2015-32416
[Federal Register Volume 80, Number 247 (Thursday, December 24, 2015)]
[Rules and Regulations]
[Pages 80247-80257]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-32416]
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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: Final rule.
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SUMMARY: The Commodity Futures Trading Commission (the ``Commission''
or ``CFTC'') is amending Commission Regulation 1.35(a) to: Provide that
all records required to be maintained under this regulation must be
maintained in a form and manner which permits prompt, accurate and
reliable location, access, and retrieval of any particular record,
data, or information; clarify that all records, except records of oral
and written communications leading to the execution of a commodity
interest transaction and related cash or forward transactions, must be
kept in a form and manner that allows for identification of a
particular transaction; exclude members of designated contract markets
(``DCMs'') and of swap execution facilities (``SEFs'') that are not
registered or required to register with the Commission (``Unregistered
Members'') from the requirements to keep written communications that
lead to the execution of a commodity interest transaction and related
cash or forward transactions, keep text messages, and keep records in a
particular form and manner; and exclude commodity trading advisors
(``CTAs'') from the oral recordkeeping requirement (``Final Rule'').
DATES: Effective December 24, 2015.
FOR FURTHER INFORMATION CONTACT: Katherine Driscoll, Associate Chief
Counsel, (202) 418-5544, [email protected]; August A. Imholtz III,
Special Counsel, (202) 418-5140, [email protected]; or Lauren Bennett,
Special Counsel, (202) 418-5290, [email protected], Division of Swap
Dealer and Intermediary Oversight, Commodity Futures Trading
Commission, 1155 21st Street NW., Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
I. Background
The Commission amended Regulation 1.35(a) in December 2012 as part
of a series of rulemakings intended to integrate certain existing
Commission rules 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 ``2012 Amendment'').\1\
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\1\ See Adaptation of Regulations to Incorporate Swaps--Records
of Transactions, 77 FR 75523 (December 21, 2012) (``2012 Amendment
Adopting Release'').
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Regulation 1.35(a) requires each futures commission merchant
(``FCM''), retail foreign exchange dealer (``RFED''), introducing
broker (``IB''), and member of a DCM or of a 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.\2\ 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 \3\ 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\ 17 CFR 1.35(a)(1).
\3\ The term ``registered entity'' is defined in CEA section
1a(40) to include both DCMs and SEFs. See CEA sections 1a(40)(A)
(DCMs) and (D) (SEFs).
\4\ 7 U.S.C. 1a(34).
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Regulation 1.35(a) requires FCMs, RFEDs, IBs, and members of a DCM
or of a SEF to keep records of written communications that lead to the
execution of a commodity interest transaction and related cash or
forward transactions. Additionally, Regulation 1.35(a) includes a
requirement to keep records of certain 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 of a 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 both commodity interest
transactions and related cash or forward transactions, the oral
recordkeeping requirement is limited to commodity interest
transactions.\6\ The scope of records covered by Regulation 1.35(a)
includes communications by telephone, voicemail, facsimile, instant
messaging, chat rooms, electronic mail, mobile device, or other digital
or electronic media.\7\ These communications include text messages.
Regulation 1.35(a) also mandates that all records be kept in a form and
manner identifiable and searchable by transaction.
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\5\ As stated in the 2012 Amendment, 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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[[Page 80248]]
The 2012 Amendment became effective on February 19, 2013.\8\
Shortly thereafter, a variety of market participants began raising
concerns regarding the practical impact of the rule, including its
impact on non-financial commercial end-users. Commission staff hosted
an End-User Roundtable Discussion on April 3, 2014 to discuss these
concerns with affected parties. Commission staff subsequently issued
no-action letters that addressed certain of the issues with the 2012
Amendment. CFTC Staff Letter No. 14-72 provided temporary no-action
relief to Unregistered Members, relieving them from the requirements to
(i) maintain text messages; and (ii) maintain records in a form and
manner identifiable and searchable by transaction.\9\ CFTC Staff Letter
No. 14-60 provided temporary no-action relief to CTAs that are members
of a DCM or of a SEF, relieving them from the requirement to maintain
records of oral communications in connection with the execution of
swaps.\10\ CFTC Staff Letter No. 14-147 extended the temporary no-
action relief provided to CTAs in CFTC Staff Letter No. 14-60, and
expanded the scope of the relief to include oral communications that
lead to the execution of a commodity interest transaction, in addition
to communications that lead to the execution of a swap transaction.\11\
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\8\ 2012 Amendment Adopting Release at 75524.
\9\ CFTC Staff Letter No. 14-72, available at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/14-72.pdf.
\10\ CFTC Staff Letter No. 14-60, available at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/14-60.pdf.
\11\ CFTC Staff Letter No. 14-147, available at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/14-147.pdf. Commission staff recently extended the relief in CFTC Staff
Letter No. 14-147 until the effective date of any final Commission
action with respect to the Proposed Amendment. See CFTC Staff Letter
No. 15-65, available at http://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/15-65.pdf.
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II. The Proposal
On November 14, 2014, the Commission published for comment in the
Federal Register a proposal to amend Regulation 1.35(a) (the ``Proposed
Amendment'' or ``Proposal'') to: (i) Provide that all records required
to be maintained under the regulation must be searchable; (ii) clarify
that all 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 leading to the execution of a commodity
interest transaction and related cash or forward transactions are not
required to be kept in a form and manner that allows for the
identification of a particular transaction; (iii) exclude Unregistered
Members 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.\12\
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\12\ See Notice of proposed rulemaking: Records of Commodity
Interest and Related Cash or Forward Transactions, 79 FR 68140
(November 14, 2014).
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III. Discussion
The Commission received 18 comment letters in response to the
Proposal. The commenters represented a variety of interests, including
eight commercial end-user trade groups, five advisor and broker trade
groups, two exchanges, one technology vendor, one mortgage lending
association, and one self-regulatory organization.\13\ After carefully
considering all of the comments received, the Commission is adopting
the Final Rule largely as proposed, with two exceptions. First, the
Commission is clarifying the requirements governing the form and manner
in which records must be kept. Second, the Commission is excluding
Unregistered Members from the requirement to keep written
communications that lead to the execution of a commodity interest
transaction and related cash or forward transactions (in addition to
adopting the proposed exclusions of Unregistered Members from the
requirements to retain text messages and to maintain records in a
particular form and manner).\14\
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\13\ Comment letters were received from American Gas Association
(``AGA''), Commodity Markets Council (``CMC''), Commercial Energy
Working Group (``CEWG''), Coalition of Physical Energy Companies
(``COPE''), Edison Electric Institute (``EEI''), Federal Home Loan
Banks (``FHLB''), Investment Adviser Association (``IAA''),
Intercontinental Exchange (``ICE''), Investment Company Institute
(``ICI''), International Energy Credit Association (``IECA''),
Managed Funds Association (``MFA''), Minneapolis Grain Exchange
(``MGEX''), National Rural Electric Cooperative Association and
American Public Power Association (Joint letter, ``NRECA & APPA''),
National Council of Farmer Cooperatives (``NCFC''), National Futures
Association (``NFA''), National Introducing Brokers Association
(``NIBA''), Asset Management Group of the Securities Industry and
Financial Markets Association (``SIFMA AMG''), Voitrax Corporation
(``Voitrax''). Public comments may be viewed on the Commission's Web
site at: http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1538.
\14\ NFA and NIBA both requested that the Commission consider
raising the revenue threshold that exempts small introducing brokers
from the requirement to record oral communications. Neither proposed
a specific alternate threshold. The Commission is not revising the
revenue threshold for defining ``small'' introducing brokers for the
purposes of the rule, as such a revision is outside of the scope of
this rulemaking.
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A. Proposal To Clarify the ``Identifiable'' and ``Searchable''
Requirements of the Rule Generally and To No Longer Require That Pre-
Trade Communications Be Identifiable by Transaction
Regulation 1.35(a) mandates that required records, including
records of oral and written communications that lead to the execution
of a transaction, be maintained in a form and manner ``identifiable and
searchable by transaction.'' \15\ Prior to the publication of the
Proposed Amendment, the Commission received numerous requests for
guidance regarding compliance with this form and manner
requirement.\16\ Therefore, the Commission proposed to clarify the rule
by stating that all required records must be searchable, but not
``searchable by transaction.'' \17\ The Commission further proposed to
replace the requirement in Regulation 1.35(a) that records be
``identifiable'' with the requirement that records be ``kept in a form
and manner that allows for the identification of a particular
transaction.'' \18\
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\15\ 17 CFR 1.35(a)(1).
\16\ See Proposal at 68143.
\17\ Id.
\18\ Id.
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In considering the Proposed Amendment, the Commission noted that
access to searchable pre-trade communications is an important element
of its oversight of the derivatives market and enforcement of
Commission rules and regulations.\19\ The Commission recognized,
however, that keeping these records in a form and manner that allows
for the identification of a particular transaction could pose
significant challenges to some market participants.\20\ Therefore, the
Commission also proposed to amend Regulation 1.35(a) to state that,
although they still must be searchable, records of oral and written
communications that lead to the execution of a transaction are not
required to be kept in a form and manner that allows for identification
of a particular transaction.\21\ This proposed change meant that market
participants would not have to link or otherwise identify a record of a
communication that leads to the execution of a transaction with a
particular transaction.
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\19\ Id.
\20\ Id.
\21\ Id.
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i. Comments on Form and Manner Generally
Many commenters generally supported the proposed changes to the
form and manner requirements of the
[[Page 80249]]
rule, although some stated that the Commission should further clarify
certain terms. AGA stated that the ``searchable'' and ``identifiable''
components of the Proposed Amendment are undefined terms that could
create confusion. SIFMA AMG recommended that the Commission adopt an
interpretation of ``searchable'' that is similar to the approach of the
Securities and Exchange Commission (``SEC''), which does not prescribe
any particular methodology. SIFMA AMG argued that this flexible
application of the term would enable firms to adopt new technology and
preserve records in a cost-effective manner without impeding regulatory
oversight.
Voitrax, a technology company, did not support the Proposed
Amendment, stating that it was developing low-cost technology which
would make the rule's existing requirement that records be
``identifiable and searchable by transaction'' both feasible and cost-
effective. Voitrax stated that the Proposed Amendment's standalone
requirement that records be searchable (rather than indexed) is not
cost-effective, and that ``at higher volumes searching becomes
infeasible.'' Voitrax also noted that it had devoted significant
resources to creating software to address the requirements in the 2012
Amendment, and if the Proposed Amendment is finalized, there may be a
disincentive for companies to invest in technology solutions related to
regulatory requirements in the future.
In the Commission's view, records are ``searchable'' when they are
kept in a form and manner which permits prompt, accurate and reliable
location, access, and retrieval of any particular record, data, or
information.\22\ Therefore, with respect to the form and manner in
which records are required to be kept, the Commission is replacing the
term ``searchable'' with the phrase ``maintained in a form and manner
which permits prompt, accurate and reliable location, access, and
retrieval of any particular record, data, or information.'' Further,
the Commission is clarifying that for the purpose of this rule, records
``allow for identification of a particular transaction'' when a market
participant can identify those records that pertain to a particular
transaction.
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\22\ The Commission observes that these requirements are
substantially similar to those contained in the SEC rules for
investment adviser recordkeeping. See 17 CFR 275.204-2(g)(2).
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The Commission notes that the Final Rule does not require market
participants to convert their records to searchable electronic
databases. Rather, the Final Rule is deliberately drafted in a way that
permits market participants subject to the rule to keep their paper and
electronic records in a manner which they deem prudent and appropriate
for their particular business. There is no prescribed methodology under
Regulation 1.35(a) by which records must be searched or retrieved, so
long as those searches yield prompt, accurate and reliable location,
access, and retrieval of any particular record, data, or information.
The Commission has carefully considered Voitrax's comment opposing
the Proposed Amendment, but disagrees with Voitrax's contention that
the requirement that records be searchable is not cost-effective, and
is also infeasible at high volumes. As explained above, the Commission
notes that the Final Rule does not prescribe any particular methodology
or corresponding technology with which records must be searchable;
rather, the rule can be satisfied using a variety of approaches with
varying costs. The Commission also acknowledges Voitrax's concern that
the Commission's changes to an existing rule may create a disincentive
for some firms to develop technology to address Commission rules. Any
rule amendment may have some effect on market participants, as well as
the vendors that support those market participants. In this case, the
Commission has tailored the rule to address some concerns that market
participants have presented in a manner consistent with the overall
purpose of the rule. Although Voitrax disagreed with the Proposed
Amendment, the Commission believes that the Final Rule preserves the
core market integrity and customer protection aspects of the rule,
while reducing certain elements of the recordkeeping obligations
imposed by the rule.\23\
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\23\ The Commission notes that the technology described in
Voitrax's Comment Letter may still be useful in helping market
participants comply with the form and manner requirements prescribed
in the Final Rule.
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ii. Comments Addressing Regulation 1.31
Regulation 1.35(a) states that market participants ``shall retain
the records required to be kept by this section in accordance with the
requirements of Sec. 1.31.'' \24\ Although the Commission did not
propose to amend Regulation 1.31 in connection with the Proposed
Amendment, several commenters raised concerns regarding the perceived
incompatibility of Regulation 1.35(a) and Regulation 1.31.\25\ In
particular, many commenters stated that the requirement under
Regulation 1.35(a) that records be ``searchable'' conflicts with the
requirement in Regulation 1.31 that records be maintained in native
file format.\26\ Some commenters stated that reconciling these
requirements was ``impossible'' or ``practically impossible,'' while
another commenter stated that it would require a substantial investment
in technology to obtain such functionality.\27\
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\24\ 17 CFR 1.35(a)(1).
\25\ See AGA, CMC, EEI, IAA, MFA, MGEX, and SIFMA AMG Comment
Letters. See also 17 CFR 1.31. Regulation 1.31 sets forth the form
and manner in which all books and records required to be kept by the
Commodity Exchange Act or Commission Rules must be maintained. Among
other things, it mandates that records ``shall be kept in their
original form (for paper records) or native file format (for
electronic records) for a period of five years from the date thereof
and shall be readily accessible during the first 2 years of the 5-
year period.'' The rule also requires all market participants who
exclusively use electronic storage for some or all of their records
to employ at least one third-party technical consultant to manage
the storage of those records. Some Unregistered Members raised
interpretive questions regarding Regulation 1.31, a rule which they
may not otherwise be subject to absent their inclusion in Regulation
1.35.
\26\ See CMC, IAA, MFA, MGEX, and SIFMA AMG Comment Letters.
\27\ See CMC, MFA, and MGEX Comment Letters.
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Commenters proposed several solutions to address these perceived
inconsistencies. AGA suggested that Regulation 1.35(a) should not
contain any form and manner requirements, and that form and manner
should be dictated solely by Regulation 1.31. Further, AGA proposed a
safe harbor for end-users to rely on the record retention performed by
a DCM, SEF, or a CFTC-registered counterparty, with respect to any of
the records required under Rules 1.35(a) and 1.31. They proposed that
in the absence of a safe harbor, the Commission should add language to
the rule stating that it would consider ``good faith compliance'' with
recordkeeping rules as a mitigating factor when exercising its
enforcement authority. CMC proposed that members of DCMs or of SEFs
that are not fiduciaries should be excluded from the requirement that
records required to be maintained pursuant to Regulation 1.35(a) be
kept in accordance with Regulation 1.31. MGEX proposed eliminating the
``searchable'' and ``identifiable'' requirements from Regulation
1.35(a). As an alternative, they supported keeping the searchable
requirement in Regulation 1.35(a) in conjunction with a significant
amendment to Regulation 1.31 regarding the storage of electronic
communications.
MFA noted that it, along with IAA and the Alternative Investment
Management Association (``AIMA''), submitted to the Commission a
petition
[[Page 80250]]
for rulemaking (``1.31 Petition'') to amend Regulation 1.31 to be,
among other things, ``more flexible with regard to permitted formats.''
\28\ MFA stated that in the event the Proposed Amendment is finalized
prior to any Commission action regarding the 1.31 Petition, the
Commission should provide interim relief to CPOs and CTAs that are
members of a DCM or of a SEF from the requirements of Regulation 1.31.
They also suggested that the Commission grant substituted compliance
with the SEC's electronic recordkeeping requirements for those CFTC-
registered CTAs and CPOs that are also SEC-registered investment
advisers. Absent this relief, MFA asserted that these entities ``will
have to institute recordkeeping requirements that are obsolete or
unworkable.'' Similarly, SIFMA AMG requested that the Commission grant
temporary no-action relief to all asset managers that are members of a
DCM or of a SEF, including all CPOS and CTAs, from compliance with Rule
1.31 pending the Commission's consideration of the 1.31 Petition.
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\28\ See Petition for Rulemaking to Amend CFTC Regulations 1.31,
4.7(b), and (c), 4.23 and 4.33, attached to MFA Comment Letter.
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The Commission is aware that some commenters are concerned with the
relationship between the requirements of Regulations 1.35(a) and 1.31.
The Commission notes that most of the comments in this area centered on
perceived inconsistencies with the requirement in Regulation 1.35(a)
that records be searchable. The Commission believes that the
clarification of the form and manner requirements of Regulation
1.35(a), as stated above, should allay some commenters' concerns
regarding compliance with both rules. Searchable records are
indispensable to the Commission's ability to conduct surveillance
inquiries and investigations in an efficient and effective manner for
the protection of customers and ensuring market integrity. For example,
searchable records facilitate the timely pursuit of potential
violations, which can be important in seeking to freeze and recover any
customer funds received from illegal activity or address market
disruptions. As noted above, the Commission reiterates that the Final
Rule does not require market participants to convert their records to
searchable electronic databases. Rather, this rule was deliberately
drafted in a way that permits market participants to maintain their
paper and electronic records in a manner which they deem prudent and
appropriate for their particular business. There is no prescribed
methodology under Regulation 1.35(a) by which records must be searched
or retrieved, so long as those searches yield prompt, accurate and
reliable location, access, and retrieval of any particular record,
data, or information.
B. Proposal To Exclude Unregistered Members From the Requirements To
Retain Text Messages and To Maintain Required Records in a Particular
Form and Manner
i. Text Messages and the Form and Manner Requirement
Regulation 1.35(a) generally mandates that the market participants
subject to its requirements retain records that are transmitted by,
among other things, telephone, mobile device, or other digital or
electronic media.\29\ This includes text messages.\30\ Prior to the
publication of the Proposed Amendment, many end-users told the
Commission that text messages were a primary means of communication for
their commodity trading businesses. They stated, however, that it was
prohibitively expensive to retain those records.\31\ In considering the
Proposed Amendment, the Commission observed that its oversight of the
derivatives market would not be unduly affected if Unregistered Members
were not required to retain text messages.\32\ Therefore, the
Commission proposed to exclude Unregistered Members from the
requirements in Regulation 1.35(a) to retain text messages.
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\29\ 17 CFR 1.35(a)(1).
\30\ Id.
\31\ See Proposal at 68143.
\32\ Id.
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As discussed above, Regulation 1.35(a) also requires that all
records be kept in a form and manner that is ``identifiable and
searchable by transaction.'' \33\ Prior to the publication of the
Proposed Amendment, many end-users stated that it was difficult to
maintain their records in this particular format due to the nature of
the relationship between their cash or forward transactions and their
trading and hedging practices in the derivatives market.\34\ The
Commission had previously stated that the requirements that records be
``searchable'' and ``identifiable'' do not require entities to link all
of their transactions in commodity interests to related cash or forward
transactions by a specific identifier.\35\ However, in considering the
Proposed Amendment, the Commission noted that these form and manner
requirements may nonetheless impose additional burdens on some
Unregistered Members.\36\ The Commission recognized that excluding
Unregistered Members from the requirement to maintain their records in
a particular form and manner may impose an incremental burden on the
Commission. However, the Commission observed that as long as those
entities were required to retain their records, this exclusion would
not unduly compromise the Commission's ability to oversee the
derivatives market.\37\ Therefore, the Commission also proposed to
exclude Unregistered Members from the requirement in Regulation 1.35(a)
to maintain records in a particular form and manner.\38\
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\33\ 17 CFR 1.35(a)(1).
\34\ See Proposal at 68143.
\35\ Id.
\36\ Id.
\37\ Id.
\38\ Id.
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In response, the Commission received comments from representatives
of commercial end-users in the agriculture and energy industry, two
exchanges, one advisor trade group, and a mortgage lending
association.\39\ These commenters were supportive of these aspects of
the Proposal related to Unregistered Members, but all contended that
the Commission did not go far enough in its proposed relief.
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\39\ See CMC, NCFC, AGA, CEWG, COPE, EEI, IECA, NRECA & APPA,
ICE, MGEX, SIFMA AMG and FHLB Comment Letters.
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Regarding the proposal to exclude Unregistered Members from the
requirement to keep text messages, several commenters asked the
Commission to clarify the term ``text message.'' \40\ AGA requested
that the Commission eliminate what it characterized as the ``arbitrary
distinction'' the rule makes between text messages and other forms of
real-time communications, including instant messaging and chat rooms.
EEI, IECA, NRECA, and APPA requested further guidance on what types of
communications qualify as text messages. In response to commenter
requests to define the ``text message,'' the Commission is clarifying
that the term ``text message,'' for the purposes of this rule, means
any written communication sent from one telephone number to one or more
telephone numbers by short message service (``SMS'') or multimedia
messaging service (``MMS''), and not those written communications
exchanged by proprietary messaging services. Proprietary messaging
services are internet-based, which enables users to send and store
messages interchangeably on mobile devices and
[[Page 80251]]
computers, whereas SMS and MMS messages are traditionally only sent and
stored on a mobile device.
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\40\ See AGA, EEI, IECA, and NRECA & APPA Comment Letters.
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Given that some Unregistered Members have informed the Commission
that they conduct their commodity interest and related cash or forward
transactions primarily via text message, it may be unduly burdensome to
require them to implement the additional technology to allow these
messages to be stored on computers. Registered market participants, on
the other hand, tend to rely more heavily on other forms of
communication to execute commodity interest transactions and related
cash or forward transactions. To the extent these registered market
participants choose to avail themselves of the ability to use text
messages, they could more easily expand their existing communications
retention infrastructure to include text message storage.
ii. Written Communications That Lead to the Execution of a Transaction
Commenters representing commercial end-users also raised issues
regarding an element of the existing rule which the Commission had not
proposed to change. Specifically, the commenters addressed the
requirement that firms maintain records of communications that ``lead
to'' the execution of a commodity interest transaction and related cash
or forward transactions. Several commenters stated that market
participants cannot readily identify which communications will ``lead
to'' the execution of transactions in commodity interests and related
cash or forward transactions. Market participants therefore may be
forced to retain every communication related to their commodity trading
business.\41\ AGA stated that the ``cumbersome and costly'' requirement
to retain all communications that lead to the execution of a
transaction will deter market participants from participating on
exchanges. AGA and CEWG suggested that Unregistered Members should not
have to retain records of pre-trade communications; rather, they should
only be required to retain written records of a final agreement or
those that contain the material economic terms of a transaction.
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\41\ See AGA, MGEX, CEWG, CMC, IECA and ICI Comment Letters.
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The Commission has previously stated that records of communications
that lead to the execution of a transaction can serve to protect market
participants and promote the integrity of the markets.\42\ However, the
Commission is persuaded that the nature of the activities of many
Unregistered Members in the commodity interest markets--which
activities predominantly involve the hedging of risks associated with
their commercial businesses--does not justify the burden Unregistered
Members may have in identifying and retaining records of communications
that lead to the execution of commodity interest and related cash or
forward transactions. The Commission therefore has determined that
Unregistered Members should not be required to keep records of written
communications that lead to the execution of a commodity interest
transaction and related cash or forward transactions. Instead,
Unregistered Members will only be required to keep records of their
transactions.
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\42\ See 2012 Amendment Adopting Release at 75538.
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In addition to the comments addressed above, nine commenters
representing a variety of commercial interests requested that
Unregistered Members be excluded from the rule altogether.\43\ Several
commenters argued that the rule is simply too burdensome for
Unregistered Members, particularly for Unregistered Members that are
commercial end-users.\44\ MGEX argued that the rule places a
significant burden upon those Unregistered Members that are individuals
that trade only for themselves, have purchased a membership for
investment purposes, and/or only engage in low-risk commercial hedging.
COPE and EEI stated that the Commission's recordkeeping rules relating
to swaps and to large trader reporting already impose sufficient
recordkeeping obligations on Unregistered Members, making compliance
with Regulation 1.35(a) unnecessary. Multiple commenters asserted that
the rule should only apply to intermediaries. Several commenters stated
that the rule discourages Unregistered Members from membership on DCMs
and SEFs. Finally, several commenters argued that there is no statutory
basis for including Unregistered Members in the rule.\45\
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\43\ See CMC, CEWG, COPE, EEG, FHLB, ICE, IECA, and NRECA & APPA
Comment Letters.
\44\ See CMC, IECA, MGEX, and NCFC Comment Letters.
\45\ See CMC, IECA, and MGEX Comment Letters.
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As far as Regulation 1.35(a) may present unique issues for
Unregistered Members, the Commission is tailoring this Final Rule to
accommodate those issues. Specifically, Unregistered Members do not
have to keep records of written communications that lead to the
execution of a commodity interest transaction and related cash or
forward transactions. They do not have to keep text messages and they
do not have to maintain records in any particular form and manner. The
Commission understands that Unregistered Members may wish to be
excluded from Regulation 1.35(a) entirely. The Commission has already
determined, however, that Unregistered Members are properly subject to
the rule.\46\ The policy reasons for this determination that were
enunciated in 2012 continue to apply.\47\ The recordkeeping
requirements of Regulation 1.35(a), including those imposed on
Unregistered Members, are an important component of the Commission's
efforts to ensure fair, orderly and efficient markets, and to detect
and deter abusive, disruptive, fraudulent, and manipulative acts that
can harm market integrity and customers.\48\
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\46\ 2012 Amendment Adopting Release at 75525. The issues that
commenters have raised regarding Unregistered Members, as summarized
immediately above, are largely the same as the issues that were
raised by commenters, and considered by the Commission, in 2012. Id.
at 75527.
\47\ Id. at 75528.
\48\ Id.
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C. Proposal To Exclude Commodity Trading Advisors From the Requirement
To Record and Maintain Oral Communications
Regulation 1.35(a) requires CTAs that are members of a DCM or of a
SEF to record all oral communications that lead to the execution of a
transaction in a commodity interest.\49\ In considering the Proposed
Amendment, the Commission noted that many CTAs who are members of a DCM
or of a SEF have discretionary trading authority over customers'
accounts and, therefore would not have routine telephone conversations
with customers that lead to the execution of a transaction in a
commodity interest.\50\ The Commission noted, however, that some CTAs
may execute an order on behalf of a customer on a non-discretionary
basis.\51\ The Commission stated that capturing customer orders was
consistent with the regulatory goals of Regulation 1.35(a), although
the costs of recording and keeping oral communications weighs against
the benefit of achieving those goals.\52\ The Commission stated that
the same was not true with respect to the costs of recording and
maintaining written records, which the Commission understood to be
significantly less than the costs of recording and maintaining
[[Page 80252]]
oral communications.\53\ Therefore, the Commission proposed to amend
Regulation 1.35(a) to exclude CTAs from the requirement to record oral
communications that lead to the execution of a transaction in a
commodity interest.
---------------------------------------------------------------------------
\49\ 17 CFR 1.35(a)(1).
\50\ See Proposal at 68143.
\51\ Id.
\52\ Id.
\53\ Id.
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In response to the Proposed Amendment and its effects on CTAs, the
Commission received comments from representatives of five advisor and
broker trade groups, one self-regulatory organization, and one
exchange.\54\ The commenters were supportive of this aspect of the
Proposed Amendment, with most noting that CTAs and CPOs trade primarily
on a discretionary basis, and therefore have little to no communication
with customers regarding transactions. In addition, some commenters
stated that CTAs are subject to extensive ``analogous'' recordkeeping
requirements under Regulation 4.33 and SEC rules for investment
advisers, which makes compliance with the oral recordkeeping
requirement of Regulation 1.35(a) unnecessary and unduly
burdensome.\55\ No commenters suggested that the Commission refrain
from excusing CTAs from the requirement to record oral communications
that lead to the execution of a transaction in a commodity interest.
---------------------------------------------------------------------------
\54\ See IAA, ICI, MFA, SIFMA AMG, NIBA, NFA, and MGEX Comment
Letters.
\55\ See IAA, ICI, MFA, and SIFMA AMG Comment Letters.
---------------------------------------------------------------------------
Commenters also requested that the Commission provide CTAs with
additional relief from the requirements of Regulation 1.35(a). IAA and
ICI cited the reasons the Commission offered to exclude CTAs and CPOs
from oral recordkeeping to argue that asset managers should be excluded
from Regulation 1.35(a) entirely. For example, IAA and ICI stated that
CTAs and CPOs act on a discretionary basis and have little to no
communication with customers regarding orders. They also noted that any
discussions CTAs and CPOs may have with market intermediaries regarding
orders are captured by those intermediaries, making CTAs' and CPOs'
records duplicative. Further, they noted that CTAs and CPOs are already
subject to extensive recordkeeping rules under CFTC, SEC and state
regulations. SIFMA AMG argued that the relief that the Commission staff
provided to Unregistered Members, by excusing them from the
requirements to retain text messages and to maintain other required
records in a particular form and manner should be expanded to include
all asset managers. SIFMA AMG stated that asset managers, including
registered CTAs and CPOs, utilize text messages in a similar capacity
as Unregistered Members. SIFMA AMG stated that the technology does not
exist to maintain text messages pursuant to the rule. SIFMA AMG also
argued that the costs associated with these recordkeeping obligations
will ``almost certainly'' reduce the liquidity that asset managers
provide to the swap markets. Further, as noted above, SIFMA AMG
observed that asset managers are also subject to extensive regulation
under other CFTC, SEC and state regulations.
The Commission has carefully considered commenters' requests that,
in addition to the proposed relief from oral recordkeeping
requirements, the Commission grant CTAs relief from the written
recordkeeping requirements of Regulation 1.35(a). The Commission has
stated in the past that access to searchable written records is an
important tool the Commission needs to ensure market integrity and
protect customers.\56\ As some commenters have acknowledged, CTAs
already maintain extensive written records that are analogous to those
required by the rule.\57\ The Commission's interest in ensuring
customer protection and market integrity justifies the incremental
costs to maintain these and other records pursuant to Regulation
1.35(a).
---------------------------------------------------------------------------
\56\ See 2012 Amendment Adopting Release at 75528.
\57\ See IAA, ICI, MFA, and SIFMA AMG Comment Letters.
---------------------------------------------------------------------------
In response to SIFMA AMG's request to extend the relief granted to
Unregistered Members to all asset managers, the Commission notes that
asset managers are uniquely situated compared to Unregistered Members,
in that asset managers may act as intermediaries.\58\ As such, an asset
manager's written records are more critical to the Commission's
interest in promoting customer protection than those of Unregistered
Members. The Commission nonetheless recognizes the burdens that CTAs
face when complying with Regulation 1.35(a), and has alleviated some of
that burden by excluding them entirely from the oral recordkeeping
requirements of the rule. Therefore, the Commission is adopting the
Final Rule as proposed.
---------------------------------------------------------------------------
\58\ CFTC Staff Letter No. 14-72 granted relief to Unregistered
Members from the requirements to retain text messages and to
maintain records in a particular form and manner. The Proposal
sought to codify that relief.
---------------------------------------------------------------------------
D. Reorganization of Paragraph (a) of Commission Regulation 1.35
The final rule text of paragraph (a) of Commission Regulation 1.35
as adopted in this release has been reorganized to provide greater
clarity regarding the regulatory obligations of affected Commission
registrants and Unregistered Members. To this end, the reorganized rule
text defines separate categories of required records and then
separately specifies for each type of Commission registrant, and for
Unregistered Members, the category or categories of records each is
required to keep. For the avoidance of doubt, other than as modified by
the amendments to paragraph (a) of Commission Regulation 1.35 that the
Commission is adopting in this release, the Commission reiterates that
the text of paragraph (a) has only been reorganized; the reorganized
rule text is not intended to modify the regulatory obligations of
Commission registrants or Unregistered Members under Commission
Regulation 1.35(a) in any other respect.
IV. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act 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 respecting the
impact.\59\ 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\60\ a regulatory flexibility
analysis or certification typically is required.\61\ The Commission
stated in the Proposal that, if adopted, the Proposal would not have a
significant economic impact on affected entities because it would
relieve them from certain regulatory obligations that would otherwise
apply to them. Specifically, the Final Rule provides relief from
certain recordkeeping requirements in Regulation 1.35(a), and the Final
Rule does not impose any new regulatory obligations on affected
persons. Commenters agreed that the Proposal would decrease regulatory
burdens on certain market participants. No commenter stated that the
Proposal would impose any new regulatory obligations on affected
persons.
---------------------------------------------------------------------------
\59\ 5 U.S.C. 601 et seq.
\60\ 5 U.S.C. 553. The Administrative Procedure Act is found at
5 U.S.C. 500 et seq.
\61\ See 5 U.S.C. 601(2), 603-05.
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[[Page 80253]]
Accordingly, the Chairman, on behalf of the Commission, hereby
certifies pursuant to 5 U.S.C. 605(b) that the rule amendment adopted
herein will not have a significant economic impact on a substantial
number of small entities.\62\
---------------------------------------------------------------------------
\62\ The Chairman made the same certification in the Proposed
Amendment.
---------------------------------------------------------------------------
B. Paperwork Reduction Act
As the Commission stated in the Proposal, this rulemaking does 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''). All
recordkeeping or information collection requirements relevant to the
subject of this 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. The Commission invited
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 Proposed
Amendment. The Commission did not receive any comments that addressed
whether additional recordkeeping or information collection requirements
or changes to existing collection requirements would result from the
adoption of the Proposal. Nevertheless, the Commission notes that the
final rule will reduce the current burden of OMB control number 3038-
0090. Accordingly, the Commission will, by separate action, publish in
the Federal Register a notice and request for comment on the amended
PRA burden associated with the final rule, and submit to OMB an
information collection request to amend the information collection, in
accordance with 44 U.S.C. 3506(c)(2)(A) and 5 CFR 1320.8(d).
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. In adopting the Final Rule, the Commission has
considered the costs and benefits resulting from its discretionary
determinations with respect to the Section 15(a) factors, and sought
comments from interested persons regarding the nature and extent of
such costs and benefits.
In summary, as the Commission stated in the 2012 Amendment, the
records (as well as the form and manner in which such records must be
kept) under Regulation 1.35 are an important component of the
Commission's efforts to ensure fair, orderly and efficient markets, and
to detect and deter abusive, fraudulent and manipulative acts and
practices that can harm market integrity and customers. In furthering
the important policy and practical objectives of the rule, the
Commission carefully considered the potential impact on the market and
market participants. The adoption of the Final Rule reflects the
agency's efforts to consider the need to promote market integrity and
protect customers, while mitigating potential cost to market
participants, and in particular, commercial end-users.
1. Background
The Commission is amending Regulation 1.35(a) to: (i) Provide that
all records that are required to be maintained under this regulation
must be maintained in a form and manner which permits prompt, accurate
and reliable location, access, and retrieval of any particular record,
data, or information; (ii) clarify that the requirement that records be
kept in a form and manner identifiable by transaction means that the
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 leading to the execution of a commodity
interest transaction 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 of SEFs from the requirements to: keep written communications that
lead to the execution of a commodity interest transaction and related
cash or forward transactions; keep text messages; and keep records in a
particular form and manner; and (iv) exclude commodity trading advisors
CTAs from the oral recordkeeping requirement. The Commission stated in
the Proposal that the baseline for this cost and benefit consideration
is the existing Regulation 1.35(a). While CFTC Staff Letters 14-72 and
14-147, as discussed above, currently provide no-action relief that is
substantially similar to much of the relief the Final Rule provides to
certain Commission registrants and Unregistered Members, the Commission
believes that CFTC Staff Letters 14-72 and 14-147 should not set or
affect the baseline from which the Commission considered the costs and
benefits of the Final Rule. This is because, as they indicate, CFTC
Staff Letters 14-72 and 14-147 do not necessarily represent the
position or view of the Commission or any other office or division of
the Commission.
The Commission invited comments from the public on all aspects of
its preliminary consideration of the costs and benefits associated with
the Proposal, and the Cost-Benefit Considerations section of the
Proposal included specific questions regarding certain aspects of
potential costs or potential benefits associated with the Proposal.
While those who commented on the Proposal generally did not
specifically address the Cost-Benefit Considerations section of the
Proposal, certain of the comments raised issues that relate to the
Commission's cost-benefit considerations. Accordingly, although the
Commission has addressed those comments above in connection with the
specific proposed regulatory provision of the Proposal to which they
referred, the Commission is also addressing those comments in the
discussion that follows.
2. Costs
The Commission stated in the Proposal that it would not impose any
new or additional costs directly upon affected market participants, but
instead would reduce some of the regulatory burdens and associated
costs that Regulation 1.35(a) imposes upon them. The Commission stated
that it is difficult to quantify what costs, if any, the Proposed
Amendment would impose upon other market participants, the markets
themselves, or the general public. The Commission observed, however,
that one possible cost associated with the Proposed Amendment would be
that certain market participants, such as CTAs that are members of a
DCM or of a SEF and Unregistered Members, would no longer be required
to keep 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. The
Commission invited public comments on the costs of the Proposal.
[[Page 80254]]
No commenter attempted to quantify the costs, if any, associated
with the Proposal. Two commenters specifically stated that the Proposal
would not affect market oversight.\63\ Additionally, some commenters
representing advisor trade groups noted that CTAs and CPOs are subject
to extensive recordkeeping obligations under other CFTC, SEC and state
regulations that are substantially similar to the requirements of
Regulation 1.35(a). Therefore, the commenters that addressed this issue
agreed that the Proposal would not significantly impact the
Commission's ability to oversee the markets. The majority of commenters
stated that the Proposal would reduce the regulatory burdens and costs
associated with Regulation 1.35(a).
---------------------------------------------------------------------------
\63\ CEWG and IECA Comment Letters.
---------------------------------------------------------------------------
Many commenters argued, however, that the Proposal should have
provided additional relief to Unregistered Members, especially those
Unregistered Members that are commercial end-users. These commenters
argued that this lack of additional relief would cause some end-users
to avoid membership on DCMs and SEFs, resulting in increased
transaction costs for those entities. These commenters also argued that
such additional costs may cause market participants to conduct some
swap transactions away from SEFs, which would, in turn, decrease market
transparency and the Commission's ability to oversee the markets. As
explained above, in adopting the Final Rule that provides additional
relief to Unregistered Members, the Commission has attempted to address
some of the concerns raised by end-users, which in turn should mitigate
the impact of the rule on the broader market.
Finally, Voitrax commented that the Commission's changes to an
existing rule may create a disincentive for some firms to develop
technology to address Commission rules. Any rule amendment may have
some effect on market participants, as well as the vendors that support
those market participants. In this case, the Commission has tailored
the rule to address some concerns that market participants have
presented in a manner consistent with the overall purpose of the rule.
However, the Commission believes that the Final Rule preserves the core
market integrity and customer protection aspects of the rule, while
reducing the recordkeeping obligations imposed by the rule.\64\ The
Commission therefore believes the costs associated with the Final Rule,
to the extent that such costs exist, are negligible.
---------------------------------------------------------------------------
\64\ The Commission notes that the technology described in
Voitrax's Comment Letter may still be useful in helping market
participants comply with the form and manner requirements prescribed
in the Final Rule.
---------------------------------------------------------------------------
3. Benefits
The Commission stated in the Proposal that it would have a direct
and tangible benefit for those market participants that are excused
from certain aspects of the recordkeeping obligations of Regulation
1.35(a). The Commission reduced the burden of Regulation 1.35(a) by
excluding CTAs and Unregistered Members from certain aspects of the
rule. The Commission replaced the requirement that records be
searchable by transaction with the more general requirement that
records be searchable. The Commission observed 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. The
Commission invited public comments on the benefits of the Proposal. In
response to those comments, the Commission is further reducing the
burden of Regulation 1.35(a) by replacing the term ``searchable'' that
was in the Proposal with the phrase ``maintained in a form and manner
which permits prompt, accurate and reliable location, access, and
retrieval of any particular record, data, or information.'' No
commenters attempted to quantify the benefits associated with the
Proposal. Commenters generally agreed that the Proposal would reduce
recordkeeping costs for certain market participants. The Commission
believes the benefits associated with the Final Rule, which are
difficult to quantify in the aggregate, will be realized in different
ways by different market participants affected by the rule depending on
the precise nature of their business and the attendant recordkeeping
obligations that accompany that business.
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 Commission stated in the Proposal that it would reduce some of
the regulatory burdens on certain market participants. The Commission
recognizes that there may be a trade-off between reducing regulatory
burdens and ensuring that the recordkeeping obligations Rule 1.35(a)
imposes upon those market participants subject to the rule are
sufficient to support the effort by the Commission to fulfill its
regulatory mission. As noted above, the Proposal would relieve certain
market participants from the requirement under Regulation 1.35(a) to
keep certain types of records that can be useful for the Commission in
exercising its oversight of the markets, including for market
surveillance, enforcement, and ensuring market integrity. The
Commission invited public comment on these issues.
No commenter stated that the Proposal would adversely affect the
ability of the Commission to provide effective oversight of the
markets. Two commenters specifically stated that the Proposal would not
affect market oversight.\65\ Additionally, some commenters representing
advisor trade groups noted that CTAs and CPOs are subject to extensive
recordkeeping obligations under other CFTC, SEC and state regulations
that are substantially similar to the requirements of Regulation
1.35(a). Therefore, the commenters that addressed this issue agreed
that the Proposal would not significantly impact the Commission's
ability to oversee the markets. The Commission agrees with commenters
that its access to records will remain sufficient to protect market
participants and the public.
---------------------------------------------------------------------------
\65\ CEWG and IECA Comment Letters.
---------------------------------------------------------------------------
Some commenters argued that that the Proposal did not go far enough
in relieving burdens on commercial end-users, which they argue creates
a disincentive to transact on DCMs and SEFs, thereby lowering market
transparency. As explained above, in adopting the Final Rule that
provides additional relief to Unregistered Members, the Commission has
attempted to address some of the concerns raised by end-users, which in
turn should mitigate the impact of the rule on the broader market.
b. Efficiency, Competitiveness, and Integrity of Markets
The 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 invited public comment on whether the Proposed
Amendment, if adopted, would actually decrease these regulatory
burdens, and whether the decreased regulatory burdens would result in
increased resource-allocation efficiency and competition without
compromising market integrity.
Commenters generally stated that the Proposal would decrease the
regulatory burdens on affected market participants. No commenters
addressed whether the relief provided in the Proposed Amendment would
result in increased
[[Page 80255]]
efficiency and competition among market participants. No commenter
stated that the Proposal would compromise market integrity. In fact, no
commenters addressed whether the Proposal would affect market
integrity.
The Commission believes that the Final Rule will decrease the
regulatory burdens on affected market participants. The Commission
believes that this should result in increased resource-allocation
efficiency for market participants overall. The Commission believes
that the Final Rule should not have any effect on competition. Finally,
the Commission believes that the Final Rule will not compromise market
integrity. The Final Rule is narrowly tailored to provide relief to
certain market participants with respect to certain types of records.
This targeted relief does not unduly compromise the recordkeeping
requirements of Regulation 1.35(a), the CEA, or other Commission
Regulations.
Some commenters stated that the lack of sufficient relief provided
in the Proposed Amendment would cause many market participates to avoid
utilizing SEFs. Further, one commenter stated that costs associated
with these recordkeeping obligations will ``almost certainly'' reduce
the liquidity that asset managers provide to the swap markets. Many
commenters agreed that although the Proposal decreased the regulatory
burdens on Unregistered Members, it did not go far enough, resulting in
decreased resource-allocation efficiency of the markets. As explained
above, in adopting the Final Rule that provides additional relief to
Unregistered Members, the Commission has attempted to address some of
the concerns raised by end-users, which in turn should mitigate the
impact of the rule on the broader market.
c. Price Discovery
The Commission stated that the Proposed Amendment would not have
any effect on price discovery. The Commission invited public comments
regarding what effect, if any, the Proposed Amendment would have on
price discovery. Only one commenter addressed price discovery, stating
that the Proposal would not have any effect on price discovery.\66\ The
Commission has no basis to believe that the Final Rule will have any
effect on price discovery.
---------------------------------------------------------------------------
\66\ IECA Comment Letter.
---------------------------------------------------------------------------
d. Sound Risk Management
The Proposal is intended, in part, to reduce some of the regulatory
burdens on certain market participants. The Commission invited public
comment on whether the Proposed Amendment would have any effect on the
risk management practices of market participants and end-users.
Commenters agreed that the Proposed Amendment would, if adopted,
decrease regulatory burdens on certain market participants. Commenters
did not address whether these decreased regulatory burdens would have
an effect on market participants' risk management practices. One
commenter stated that the Proposed Amendment did not provide sufficient
relief to Unregistered Members that are commercial end-users, which
they assert perpetuates a disincentive for these firms to transact on
SEFs.\67\ The commenter argues that any disincentive to SEF utilization
decreases the risk management options that are available to
Unregistered Members. As explained above, in adopting the Final Rule
that provides additional relief to Unregistered Members, the Commission
has attempted to address some of the concerns raised by end-users,
which in turn should mitigate the impact of the rule on the broader
market.
---------------------------------------------------------------------------
\67\ IECA Comment Letter.
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e. Other Public Interest Considerations
The Commission did not identify any other public interest
considerations for this rulemaking, nor were any identified by
commenters.
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 amends 17 CFR part 1 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 paragraphs (a)(1) through (4) and add
paragraphs (a)(5) through (9) to read as follows:
Sec. 1.35 Records of commodity interest and related cash or forward
transactions.
(a) * * *
(1) Futures commission merchants, retail foreign exchange dealers,
and certain introducing brokers. Each futures commission merchant,
retail foreign exchange dealer, and introducing broker that has
generated over the preceding three years more than $5 million in
aggregate gross revenues from its activities as an introducing broker,
shall:
(i) Keep full, complete, and systematic records (including all
pertinent data and memoranda) of all transactions relating to its
business of dealing in commodity interests and related cash or forward
transactions, which shall include 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 (for purposes of this section, all
records described in this paragraph (a)(1)(i) are referred to as
``commodity interest and related records'');
(ii) If such person is a member of a designated contract market or
swap execution facility, retain and produce for inspection 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, all records
described in this paragraph (a)(1)(ii) are referred to as ``original
source documents,'' and, together with commodity interest and related
records, ``transaction records''); and
(iii) Keep 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 any related cash or forward transactions (but not oral
communications that lead solely to the execution of a related cash or
forward transaction), whether transmitted by telephone, voicemail,
facsimile, instant messaging, chat rooms, electronic mail, mobile
device, or other digital or electronic media (for purposes of this
section, all communications described in this paragraph (a)(1)(iii) are
referred to as ``oral pre-trade communications'' if transmitted orally
or as ``written pre-trade communications'' if transmitted in writing,
and all such communications
[[Page 80256]]
are referred to collectively as ``pre-trade communications'').
(2) Registered members of designated contract markets or swap
execution facilities. Each introducing broker that is not subject to
paragraph (a)(1) of this section and is a member of a designated
contract market or swap execution facility, and each member of a
designated contract market or swap execution facility that is
registered or required to be registered with the Commission as a floor
trader, commodity pool operator, commodity trading advisor, swap
dealer, or major swap participant, shall keep:
(i) All transaction records; and
(ii) All written pre-trade communications.
(3) Other introducing brokers. Each introducing broker that is not
subject to paragraph (a)(1) or (2) of this section shall keep:
(i) All commodity interest and related records; and
(ii) All written pre-trade communications.
(4) Floor broker members of designated contract markets or swap
execution facilities. Each member of a designated contract market or
swap execution facility that is registered or required to be registered
with the Commission as a floor broker shall keep:
(i) All transaction records;
(ii) All written pre-trade communications; and
(iii) All oral pre-trade communications that lead to the purchase
or sale of any commodity for future delivery, security futures product,
swap, or commodity option authorized under section 4c of the Commodity
Exchange Act for the account of any person other than such floor
broker.
(5) Form and manner. All records required to be kept pursuant to
paragraphs (a)(1), (2), (3), and (4) of this section shall be kept in a
form and manner that:
(i) Permits prompt, accurate, and reliable location, access, and
retrieval of any particular record, data, or information; and
(ii) Other than pre-trade communications, allows for identification
of a particular transaction.
(6) Unregistered members of designated contract markets or swap
execution facilities. Each 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, shall keep all
transaction records; provided that such records need not include
transmissions by short message service (SMS) or multimedia messaging
service (MMS).
(7) Definition of related cash or forward transaction. For purposes
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.
(8) Other requirements. 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 representative of the
Commission or the United States Department of Justice.
(9) Alternative Compliance Schedule. (i) The Commission may in its
discretion establish an alternative compliance schedule for the
requirement to record oral communications under paragraph (a)(1) or (4)
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) or (4) 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)(9)(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)(9)(i) of this section.
(iv) Relief granted under paragraph (a)(9)(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 December 18, 2015, 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 Bowen and
Giancarlo voted in the affirmative. No Commissioner voted in the
negative.
Appendix 2--Statement of Chairman Timothy G. Massad
Today, the Commission is adopting significant changes to a rule
that will reduce recordkeeping obligations for commercial end-users.
The changes ensure that the rule strikes an appropriate balance
between the costs of recordkeeping and the benefits to market
oversight. This will help ensure that businesses as well as farmers
and ranchers that depend on the derivatives markets are able to
continue using them effectively and efficiently.
Commercial end-users were not the cause of the crisis, and
should not bear the burdens of reforms designed to rein in systemic
risk. Since I became Chairman, the CFTC has taken a number of
actions to fine-tune our rules to ensure they do not impose
unintended burdens on those who use the derivatives markets to hedge
commercial risk. Today, I'm pleased to support another final rule
that makes important strides towards that goal.
This final rule amends recordkeeping requirements set forth
under Commission Regulation 1.35. This regulation requires various
types of market participants to keep written and oral records of
their commodity interest and related cash or forward transactions.
It is very important to our efforts to ensure our markets are
strong, transparent, and operate free of fraud and manipulation.
This rule was first implemented in 1948. CFTC made changes to
this regulation in 2012, to ensure it accurately reflected evolution
of the market and changes in the CFTC's jurisdiction. But we have
been evaluating the rule since then, and we have determined that for
some market participants, the costs of complying with certain
aspects of the changes may exceed the potential benefits. Throughout
this process, we have benefitted from the input of many commercial
businesses and other market participants. We appreciate their
feedback.
[[Page 80257]]
Today's final rule clarifies that members of exchanges and swap
execution facilities not registered with the Commission--typically,
end-users--do not have to keep pre-trade communications or text
messages. Further, it simplifies the requirements for keeping
records of final transactions. The amended rule also states that
commodity trading advisors do not have to record oral communications
regarding their transactions.
I believe this rule is an important change that will reduce
recordkeeping burdens on end-users, and I applaud my fellow
commissioners for their unanimous support.
Appendix 3--Statement of Commissioner J. Christopher Giancarlo
I am pleased to support this final rule that revises Rule 1.35.
In the end, after numerous iterations, several comment periods,
significant legislative interest from Congress, and months of
negotiating, the Commodity Futures Trading Commission (``CFTC'' or
``Commission'') thankfully listened to the concerns of market
participants. I am appreciative of the CFTC staff's diligent work
over the past few months to make key revisions to this rule. Fixing
this regulation was one of the first issues that I raised with my
fellow Commissioners upon my arrival at the CFTC. I believe we have
now produced a more workable rule that will not impose needless
regulatory costs on America's agricultural producers, grain elevator
operators or energy producers, to name a few.
As background, the Commission revised long-standing Rule 1.35 in
2012 despite the fact that the Dodd-Frank Act \1\ contained no
mandate to change the CFTC's recordkeeping rules.\2\ The revised
rule proved to be unworkable. Its publication was followed by
requests for no-action relief and a public roundtable at which
entities impacted by the rule voiced their inability to tie all
communications leading to the execution of a transaction to a
particular transaction or transactions. End-user exchange members
pointed out that business that was once conducted by telephone had
moved to text messaging, so the carve out in the rule for oral
communications had little utility. They pointed out that it was
simply not technologically feasible to keep pre-trade text messages
in a form and manner ``identifiable and searchable by transaction.''
Further, bipartisan Congressional action on the rule's unworkable
nature made it clear that the Commission should re-open the rule to
lessen the burden on market participants not registered with the
CFTC.\3\
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\1\ Dodd-Frank Wall Street Reform and Consumer Protection Act,
Public Law 111-203, 124 Stat. 1376 (2010).
\2\ See Adaptation of Regulations to Incorporate Swaps-Records
of Transactions, 77 FR 75523 (Dec. 21, 2012), available at https://www.gpo.gov/fdsys/pkg/FR-2012-12-21/pdf/2012-30691.pdf.
\3\ See H.R. 4413, the Customer Protection and End-User Relief
Act, Sec. 353 (113th Congress) and H.R. 2289, the Commodity End-User
Relief Act, Sec. 308 (114th Congress).
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In November 2014, the CFTC did propose changes to Rule 1.35.\4\
Unfortunately, I could not support that proposal because it did not
go far enough in addressing concerns about the feasibility and cost
of compliance.\5\ It continued to contain provisions that were
overly burdensome in practice for certain covered entities. For
example, the proposal kept 2012 rule revisions that required the
keeping of all oral and written records that lead to the execution
of a transaction in a commodity interest and related cash or forward
transaction, in a form and manner ``identifiable and searchable by
transaction.'' \6\ This ``searchable'' requirement also conflicted
with the requirements of Commission Rule 1.31, which applies to all
books and records required to be kept by the Commodity Exchange Act
and Commission regulations.
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\4\ See Records of Commodity Interest and Related Cash or
Forward Transactions, 79 FR 68140 (Nov. 14, 2014), available at
http://www.cftc.gov/idc/groups/public/@lrfederalregister/documents/file/2014-26983a.pdf.
\5\ See id. at 68147-148 (Dissenting Statement of Commissioner
J. Christopher Giancarlo).
\6\ See supra note 4.
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Appropriately, the final revisions to Rule 1.35 address many of
the issues raised in my year-old dissent. End-user exchange members
that are not registered or required to be registered with the
Commission now must only keep transaction records, which is a
logical and prudent course of regulatory policy. Text messages are
also excluded from the recordkeeping requirement for end-users, but
communications through internet-based messaging services must be
kept on file. I anticipate that this distinction will generate
interesting public commentary.\7\
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\7\ As finalized, the rule excludes text messages based on SMS
and MMS technology, but includes internet-based messaging services
such as iPhone messages because they are easier to store and
retrieve on computers. While this outcome is puzzling and not
technologically neutral, the best manner to ensure compliance with
CFTC regulations is education on our rules.
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Aside from the technical points of the final rule, it is
appropriate to comment on the skyrocketing compliance costs
associated with trading in American commodity markets. There is an
undeniable need for the CFTC to police these markets and root out
fraud and abuse. Confidence and trust in our markets is essential so
that farmers, manufacturers and other end-users can safely hedge
their risks and costs of production. Yet, agricultural
intermediaries, particularly small futures commission merchants, are
being squeezed by the prolonged environment of low interest rates
and increased regulatory burdens. Regulators must always balance the
public's interest in collecting commercial information for use in
investigations and enforcement, against costs and burdens placed on
American commerce and industry and the jobs they generate. In this
protracted period of weak economic growth with an enormous number of
Americans out of the workforce, we must scrupulously avoid needless
red tape and compliance costs that are invariably passed along
through higher costs for everyday items like a loaf of bread or a
gallon of gasoline, milk or winter heating oil.
I believe the final Rule 1.35 generally gets the balance right.
Yet, I must give a plain and simple warning: The elimination of
unnecessary recordkeeping burdens provided in this final rule will
be paradoxically tossed aside for many small market participants if
Regulation Automated Trading (``Regulation AT'') is finalized as
proposed.\8\ Under Regulation AT, many unregistered market
participants would be forced to register for the first time with the
CFTC as ``floor traders'' due to the broad definition of
``algorithmic trading.'' \9\ As new floor traders, these market
participants would then be subject to heighted recordkeeping
requirements under Rule 1.35, such as keeping all ``written
communications provided or received concerning quotes, bids, offers,
instructions, trading, and prices that lead to the execution of a
transaction.'' \10\ As I said in my statement accompanying the
Notice of Proposed Rulemaking for Regulation AT, I encourage market
participants to carefully review and consider the compliance and
cost consequences of that potential new regulatory regime and
compare it to today's common-sense revisions to Rule 1.35.
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\8\ See CFTC Notice of Proposed Rulemaking (3038-AD52),
Regulation Automated Trading (Dec. 14, 2015), available at http://www.cftc.gov/idc/groups/public/@newsroom/documents/file/federalregister112415.pdf.
\9\ See definition of ``Algorithmic Trading'' in proposed
Commission regulation 1.3(zzzz), which is very broad and would
appear to capture market participants using off-the-shelf type
automated systems or simple excel spreadsheets to automate trading.
\10\ Emphasis added; see Commission Rule 1.35(a)(1)(iii)
(defining ``written pre-trade communications'') and Rule
1.35(a)(2)(ii) (requiring all ``floor traders'' to keep all
``written pre-trade communications'').
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As I have mentioned in the past, I have been fortunate during my
time as a Commissioner to visit with agricultural and energy
producers and intermediaries in Illinois, Indiana, Iowa, Minnesota,
Texas, Louisiana and Kentucky. The common refrain I hear again and
again is that Washington does not listen to everyday Americans. It
imposes rules and regulations without regard to their obvious impact
on ordinary people. Well, I believe this rule benefits from
listening to those concerns and is a step in the right direction. I
am hopeful that it is an indicator of future action by the CFTC that
more readily takes to heart these common concerns in all of our
regulatory actions.
[FR Doc. 2015-32416 Filed 12-23-15; 8:45 am]
BILLING CODE 6351-01-P
Last Updated: December 24, 2015