[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.

———————————————————————–

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.

—————————————————————————

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

—————————————————————————

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

—————————————————————————

37 17 CFR 1.35(a)(1).

38 7 U.S.C. 1a(34).

—————————————————————————

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.

—————————————————————————

39 See CFTC Letter 14-72 and End-User Roundtable Transcript at

55.

40 See End-User Roundtable Transcript.

—————————————————————————

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.

—————————————————————————

41 17 CFR 1.35(a)(1).

—————————————————————————

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.

—————————————————————————

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.

—————————————————————————

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.

—————————————————————————

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

—————————————————————————

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).

—————————————————————————

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