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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
—————————————————————————
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).
—————————————————————————
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.–
—————————————————————————
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.
—————————————————————————
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).
—————————————————————————
21 SEC Rule 204-2(e) states that all books and records shall
be maintained and preserved in an easily accessible place for a
period of not less than five years from the end of the fiscal year
during which the last entry was made on such record, the first two
years in an appropriate office of the investment adviser. SEC Rule
31a-2 similarly requires the operator of an investment company to
retain records for a minimum of six years the first two years in an
easily accessible place.
—————————————————————————
Request for comment: The Commission requests comment from all
interested parties and the general public regarding the proposed
retention periods in Sec. 1.31(c). The Commission encourages all
comments including background information, actual market
[[Page 6361]]
examples, best practice principles, and estimates of any asserted costs
and expenses. Regarding the proposed retention periods, the Commission
specifically requests comment on the following questions:
Are the proposed recordkeeping retention periods
appropriate? If not, what modifications to the retention periods should
be made?
Given the advances in information technology, such as
cloud storage, should the Commission extend the standard five year
retention period?
Is there a longer or shorter period of retention that
would be appropriate for some records, and if so please specify which
records and such time-frames?
D. Regulation 1.31(d): Form and Manner of Retention
The Commission proposes to revise Sec. 1.31(d) to describe
recordkeeping requirements regarding the form and manner in which
regulatory records are retained by records entities. These proposed
revisions are designed to ensure the integrity and availability of all
regulatory records. The Commission is cognizant that other provisions
of the Act and Commission regulations distinguish between different
classes of records entities. In particular, the Commission recognizes
that records entities that are not registered or required to be
registered with the Commission in any capacity, nor are one of the
enumerated “registered entities” defined in Section 1a(40) of the CEA
or so required to be registered or designated,22 currently are not
required to comply with the full panoply of recordkeeping
requirements.23 It is the Commission’s goal to preserve this
distinction, especially in those cases where a records entity
exclusively maintains paper regulatory records.
—————————————————————————
22 Section 1a(40) of the Act defines a “registered entity”
to mean: (a) A board of trade designated as a contract market under
section 5; (b) a derivatives clearing organization registered under
section 5b; (c) a board of trade designated as a contract market
under section 5f; (d) a swap execution facility registered under 5h;
(e) a swap data repository registered under section 21; and (f) with
respect to a contract that the Commission determines is a
significant price discovery contract, any electronic trading
facility on which the contract is executed or traded.
23 For example, part 20 of the Commission’s regulations sets
forth requirements regarding large trader reporting for physical
commodity swaps. Regulation 20.1 defines a “reporting entity” to
mean a clearing member of a clearing organization or a swap dealer
in one or more paired swaps or swaptions. Pursuant to Sec. 20.6,
only clearing organizations and reporting entities must keep all
books and records in accordance with Sec. 1.31. Any other person
who exceeds the reportable level in any contract “shall keep books
and records . . . in the record retention format that such person
has developed in the normal course of its business operations.” All
books and records kept pursuant to Sec. 20.6, however, shall be
furnished upon request to any Commission representative.
—————————————————————————
The Commission proposes to re-state and revise in new Sec. 1.31(d)
certain requirements for regulatory records currently set forth in
Sec. 1.31(b)(1) through (3). In doing so, the Commission proposes to
adopt a general standard in Sec. 1.31(d)(1) to require each records
entity to retain all regulatory records in a form and manner necessary
to ensure the records’ and recordkeeping systems’ authenticity and
reliability. This general requirement would not distinguish between
paper and non-paper regulatory records.
With respect to electronic regulatory records, the Commission
proposes to set forth in new Sec. 1.31(d)(2)(i) through (iii)
additional controls for records entities retaining electronic
regulatory records. In particular, each records entity would be
required to:
(A) Have systems that maintain security, signature, chain of
custody elements, and data as necessary to ensure the authenticity of
the information contained in regulatory records and to monitor
compliance with the Act and Commission regulations;
(B) Have systems that ensure the records entity is able to produce
regulatory records in accordance with this section, and ensure the
availability of regulatory records in the event of an emergency or
other disruption of the records entity’s record retention systems; and
(C) Create and maintain an up-to-date inventory that identifies and
describes each system that maintains information necessary for
accessing or producing regulatory records.
The Commission believes that these requirements are not new and are
consistent with certain SEC requirements.24 Currently, Sec.
1.31(b)(1)(ii)(B) mandates that electronic storage media verifies
automatically the quality and accuracy of the storage media recording
process. Existing rules require any records entity that utilizes
electronic storage media to organize and maintain an accurate index of
all information such that the location of any record may be immediately
ascertained. Among other requirements, existing Sec. 1.31(b)(3)
requires any records entity that utilizes electronic storage media to
keep current a copy of the physical and logical format of the
electronic storage media, the file format of all different information
types maintained, documentation and information necessary to access
records and indexes maintained on the electronic media.
—————————————————————————
24 With respect to electronic storage media, SEC Rule 204-
2(g)(3) requires investment advisers to establish written procedures
that: (1) Maintain and preserve the records, so as to reasonably
safeguard them from loss, alteration, or destruction; (2) limit
access to the records to properly authorized personnel and the SEC;
and (3) reasonably ensure that any reproduction of a non-electronic
original record on electronic storage media is complete, true, and
legible when retrieved. SEC Rule 31a-2(f) sets forth similar
requirements for the operators of investment companies.
—————————————————————————
Finally, based on the foregoing proposed amendments, the Commission
believes that the existing provision in Sec. 1.35(a)(5)(i) regarding
the form and manner in which records of commodity interest and cash
forward transactions should be maintained is redundant and therefore
should be repealed.
Request for comment: The Commission requests comment from all
interested parties and the general public regarding the proposed
standards for form and manner of retention of regulatory records in
Sec. 1.31(d). The Commission encourages all comments including
background information, actual market examples, best practice
principles, and estimates of any asserted costs and expenses. With
respect to the authenticity and reliability of regulatory records and
recordkeeping systems, the Commission specifically requests comment on
the following questions:
Should the Commission routinely publish guidelines
regarding the technical standards for electronic regulatory records?
With respect to potential impacts of the Proposal, the Commission
specifically requests comment on the following questions:
Would the Proposal require market participants to change
their existing recordkeeping procedures under the Proposal? What, if
any, transition or ongoing costs would result from such changes? Please
provide details and estimates regarding any asserted costs.
For entities who maintain digitized copies of paper
records, what costs or other impacts would result under the Proposal?
E. Regulation 1.31(e): Inspection and Production of Regulatory Records
1. Inspection
The Commission proposes to re-state in revised Sec. 1.31(e)(1) the
right of inspection of the Commission and the United States Department
of Justice (“DOJ”) in existing Sec. 1.31(a)(1). Specifically, the
Commission proposes Sec. 1.31(e)(1) to state that all regulatory
records shall be open to inspection by any representative of the
Commission or the DOJ. The Commission previously determined that
production of records is part of the Commission’s inspection
[[Page 6362]]
powers.25 Accordingly, the Commission has determined to limit
reference to the DOJ in Sec. 1.31 to a single reference in this
paragraph. Any requirement for a records entity to produce regulatory
records extends to DOJ as is currently the requirement.
—————————————————————————
25 See 46 FR 21 (Jan. 3, 1981); see also, CFTC Letter 77-4
(Apr. 14, 1977).
—————————————————————————
Request for comment: The Commission requests comment from all
interested parties and the general public regarding the proposed
regulations set forth in Sec. 1.31(e)(1). The Commission encourages
all comments including background information, actual market examples,
best practice principles, and estimates of any asserted costs and
expenses.
2. Production
The Commission proposes to revise and re-state in new Sec.
1.31(e)(2) the existing production requirement currently set forth in
Sec. 1.31(a)(2) and (b). Currently, a records entity is required to
produce regulatory records in a form specified by any representative of
the Commission, including the DOJ, upon the representative’s request.
If the requested book or record is stored either on micrographic media
or electronic storage media, production shall be immediate.26
Otherwise, all copies or originals shall be provided promptly.27 The
Commission proposes to amend this requirement in new Sec. 1.31(e)(i)
and (ii) to differentiate between the production of paper and
electronic regulatory records, particularly with respect to the form
and medium of requested electronic regulatory records.
—————————————————————————
26 See Sec. 1.31(b)(2)(i) and (ii). In addition, persons
using electronic storage media must be ready at all times to
provide, and immediately provide at the expense of the person
required to keep such records, copies of such records on such
compatible data processing media as defined in Commission regulation
15.00(d) which any representative of the Commission or the
Department of Justice may request. Records must use a format and
coding structure specified in the request. See Sec. 1.31(b)(3)(i).
27 See Sec. 1.31(a)(2).
—————————————————————————
With respect to the production of regulatory records exclusively
created and maintained on paper, proposed Sec. 1.31(e)(2) would
require a records entity to produce such regulatory records promptly
upon request. With respect to regulatory records other than paper
regulatory records, proposed Sec. 1.31(e)(3) would set forth the
process by which a records entity must respond to a request from a
Commission representative. In particular, Sec. 1.31(e)(3)(i) would
require a Commission representative to specify a reasonable form and
medium in which a records entity must produce such regulatory records.
Proposed Sec. 1.31(e)(3)(ii) would require a records entity, at its
own expense, to produce such regulatory records in the form and medium
requested promptly, upon request, unless otherwise directed by the
Commission representative.
The Commission recognizes that production, depending on the
records, may require the records entity to engage multiple employees,
officers, or directors in order to satisfy the production request,
depending upon its size and scope. Historically, Commission staff has
exercised broad discretion regarding production schedules and
“typically exhibits flexibility. . . .” 28 However, timely
production is a Commission priority and the proposed “prompt”
standard should not be interpreted as sanctioning any unnecessary
delay. It is the Commission’s understanding that most registrants
maintain records electronically and therefore would be required under
existing Sec. 1.31 to produce said records immediately, subject to the
discretion of Commission staff. The prompt production standard is
therefore consistent with the existing standard. The Commission notes
that the standard “promptly upon request” is also consistent with SEC
Rule 17a-4 applicable to broker-dealers thereby maintaining a
harmonized standard for entities that may be dually registered with the
SEC and the CFTC.29
—————————————————————————
28 FIA comment regarding proposed amendments to Sec. 1.31. 64
FR 28735 at 28739 (May 27, 1999).
29 SEC Rule 17a-1 similarly requires national securities
exchanges and registered clearing agencies to “promptly furnish”
records to any representative of the SEC upon request.
—————————————————————————
In adopting this revised regulation, the Commission is cognizant of
the need to balance the opportunities for recordkeepers to reduce costs
and improve efficiencies regarding recordkeeping systems with the
Commission’s need for prompt access to complete and accurate records in
a format that the Commission can process, i.e., a useable format.30
For the purposes of production, the Commission continues to believe
that it is not sufficient to simply reduce electronic records to a
paper format, i.e., printing out data from a database and saving into a
portable document file, or PDF. This type of production detracts from
the Commission’s ability to properly evaluate the integrity of the
electronic records by accessing the associated metadata, for example.
Based upon these principles, the Commission proposes to revise Sec.
1.31 to permit a records entity that cannot promptly produce electronic
regulatory records in the form and medium requested by the Commission
the opportunity to produce records in an alternative manner sufficient
for the Commission to adequately inspect the records. The ultimate goal
is not necessarily to obtain records in their “native file format,”
but rather in the most useable form and medium.
—————————————————————————
30 See 77 FR at 66298 (referring to the 1999 Amendment).
—————————————————————————
Finally, the Commission further proposes to adopt new Sec.
1.31(e)(4) to preserve the existing right of a records entity to
provide a representative of the Commission with an original regulatory
record for reproduction by the representative in lieu of a copy
currently set forth in Sec. 1.31(a)(2). As with the existing
provision, the Commission proposes to require the Commission
representative to issue a receipt for the original regulatory record to
the records entity upon request.
Request for comment: The Commission requests comment from all
interested parties and the general public regarding the proposed
inspection and production of regulatory records in Sec. 1.31(e). The
Commission encourages all comments including background information,
actual market examples, best practice principles, and estimates of any
asserted costs and expenses. Regarding the production of regulatory
records, the Commission specifically requests comment on the following
questions:
Should the Commission impose a different standard with
respect to the production of paper regulatory records or other
regulatory records?
Are there records entities that retain only paper
regulatory records?
F. Other Matters
1. Sec. 1.31(b)(4)–Technical Consultant
Consistent with the foregoing amendments and in response to the
Petitioners’ request, the Commission proposes to amend Sec.
1.31(b)(4)(i) to remove the requirement for a records entity to enter
into an arrangement with a Technical Consultant and provide the
Technical Consultant with access to and the ability to download
information from the records entity’s electronic storage media to any
acceptable medium. Further, the Commission proposes to remove the
requirement set forth in Sec. 1.31(b)(4)(ii) which requires the
Technical Consultant to file with the Commission an acceptable
undertaking regarding its ability and willingness to provide the
Commission and DOJ with access to the information contained on the
record entity’s electronic storage media. The Commission concurs with
the position taken by Petitioners that the information technology
expertise within
[[Page 6363]]
the derivatives industry obviates the need for the Commission to
require those records entities electing to store information
electronically to engage a third party to ensure compliance with all
applicable electronic recordkeeping obligations. However, to the extent
that a records entity chose to use a third party or Technical
Consultant, the records entity would remain responsible for compliance
with the CEA and Commission regulations thereunder.
2. Sec. 1.31(c)–Representation to the Commission
Consistent with the foregoing amendments and in response to the
Petitioners’ request, the Commission proposes to amend Sec. 1.31 by
removing existing Sec. 1.31(c). This provision requires any person
utilizing electronic storage media to provide a written representation
to the Commission prior to the use of the system certifying that the
system satisfies the requirements in existing paragraph (b)(1)(ii) and,
where applicable, if the system will be using storage media other than
optical disk or CD-ROM. Further, the written representation must
include an affirmation from an individual consistent with Sec.
1.10(d)(4), i.e., the information provided is true and correct to the
best knowledge and belief of the affirming individual. The Commission
believes that the requirement set forth in proposed Sec. 1.31(c)(2)
regarding written policies and procedures for regulatory records
obviates the need for any records entity to provide notice to the
Commission regarding its compliance with Sec. 1.31. Moreover, the
Commission recognizes that references to optical disks and CD-ROM are
outdated.
3. Sec. 1.31(d)–Other Paper Regulatory Records
Consistent with the foregoing amendments, the Commission proposes
to amend Sec. 1.31 by removing current Sec. 1.31(d). This provision
states that certain paper records, such as trading cards and paper
copies of electronically filed certified forms, must be retained in
hard-copy for the required time period. The Commission believes that
revised Sec. 1.31 provides records entities with sufficient
flexibility on how to retain regulatory records while maintaining the
Commission’s ability to access reliable regulatory information. Having
eliminated the requirement for a records entity to retain regulatory
records in a specific form and manner, the Commission believes that
Sec. 1.31(d) no longer serves any regulatory purpose.
Request for comment: The Commission requests comment from all
interested parties and the general public regarding the proposed
deletion of existing provisions in Sec. 1.31(b)(4), (c) and (d); and
Sec. 1.35(a)(5)(i). The Commission encourages all comments including
background information, actual market examples, best practice
principles, and estimates of any asserted costs and expenses.
4. Potential Technical Amendments
In conjunction with the Proposal, the Commission is reviewing its
regulations for potential technical amendments related to Sec. 1.31,
including those part 4 regulations cited by Petitioners. This review
may or may not result in a new proposed rulemaking.
Request for comment: The Commission requests comment from all
interested parties and the general public regarding potential technical
amendments to Commission regulations related to Sec. 1.31. The
Commission specifically requests comment whether the proposed changes
to Sec. 1.31 will resolve all outstanding issues regarding compliance
with part 4 of the Commission’s regulations identified by Petitioners.
The Commission encourages all comments including background
information, actual market examples, best practice principles, and
estimates of any asserted costs and expenses.
III. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (“RFA”) 31 requires Federal
agencies, in promulgating regulations, to consider whether the rules
they propose will have a significant economic impact on a substantial
number of small entities and, if so, to provide a regulatory
flexibility analysis regarding the economic impact on those entities.
—————————————————————————
31 5 U.S.C. 601 et seq.
—————————————————————————
As discussed above, because the Proposal relates to most
recordkeeping obligations under the CEA and the Commission’s
regulations, it may affect the full spectrum of Commission registrants,
all persons required to register but not registered with the
Commission, and certain persons that are neither registered nor
required to register with the Commission. The Commission has previously
determined that certain registrants are not small entities for purposes
of the RFA and, therefore, the requirements of the RFA do not apply to
those entities.32 For other registrants, however, the Commission has
found it appropriate to consider whether such registrants should be
deemed small entities for purposes of the RFA on a case-by-case basis,
in the context of the particular Commission regulation at issue.33 As
certain persons affected by the Proposal, including Commission
registrants, may be small entities for purposes of the RFA, the
Commission considered whether this rulemaking would have a significant
economic impact on any such persons.
—————————————————————————
32 See, e.g., Policy Statement and Establishment of
Definitions of “Small Entities” for Purposes of the Regulatory
Flexibility Act, 47 FR 18618 (Apr. 30, 1982) (futures commission
merchants and commodity pool operators); Leverage Transactions, 54
FR 41068 (Oct. 5, 1989) (leverage transaction merchants); Regulation
of Off-Exchange Retail Foreign Exchange Transactions and
Intermediaries, 75 FR 55410, 55416 (Sept. 10, 2010) (retail foreign
exchange dealers); and Registration of Swap Dealers and Major Swap
Participants, 77 FR 2613, 2620 (Jan. 19, 2012) (swap dealers and
major swap participants).
33 See 47 FR at 18620 (commodity trading advisors and floor
brokers); Registration of Floor Traders; Mandatory Ethics Training
for Registrants; Suspension of Registrants Charged With Felonies, 58
FR 19575, 19588 (Apr. 15, 1993) (floor traders); and Introducing
Brokers and Associated Persons of Introducing Brokers, Commodity
Trading Advisors and Commodity Pool Operators; Registration and
Other Regulatory Requirements, 48 FR 35248, 35276 (Aug. 3, 1983)
(introducing brokers).
—————————————————————————
As discussed above, the Proposal generally updates and simplifies
existing Commission regulation 1.31 with new provisions that safeguard
the same statutory-based principles previously identified by the
Commission. It accomplishes this by deleting outdated terms and
revising provisions to reflect advances in information technology,
allowing records entities to benefit from evolving technological
developments while maintaining necessary safeguards to ensure the
reliability of the recordkeeping process.
The Commission believes that the proposed rules would impose only
limited additional costs on small entities related to the requirement
that they establish written recordkeeping policies and procedures.
However, this new requirement is replacing existing requirements
applicable to such persons in many cases, including the existing
similar requirements discussed above to (i) Maintain an audit system
and (ii) under certain circumstances, retain a Technical Consultant.
Further, as part of the Proposal, the Commission is proposing to remove
existing requirements that are expected to lower costs for all records
entities, including small entities, by removing requirements that
certain records be kept in paper form.
In light of the limited scope of the proposed changes and the added
flexibility and expected cost-savings provided to small entities
thereby, the Commission does not expect small entities that are records
entities to incur
[[Page 6364]]
new costs, on a net basis, as a result of the Proposal. Consequently,
the Commission finds that no significant economic impact on small
entities will result from the Proposal.
Accordingly, the Chairman, on behalf of the Commission, hereby
certifies pursuant to 5 U.S.C. 605(b) that the Proposal will not have a
significant economic impact on a substantial number of small entities.
B. Paperwork Reduction Act
1. Background
The Paperwork Reduction Act of 1995 (“PRA”) 34 imposes certain
requirements on Federal agencies (including the Commission) in
connection with their conducting or sponsoring any collection of
information as defined by the PRA. The Proposal would result in a
collection of information within the meaning of the PRA, as discussed
below. The Commission therefore is submitting the Proposal to the
Office of Management and Budget (“OMB”) for review.
—————————————————————————
34 44 U.S.C. 3501 et seq.
—————————————————————————
The Proposal contains a collection of information for which the
Commission has previously received a control number from OMB. The title
for this collection of information is “Adaptation of Regulations to
Incorporate Swaps-Records of Transactions, OMB control number 3038-
0090”.35 Collection 3038-0090 is currently in force with its control
number having been provided by OMB.
—————————————————————————
35 See OMB Control No. 3038-0090, http://www.reginfo.gov/public/do/PRAOMBHistory?ombControlNumber=3038-0090# (last visited
Sep. 20, 2016).
—————————————————————————
The responses to the Proposal’s collection of information are
mandatory. An agency may not conduct or sponsor, and a person is not
required to respond to, a collection of information unless it displays
a currently valid control number issued by OMB.
As discussed above, in respect of collections of information, the
Proposal would replace the existing audit system requirements with a
requirement that records entities establish written recordkeeping
policies and procedures. Such changes would result in revisions to
collection 3038-0090. Therefore, the Commission proposes to revise
collection 3038-0090 as described below.
2. Modification of Collection 3038-0090–Recordkeeping Policies and
Procedures
The Commission estimates that the Proposal will require
approximately 15,000 persons to develop and maintain recordkeeping
policies and procedures. This estimate includes approximately 8,792
registrants, 15 designated contract markets, 23 swap execution
facilities, 4 swap data repositories, 15 designated clearing
organizations, and 3,200 unregistered members of designated contract
markets or swap execution facilities, with the balance reflecting the
Commission’s estimate of those persons that are required to register
with the Commission, but have not so registered, and other persons
neither registered nor required to register with the Commission.36
—————————————————————————
36 With respect to registrants and registered entities, these
numbers are based on the number of such persons so registered with
the Commission as of November 2, 2016. With respect to the number of
unregistered members of designated contract markets or swap
execution facilities, see Agency Information Collection Activities:
Proposed Collection Revision, Comment Request: Final Rule for
Records of Commodity Interest and Related Cash or Forward
Transactions, 80 FR 80327 (Dec. 24, 2015).
—————————————————————————
Based on the above, the estimated additional hour burden for
recordkeeping policies and procedures of 150,000 hours is calculated as
follows:
Number of affected persons: 15,000.
Frequency of collection: Annually.
Estimated annual responses per registrant: 1.
Estimated aggregate number of annual responses: 15,000.
Estimated annual hour burden per registrant: 10.37
—————————————————————————
37 This burden hour estimate reflects the Commission’s
assumption that many records entities already have policies and
procedures that, in whole or in part, satisfy the proposed
recordkeeping policies and procedures requirement.
—————————————————————————
Estimated aggregate annual hour burden: 150,000 (15,000 registrants
x 10 hours per registrant).38
—————————————————————————
38 The Commission will also submit to OMB revisions to
Collection 3038-0090 to reflect the Proposal’s replacement of the
audit system requirements in current Commission regulation 1.31.
—————————————————————————
3. Information Collection Comments
The Commission invites the public and other Federal agencies to
comment on any aspect of the proposed information collection
requirements discussed above. Pursuant to 44 U.S.C. 3506(c)(2)(B), the
Commission solicits comments in order to: (1) Evaluate whether the
proposed collection of information is necessary for the proper
performance of the functions of the Commission, including whether the
information will have practical utility; (2) evaluate the accuracy of
the Commission’s estimate of the burden of the proposed collection of
information; (3) determine whether there are ways to enhance the
quality, utility, and clarity of the information to be collected; and
(4) minimize the burden of the collection of information on those who
are to respond, including through the use of automated collection
techniques or other forms of information technology.
Comments may be submitted directly to the Office of Information and
Regulatory Affairs, by fax at (202) 395-6566, or by email at
[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 CEA39 requires the Commission to consider
the costs and benefits of its actions before issuing a regulation under
the CEA. Section 15(a) further specifies that the costs and benefits
shall be evaluated in light of the following five broad areas of market
and public concern: (i) Protection of market participants and the
public; (ii) efficiency, competitiveness and financial integrity of
futures markets; (iii) price discovery; (iv) sound risk management
practices; and (v) other public interest considerations. The Commission
considers the costs and benefits resulting from its discretionary
determinations with respect to the Section 15(a) considerations.
—————————————————————————
39 7 U.S.C. 19(a).
—————————————————————————
1. Costs
As discussed above in relation to the RFA, the Proposal generally
updates and simplifies existing Commission regulation 1.31 by deleting
outdated terms and revising provisions to reflect advances in
information technology while safeguarding the statutory-based
principles previously identified by the Commission. The Commission
preliminarily believes that the Proposal would impose certain costs on
records entities. These costs are those necessary to establish and
maintain required written recordkeeping policies and procedures. The
Commission believes that these costs will be quite limited. At
[[Page 6365]]
the same time, the Commission preliminarily believes that the Proposal
would also reduce current recordkeeping costs under Commission
regulation 1.31, because the Proposal would increase flexibility
provided to records entities and also eliminate certain requirements as
described above (e.g., removing the requirements to have an audit
system, to maintain electronic records in limited specified formats,
and to retain a Technical Consultant).
2. Benefits
The Commission is committed to reviewing its regulations to ensure
they keep pace with technological developments and industry trends, and
reduce regulatory burden. The Commission believes that the Proposal
will allow records entities to benefit from evolving technology while
maintaining necessary safeguards to ensure the reliability of the
recordkeeping process. By deleting outdated terms and revising
provisions to reflect advances in information technology, the Proposal
will allow records entities to utilize a wider range of currently
available technology than previously allowed and remove requirements
that the Commission believes are now obsolete, allowing records
entities to reduce their costs. In addition, the Commission believes
that the flexibility provided by the Proposal will, without further
Commission rulemaking, allow records entities to adopt new technologies
as such technologies evolve, allowing such persons to reduce their
future costs.
Moreover, the Commission expects that the added flexibility
provided by the Proposal will encourage records entities to utilize
electronic storage rather than maintain paper regulatory records. The
Commission expects that this conversion will benefit the Commission,
the DOJ, and the commodity interest industry, generally, by making the
universe of regulatory records more accessible and searchable.
In addition, as a result of the Proposal codifying industry
practices to require recordkeeping policies and procedures and, in
doing so, providing records entities with an opportunity to examine
their own recordkeeping practices, the Commission expects that records
entities may improve the quality of such practices and, thus, the
accuracy and integrity of their regulatory records.
3. Section 15(a) Factors
Section 15(a) of the CEA requires the Commission to consider the
costs and benefits of its actions before promulgating a regulation
under the CEA or issuing certain orders. CEA Section 15(a) further
specifies that the costs and benefits shall be evaluated in light of
five broad areas of market and public concern: (i) Protection of market
participants and the public; (ii) efficiency, competitiveness, and
financial integrity of futures markets; (iii) price discovery; (iv)
sound risk management practices; and (v) other public interest
considerations.
i. Protection of Market Participants and the Public
The Proposal will continue to protect the public by maintaining
necessary safeguards to ensure the reliability of the recordkeeping
process while allowing records entities to benefit from evolving
technology.
ii. Efficiency, Competitiveness, and Financial Integrity of Markets
As discussed above, the Proposal may increase resource allocation
efficiency by improving the way in which records are maintained.
Otherwise, the Commission anticipates minimal change to the efficiency,
competitiveness, and financial integrity of the markets.
iii. Price Discovery
The Commission believes that the Proposal may increase confidence
and participation in the markets for the reasons discussed above.
Nevertheless, the Commission does not anticipate a significant increase
in liquidity or a significant improvement in price discovery as a
result of this rulemaking.
iv. Sound Risk Management Practices
By improving recordkeeping policies and procedures, the Proposal
may encourage records entities to analyze their recordkeeping practices
and create or update policies and procedures related thereto.
v. Other Public Interest Considerations
The Commission has not identified any additional public interest
considerations.
4. Request for Comments
The Commission invites public comment on its cost-benefit
considerations, including the Section 15(a) factors described above.
Commenters are also invited to submit any data or other information
that they may have quantifying or qualifying the costs and benefits of
the Proposal with their comment letters.
The Commission specifically seeks comment on the following:
For those market participants with written operational
procedures and controls that comply with current Commission regulation
1.31, what transition costs, if any, will the Proposal’s requirement
for written policies and procedures entail?
Are there any costs or benefits associated with the
Proposal that the Commission has not considered in the Proposal? Please
provide details and estimates regarding any asserted costs or benefits.
List of Subjects
17 CFR Part 1
Commodity futures, Reporting and recordkeeping requirements.
17 CFR Part 23
Authority delegations (Government agencies), Commodity futures,
Reporting and recordkeeping requirements.
For the reasons stated in the preamble, the Commodity Futures
Trading Commission proposes to amend 17 CFR chapter I as follows:
PART 1–GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT
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
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