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, [email protected]; Frank Fisanich, Chief Counsel, (202) 418-

5949, [email protected]; Andrew Chapin, Associate Chief Counsel, (202)

418-5465, [email protected]; Katherine Driscoll, Associate Chief

Counsel, (202) 418-5544, [email protected]; C. Barry McCarty, Special

Counsel, (202) 418-6627, [email protected]; or Jacob Chachkin, Special

Counsel, (202) 418-5496, [email protected], 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.

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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.

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\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.

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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.

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\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.

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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.

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

(Apr. 14, 1977).

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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.

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\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).

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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.

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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.

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

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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.

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

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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.

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\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).

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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.

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

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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.

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

Sep. 20, 2016).

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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\

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\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).

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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\

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\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.

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

x 10 hours per registrant).\38\

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\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.

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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

[email protected] 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.

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

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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

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. 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

0

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