett, Attorney-Advisor,
(202) 418-5290, [email protected], Division of Swap Dealer and
Intermediary Oversight, Commodity Futures Trading Commission, Three
Lafayette Centre, 1155 21st Street NW., Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
I. Background
A. Commission Recordkeeping Requirements for Certain Market
Participants
On December 21, 2012, the Commission published a final rulemaking,
which amended the recordkeeping provisions of Commission Regulation
1.35(a) to integrate the rule more fully with the framework created by
the Dodd-Frank Wall Street Reform and Consumer Protection Act for swap
dealers and major swap participants (the ``Final Rule'').\2\ The Final
Rule requires each futures commission merchant (``FCM''), retail
foreign exchange dealer (``RFED''), introducing broker (``IB''), and
member of a DCM or SEF to keep full, complete, and systematic records
of all transactions relating to its business of dealing in commodity
interest and related cash or forward transactions.\3\ The Commodity
Exchange Act (``CEA'') defines ``member'' as an individual,
association, partnership, corporation, or trust--(i) owning or holding
membership in, or admitted to membership representation on, the
registered entity or derivatives transaction execution facility; or
(ii) having trading privileges on the registered entity or derivatives
transaction execution facility.\4\
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\2\ See Adaptation of Regulations to Incorporate Swaps--Records
of Transactions, 77 FR 75523 (Dec. 21, 2012) (``Final Rule Adopting
Release'').
\3\ 17 CFR 1.35(a)(1).
\4\ 7 U.S.C. 1a(34). The CEA can be accessed through the
Commission's Web site.
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The Final Rule includes a requirement to keep records of all oral
communications, which applies to each FCM, RFED, large IB (defined as
an IB that has generated over $5 million in aggregate gross revenues
over the preceding three years from its activities as an IB), and
member of a DCM or SEF that is registered or required to register with
the Commission as a floor broker (``FB'') (only with regard to acting
as an agent for a non-affiliated client) or as a CTA.\5\ Unlike the
written recordkeeping requirement that applies to transactions in a
commodity interest and related cash or forward transactions, the oral
recordkeeping requirement is limited to transactions in a commodity
interest.\6\ The scope of Regulation 1.35(a) under the Final Rule
includes communications made via telephone, voicemail, facsimile,
instant messaging, chat rooms, electronic mail, mobile device, or other
digital or electronic media.\7\ These communications include text
messages. The Final Rule also mandates that such records be kept in a
form and manner identifiable and searchable by transaction.
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\5\ As stated in the Final Rule, the oral recordkeeping
requirement in Regulation 1.35(a) does not apply to: (i) Oral
communications that lead solely to the execution of a related cash
or forward transaction; (ii) oral communications provided or
received by a floor broker that do not lead to the purchase or sale
for any person other than the floor broker of any commodity for
future delivery, security futures product, swap, or commodity option
authorized under section 4c of the Commodity Exchange Act; (iii) an
introducing broker that has generated over the preceding three years
$5 million or less in aggregate gross revenues from its activities
as an introducing broker; (iv) a floor trader; (v) a commodity pool
operator; (vi) a swap dealer; (vii) a major swap participant; or
(viii) a member of a DCM or SEF that is not registered or required
to be registered with the Commission in any capacity. 17 CFR
1.35(a)(1).
\6\ 17 CFR 1.35(a)(1).
\7\ Id.
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The Final Rule became effective on February 19, 2013, with a
December 21, 2013 compliance date for the oral recordkeeping
requirement.\8\
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\8\ Final Rule Adopting Release at 75524.
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[[Page 68141]]
B. Comments Received on the 2011 Proposed Amendments to Regulation
1.35(a)
Prior to promulgating the Final Rule, on June 7, 2011, the
Commission published proposed changes to Regulation 1.35(a) and sought
public comment on those proposed changes (the ``2011 Proposed
Rule'').\9\ In response, the Commission received 35 comment letters
from a variety of institutions.\10\ Many commenters opposed the
Proposed Rule's written and oral recordkeeping requirements for members
of a DCM or SEF that are commercial end-users and non-
intermediaries.\11\ The commenters on the 2011 Proposed Rule generally
argued that entities that do not trade for customers pose minimal risk
to the market, and should therefore not be subject to what they
believed to be the costly recordkeeping burdens outlined in the
proposed changes to Regulation 1.35(a).\12\ Some commenters also
suggested that the proposed recordkeeping provisions could potentially
deter some end-users from hedging commercial risk on a DCM or SEF,
thereby ``defeating the Dodd-Frank Act's transparency objectives.''
\13\
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\9\ Adoption of Regulations to Incorporate Swaps, 76 FR 33066
(July 7, 2011).
\10\ See Final Rule Adopting Release at 75524. These comments
can be found on the Commission's Web site at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1037.
\11\ Final Rule Adopting Release at 75527.
\12\ Id.
\13\ Id.
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After carefully considering the comments to the 2011 Proposed Rule,
the Commission excluded commercial end-users and non-intermediaries
from the oral recordkeeping provisions.\14\ The Commission did not
exclude those same market participants from the written recordkeeping
requirements of Regulation 1.35(a), concluding that the Final Rule
would ``significantly advance the Commission's efforts to detect and
deter abusive, disruptive, fraudulent and manipulative acts and
practices that seriously harm market integrity and customers.'' \15\
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\14\ Under the Final Rule, members of a DCM or SEF that are not
registered or required to register with the Commission in any
capacity are not required to record and keep oral communications.
Because floor traders and commodity pool operators do not face
customers, the Commission chose to exempt them as well from the oral
recordkeeping requirement. 17 CFR 1.35(a)(1).
\15\ Final Rule Adopting Release at 75528.
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Since the Final Rule was promulgated on December 21, 2012, the
Commission has received additional comments from a wide range of
commercial end-users and CTAs that are members of a DCM or SEF that the
Final Rule, and in some instances Regulation 1.35(a) as it existed
before the Commission promulgated the Final Rule, is overly burdensome
and inappropriate in its application to end-users and to CTAs.
Subsequently, on April 3, 2014, the Commission staff held a Public
Roundtable to Discuss Dodd-Frank End-User Issues \16\ (the ``End-User
Roundtable''). In addition, Commission staff has provided certain
market participants with relief from particular aspects of the Final
Rule.\17\ Both the End-User Roundtable and staff relief are described
below.
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\16\ Public Roundtable to Discuss Dodd-Frank End-User Issues,
Commodity Futures Trading Commission (Apr. 3, 2014), available at:
http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/transcript040314.pdf (``End-User Roundtable Transcript'').
\17\ See CFTC Staff Letter No. 13-77, Time-Limited No-Action
Relief for Certain Members of Swap Execution Facilities from the
Requirement to Record Oral Communications Pursuant to Commission
Regulation 1.35(a) (Dec. 20, 2013), available at: http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/13-77.pdf (``CFTC Staff Letter No. 13-77''); CFTC Staff Letter No. 14-
33, Time-Limited No-Action Relief for Certain Members of a
Designated Contract Market from the Requirement to Record Oral
Communications, Pursuant to Commission Regulation 1.35(a), in
Connection with the Execution of Swap Transactions (Mar. 21, 2014),
available at: http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/14-33.pdf (``CFTC Staff Letter No.
14-33''); CFTC Staff Letter No. 14-60, Time-Limited No-Action Relief
for Certain Members of Swap Execution Facilities and Designated
Contract Markets from the Requirement to Record Oral Communications,
Pursuant to Commission Regulation 1.35(a), in Connection with the
Execution of Swap Transactions (Apr. 25, 2014), available at: http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/14-60.pdf (``CFTC Staff Letter No. 14-60''); CFTC Staff Letter No.
14-72, Time-Limited No-Action Relief for Members of Designated
Contract Markets and Swap Execution Facilities that Are Not
Registered with the Commission from the Requirement to Record
Written Communications, Pursuant to Commission Regulation 1.35(a),
in Connection with the Execution of a Transaction in a Commodity
Interest and Related Cash or Forward Transactions (May 22, 2014),
available at: http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/14-72.pdf (``CFTC Staff Letter No.
14-72'').
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C. End-User Roundtable
On April 3, 2014, Commission staff hosted the End-User Roundtable
to discuss, among other things, the impact of the amendments to
Regulation 1.35(a) on various market participants. One of the primary
issues discussed at the roundtable was the fact that many market end-
users are subject to Regulation 1.35(a) simply by virtue of having
trading privileges on a DCM or SEF.\18\ One roundtable participant
noted that many end-users that have trading privileges rely on text
messages to communicate to market intermediaries their interest to
engage in commodity interests and related cash and forward
transactions.\19\ Some roundtable participants stated it is
prohibitively expensive to retain text messages.\20\
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\18\ See End-User Roundtable Transcript.
\19\ Id. at 55.
\20\ See id.
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Many roundtable commenters also noted that, given the nature of
their business, it is very difficult to maintain required written
records in a manner identifiable and searchable by transaction.\21\ As
explained by one end-user participant, because they do not manage their
positions on a transaction-by-transaction basis, but on a portfolio
basis, they are not able to identify the extent to which certain
records must be kept for certain transactions.\22\
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\21\ See id.
\22\ See id. at 14-16.
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The End-User Roundtable also addressed the oral recordkeeping
requirement for members of a DCM or SEF that are CTAs. One CTA
participant stated that as a fiduciary that manages assets on a
discretionary basis, a CTA's investment decisions are made
independently by the CTA based on a client's investment guidelines,
rather than ongoing communications with the client.\23\ The CTA
participant therefore observed that the oral recordkeeping provision of
Regulation 1.35(a) would not further the interest of customer
protection with respect to CTAs.\24\
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\23\ Id. at 64-65.
\24\ Id.
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D. CFTC Letter No. 13-77
On December 10, 2013, the Asset Management Group of the Securities
Industry and Financial Markets Association (``SIFMA AMG'') and the
Managed Funds Association (``MFA'') submitted a letter to the CFTC
Division of Swap Dealer and Intermediary Oversight (``DSIO'') seeking
interpretive guidance and relief that would confirm their view that
those asset managers, including CTAs, that participate on a SEF would
not be members of a SEF for purposes of the Final Rule, or for guidance
or relief that would otherwise exempt asset managers from the Final
Rule.\25\ In the alternative, SIFMA AMG and MFA sought additional time
to allow asset managers that are members of SEFs to come into
compliance with the Final Rule. In response, DSIO and the Division of
Market Oversight (together, the ``Divisions'') issued a no-action
letter on December 20, 2013 granting relief to CTAs that are members of
SEFs from the requirement under the Final Rule to record oral
[[Page 68142]]
communications.\26\ That relief was set to expire on May 1, 2014. The
Divisions believed that additional time for these asset managers was
warranted given that SEFs had only recently begun publishing their
rulebooks, and the requestors' representations that asset managers
needed more time to adjust their recordkeeping processes in order to
comply with the Final Rule.
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\25\ See SIFMA AMG and MFA Letter, Request for Interpretive
Guidance on Application of Rule 1.35(a) to Asset Managers (Dec. 10,
2013), available at http://www.sifma.org/issues/item.aspx?id=8589946605 and CFTC Staff Letter No. 13-77.
\26\ Id.
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E. CFTC Letter No. 14-33
On March 21, 2014, trueEX, a registered DCM and provisionally
registered SEF, submitted a letter to the Divisions requesting relief
on behalf of CTAs that are members of trueEX from the requirement under
the Final Rule to record oral communications that lead to the execution
of swap transactions on trueEX DCM.\27\ In response to the trueEX
request, and citing to the relief in CFTC Letter No. 13-77 granted to
CTAs that are members of SEFs, the Divisions issued no-action relief to
CTAs that are members of trueEX DCM from the requirement to record oral
communications that lead to the execution of swap transactions on
trueEX DCM.\28\ That relief was set to expire on May 1, 2014.
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\27\ See CFTC Staff Letter No. 14-33.
\28\ Id.
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F. CFTC Letter No. 14-60
On April 17, 2014, SIFMA AMG submitted another letter to the
Divisions requesting exemptive relief from the recordkeeping
requirements of Regulation 1.35(a) for asset managers that are members
of SEFs or DCMs in connection with the execution of swaps.\29\ SIFMA
AMG contended that the costs of compliance associated with the rule's
oral and written recordkeeping requirements for asset managers
significantly outweighed the benefits.\30\
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\29\ See SIFMA AMG Letter, CFTC Staff Public Roundtable to
Discuss Dodd-Frank End-User Issues and Request for Interpretative
Guidance and Relief on Application of Rule 1.35(a) to Asset Managers
(Apr. 17, 2014), available at: http://www.sifma.org/issues/item.aspx?id=8589948677, and CFTC Staff Letter No. 14-60.
\30\ Id.
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The Divisions considered SIFMA AMG's concerns in relation to the
prior no-action relief granted to asset managers and comments from the
recent end-user roundtable discussion, and issued a no-action letter on
April 25, 2014 which provides no-action relief to CTAs that are members
of SEFs or DCMs from the requirement to record oral communications in
connection with the execution of swaps. This relief will expire on
December 31, 2014.\31\
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\31\ See CFTC Staff Letter No. 14-60. SIFMA's letter requested
relief from the oral and written recordkeeping requirements of the
regulation, but the Divisions addressed the request for relief
solely with respect to oral communications.
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G. CTFC Letter No. 14-72
On December 12, 2013, the Commodity Markets Council (``CMC'')
submitted a request (``CMC Request'') for interpretive guidance to the
Divisions regarding the electronic recordkeeping requirements of
Regulation 1.35(a) on behalf of members of DCMs and SEFs that are not
registered or required to register with the Commission in any capacity
(``Unregistered Members'').\32\ CMC stated that although text messaging
and other electronic communications had become the primary mode of
communication for Unregistered Members, these firms had encountered
difficulties in securing a technology solution for storing and
searching those records.\33\
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\32\ See CMC Letter, Request for Interpretive Guidance--Rule
1.35 Contained Within the Final Rules on Adaptation of Regulations
to Incorporate Swaps--Records of Transactions (Dec. 12, 2013),
available at: http://www.commoditymkts.org/wp-content/uploads/2014/05/CMC-Rule-1.35-Interpretive-Guidance-Request-Letter-12.12.2013a.pdf, and CFTC Staff Letter No. 14-72.
\33\ Id.
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The Divisions considered this concern in conjunction with similar
comments raised at the End-User Roundtable discussion regarding the
``searchability'' requirement, and granted limited no-action relief to
Unregistered Members from the requirements under Regulation 1.35(a) to:
(i) Retain text messages, and (ii) store required records in a form and
manner identifiable and searchable by transaction.\34\ Under the no-
action letter, the relief for Unregistered Members will remain
effective until any final Commission action with respect to the CMC
Request, including a rulemaking, order, or a determination not to take
action.
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\34\ Id.
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II. The Proposal
The Commission carefully considered all of the comments submitted
prior to the adoption of the Final Rule. In drafting the Final Rule,
the Commission aimed to address its goals of promoting market integrity
and customer protection with the consequential burdens imposed on
market participants. In light of the concerns raised at the End-User
Roundtable and letters to the Commission from the public requesting
guidance and exemptive relief, the Commission is considering further
amendments to Regulation 1.35(a). In response to several requests from
market participants for guidance on how to comply with the requirement
under Regulation 1.35(a) that records be ``identifiable and searchable
by transaction,'' the Commission is proposing to amend the language of
Regulation 1.35(a) to: (i) provide that all records that are required
to be maintained under this regulation must be searchable; and (ii)
clarify that all such records must be kept in a form and manner that
allows for identification of a particular transaction, except that
records of oral and written communications provided or received
concerning quotes, solicitations, bids, offers, instructions, trading,
and prices that lead to the execution of a transaction in a commodity
interest and related cash or forward transactions are required to be
searchable, but need not be kept in a form and manner that allows for
identification of a particular transaction.\35\
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\35\ The proposed amendment to Regulation 1.35(a) does not
modify, limit, restrict or reduce the obligations that exist under
Regulation 1.31 to produce required records in native file format,
and to produce those records in such a manner as to preserve the
full functionality that may be available in native file format.
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The Commission also understands that compliance with some aspects
of the rule imposes burdens on certain Unregistered Members and CTAs.
The Commission also has a particular interest in protecting customers
who engage with intermediaries to access the commodities markets. Thus,
the Commission is proposing to exclude Unregistered Members from the
requirement to retain text messages, and from the requirement to
maintain records in a particular form and manner. The Commission also
recognizes that many CTAs who are members of DCMs or SEFs and have
discretionary trading authority do not have routine discussions with
end-clients regarding transactions in commodity interests, and is
therefore proposing to further balance CTAs' recordkeeping burden by
excluding them from the oral recordkeeping requirement of Regulation
1.35(a).
A. Proposing To Amend Regulation 1.35(a) To Clarify the
``Identifiable'' and ``Searchable'' Requirements of the Rule Generally
Regulation 1.35(a) mandates that required records be maintained in
a form and manner ``identifiable and searchable by transaction.'' \36\
The Commission has received several
[[Page 68143]]
requests from market participants for guidance on how to comply with
this requirement. The Commission is now proposing that all required
records must be searchable, but not ``searchable by transaction.'' The
current rule also states that all required records be ``identifiable by
transaction.'' The Commission is clarifying that this means records
must be kept in a form and manner that allows for identification of a
particular transaction, with certain exception, as described below.
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\36\ 17 CFR 1.35(a)(1).
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B. Proposing That Records of Oral and Written Communications That Lead
to the Execution of a Transaction Be Searchable, But Not Kept in a Form
and Manner That Allows for Identification of a Particular Transaction
As it does for all records, Regulation 1.35(a) states that records
of all oral and written communications provided or received concerning
quotes, solicitations, bids, offers, instructions, trading, and prices
that lead to the execution of a transaction in a commodity interest and
related cash or forward transactions, whether communicated by
telephone, voicemail, facsimile, instant messaging, chat rooms,
electronic mail, mobile device, or other digital or electronic media,
be kept in a form and manner identifiable and searchable by
transaction. The Commission has received several requests from market
participants for guidance on how to comply with this requirement. The
Commission believes that access to these oral and written
communications is necessary for the Commission to oversee and monitor
the derivatives market and to enforce Commission rules and regulations.
The Commission therefore is not altering the existing requirements that
covered entities maintain these records in a searchable format. The
Commission therefore is proposing to amend Regulation 1.35(a) to
clarify that records of oral and written communications provided or
received concerning quotes, solicitations, bids, offers, instructions,
trading, and prices that lead to the execution of a transaction in a
commodity interest and related cash or forward transactions are
required to be searchable, but are not required to be kept in a form
and manner that allows for identification of a particular transaction.
This means that there would be no requirement for a market participant
to link or otherwise identify a record of a communication that leads to
the execution of a transaction with a particular transaction.
C. Proposing To Exclude Unregistered Members of Designated Contract
Markets or Swap Execution Facilities From the Requirements To Retain
Text Messages and To Maintain Required Records in a Particular Form and
Manner
Pursuant to the Final Rule, FCMs, RFEDs, IBs, and all members of
DCMs or SEFs must retain written records of commodity interests and
related cash or forward transactions.\37\ The CEA defines ``member'' as
an individual, association, partnership, corporation, or trust (i)
owning or holding membership in, or admitted to membership
representation on, the registered entity or derivatives transaction
execution facility; or (ii) having trading privileges on the registered
entity or derivatives transaction execution facility.\38\
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\37\ 17 CFR 1.35(a)(1).
\38\ 7 U.S.C. 1a(34).
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For various reasons relating to the nature of their market
activity, many end-user market participants that meet this definition
of member are not registered or required to register with the
Commission. Many of these end-users have noted that text messaging is
their primary method of communication regarding commodity interest
transactions and related cash or forward transactions.\39\ These end-
users have further stated that it is prohibitively expensive for them,
in light of their business, to retain text messages.\40\ Accordingly,
the Proposal would exclude Unregistered Members from the requirement
under Regulation 1.35(a) to retain text messages. Although text
messages are a primary means of communication for a significant number
of Unregistered Members, certain other Unregistered Members (e.g.,
commodity trading firms) do not rely on text messages to the same
extent to transact in commodity interests and related cash and forward
transactions. Because all Unregistered Members must retain all other
required written records and electronic communications, the Commission
believes that its ability to properly oversee and monitor the
derivatives market is not unduly affected. In addition, the Commission
notes that the Proposal does not change the written recordkeeping
requirement for all registered members, including with respect to text
messages.
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\39\ See CFTC Letter 14-72 and End-User Roundtable Transcript at
55.
\40\ See End-User Roundtable Transcript.
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Some end-users subject to the Final Rule also have stated that
maintaining the required written records in a manner that is
identifiable and searchable by transaction is difficult given the
nature of the relationship between their cash or forward transactions
and their trading and hedging practices in the derivatives markets. The
Commission notes that the ``searchable'' and ``identifiable''
requirements do not require covered entities to link all of their
transactions in commodity interests to related cash or forward
transactions (e.g., their hedges with related hedged positions) by a
specific identifier. Nonetheless, the Commission recognizes that the
proposed requirement that covered entities keep records in a searchable
format and in a form and manner that allows for identification of a
particular transaction may pose additional burdens on those
Unregistered Members who manage their positions on an aggregate basis.
Therefore, the Proposal also would exclude Unregistered Members from
these requirements. The Commission understands that these exclusions
may result in an incremental burden on the Commission, if it is
required to search through these records. The Commission believes,
however, that as long as Unregistered Members maintain their records,
this Proposal would not unduly compromise the Commission's ability to
oversee and monitor the derivatives market and to enforce Commission
rules and regulations.
D. Proposing To Exclude Commodity Trading Advisors From the Requirement
To Record and Maintain Oral Communications
The Final Rule requires, among other things, that all CTAs that are
members of a DCM or SEF record all oral communications that lead to the
execution of a transaction in a commodity interest.\41\ The Proposal
would exclude members of a DCM or SEF that are CTAs from this oral
recordkeeping obligation. Removing CTAs from the requirement to record
and keep oral communications, as with removing unregistered members of
a DCM or SEF from certain aspects of the written recordkeeping
requirements, is consistent with the Commission's goals of balancing
its interest in protecting customers and ensuring market integrity,
with the burdens of affected market participants. The Commission
understands that many CTAs who are members of a DCM or SEF have
discretionary trading authority over their customers' accounts and,
therefore, those CTAs would not be having routine telephone
conversations with customers that lead to the execution of an order on
a DCM or SEF. Nevertheless, the Commission is not proposing to remove
[[Page 68144]]
members of a DCM or SEF that are CTAs from the written recordkeeping
requirements of 1.35(a) because certain CTAs may receive orders from
customers that the CTAs then execute on behalf of the customer on a
non-discretionary basis, or may receive instructions changing or
limiting their discretionary authority. Although the Commission
believes it is consistent with the regulatory goals of Rule 1.35(a) to
ensure that customer communications regarding orders be captured, the
cost of recording and keeping oral communications weighs against the
benefits of achieving these goals. The same cannot be said for the
costs of recording and maintaining written records, which costs the
Commission understands to be significantly less than the same costs
regarding oral communications.
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\41\ 17 CFR 1.35(a)(1).
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III. Request for Comments
The Commission seeks comment on all aspects of this Proposal. In
particular, the Commission seeks comment on the following questions:
1. What are the potential effects of removing the requirement that
records of oral and written communications provided or received
concerning quotes, solicitations, bids, offers, instructions, trading,
and prices that lead to the execution of a transaction in a commodity
interest and related cash or forward transactions are not required to
be kept in a form and manner that allows for identification of a
particular transaction?
2. What are the potential effects of excluding Unregistered Members
from the requirement to retain text messages?
3. Is existing technology for storing text messages cost
prohibitive for Unregistered Members to use? Are there other
impediments to using this technology?
4. What are the potential effects of excluding Unregistered Members
from the requirements to store required records in a form and manner
that is searchable and in a form and manner that allows for
identification of a particular transaction?
5. Rather than excluding all Unregistered Members from these
aspects of the written recordkeeping obligations of the rule, would the
interests of promoting customer protection and minimizing recordkeeping
burdens be better balanced by excluding only small Unregistered Members
from these requirements? If so, how would ``small'' Unregistered
Members be defined?
6. Would the exclusion of text messages from the written records
requirement for all Unregistered Members incentivize Unregistered
Members, especially commodity trading firms, to switch their method of
communication? If so, should the Commission use a certain threshold in
setting this exclusion, ensuring that the Commission can continue to
properly oversee and monitor the derivatives market and enforce
Commission rules and regulations?
7. What is the potential effect on the market of excluding members
of DCMs or SEFs that are CTAs from the oral recordkeeping requirement
of the Final Rule?
8. Is there a significant difference in the administrative burden
of the oral recordkeeping requirement of Regulation 1.35(a) for large
and small CTAs that would warrant exclusion of small CTAs, but not
large CTAs?
9. If so, how would ``large'' CTAs be defined?
10. Would the Proposal impact the Commission's ability to carry out
its market oversight responsibilities with regard to the overall
derivatives market? If so, how?
11. Does the Proposal serve the public interest? In what ways?
IV. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act \42\ requires that Federal agencies
consider whether the rules they propose will have a significant
economic impact on a substantial number of small entities and, if so,
they must provide a regulatory flexibility analysis reflecting the
impact. Whenever an agency publishes a general notice of proposed
rulemaking for any rule, pursuant to the notice-and-comment provisions
of the Administrative Procedure Act \43\ a regulatory flexibility
analysis or certification typically is required.\44\ The Proposal, if
adopted, will not have a significant economic impact on affected
persons because the Proposal will relieve them from certain regulatory
obligations that would otherwise apply to them. Specifically, the
(proposed) amendment to 1.35(a) would provide relief from certain
elements of the existing recordkeeping requirements of that section,
and the Proposal would not impose any new regulatory obligations on the
affected persons. Thus, the Proposal would not have any appreciable
economic impact on affected entities.
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\42\ 5 U.S.C. 601 et seq.
\43\ 5 U.S.C. 553. The Administrative Procedure Act is found at
5 U.S.C. 500 et seq.
\44\ See 5 U.S.C. 601(2), 603-05.
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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
The Proposal will not impose any new recordkeeping or information
collection requirements, or other collections of information that
require approval of the Office of Management and Budget under the
Paperwork Reduction Act (``PRA'').\45\ All recordkeeping or information
collection requirements relevant to the subject of this proposed
rulemaking, or discussed herein, already exist under current law. The
title for this collection of information is ``Adaptation of Regulations
to Incorporate Swaps--Records of Transactions,'' OMB control number
3038-0090. This collection of information is not expected to be
impacted by the rule amendment proposed herein, as the calculations
which are already reflected in the burden estimate are not expected to
appreciably change because of the relief provided in the Proposal. The
PRA burden hours associated with this collection of information are
therefore not expected to be increased or reduced as a result of the
amendment proposed. Accordingly, the PRA does not apply. The Commission
invites public comment on the accuracy of its estimate that no
additional recordkeeping or information collection requirements or
changes to existing collection requirements would result from the
amendments proposed herein.
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\45\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------
C. Cost-Benefit Considerations
Section 15(a) of the CEA requires the Commission to consider the
costs and benefits of its actions before promulgating a regulation
under the CEA or issuing certain orders. Section 15(a) further
specifies that the costs and benefits shall be evaluated in light of
five broad areas of market and public concern: (1) Protection of market
participants and the public; (2) efficiency, competitiveness, and
financial integrity of futures markets; (3) price discovery; (4) sound
risk management practices; and (5) other public interest
considerations. The Commission considers the costs and benefits
resulting from its discretionary determinations with respect to the
section 15(a) factors.
1. Background
The Commission is proposing an amendment to Regulation 1.35(a)
which would: (i) Provide that all records that
[[Page 68145]]
are required to be maintained under this regulation must be searchable;
(ii) clarify that all records be kept in a form and manner that allows
for identification of a particular transaction, except that records of
oral and written communications leading to the execution of a
transaction in a commodity interest and related cash or forward
transactions are not required to be kept in a form and manner that
allows for identification of a particular transaction; (iii) exclude
unregistered members of DCMs and SEFs from the requirements to retain
text messages and to maintain records in a particular form and manner;
and (iv) exclude CTAs from the oral recordkeeping requirement.
The Commission believes that the baseline for this cost and benefit
consideration is the existing rule 1.35(a). While CFTC Staff Letters
14-60 and 14-72, as discussed above, currently provide no-action relief
that is substantially similar to the relief the proposed amendments
provide to certain market participants and end users, the Commission
preliminarily believes that CFTC Staff Letters 14-60 and 14-72 should
not set or affect the baseline from which the Commission considered the
costs and benefits of the Proposal. This is because, as they indicate,
CFTC Staff Letters 14-60 and 14-72 do not necessarily represent the
position or view of the Commission or any other office or division of
the Commission.
2. Costs
The Commission believes that the Proposal will not impose any
additional costs upon those affected market participants and end users,
but instead will reduce some of the regulatory burdens and associated
costs that Regulation 1.35(a) imposes upon them. The Commission
preliminarily believes that it may be difficult to quantify what costs
the Proposal imposes upon other market participants, the markets
themselves, or the general public. The Commission preliminarily
believes that one of the costs associated with the Proposal will be
that certain market participants and end-users will no longer be
required to create and maintain certain types of records that are
useful for the Commission in exercising its oversight of the markets,
including for market surveillance, enforcement, and ensuring market
integrity. Comments are invited regarding the extent of all of these
costs, and any other costs that would result from adoption of the
Proposal, including estimates of monetary or other measurements
thereof.
3. Benefits
The Commission believes that the Proposal will have a tangible
benefit for those market participants and end-users that are excluded
from some of the regulatory burdens and associated costs of Regulation
1.35(a) under the Proposal. The Commission preliminarily believes that
it may be difficult to quantify what other benefits the Proposal may
have for other market participants, the markets themselves, or the
general public. Comments are sought regarding these benefits and any
other benefits resulting from adoption of the Proposal, and to the
extent they can be quantified, estimates of the monetary or other value
thereof.
4. Section 15(a)
Section 15(a) of the CEA requires the Commission to consider the
effects of its actions in light of the following five factors:
a. Protection of Market Participants and the Public
The proposed amendments to Rule 1.35(a) are intended, in part, to
reduce some of the regulatory burdens on certain market participants
and end-users. The Commission recognizes that there may be a trade-off
between reducing regulatory burdens while at the same time ensuring
that the recordkeeping obligations Rule 1.35(a) imposes upon market
participants and end users are sufficient to support the effort by the
Commission to fulfill its regulatory mission. Are the scope and reach
of the proposed amendments appropriate to achieve these goals?
Under the proposed amendments to Rule 1.35(a) certain market
participants and end-users will no longer be required to create and
maintain certain types of records that would be useful for the
Commission in exercising its oversight of the markets, including for
market surveillance, enforcement, and ensuring market integrity. What
effect, if any, will the proposed amendments have on the ability of the
Commission to obtain information necessary to effectively oversee the
markets and investigate and prosecute misconduct?
b. Efficiency, Competitiveness, and Integrity of Markets
The proposed amendments to Rule 1.35(a) are intended, in part, to
reduce some of the regulatory burdens on certain market participants
and end-users. Will the proposed amendments actually decrease the
regulatory burdens on certain market participants and end-users? If so,
will this result in increased efficiency and competition among end-
users, without compromising market integrity?
What effect, if any, will the proposed amendments to Rule 1.35(a)
have on the ability of customers to trade in efficient, competitive,
and liquid markets?
Will the proposed amendments to Rule 1.35(a) reduce the regulatory
burdens for unregistered end-users that are DCM or SEF members? If so,
will reducing this regulatory burden increase or decrease the
efficiency, competitiveness and integrity of the markets?
c. Price Discovery
The Commission preliminarily believes that the proposed amendments
will not have any effect on price discovery. The Commission recognizes
that, under the Proposal, certain market participants and end-users
will no longer be required to create and maintain certain types of
records that may be useful for the Commission in exercising its
oversight of the markets, including for market surveillance,
enforcement, and ensuring market integrity. Might this be perceived as
a reduction in Commission surveillance or enforcement capability that
potentially could result in increased market misconduct that ultimately
affects price discovery?
d. Sound Risk Management
The proposed amendments to Rule 1.35(a) are intended, in part, to
reduce some of the regulatory burdens on certain market participants
and end-users. Will the proposed amendments actually decrease the
regulatory burdens on certain market participants and end-users? If so,
what effect, if any, will this have on the risk management practices of
market participants and end-users?
e. Other Public Interest Considerations
The Commission has not identified any other public purpose
considerations for this rulemaking.
5. Request for Comment
The Commission invites comments from the public on all aspects of
its preliminary consideration of costs and benefits associated with the
Proposal. The Commission also invites comments from the public on all
aspects of its preliminary consideration of the five factors that the
Commission is required to consider under Section 15(a) of the CEA. The
questions below relate to areas that the Commission preliminarily
believes may be relevant. In addressing these or any other aspect of
the Commission's preliminary assessment, commenters are encouraged to
submit any data or other information that they
[[Page 68146]]
may have quantifying or qualifying the costs and benefits of the
Proposal.
a. What are the costs and benefits to market participants, if any,
associated with the Proposal? Please explain and, to the extent
possible, quantify these costs.
b. What are the costs and benefits to the public, if any,
associated with the Proposal? Please explain and, to the extent
possible, quantify these costs.
c. To what extent does the Proposal protect market participants and
the public? How, if at all, could the Proposal be altered to better
protect market participants and the public?
d. How, if at all, does the Proposal affect the efficiency,
competitiveness, and financial integrity of markets?
e. How, if at all, does the Proposal affect price discovery?
f. How, if at all, does the Proposal affect sound risk management
for market participants and end-users?
g. How, if at all, does the Proposal affect the public interest?
h. What are the costs and benefits to market participants and the
public, if any, associated with the application of this rule for
activities outside of the United States? Please explain, and to the
extent possible, quantify these costs.\46\
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\46\ Pursuant to CEA section 2(i) this rule will apply to swaps
activities outside the United States to the extent they meet the
requirements of that section. See 7 U.S.C. 2(i).
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List of Subjects in 17 CFR Part 1
Agricultural commodity, Agriculture, Brokers, Committees, Commodity
futures, Conflicts of interest, Consumer protection, Definitions,
Designated contract markets, Directors, Major swap participants,
Minimum financial requirements for intermediaries, Reporting and
recordkeeping requirements, Swap dealers, Swaps.
For the reasons stated in the preamble, the Commodity Futures
Trading Commission proposes to amend 17 CFR chapter I as set forth
below:
PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT
0
1. The authority citation for part 1 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 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. In Sec. 1.35, revise paragraph (a) to read as follows:
Sec. 1.35 Records of commodity interest and related cash or forward
transactions.
(a) Futures commission merchants, retail foreign exchange dealers,
introducing brokers, and members of designated contract markets or swap
execution facilities. (1) Each futures commission merchant, retail
foreign exchange dealer, introducing broker, and member of a designated
contract market or swap execution facility shall keep full, complete,
and systematic records, which include all pertinent data and memoranda,
of all transactions relating to its business of dealing in commodity
interests and related cash or forward transactions. Included among such
records shall be all orders (filled, unfilled, or canceled), trading
cards, signature cards, street books, journals, ledgers, canceled
checks, copies of confirmations, copies of statements of purchase and
sale, and all other records, which have been prepared in the course of
its business of dealing in commodity interests and related cash or
forward transactions. Among such records each member of a designated
contract market or swap execution facility must retain and produce for
inspection are all documents on which trade information is originally
recorded, whether or not such documents must be prepared pursuant to
the rules or regulations of either the Commission, the designated
contract market or the swap execution facility. For purposes of this
section, such documents are referred to as ``original source
documents.'' Also included among the records required to be kept by
this paragraph are all oral and written communications provided or
received concerning quotes, solicitations, bids, offers, instructions,
trading, and prices that lead to the execution of a transaction in a
commodity interest and related cash or forward transactions, whether
communicated by telephone, voicemail, facsimile, instant messaging,
chat rooms, electronic mail, mobile device, or other digital or
electronic media.
(2) Form and manner. (i) All records required to be kept pursuant
to paragraph (a)(1) of this section shall be searchable; and
(ii) All records required to be kept pursuant to paragraph (a)(1)
of this section shall be kept in a form and manner that allows for
identification of a particular transaction, except for records of all
oral and written communications provided or received concerning quotes,
solicitations, bids, offers, instructions, trading, and prices that
lead to the execution of a transaction in a commodity interest and
related cash or forward transactions, whether communicated by
telephone, voicemail, facsimile, instant messaging, chat rooms,
electronic mail, mobile device, or other digital or electronic media.
(3) Provided, however, for a member of a designated contract market
or swap execution facility that is not registered or required to
register with the Commission in any capacity, records required to be
kept pursuant to paragraph (a)(1) of this section:
(i) Are not required to be kept pursuant to paragraph (a)(2) of
this section; and
(ii) Do not include text messages sent or received by such member.
(4) Provided, however, the requirement in paragraph (a)(1) of this
section to record oral communications shall not apply to:
(i) Oral communications that lead solely to the execution of a
related cash or forward transaction;
(ii) Oral communications provided or received by a floor broker
that do not lead to the purchase or sale for any person other than the
floor broker of any commodity for future delivery, security futures
product, swap, or commodity option authorized under section 4c of the
Commodity Exchange Act;
(iii) An introducing broker that has generated over the preceding
three years $5 million or less in aggregate gross revenues from its
activities as an introducing broker;
(iv) A floor trader;
(v) A commodity pool operator;
(vi) A commodity trading advisor;
(vii) A swap dealer;
(viii) A major swap participant; or
(ix) A member of a designated contract market or swap execution
facility that is not registered or required to be registered with the
Commission in any capacity.
(5) For purposes of paragraph (a)(1) of this section, ``related
cash or forward transaction'' means a purchase or sale for immediate or
deferred physical shipment or delivery of an asset related to a
commodity interest transaction where the commodity interest transaction
and the related cash or forward transaction are used to hedge, mitigate
the risk of, or offset one another.
(6) Each futures commission merchant, retail foreign exchange
dealer, introducing broker, and member of a designated contract market
or swap execution facility shall retain the records required to be kept
by this section in accordance with the requirements of Sec. 1.31, and
produce them for inspection and furnish true and correct information
and reports as to the contents or the meaning thereof, when and as
requested by an authorized
[[Page 68147]]
representative of the Commission or the United States Department of
Justice.
(7) (i) The Commission may in its discretion establish an
alternative compliance schedule for the requirement to record oral
communications under paragraph (a)(1) of this section that is found to
be technologically or economically impracticable for an affected entity
that seeks, in good faith, to comply with the requirement to record
oral communications under paragraph (a)(1) of this section within a
reasonable time period beyond the date on which compliance by such
affected entity is otherwise required.
(ii) A request for an alternative compliance schedule under
paragraph (a)(7)(i) of this section shall be acted upon within 30 days
from the time such a request is received, or it shall be deemed
approved.
(iii) The Commission hereby delegates to the Director of the
Division of Swap Dealer and Intermediary Oversight or such other
employee or employees as the Director may designate from time to time,
the authority to exercise the discretion. Notwithstanding such
delegation, in any case in which a Commission employee delegated
authority under this paragraph believes it appropriate, he or she may
submit to the Commission for its consideration the question of whether
an alternative compliance schedule should be established. The
delegation of authority in this paragraph shall not prohibit the
Commission, at its election, from exercising the authority set forth in
paragraph (a)(7)(i) of this section.
(iv) Relief granted under paragraph (a)(7)(i) of this section shall
not cause an affected entity to be out of compliance or deemed in
violation of any recordkeeping requirements.
* * * * *
Issued in Washington, DC, on November 4, 2014, by the
Commission.
Christopher J. Kirkpatrick,
Secretary of the Commission.
Note: The following appendices will not appear in the Code of
Federal Regulations.
Appendices to Records of Commodity Interest and Related Cash or Forward
Transactions--Commission Voting Summary, Chairman's Statement, and
Commissioner's Statement
Appendix 1--Commission Voting Summary
On this matter, Chairman Massad and Commissioners Wetjen and
Bowen voted in the affirmative. Commissioner Giancarlo voted in the
negative.
Appendix 2--Statement of Chairman Timothy G. Massad
I support the Staff's recommendation to amend CFTC Regulation
1.35. One of my priorities has been to fine-tune our rules to make
sure they work as intended and do not impose undue burdens or
unintended consequences, particularly for the nonfinancial
commercial businesses that use these markets to hedge commercial
risks. Consistent with that goal, the proposed amendment is designed
to make sure that the farmers, ranchers, manufacturers, and other
commercial companies who depend on the derivatives markets can
continue to use them efficiently and effectively.
Regulation 1.35 requires various types of market participants to
keep written and oral records of transactions. This record keeping
is very important to our efforts to police the markets and insure
integrity and transparency.
Regulation 1.35 has been on the books since 1948, and we have
updated it from time to time in light of changes in marketplace
practices as well as the scope of our jurisdiction. After the
Commission amended this rule in December 2012 and the Staff observed
implementation of these changes, the Staff determined that the costs
of complying with certain aspects of the rule for some market
participants might exceed the potential benefits, and the Staff
granted no action relief. Specifically, the Staff said that
regarding written records, members of DCMs and SEFs that are not
registered with the Commission do not have to keep text messages or
store their other records in a manner that is identifiable and
searchable by transaction. Regarding oral communications, Staff said
that commodity trading advisors do not have to record oral
communications regarding their swap transactions.
The costs of maintaining the records that our rules require
market participants to keep will ultimately be reflected in the
transaction costs incurred by all customers, and so we must always
keep the costs in balance with the benefit to market oversight.
Today, we are simply proposing to revise the rule so that it reads
consistent with that staff no action relief and to provide a slight
expansion of some of that relief so that CTAs do not have to record
any oral communications. We are also proposing to clarify one aspect
of the rule that has generated confusion. This pertains to the
requirement that records must be identifiable and searchable by
transaction and what ``identifiable and searchable'' means.
Appendix 3--Dissenting Statement of Commissioner J. Christopher
Giancarlo
I respectfully dissent from the Commodity Futures Trading
Commission's (CFTC or Commission) approval of the proposed rule on
Records of Commodity Interest and Related Cash or Forward
Transactions, commonly known as Rule 1.35.
In 2012, the CFTC revised Rule 1.35. The rule currently requires
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.'' This recordkeeping must be done (with
certain carve outs) by futures commission merchants (FCMs), retail
foreign exchange dealers (RFEDs), introducing brokers (IBs), and
members of designated contract markets (DCMs) and swap execution
facilities (SEFs).
The revised rule proved to be unworkable. Its publication was
followed by requests for no-action relief and a public roundtable at
which entities covered 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 feasible technologically to keep pre-trade text messages
in a form and manner ``identifiable and searchable by transaction.''
The proposed revisions to Rule 1.35 go a long way towards
addressing the difficulties presented by the current rule.
Unfortunately, they do not go far enough. The proposed rule text
raises unanswered questions. It continues to contain provisions that
may be difficult to comply with or overly burdensome in practice for
certain covered entities. In my opinion, many of the problems that
remain stem from imprecise legal drafting and undefined terms.
Section (a)(1) of the proposed rule identifies the records that
must be kept by a covered entity, which include ``all pertinent data
and memoranda, of all transactions relating to its business of
dealing in commodity interests and related cash or forward
transactions. Included among such records shall be all orders
(filled, unfilled, or canceled), trading cards, signature cards,
street books, journals, ledgers, canceled checks, copies of
confirmations, copies of statements of purchase and sale, and all
other records, which have been prepared in the course of its
business of dealing in commodity interests and related cash or
forward transactions.'' Also included among the records required to
be kept by Section (a)(1) are ``all oral and written communications
provided or received concerning quotes, solicitations, bids, offers
instructions, trading, and prices that lead to the execution of a
transaction in a commodity interest and related cash or forward
transactions, whether communicated by telephone, voicemail,
facsimile, instant messaging, chat rooms, electronic mail, mobile
device, or other digital or electronic media.''
Section (a)(2)(i) of the proposed rule requires that all of the
above records be ``searchable.'' Section (a)(2)(ii) requires that
they be ``kept in a form and manner that allows for identification
of a particular transaction, except for records of all oral and
written communications provided or received concerning quotes,
solicitations, bids, offers, instructions, trading, and prices that
lead to the execution of a transaction in a commodity interest and
related cash or forward transactions.''
Members of DCMs and SEFs that are not registered or required to
register with the Commission are carved out from the
[[Page 68148]]
requirements that records be searchable and kept in a form and
manner that allows for identification of a particular transaction,
thus those requirements apply to FCMs, RFEDs, IBs, and members of
DCMs and SEFs that are required to register with the Commission,
such as commodity trading advisors (CTAs).
Section (a)(6) of the proposal requires covered entities to
retain Rule 1.35 records in accordance with Rule 1.31. Rule 1.31
(which applies to all books and records required to be kept by the
Commodity Exchange Act and Commission regulations) contains detailed
requirements regarding the form and manner in which records must be
maintained and produced. It states, among other things, that paper
records shall be kept in their original form, and that electronic
records shall be kept in their native file format. See Rule
1.31(a)(1). It also requires that records be produced ``in a form
specified by any representative of the Commission.'' Id. Thus, Rule
1.35, on the one hand, identifies the particular records that must
be kept, while Rule 1.31, on the other hand, sets the form and
manner in which such records must be maintained and produced. But
the proposal mixes things up by adding to Rule 1.35 (where they do
not belong) new requirements for most covered entities regarding
form and manner--that the records allow for identification of a
particular transaction and be ``searchable,'' a term that is not
defined.
While it is likely that electronic records kept in their native
file format are searchable, it is not clear what ``searchable''
means when it comes to paper records such as canceled checks, signed
account agreements, and paper orders. Does the proposal require that
a record of a wire transfer received by an FCM to cover margin for
multiple positions be kept in a form and manner that allows for
identification of each potential transaction? Will a small FCM
embedded in a grain elevator have to keep copies of checks received
from farmers in some sort of searchable format tied to specific
transactions? What if the farmer's check mistakenly references the
wrong transactions and the FCM doesn't catch it? Is the FCM now in
breach of our rules? Will FCMs and IBs need to hire a paper records
``searchability'' staff just to tie records to individual
transactions in the event, but not the certainty, that someday the
CFTC will want those records? At what cost to them and to American
markets and end-users?
I am also concerned that although the proposal provides relief
to asset managers, such as CTAs, from the oral record keeping
requirements, its adoption would continue to burden them with
unnecessary costs and potentially discourage them from becoming
members of SEFs. A comment letter filed by SIFMA's Asset Management
Group after the public roundtable stated, for example, that a
requirement similar to Rule 1.31's requirement that any digital
storage medium or system must ``preserve the records exclusively in
a non-rewritable, non-erasable format,'' see Rule 1.31(b)(1)(ii)(A),
also known as ``WORM,'' was rejected by the Securities and Exchange
Commission when considering amending its own recordkeeping
requirements for registered investment advisers and registered
investment companies because the costs associated with preserving
records in that manner outweighed the benefits. SIFMA AMG Letter
(Apr. 17, 2014), available at: http://www.sifma.org/issues/item.aspx?id=8589948677.
I encourage all affected parties to give us detailed comments on
the proposal, with emphasis on the intersection between Rule 1.35
and Rule 1.31, and how the proposed searchability and identification
by transaction requirements will work in practice. I encourage the
public to make us listen once again to their concerns about the
costs and benefits of this particular rule set.
I am also interested in answers to the following questions:
1. The proposal excludes unregistered exchange members from the
requirement to retain text messages. Is the scope of this exclusion
appropriate? Do the impediments for storing text messages in a
searchable format extend to persons beyond unregistered members?
2. While unregistered members would not be required under the
proposal to keep records in a searchable format, or in a form and
manner that allows for identification of a particular transaction,
they still would be required to keep all Rule 1.35 records,
including all written communications (except text messages) provided
or received concerning quotes, solicitations, bids, offers,
instructions, trading, and prices that lead to the execution of a
transaction in a commodity interest and related cash or forward
transactions. FCMs, IBs, RFEDs and registered exchange members must
keep such records (including text messages) in a searchable format.
What are the costs associated with keeping such records in
accordance with Rule 1.31? Is leading to the execution of a
transaction the appropriate scope of this particular recordkeeping
requirement? Should the scope be narrowed or broadened? If so, why?
3. Are there any technological impediments to the oral
recordkeeping requirements of Rule 1.35(a)?
4. Is there a need to revise Rule 1.31 given advancements in
technology and current business practices?
Although I do not support today's proposal, I am hopeful that
after thoughtful consideration of the comments, the Commission will
promulgate a final rule that is precise in its meaning and terms and
that appropriately balances compliance costs with the need to
effectively regulate the markets we oversee.
[FR Doc. 2014-26983 Filed 11-13-14; 8:45 am]
BILLING CODE 6351-01-P
Last Updated: November 14, 2014