Adaptation of Regulations To Incorporate Swaps-Records of Transactions, 75523-75543 [2012-30691]
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Federal Register / Vol. 77, No. 246 / Friday, December 21, 2012 / Rules and Regulations
31 of either of the prior two calendar
years.
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Banks, banking, Community
development, Credit, Investments,
Reporting and recordkeeping
requirements.
$1.186 billion as of December 31 of
either of the prior two calendar years.
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Federal Reserve System
12 CFR Part 345
Dated: December 13, 2012.
Daniel P. Stipano,
Acting Chief Counsel.
12 CFR Chapter II
Department of the Treasury
12 CFR Chapter I
For the reasons set forth in the
preamble, the Board of Governors of the
Federal Reserve System amends part
228 of chapter II of title 12 of the Code
of Federal Regulations as follows:
For the reasons discussed in the
preamble, 12 CFR parts 25 and 195 are
amended as follows:
PART 228—COMMUNITY
REINVESTMENT (REGULATION BB)
Office of the Comptroller of the
Currency
PART 25—COMMUNITY
REINVESTMENT ACT AND
INTERSTATE DEPOSIT PRODUCTION
REGULATIONS
2. Revise § 25.12(u)(1) to read as
follows:
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Definitions.
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(u) Small bank—(1) Definition. Small
bank means a bank that, as of December
31 of either of the prior two calendar
years, had assets of less than $1.186
billion. Intermediate small bank means
a small bank with assets of at least $296
million as of December 31 of both of the
prior two calendar years and less than
$1.186 billion as of December 31 of
either of the prior two calendar years.
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PART 195—COMMUNITY
REINVESTMENT
3. The authority citation for part 195
continues to read as follows:
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Authority: 12 U.S.C. 1462a, 1463, 1464,
1814, 1816, 1828(c), 2901 through 2908, and
5412(b)(2)(B).
4. Revise § 195.12(u)(1) to read as
follows:
Definitions.
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(u) Small savings association—(1)
Definition. Small savings association
means a savings association that, as of
December 31 of either of the prior two
calendar years, had assets of less than
$1.186 billion. Intermediate small
savings association means a small
savings association with assets of at
least $296 million as of December 31 of
both of the prior two calendar years and
less than $1.186 billion as of December
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16:08 Dec 20, 2012
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§ 228.12
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(u) Small bank—(1) Definition. Small
bank means a bank that, as of December
31 of either of the prior two calendar
years, had assets of less than $1.186
billion. Intermediate small bank means
a small bank with assets of at least $296
million as of December 31 of both of the
prior two calendar years and less than
$1.186 billion as of December 31 of
either of the prior two calendar years.
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Federal Deposit Insurance Corporation
Authority and Issuance
For the reasons set forth in the
preamble, the Board of Directors of the
Federal Deposit Insurance Corporation
amends part 345 of chapter III of title 12
of the Code of Federal Regulations to
read as follows:
PART 345—COMMUNITY
REINVESTMENT
7. The authority citation for part 345
continues to read as follows:
■
8. Revise § 345.12(u)(1) to read as
follows:
■
Definitions.
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(u) Small bank—(1) Definition. Small
bank means a bank that, as of December
31 of either of the prior two calendar
years, had assets of less than $1.186
billion. Intermediate small bank means
a small bank with assets of at least $296
million as of December 31 of both of the
prior two calendar years and less than
PO 00000
By order of the Board of Directors.
Dated at Washington, DC, this 6th day of
December, 2012.
Federal Deposit Insurance Corporation.
Valerie J. Best,
Assistant Executive Secretary.
[FR Doc. 2012–30775 Filed 12–20–12; 8:45 am]
BILLING CODE 4810–33–P; 6210–01–P; 6714–01–P
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COMMODITY FUTURES TRADING
COMMISSION
17 CFR Part 1
RIN 3038–AD53
Adaptation of Regulations To
Incorporate Swaps—Records of
Transactions
Commodity Futures Trading
Commission.
ACTION: Final rules.
AGENCY:
The Dodd-Frank Wall Street
Reform and Consumer Protection Act
(‘‘Dodd-Frank Act’’ or ‘‘DFA’’)
established a comprehensive new
statutory framework for swaps and
security-based swaps. The Dodd-Frank
Act repeals some sections of the
Commodity Exchange Act (‘‘CEA’’ or
‘‘Act’’), amends others, and adds a
number of new provisions. The DFA
also requires the Commodity Futures
Trading Commission (‘‘CFTC’’ or
‘‘Commission’’) to promulgate a number
of rules to implement the new
framework. The Commission has
proposed and finalized numerous rules
to satisfy its obligations under the DFA.
This final rulemaking makes certain
conforming amendments to
recordkeeping provisions of regulations
1.31 and 1.35(a) to integrate these
regulations more fully with the new
framework created by the Dodd-Frank
Act.1 This final rulemaking requires
futures commission merchants
(‘‘FCMs’’), certain introducing brokers
(‘‘IBs’’), retail foreign exchange dealers
(‘‘RFEDs’’) and certain other registrants
SUMMARY:
12 CFR Chapter III
§ 345.12
By order of the Board of Governors of the
Federal Reserve System, acting through the
Secretary of the Board under delegated
authority, December 17, 2012.
Robert deV. Frierson,
Secretary of the Board.
Definitions.
Authority: 12 U.S.C. 1814–1817, 1819–
1820, 1828, 1831u and 2901–2907, 3103–
3104, and 3108(a).
■
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Authority: 12 U.S.C. 321, 325, 1828(c),
1842, 1843, 1844, and 2901 et seq.
6. Revise § 228.12(u)(1) to read as
follows:
Authority: 12 U.S.C. 21, 22, 26, 27, 30, 36,
93a, 161, 215, 215a, 481, 1814, 1816, 1828(c),
1835a, 2901 through 2908, and 3101 through
3111.
§ 195.12
5. The authority citation for part 228
continues to read as follows:
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1. The authority citation for part 25
continues to read as follows:
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§ 25.12
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1 All Commission regulations are in Chapter I of
Title 17 of the CFR.
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Federal Register / Vol. 77, No. 246 / Friday, December 21, 2012 / Rules and Regulations
that are members of designated contract
markets (‘‘DCMs’’) or swap execution
facilities (‘‘SEFs’’) to record all oral
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,
whether communicated by telephone,
voicemail, mobile device, or other
digital or electronic media, and to keep
those records for one year. This final
rule also requires FCMs, IBs, RFEDs,
and all members of a DCM or SEF to
record and keep all 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 or
related cash or forward transactions,
whether communicated by telephone,
voicemail, facsimile, instant messaging,
chat rooms, electronic mail, mobile
device, or other digital or electronic
media, and to keep those written
records for five years.
DATES: Effective date: This final rule
will become effective on February 19,
2013. Compliance date: Each affected
entity must comply with the oral
communications recordkeeping
requirement in regulation 1.35(a)(1) (17
CFR 1.35(a)(1)) no later than December
21, 2013.
FOR FURTHER INFORMATION CONTACT:
Katherine Driscoll, Associate Director,
202–418–5544, kdriscoll@cftc.gov,
Elizabeth Miller, Attorney-Advisor,
202–418–5450, emiller@cftc.gov,
Division of Swap Dealer and
Intermediary Oversight; Peter A. Kals,
Special Counsel, 202–418–5466,
pkals@cftc.gov, Division of Clearing and
Risk; David E. Aron, Counsel, 202–418–
6621, daron@cftc.gov, Office of General
Counsel; Alexis Hall-Bugg, AttorneyAdvisor, 202–418–6711,
ahallbugg@cftc.gov, Division of Market
Oversight, Commodity Futures Trading
Commission, Three Lafayette Centre,
1151 21st Street NW., Washington, DC
20581.
SUPPLEMENTARY INFORMATION:
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A. The Dodd-Frank Act
On July 21, 2010, President Obama
signed the Dodd-Frank Act into law.2
Title VII of the Dodd-Frank Act 3 (‘‘Title
2 See Dodd-Frank Wall Street Reform and
Consumer Protection Act, Public Law 111–203, 124
Stat. 1376 (2010). The text of the Dodd-Frank Act
is available at https://www.cftc.gov/LawRegulation/
OTCDERIVATIVES/index.htm.
3 Pursuant to section 701 of the Dodd-Frank Act,
Title VII may be cited as the ‘‘Wall Street
Transparency and Accountability Act of 2010.’’
16:08 Dec 20, 2012
B. Proposed Changes to Regulation
1.35(a)—Records of Transactions
On June 7, 2011, the Commission
published in the Federal Register a
notice of proposed rulemaking (the
‘‘Proposal’’) to apply its regulations,
regarding the activities of intermediaries
and other DCM members to the swaps
activities of those persons, in
conformance with the Dodd-Frank Act.5
The Proposal provided for a 60-day
public comment period, which ended
on August 8, 2011. The Proposal
proposed to conform the existing
recordkeeping requirements of
regulation 1.35(a) to the recordkeeping
requirements for SDs and MSPs, under
what was then proposed regulation
23.202(a)(1) and (b)(1),6 so that FCMs,
IBs, RFEDs, and DCM and SEF members
would be required to record all oral and
written communications provided or
received concerning quotes,
solicitations, bids, offers, instructions,
trading, and prices, that lead to the
execution of transactions in a
47
U.S.C. 1 et seq. (2006).
of Regulations to Incorporate Swaps,
76 FR 33066 (June 7, 2011) (‘‘the Proposal’’).
6 See the Proposal, 76 FR at 33067; Reporting,
Recordkeeping, and Daily Trading Records
Requirements for Swap Dealers and Major Swap
Participants, 76 FR 76666, 76675 (Dec. 9, 2010)
(Proposed regulation 23.202(a)(1) would have
required ‘‘[e]ach swap dealer and major swap
participant [to] make and keep pre-execution trade
information, including, at a minimum, records of all
oral and written communications provided or
received concerning quotes, solicitations, bids,
offers, instructions, trading, and prices, that lead to
the execution of a swap, whether communicated by
telephone, voicemail, facsimile, instant messaging,
chat rooms, electronic mail, mobile device or other
digital or electronic media’’).
5 Adaptation
I. Introduction
VerDate Mar<15>2010
VII’’) amended the CEA 4 to establish a
comprehensive new regulatory
framework for swaps and security-based
swaps. The legislation was enacted,
among other reasons, to reduce risk,
increase transparency, and promote
market integrity within the financial
system by, among other things: (1)
Providing for the registration and
comprehensive regulation of swap
dealers (‘‘SDs’’), security-based swap
dealers, major swap participants
(‘‘MSPs’’), and major security-based
swap participants; (2) imposing clearing
and trade execution requirements on
swaps and security-based swaps, subject
to certain exceptions; (3) creating
rigorous recordkeeping and real-time
reporting regimes; and (4) enhancing the
rulemaking and enforcement authorities
of the Commission with respect to,
among others, all registered entities and
intermediaries subject to the
Commission’s oversight.
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commodity interest 7 or cash
commodity, whether communicated by
telephone, voicemail, facsimile, instant
messaging, chat rooms, electronic mail,
mobile device, or other digital or
electronic media. To be consistent with
what was then proposed regulation
23.202(a) and (b), the Proposal would
have amended regulation 1.35(a) by
requiring that each record be
maintained in a separate electronic file
identifiable by transaction and
counterparty. On November 2, 2012, the
Commission published in the Federal
Register the Final Adaptation Rule.8
The Final Adaptation Rule promulgated
the vast majority of the amendments
that the Proposal had introduced. In the
Final Adaptation Rule, the Commission
stated that it would address in a
separate release certain of the proposed
changes to regulation 1.35 (i.e., those
enumerated above) and related
amendments to regulation 1.31.9
In response to the amendments to
regulation 1.35(a) in the Proposal, the
Commission received 35 comment
letters from a variety of institutions,
including DCMs, agricultural trade
associations, and agricultural
cooperatives.10 The Commission has
7 The term ‘‘commodity interest’’ means: (1) any
contract for the purchase or sale of a commodity for
future delivery; (2) any contract, agreement or
transaction subject to Commission regulation under
section 4c or 19 of the Act; (3) any contract,
agreement or transaction subject to Commission
jurisdiction under section 2(c)(2) of the Act; and (4)
any swap as defined in the Act, by the Commission,
or jointly by the Commission and the Securities and
Exchange Commission. See Adaptation of
Regulations to Incorporate Swaps, 77 FR 66288,
66319 (Nov. 2, 2012) (‘‘Final Adaptation Rule’’) (to
be codified at 17 CFR 1.3(yy)).
8 Final Adaptation Rule, 77 FR 66288.
9 See id., 77 FR at 66288, 66296 n. 59, 66297 n.
63, and 66299 n. 72.
10 Commenters included: Agribusiness Council of
Indiana; American Cotton Shippers Association
(‘‘ACSA’’); Amcot; American Feed Industry
Association (‘‘AFIA’’); American Gas Association;
American Petroleum Institute; Barclays Capital
(‘‘Barclays’’); Mr. Chris Barnard; Commodity
Markets Council (‘‘CMC’’); Compliant Phones
(‘‘Compliant’’); Electric Power Supply Association
(‘‘EPSA’’); Electric Utility Trade Associations
(National Rural Electric Cooperative Association,
American Public Power Association, Large Public
Power Council, and Edison Electric Institute)
(‘‘ETA’’); Encana; Falmouth Farm Supply; The
Fertilizer Institute; Futures Industry
Association(‘‘FIA’’); Grain and Feed Association of
Illinois; Kansas City Board of Trade (‘‘KCBT’’); CME
Group (‘‘CME’’); Henderson & Lyman;
IntercontinentalExchange, Inc. (‘‘ICE’’); Land
O’Lakes, Inc.; Minneapolis Grain Exchange
(‘‘MGEX’’); Minnesota Grain and Feed Association;
National Grain and Feed Association (‘‘NGFA’’);
National Introducing Brokers Association (‘‘NIBA’’);
National Council of Farmer Cooperatives (‘‘NCFC’’);
National Futures Association (‘‘NFA’’); Natural Gas
Supply Association; Ohio Agribusiness Association;
Oklahoma Grain and Feed Association; Rocky
Mountain Agribusiness Association (‘‘RMAA’’);
South Dakota Grain & Feed Association; and
Working Group of Commercial Energy Firms
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Federal Register / Vol. 77, No. 246 / Friday, December 21, 2012 / Rules and Regulations
determined to adopt the Proposal’s
amendments to regulation 1.35(a), with
certain modifications, discussed below,
which address the comments the
Commission received. In addition, as
part of this final rulemaking, the
Commission is making certain related
modifications to the record retention
periods set forth in regulation 1.31.
Finally, the final amendments to
regulations 1.31 and 1.35(a) are
consistent with the Commission’s final
rules concerning recordkeeping
requirements for SDs and MSPs
(regulations 23.202(a) and (b) and
23.203(b)(2)).11
II. Oral Communications and Other
Recordkeeping Changes in the
Proposal; Comments Received
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Under the Proposal, FCMs, IBs,
RFEDs, and DCM and SEF members 12
would be required to record 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 or cash commodity,
whether communicated by telephone,
voicemail, facsimile, instant messaging,
chat rooms, electronic mail, mobile
device, or other digital or electronic
media. Comments to these proposed
amendments to regulation 1.35(a)
primarily focused on: oral
recordkeeping generally; the portion of
the proposed provisions that would
have required all DCM and SEF
members, including commercial endusers and non-intermediaries, to keep
records of their cash commodity
transactions; and the proposed
requirement that each record be
maintained in a separately identifiable
electronic file identifiable by transaction
and counterparty (‘‘tagging’’).
(‘‘Commercial Energy Working Group’’). Comments
are available in the comment file on www.cftc.gov.
In the Final Adaptation Rule, the Commission
addressed those comments unrelated to the
proposed changes to regulation 1.35(a) concerning
records of oral and written communications. See
Final Adaptation Rule, 77 FR 66288.
11 See Swap Dealer and Major Swap Participant
Recordkeeping, Reporting, and Duties Rules;
Futures Commission Merchant and Introducing
Broker Conflicts of Interest Rules; and Chief
Compliance Officer Rules for Swap Dealers, Major
Swap Participants, and Futures Commission
Merchants, 77 FR 20128 (Apr. 3, 2012) (‘‘SD and
MSP Recordkeeping Final Rule’’) (adopting for SDs
and MSPs reporting and recordkeeping standards
now found in 17 CFR 23.201–23.203).
12 A ‘‘member’’ is an individual, association,
partnership, corporation, or trust—(i) owning or
holding membership in, or admitted to membership
representation on, a registered entity; or (ii) having
trading privileges on a registered entity. See Final
Adaptation Rule, 77 FR at 66316 (to be codified at
17 CFR 1.3(q)).
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16:08 Dec 20, 2012
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A. Proposed Requirements To Record
Oral Communications and Keep Them
in Separate Electronic Files Identifiable
by Transaction and Counterparty
1. Comments on Oral Recordkeeping
Generally
Commenters asserted that the
proposed requirement for FCMs, IBs,
RFEDs, and DCM and SEF members to
record oral communications that lead to
the execution of a commodity interest or
cash commodity transaction was too
costly, impossible to satisfy, overly
broad, and/or unnecessary. ACSA,
AFIA, Amcot, EPSA, ICE, and Land
O’Lakes commented that these proposed
amendments were broad and
ambiguous.13 AFIA, CME, EPSA,
MGEX, and the Commercial Energy
Working Group argued that the phrases
‘‘concerning quotes, solicitations, bids’’
and ‘‘lead to the execution of’’ were
vague and could encompass a great
number of communications. Amcot
asserted that the overbreadth of the
proposed amendment would be
burdensome for agricultural DCM
members given that there are a variety
of settings, including grower meetings
and on-site visits, where a DCM member
could have a discussion with an
agricultural producer that leads to a
cash commodity or commodity interest
transaction. Land O’Lakes was unsure
whether face-to-face conversations
would have to be recorded under the
proposed requirement. ICE inquired as
to whether a general conversation about
markets would be subject to the
proposed recording requirement if a
transaction occurred later in the day.
AFIA stated that the risk of an incorrect
interpretation would fall on local grain
producers.
Regarding application of the proposed
requirement to telephone conversations,
Land O’Lakes and MGEX each argued
that a DCM member might not know in
advance of a telephone call whether that
call would lead to a transaction. MGEX
believed that this fact would require a
DCM member to record all
conversations, which they argued would
be impossible. Land O’Lakes asserted
that complying with the proposed
requirement could involve massive
amounts of recording, thereby deterring
open communication between a DCM
member and one of its agricultural
producers. The Commercial Energy
Working Group commented that
proposed regulation 1.35(a) was too
broad in that it could require DCM
members to record communications of
attorneys and other ‘‘middle office’’
13 FIA made a similar argument regarding the
application of the amendment to FCMs.
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75525
personnel, and not just the
communications of traders who are
directly involved in executing a
transaction. CMC argued that the
Commission has substantially
underestimated the considerable costs
and limited benefits associated with the
recordkeeping requirements for DCM
and SEF members. CME does not
believe firms can comply with the
proposed oral recordkeeping
requirements with respect to mobile
telephones because, they stated, mobile
telephone recording technology is not
well developed in the United States.
Regarding whether an oral
communications recordkeeping
requirement is necessary, NCFC stated
that the proposed requirement to record
oral communications is not necessary to
achieve the Commission’s stated goal of
protecting customers from abusive sales
practices. CMC asserted that current
regulation 1.35(a)’s requirement to
maintain written records of commodity
interest and cash commodity
transactions suffices to prevent market
abuses. Amcot stated that the
Commission failed to demonstrate the
inadequacy of its existing regulations.
Henderson & Lyman, NFA, and NIBA
stated that the oral recordkeeping
requirement is unnecessary because
NFA already requires certain FCMs and
IBs with a history of sales practice
abuses to record calls made by their
associated persons. Henderson & Lyman
stated that the NFA rule and NFA’s
related guidance concerning
communications are sufficient and costeffective.
NIBA commented that all IBs, or at
the very least small IBs, should be
exempt from the proposed amendments
to regulation 1.35(a) because the burden
on such small entities would be too
great. Henderson & Lyman similarly
commented that the proposed regulation
would favor large IBs over small IBs.
Neither NIBA nor Henderson & Lyman,
however, offered a definition of ‘‘small
IB’’ or provided any quantitative or
qualitative thresholds. Henderson &
Lyman stated that it is unnecessary to
have an oral recording requirement for
IBs because most IBs solicit customers
electronically rather than over the
telephone. Henderson & Lyman also
stated that the focus on IBs was
misplaced since misleading
communications come from marketing
firms rather than from IBs. NIBA further
stated that the proposed amendment
would be ineffective in compelling IBs
to record their calls since those who
refuse to do so will find a way to
circumvent the regulation.
Falmouth Farm Supply had several
concerns with the proposed
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amendment, asserting that a grain
business-DCM member recording its
telephone conversations with a farmersupplier would amount to an invasion
of privacy and that grain producers do
not need the Commission’s protection.
CMC and ICE stated that it would be
redundant for a DCM or SEF member to
comply with proposed regulation
1.35(a) because the DCM or SEF member
will have to engage an FCM clearing
agent for each transaction, and the FCM
would have to comply with the
regulation.
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2. Comments on the Proposed
‘‘Tagging’’ Requirement
CME, Barclays, Henderson & Lyman,
NGFA, and NIBA stated that it would be
burdensome to comply with the
proposed requirement to maintain
records as separate electronic files
identifiable by counterparty and
transaction.14 FIA commented that the
‘‘separate electronic file requirement’’ is
open-ended and, on its face, impossible
to achieve.15 CME stated that potentially
relevant conversations could span
several days and that it would be
difficult to link conversations to
transactions. Therefore, CME
commented, FCMs and IBs should only
be required to record and identify
conversations immediately preceding an
order. FIA stated that a customer may
decide to enter an order with an FCM
at any time, even if that was not the
original purpose of the call. According
to FIA, this aspect of the futures
business means that an FCM would
have to record all of its telephone calls
to comply with proposed regulation
1.35(a) and this would be difficult if not
impossible. Moreover, FIA stated that
compliance would be impossible
because one could argue that any
conversation pertains to a particular
transaction. Like CME, Barclays stated
that the tagging requirement is vague,
potentially requiring an FCM to tag
every communication that could ever
lead to a transaction. Barclays stated
that it would be particularly challenging
to tag a telephone call when the firm is
telephoned by a counterparty; when
parties discuss a transaction that the
firm did not originally anticipate; or
when multiple transactions are
discussed during a particular call.
According to Barclays, there is no
technology to automatically tag
communications, so the firm would
have to manually tag over 2.4 billion
14 NGFA’s letter was supported by the other Grain
and Feed Associations, the Agribusiness
Associations, Land O’ Lakes, and NCFC.
15 ACSA generally supported FIA’s comment
letter.
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16:08 Dec 20, 2012
Jkt 229001
electronic communications it sends and
receives every year. Barclays also stated
that it is not aware of any commercially
available technology that would allow
entities to tag their telephone recordings
by transactions and counterparty. Other
commenters expressed similar concern
regarding the reliability and availability
of technological solutions for the
proposed tagging requirement. The
Commercial Energy Working Group
stated that, in lieu of an accurate and
commercially available software
solution, manual identification and
retrieval of oral records would require
as many as three to five analysts and
one to two additional technical support
personnel to support transactions for a
small or modest-sized end-user
commodity business and that the total
cost to a commodity business is likely
to be in excess of $1 million annually.
According to Barclays, an FCM
should be permitted to maintain records
in any manner so long as it is able to
respond to Commission inquiries in a
timely and comprehensive fashion. The
Commercial Energy Working Group
commented that a firm should only have
to identify communications as
pertaining to a particular transaction if
the Commission requests that
information. Moreover, the Commercial
Energy Working Group stated that it is
unlikely that the Commission will
request such information, so DCM
members should not have a general
obligation to tag conversations.16 The
Commercial Energy Working Group
urged the Commission to allow market
participants to make their records
searchable by transaction at the time the
Commission requests the records rather
than require that all records be
maintained on a transaction-bytransaction basis in real-time.
MGEX sought clarification as to
whether the requirement in proposed
regulation 1.35(a) to maintain ‘‘each
transaction record in a separate
electronic file identifiable by transaction
and counterparty’’ requires a file to be
kept for each counterparty and for each
transaction or whether it suffices to
keep one transaction file that is indexed
by counterparty and transaction. MGEX
also stated that it would be duplicative
for a firm to keep records of both written
and oral communications if they
contained substantially the same
content.
3. Commenters’ Suggested Revisions to
the Oral Communications Requirement
Commenters made suggestions about
how the Commission should revise the
16 API generally supported the Commercial
Energy Working Group’s comment letter.
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Proposal to limit the burden. NGFA
suggested that if the Commission adopts
the proposed oral recordkeeping
requirement, it should give FCMs and
IBs a generous compliance timetable
and flexible implementation options,
particularly for smaller firms. CME, FIA,
and MGEX asserted that firms should
only be required ‘‘reasonably’’ to
comply with oral recordkeeping
requirements. MGEX suggested that a
DCM member should only be required
reasonably to link a conversation to an
executed transaction. Barclays
highlighted that the United Kingdom
Financial Services Authority (‘‘FSA’’)
adopted a reasonableness standard for
compliance with its mobile telephone
conversation recording requirement.17
CME stated that a reasonableness
standard is necessary because of limited
technology, particularly a lack of
reliable search mechanisms. According
to CME, one way a firm should be able
to comply would be by having a policy
prohibiting the use of mobile telephones
to solicit or accept orders. CME
commented that the Commission fails to
provide evidence that the Proposal
would be less effective with such a
‘‘reasonableness’’ standard than without
it. CME stated that only firm-provided
landline and mobile telephones should
be covered by the rule as that would
make the proposal consistent with
foreign regulatory regimes. ETA stated
that the Commission fails to justify
aligning its recordkeeping requirements
with those of other countries. CMC
commented that the Proposal’s reference
to the fact that 80% of large U.K.
financial services firms were already
recording their traders’ telephone calls
prior to the FSA’s enactment of its voice
recordkeeping requirement is irrelevant
to the burden that the Proposal would
impose on agricultural enterprises who
are DCM members trading for their own
accounts and not on behalf of
customers. FIA sought confirmation that
an FCM, IB, or other DCM or SEF
member can satisfy the recordkeeping
requirements under regulation 1.35(a)
by relying on record retention
performed by a DCM or SEF.
17 In November 2011, the FSA rule requiring
taping of mobile telephones became effective.
Under the rule, a firm is required, ‘‘to take
reasonable steps to record relevant conversations,
and keep a copy of relevant electronic
communications, made with, sent from or received
on equipment: (1) Provided by the firm to an
employee or contractor; or (2) the use of which by
an employee or contractor has been sanctioned or
permitted by the firm.’’ See Financial Services
Authority, Conduct of Business Sourcebook,
Section 11.8 Recording telephone conversations
and electronic communications (June 2012, Release
126, 11.8.2).
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NFA recognized that audio recordings
have been very useful to the
Commission in enforcement
proceedings and stated that only those
firms that choose to record calls should
have to maintain their recordings.
Acknowledging that some FCMs
currently record their telephone calls,
FIA commented that, to the extent they
do, recording is limited to dedicated
order desks and only required to be
stored for no more than a few days or
weeks. FIA and MGEX asserted that the
technology available to comply with the
Proposal was ‘‘uncertain at best’’ and,
therefore, the Proposal should be
considered further in the context of
available technology and then reproposed in a separate release.
EPSA suggested that a separate
rulemaking should be published to
address changes to regulation 1.35(a) to
give affected parties reasonable notice.
Amcot, Henderson & Lyman, and ICE
asserted that the Commission has not
considered existing state and federal
wiretapping law and privacy laws in
proposing these new requirements.
mstockstill on DSK4VPTVN1PROD with
B. Proposed Requirement for All
Members of a DCM or SEF To Record
Oral and Written Communications
Leading to the Execution of Cash
Commodity Transactions
Three DCMs joined various
agricultural and energy sector trade
organizations in opposing the
Commission’s proposed requirement to
keep oral communications, and existing
requirement to keep written
communications, regarding cash market
transactions on members of a DCM or
SEF who are non-financial entities and
commercial end-users, and who do not
have customers.18 These commenters
pointed out that including a DCM
member’s cash transactions would
require compliance by hundreds, if not
thousands, of agricultural and energy
firms, including many who do not have
customers and do not themselves enter
into futures or swaps.19 EPSA and the
Commercial Energy Working Group
stated that many of the affected entities
in the energy sector would be small
entities that likely are unaware of the
Proposal. Commenters asserted that the
requirement amounted to unauthorized
18 Commenters included ACSA, the Agribusiness
Associations, Amcot, CMC, Falmouth Farm Supply,
the Grain and Feed Associations, Land O’Lakes,
NCFC, AGA, API, EPSA, ETA, the Commercial
Energy Working Group, ICE, KCBT, TFI, and MGEX.
19 In related commentary, the Commercial Energy
Working Group asked the Commission to clarify
that the definition of ‘‘member’’ in the final rule
covers only those people holding equity interests in
a DCM that permit such holder to submit orders
directly on the DCM’s floor (or an electronic
equivalent).
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regulation of the cash market, which
they asserted has always been carved
out of the Commission’s jurisdiction.20
Commenters also stated that the DoddFrank Act did not intend for the
Commission to subject cash commodity
transactions to new recordkeeping
requirements.21
The Grain and Feed Association of
Illinois, the Oklahoma Grain and Feed
Association, NCFC, and NGFA opposed
the proposed revisions on the grounds
that the employees of a grain elevator
that is a DCM member would have to
record calls and preserve emails with
farmer producers from whom they buy
grain for cash and, thus, hundreds of
employees of grain storage and
processing facilities would be
significantly burdened. As a result,
these commenters stated, a grain
elevator that is a DCM member would
be disadvantaged as compared to a grain
elevator that is not a DCM member as
the non-member would not be burdened
by the compliance costs associated with
proposed regulation 1.35(a). KCBT
asserted that this creates a
discriminatory regulatory structure.
According to ICE, this outcome would
deter firms from hedging commercial
risk on a DCM or SEF, thereby defeating
the Dodd-Frank Act’s transparency
objectives. NGFA and its affiliates
argued that burdening facilities owned
by companies that are DCM members
with the new rules would create a
bifurcation of the cash grain
marketplace into facilities required to
comply with new recordkeeping
requirements and facilities owned and
operated by companies who are not
DCM members and, therefore, not
required to comply. KCBT stated that
their rules (and the rules of other DCMs)
require that operators of registered
delivery warehouses be members,
further stating that the regulatory
disincentives created by the application
of proposed regulation 1.35(a) to all
DCM member cash transactions could
affect not only DCM expertise, but
deliverable supplies and convergence.
According to KCBT, should DCM
commercial members operating delivery
warehouses decide to withdraw from
membership because of proposed
regulation 1.35(a), deliverable supplies
would be negatively impacted and there
20 Commenters included Agribusiness Council of
Indiana; Agribusiness Association of Ohio; EPSA;
Grain and Feed Association of Illinois; KCBT; Land
‘O Lakes; Minnesota Grain and Feed Association;
NCFC; NGFA; Oklahoma Grain and Feed
Association; RMAA; and the Commercial Energy
Working Group.
21 Commenters included Amcot; CME; EPSA;
FIA; and NCFC.
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75527
would be fewer deliverable supplies to
foster convergence at delivery.
Amcot stated that neither it nor its
members should be subject to the
proposed amendments because they do
not transact with the public. Similarly,
the Commercial Energy Working Group
commented that end-users (i.e., DCM or
SEF members trading for themselves)
should not have to comply with
proposed regulation 1.35(a) because
they do not trade for customers and,
therefore, pose minimal systemic risk.
EPSA stated that regulation 1.35(a) was
never intended to burden end-users.
Several commenters objected to the
Commission’s regulation of records of
cash commodity transactions. KCBT
stated that it did not believe the
Commission ever intended for
regulation 1.35(a) to apply to cash and
cash forward transactions outside of
those directly relating to a regulated
futures or swaps transaction. KCBT
further stated that it has always
interpreted regulation 1.35(a) to cover
only those transactions for which a
DCM member is acting as an agent for
a customer. Thus, according to KCBT,
the only DCM members (who were not
otherwise FCMs or IBs) who would be
required to comply would be floor
brokers (‘‘FBs’’); DCM members who
trade for themselves would not be
covered. KCBT stated that it has also
understood the ‘‘related cash
transactions’’ referenced by regulation
1.35(a) to refer only to those
transactions involving an exchange of a
futures transaction for a physical
commodity.
The Commercial Energy Working
Group asserted that, under the proposed
amendments to regulation 1.35(a), many
of the entities that transact on ICE, for
example, would now be required to
maintain records pursuant to
Commission rules without
consideration of whether the market
users handle customer orders, which
would be a departure from the past for
members of contract markets that are
not FCMs, IBs, or present on a trading
floor. As a general matter, FIA argued
that these proposed amendments to
regulation 1.35(a) are not necessary to
implement the Dodd-Frank Act and,
therefore, they run counter to the
guiding principles set out in President
Obama’s January 2011 Executive Order
13563, Improving Rulemaking and
Regulatory Review.
ACSA, CMC, FIA, Henderson &
Lyman, ICE, NFA, and NIBA stated that
the proposed amendments were
inconsistent with the Commission’s
proposed recordkeeping requirements
for SDs and MSPs because they would
require FCMs, RFEDs, IBs, and members
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of a DCM or SEF to record voice
communications regardless of any other
recordkeeping requirement that captures
the same information.
mstockstill on DSK4VPTVN1PROD with
C. Relationship Between Regulations
1.31 and 1.35(a)
Amcot stated that it would be
burdensome for its farmer-owned cotton
marketing cooperative members to
retain recordings of telephone calls for
five years as the Commission proposed.
CME commented that conversations
should only be retained for six months
after the execution of a transaction. FIA
commented that the Commission failed
to provide a justification for requiring
that a swap record be maintained for the
life of the swap plus five years. In
contrast to other commenters, Mr. Chris
Barnard asserted that all records should
be kept indefinitely and scanned after
two years, arguing that there is no
technological or practical reason to limit
the record retention period. Mr. Barnard
specifically commented that records of
voice communications also should be
kept indefinitely. To support the
asserted usefulness of such records, Mr.
Barnard cited a 2009 IOSCO report
stating that telephone records could
benefit enforcement investigations.22
III. Final Rules
The markets subject to the jurisdiction
of the Commission have undergone a
significant transformation over the last
few decades, and particularly in the last
few years. Technological advances have
contributed to a tremendous growth in
trading volume as well as the number
and type of market participants,
including significant numbers of retail
customers that invest in the commodity
markets through a variety of means.
Markets are also more interconnected
than ever before, with order flow
distributed across multiple trading
centers. These changes require the
Commission to adapt, and these final
rules are part of that adaptation.
The overarching purpose of the
Commission’s final rules is to promote
market integrity and protect customers.
Requiring the recording and retention of
oral communications will serve as a
disincentive for covered entities to make
fraudulent or misleading
communications to their customers over
the telephone and could serve as a
meaningful deterrent against violations
such as trading ahead of customer
orders by providing a record of the time
that a customer’s telephone order is
received. When the perspectives of the
commenters are combined with the
22 https://www.iosco.org/news/pdf/
IOSCONEWS137.pdf.
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Commission’s own experiences
regulating the markets subject to its
jurisdiction, a common theme emerges:
The collection of and access to
searchable records, both oral and
written, are indispensable tools the
Commission needs to ensure market
integrity and protect customers.
Currently, many of the market
participants that will be subject to the
final rules have such records by way of
their business needs or other regulatory
requirements. Some commenters have
urged the Commission to rely on
currently available information and not
require more. While existing
information aids the Commission in
discharging its regulatory responsibility,
the Commission believes current
recordkeeping, particularly in the area
of oral recordkeeping, is limited, to
varying degrees, in availability, scope
and effectiveness.
The final rules will significantly
advance the Commission’s efforts to
detect and deter abusive, disruptive,
fraudulent and manipulative acts and
practices that seriously harm market
integrity and customers. In addition, the
information that will be required as a
result of this rulemaking will benefit the
Commission in its market analysis
efforts, such as investigating and
preparing market reconstructions and
understanding causes of unusual market
activity. Further, the requirement that
records be kept current and readily
available facilitates the timely pursuit of
potential violations, which can be
important in seeking to freeze and
recover any profits received from illegal
activity.
Notwithstanding the important policy
and practical reasons for the final rules,
the Commission shares many of the
commenters’ concerns regarding costs
and the availability of relevant
technology. Therefore, as discussed
below, the Commission is adopting
alternatives to the Proposal where doing
so would achieve the Commission’s
objectives and the benefits of promoting
market integrity and protecting
customers albeit at lower cost. The
Commission is also significantly
extending the amount of time entities
have to come into compliance with the
final rule requiring the recording of oral
communications. In so doing, the
entities subject to this rulemaking are
afforded the same amount of time as
SDs and MSPs to come into compliance
with analogous requirements in
regulations 23.202(a)(1) and (b)(1).
Regarding oral communications, in
response to commenters’ concerns that
the scope of the new requirement was
too broad, the new requirement to
record oral communications will be
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limited to those oral communications
that lead to a transaction in a
commodity interest. As proposed, the
oral communications recordkeeping
requirement would have applied to
commodity interest and cash
commodity transactions. In response to
comments asserting that the cost of
implementing and maintaining an oral
communication recording system would
be overly burdensome for small entities
and the commercial end-user, nonintermediary members of a DCM or SEF,
the Commission has determined to
exclude from the new requirement to
record oral communications: Small
IBs23; the oral communications of an FB
who is a member of a DCM or SEF that
do not lead to the purchase or sale for
any person other than the FB of any
commodity for future delivery, security
futures product, swap, or commodity
option authorized under section 4c of
the Act; and certain members of a DCM
or SEF, including floor traders
(‘‘FTs’’),24 commodity pool operators
23 Final regulation 1.35(a) excludes from the oral
communications recordkeeping requirement any IB
that has generated, over the preceding three years,
$5 million or less in aggregate gross revenues from
its activities as an IB (‘‘Small IB’’). All other IBs
with aggregate gross revenue exceeding $5 million
will be referred to as ‘‘non-Small IBs.’’ The
Commission has previously determined this to be
an appropriate definition of a small IB. In
connection with regulation 1.71 (Conflicts of
Interest Policies and Procedures by Futures
Commission Merchants and Introducing Brokers),
the Commission provided a separate regulatory
standard for small IBs, based on this definition, to
lessen the compliance burden imposed by the
conflicts of interest requirements on such firms. See
SD and MSP Recordkeeping Final Rule, 77 FR at
20148. In that rule, the Commission found that
‘‘Section 4d(c) of the Act mandates the
establishment of ‘appropriate informational
partitions’ within FCMs and IBs, and all such firms
are bound by that statutory requirement,’’ and. It
concluded that ‘‘the size of an IB plays a significant
role in determining the appropriateness of such
partitions.’’ Id. at 70149. Applying this new
standard for IBs to the instant final rulemaking, the
Commission estimates that with respect to IBs,
limiting the scope of final regulation 1.35(a) to IBs
that are not small excludes more than 95% of IBs
from the regulation 1.35 oral communications
recordkeeping requirement adopted in this release.
Thus, at present, the Commission expects that no
more than approximately 75 IBs will be subject to
the final oral recordkeeping requirements of
regulation 1.35.
24 The Commission notes that certain FTs,
although excluded from the oral communications
requirement in regulation 1.35(a), will be required
to record their oral communications concerning
swap transactions and their related cash and
forward transactions, pursuant to regulation
23.202(a)(1) and (b)(1). Pursuant to regulation
23.200(i), a related cash or forward transaction
means a purchase or sale for immediate or deferred
physical shipment or delivery of an asset related to
a swap where the swap and the related cash or
forward transaction are used to hedge, mitigate the
risk of, or offset one another. See SD and MSP
Recordkeeping Final Rule, 77 FR at 20202. The
recently finalized definition of SD (regulation
1.3(ggg)(iv)(H)) requires certain FTs who deal in
swaps to comply with regulation 23.202, as well as
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(‘‘CPOs’’), SDs, MSPs,25 and members
that are not registered or required to be
registered with the Commission in any
capacity. As proposed, the oral
communications recording requirement
would have applied to FCMs, RFEDs, all
IBs and all members of a DCM or SEF.
These exclusions are based on the
Commission’s experience that such
entities are either unlikely to or
prohibited from having a customer
interface or an effect on market
integrity. For example, while a Small IB
takes customer orders, they generally do
not execute those orders, meaning that
they lack a direct market interface that
could affect market integrity. Further, as
defined herein, a Small IB is unlikely to
generate the volume of market activity
that the Commission would expect
could affect the integrity of the markets.
Conversely, where an FT could affect
market integrity, they are prohibited
from accepting customer funds and are
therefore excluded by the limiting
principle of customer protection.
While seeking to mitigate the costs of
compliance for smaller entities without
compromising the Commission’s
objectives, the Commission is not
exempting Small IBs and other excluded
participants from the requirement to
keep written records of covered
information, for example, given or
received by telephone. For example, if
a Small IB receives a customer’s order
over the telephone, then the Small IB
would not be required to record the
telephone call under the new provision
in regulation 1.35(a), but the Small IB
would be required to keep a written
record of the order under both the
existing requirement in regulation
1.35(a) to keep and maintain records of
‘‘all orders (filled, unfilled, or
cancelled)’’ and the new requirement in
regulation 1.35(a) to keep records of
‘‘instructions’’ to place orders.
Therefore, although this rulemaking’s
definition of Small IB will exclude most
IBs from the requirement to record oral
communications, the Commission
believes it can continue to promote
certain other regulations in part 23,
notwithstanding the fact that such FTs are not
required to register as SDs. See 17 CFR
1.3(ggg)(iv)(H), as finalized by the Commission in
Further Definition of ‘‘Swap Dealer,’’ ‘‘SecurityBased Swap Dealer,’’ ‘‘Major Swap Participant,’’
‘‘Major Security-Based Swap Participant’’ and
‘‘Eligible Contract Participant,’’ 77 FR 30596 (May
23, 2012).
25 As noted above, SDs and MSPs are subject to
the oral communications recording requirement in
Part 23. See SD and MSP Recordkeeping Final Rule,
77 FR at 20148 (to be codified at 17 CFR
23.202(a)(1) and (b)(1)). SDs and MSPs that are also
registered in a capacity covered by the oral
communications recording requirement in
regulation 1.35(a) would be subject to the recording
requirements in both rules.
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market integrity and protect customers
because the same IBs will continue to be
required to keep written records under
regulation 1.35(a). In addition, because
many of an IB’s oral communications
leading to a commodity interest
transaction are conducted with FCMs,
those oral communications would be
recorded by the FCM.
The Commission has also considered
whether FBs should be treated similarly
to IBs in drawing a distinction between
large and small entities.26 The
Commission does not believe any
similar distinction is warranted. As
Congress recognized by creating
separate categories of registrants, FBs
and IBs perform different functions.
While both receive orders, an FB
executes orders,27 and an IB transmits
orders for execution.28 Because FBs
execute orders and can direct the
manner of the same without an
intermediary, they can have a
significant impact on the integrity of the
market.29 When an IB solicits or
receives order information from a
customer through an oral
communication, it then will often
communicate that information either to
an FCM or FB. Under the regulation as
adopted, the FCM or FB would have to
record the oral communication with the
IB. By contrast, an FB may have covered
26 Regarding FBs, KCBT stated that, ‘‘it has always
understood 1.35(a) to apply to members of DCMs
* * * in order to capture and monitor the activities
of DCM members * * * dealing with customers as
agent for such transactions, namely registered FBs.’’
27 An FB generally is defined in section 1a(22)(A)
of the CEA, 7 U.S.C. 1a(22)(A), as: Any person—(—
(i) who, in or surrounding any pit, ring, post, or
other place provided by a contract market for the
meeting of persons similarly engaged, shall
purchase or sell for any other person—(I) any
commodity for future delivery, security futures
product, or swap; or (II) any commodity option
authorized under section 4c of the CEA; or (ii) who
is registered with the Commission as an FB.
28 An IB generally is defined in section 1a(31)(A)
of the CEA, 7 U.S.C. 1a(31)(A), as: Any person
(except an individual who elects to be and is
registered as an associated person of a futures
commission merchant) (i) who—(I) is engaged in
soliciting or in accepting orders for—(aa) the
purchase or sale of any commodity for future
delivery, security futures product, or swap; (bb) any
agreement, contract, or transaction described in
section 2(c)(2)(C)(i) or section 2(c)(2)(D)(i); (cc) any
commodity option authorized under section 4c; or
(dd) any leverage transaction authorized under
section 19; and (II) does not accept any money,
securities, or property (or extend credit in lieu
thereof) to margin, guarantee, or secure any trades
or contracts that result or may result therefrom; or
(ii) who is registered with the Commission as an IB.
See 7 U.S.C. 1a(31)(B).
29 See, e.g., In re DiPlacido, [2007–2009 Transfer
Binder] Comm. Fut. L. Rep. (CCH) ¶ 30,970 at
62,484 (CFTC Nov. 5, 2008), summary affirmance,
364 Fed. Appx. 657 (2d Cir. 2009), cert. denied, 130
S.Ct. 1883 (2010) (records of FB’s oral
communications with customer admitted as
evidence in case concerning manipulation of price
of NYMEX electricity futures contracts).
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communications with a customer who is
not itself subject to a recording
requirement. The need for recording
oral communications with FBs has been
independently recognized by several
DCMs.30 DCM rules requiring FBs to
record oral communications do not
make distinctions based on an FB’s size.
To address commenter concerns that
the proposed rule would capture the
oral communications of certain
members of DCMs who currently are
registered as FBs, but are solely trading
for their own accounts, i.e., acting as
FTs.,31 the Commission has determined
to limit an FB’s obligation to record its
oral communications under regulation
1.35(a) to those oral communications
that lead to the purchase or sale for any
person other than the FB of any
commodity for future delivery, security
futures product, swap, or commodity
option authorized under section 4c of
the CEA. In this way, a registered FB
operating as an FT (i.e., not handling
customer orders) will be treated the
same as an FT under the final rules.32
In determining the applicability of the
final rules to another group of market
participants that are DCM members,
commodity trading advisors (‘‘CTAs’’),
the Commission has considered
measures to again tailor the oral
communications recordkeeping
requirements for CTAs to mitigate the
costs of compliance while achieving the
twin objectives of promoting market
integrity and protecting customers. The
Commission has reduced the impact on
CTAs by: Limiting the oral
communications recordkeeping
requirement to commodity interest
transactions (i.e., not adopting the
30 For instance, CME Rule 536.G, Telephone
Recordings, states:
Unless specifically exempted by the Market
Regulation Department or designated Exchange
staff, all headset communications must be voice
recorded by the member or member firm authorized
to use the headset and all such recordings must be
maintained for a minimum of 10 business days
following the day on which the recording is made.
Members and member firms are permitted to utilize
their own recording devices, provided that the
devices meet reasonable standards with respect to
quality and reliability. Alternatively, members and
member firms may utilize an Exchange
administered voice recording system for a fee.
CME Rulebook, Chapter 5 Trading Qualifications
and Practices, Rule 536 Recordkeeping
Requirements for Pit, Globex, and Negotiated
Trades.
31 An FT generally is defined in section 1a(23)(A)
of the CEA, 7 U.S.C. 1a(23)(A), as: Any person—(i)
who, in or surrounding any pit, ring, post, or other
place provided by a contract market for the meeting
of persons similarly engaged, purchases or sells
solely for such person’s own account—(I) any
commodity for future delivery, security futures
product, or swap; or (II) any commodity option
authorized under section 4c of the CEA; or (ii) who
is registered with the Commission as an FT.
32 See 17 CFR 3.4(a).
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mstockstill on DSK4VPTVN1PROD with
proposal to include cash commodity
transactions); reducing the record
retention period for all records of oral
communications from 5 years to 1 year;
permitting covered persons to contract
with other Commission registrants to
retain the required records (provided
that the records retained by the
contractor registrant are the same
records, thus allowing covered persons
to avoid retaining the same records as
other Commission registrants); and
removing the tagging requirement.33
The Commission understands that
currently available technology for
recording oral communications may not
be immediately accessible or may
involve a material cost outlay for an
affected entity. However, the
Commission also anticipates that as the
availability of this technology increases
over time, the costs to use such
technology will decline accordingly.
Accordingly, to further conform
regulation 1.35(a) with the final
recordkeeping rule for SDs and MSPs,34
and in response to commenter request
for a flexible compliance timetable, the
Commission is adopting a [November
28, 2013] compliance date and
regulation 1.35(a)(4)(i) pursuant to
which the Commission may, in its
discretion, establish an alternative
compliance schedule for the
requirement to record oral
communications under regulation
1.35(a)(1). Under new regulation
1.35(a)(4)(i), compliance with the
requirement to record oral
communications must be found to be
technologically or economically
impracticable for an affected entity that
seeks, in good faith, to comply with the
requirement. Pursuant to new regulation
1.35(a)(4)(iii), the Commission delegates
to the Director of the Division of Swap
Dealer and Intermediary Oversight the
authority to exercise the Commission’s
33 The Commission considered drawing a
revenues-based threshold for CTAs. However, given
that CTAs do not have a capital requirement it is
not possible for the Commission to readily
determine the sizes of all registered CTAs and,
therefore, the Commission would not be able
measure the impact that such a threshold would
have on CTAs. The Commission also considered, as
an alternative, limiting the types of oral
communications that a CTA must record in a
similar manner to the way in which it has limited
the types of oral communications that an FB must
record to brokering communications. However, the
Commission has determined that such a limitation
is a not a reasonable alternative to having all CTAs
who are members of a DCM or SEF record all oral
communications that lead to the execution of a
commodity interest transaction. Indeed, the
limitation for FBs is appropriate for FBs, and not
for other registration categories, given the current
regulatory regime for FBs and FTs discussed above.
34 See 17 CFR 23.206, as adopted by the
Commission in SD and MSP Recordkeeping Final
Rule.
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discretion under regulation 1.35(a)(4)(i).
The purpose of new regulation
1.35(a)(4) is to facilitate the ability of the
Commission to provide a
technologically practicable compliance
schedule for an affected entity that seeks
to comply in good faith with the oral
communications recordkeeping
requirements of regulation 1.35(a)(1). In
order to obtain relief under new
regulation 1.35(a)(4), an affected entity
must submit a request to the
Commission. An affected entity
submitting a request for relief must
specify the basis in fact supporting its
claim that compliance with the oral
communications recordkeeping
requirement under regulation 1.35(a)(1)
would be technologically or
economically impracticable. Such a
request may include a recitation of the
specific costs and technical obstacles
particular to the entity seeking relief
and the efforts the entity intends to
make in order to ensure compliance
according to an alternative compliance
schedule. Relief granted under
regulation 1.35(a)(4) shall not cause an
affected entity to be out of compliance
or deemed in violation of any
recordkeeping requirements. Such
requests for an alternative compliance
schedule shall be acted upon within 30
days from the time such a request is
received. If not acted upon within the
30-day period, such request will be
deemed approved.
Regarding comments that the
proposed amendments to regulation
1.35(a) were inconsistent with the
Commission’s proposed recordkeeping
requirements for SDs and MSPs because
they would require FCMs, RFEDs, IBs,
and members of a DCM or SEF to record
voice communications regardless of any
other recordkeeping requirement that
captures the same information, the
Commission addressed these comments
in the final recordkeeping rules for SDs
and MSPs, clarifying that, to the extent
pre-execution trade information does
not include information communicated
by telephone, an SD or MSP is under no
obligation to create recordings of its
telephone conversations. If, however,
any of this pre-execution trade
information is communicated by
telephone, the SD or MSP must record
such communications.35 This
clarification is consistent with the
requirements under the revision to
regulation 1.35 requiring that all oral
communications be recorded regardless
of whether an audit trail can be
established with other types of records.
In response to commenter inquiry about
35 See SD and MSP Recordkeeping Final Rule, 77
FR at 20130.
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whether face-to-face communications
would have to be recorded under the
final rule, the Commission does not
intend for the final rule to require the
recording of face-to-face conversations
that do not occur over electronic, digital
or other media.
2. Written Communications
Regarding written communications,
the Commission has decided to adopt
the proposed amendment to regulation
1.35(a) to clarify that the existing
requirement to keep written records
applies to electronic written
communications such as emails and
instant messages, as proposed. The
Commission considered comments
asserting that: The requirement to keep
‘‘electronic communications’’ should
not extend to members of a DCM or SEF
that do not handle customer orders;
regulation 1.35(a) has never required
DCM members to keep records of their
electronic communications relating to
their cash commodity transactions; and
storing records of electronic
communications would be overly
burdensome for these members. In
response, the Commission notes that the
record retention requirements of
existing regulation 1.35, as confirmed by
the Commission’s Division of Market
Oversight in 2009, include all electronic
forms of communication (emails, instant
messages, and any other form of
communication created or transmitted
electronically).36 Thus, contrary to
commenter assertions, the
recordkeeping obligations of regulation
1.35 currently require that all DCM
members keep electronic
36 See U.S. Commodity Futures Trading
Commission, Division of Market Oversight,
Advisory for Futures Commission Merchants,
Introducing Brokers, and Members of a Contract
Market over Compliance with Recordkeeping
Requirements, Feb. 5, 2009, (https://www.cftc.gov/
ucm/groups/public/@industryoversight/documents/
file/recordkeepingdmoadvisory0209.pdf) (footnotes
omitted):
The Division of Market Oversight (‘‘Division’’)
has become aware that there is an industry
misunderstanding of the record retention
requirements of Regulations 1.35 and 1.31 as it
relates to electronically conveyed records. The
Division is issuing this Advisory to address any
industry misunderstanding of the Commission’s
recordkeeping requirements applicable to futures
commission merchants (‘‘FCMs’’), introducing
brokers (‘‘IBs’’), and members of a designated
contract market (‘‘members’’). With the increased
reliance in the futures industry on electronic media
and the use of personal electronic devices and
communications technology to facilitate the
execution of transactions for both open outcry and
electronic trading, the Division is issuing this
Advisory to correct any misunderstandings and to
make certain that the individuals and entities
subject to the Commission’s recordkeeping
requirements maintain all electronic forms of
communications, including email, instant messages,
and any other form of communication created or
transmitted electronically for all trading.
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communications. Therefore, the relevant
portion of the proposed new language
(now being adopted by the Commission)
‘‘all * * * written communications
* * * whether communicated by * * *
instant messaging, chat rooms,
electronic email, mobile device, or other
digital or electronic media’’ does not
impose any new requirements on DCM
members. Instead, the new language
clarifies the existing requirement for
DCM members to maintain electronic
communications by enumerating the
forms of communications that the
Commission intends to be covered by
the rule. In addition, as explained
above, the final language relating to
written communications is consistent
with the final recordkeeping rule for
SDs and MSPs.37
The Commission also has decided to
change the proposed language in
regulation 1.35(a) which would have
required an entity to keep records of ‘‘all
transactions related to its business of
dealing in commodity interests and cash
commodities’’ to ‘‘all transactions
related to its business of dealing in
commodity interests 38 and related cash
and forward transactions.’’ This is
different than existing regulation 1.35,
which states ‘‘commodity futures, retail
forex transactions, commodity options
and cash commodities (including
currencies).’’ 39 The final rule defines
‘‘related cash or forward transaction’’ as
a purchase or sale for immediate or
deferred physical shipment or delivery
of an asset related to a commodity
interest where the commodity interest
transaction and the related cash or
forward transaction are used to hedge,
mitigate the risk of, or offset one
another.40 Because a forward is a type
of cash transaction already covered by
existing regulation 1.35, amending
regulation 1.35 to apply to related
forward transactions does not constitute
37 See SD and MSP Recordkeeping Final Rule, 77
FR at 20202–03 (17 CFR 23.202(a)(1) and (b)(1)).
38 ‘‘Commodity interest’’ includes commodity
futures, retail forex, commodity options, and swaps.
See Final Adaptation Rule, 77 FR at 66319 (to be
codified at 17 CFR 1.3(yy)).
39 17 CFR 1.35(a). Regulation 1.35(a) has included
transactions in ‘‘cash commodities’’ since as early
as 1964:
Each futures commission merchant and each
member of a contract market shall keep full,
complete, and systematic records, together with all
pertinent data and memoranda, of all transactions
relating to his business of dealing in commodity
futures and cash commodities * * *
17 CFR 1.35(a) (1964).
40 This definition of ‘‘related cash or forward
transaction’’ mirrors the definition of the same term
as it applies to swap transactions for purposes of
certain of an SD’s or MSP’s recordkeeping
obligations under Part 23 of the Commission’s
regulations. See SD and MSP Recordkeeping Final
Rule, 77 FR at 20202.
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an expansion of the scope of existing
regulation 1.35.41
To reflect these changes, the
Commission also is changing the
proposed revision to the title of
regulation 1.35 from ‘‘Records of
Commodity Interest and Cash
Commodity Transactions’’ to ‘‘Records
of Commodity Interest and Related Cash
or Forward Transactions.’’
In response to comments that the
requirement to keep transaction records
in separate files identifiable by
transaction and counterparty is
overbroad, overly burdensome, costly,
and/or impossible to achieve, the
Commission is modifying the Proposal
to remove the requirement that each
transaction be maintained as a separate
electronic file. Instead, the final rule
will require that such records be kept in
a form and manner identifiable and
searchable by transaction. This should
be less burdensome than the Proposal
because it will allow those required to
comply to maintain searchable
databases of the required records
without the added cost and time needed
to compile the required records into
individual electronic files. It also is
consistent with the final recordkeeping
rule for SDs and MSPs under regulation
23.202.42 As the Commission noted in
the final release for that rulemaking,
regulation 23.202 does not require the
raw data to be tagged with transaction
and counterparty identifiers so long as
the recordkeeper can readily access and
identify records pertaining to a
transaction or counterparty by running
a search of the raw data.43 Covered
entities will be able to comply with this
obligation by using any of a number of
different solutions available, including
commercially available products
capable of conducting speech analytics
on recordings from both landlines and
mobile calls.
FIA requested guidance on whether
an FCM, IB, or other DCM or SEF
member can satisfy the recordkeeping
41 The Commission’s glossary includes this
definition of ‘‘forward contract’’:
A cash transaction common in many industries,
including commodity merchandising, in which a
commercial buyer and seller agree upon delivery of
a specified quality and quantity of goods at a
specified future date. Terms may be more
‘‘personalized’’ than is the case with standardized
futures contracts (i.e., delivery time and amount are
as determined between seller and buyer). A price
may be agreed upon in advance, or there may be
agreement that the price will be determined at the
time of delivery.
See CFTC Glossary, A Guide to the Language of
the Futures Industry, at https://www.cftc.gov/
ConsumerProtection/EducationCenter/
CFTCGlossary/glossary_f.html.
42 See SD and MSP Recordkeeping Final Rule, 77
FR at 20130.
43 Id.
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75531
requirements under regulation 1.35(a)
by relying on record retention
performed by a DCM or SEF,44 and other
commenters similarly requested
guidance on whether a covered
participant can rely on another
Commission registrant’s records to
satisfy its recordkeeping obligations.
While complying with the final rule is
the responsibility of the covered
participant and the covered participant
will be liable for failure to comply,
depending on the type of record and
arrangements made for access, covered
persons may reasonably rely on a DCM,
SEF or other Commission registrant to
maintain certain records on their behalf.
For example, a member of a DCM or SEF
can rely on electronic order routing or
order execution systems of FCMs,
DCMs, or SEFs to record the audit trail
information it enters into the system in
accordance with Commission
requirements, if the covered person
arranges to get access to such records in
order to satisfy requirements under the
regulation. Reliance on another person,
however, will not relieve a covered
person of responsibility for compliance
with the regulation. Reliance on a third
party is only appropriate where the
records maintained by the third party
duplicate the information required to be
kept by the regulation. For example, if
an FCM records its telephone calls with
a covered IB, the IB need not separately
record the same calls if the IB and FCM
agree that the FCM will maintain the
record and provide access to the IB. By
contrast, if a covered IB receives a
customer order by telephone and then
calls it into the FCM, the covered IB
must record its telephone call with the
customer, while the FCM records the
call between the IB and FCM. For other
types of records, like instant messages
and emails, it is unlikely that covered
persons will be able to rely on
recordkeeping by a third party because
the third party recipient will not have
a complete record of the distribution of
the message by the sender.
The Commission has considered
commenter requests to adopt best efforts
approach to compliance, and require
only the recording of conversations on
firm-provided mobile telephones, not
personal devices. The Commission
declines these requests and reiterates
that any conversation the content of
44 FIA stated:
We interpret the Commission’s statement to mean
that, to the extent a DCM or SEF records the
relevant conversations of orders transmitted for
execution by telephone, a Commission registrant
that transmits such orders may rely on the DCM or
SEF and is not required to record such
conversations and maintain such records
separately.
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mstockstill on DSK4VPTVN1PROD with
which is described under the regulation
must be recorded, regardless of whether
it occurs on a firm-provided or personal
phone.45 It would be contrary to the
objectives of ensuring market integrity
and customer protection to allow
circumvention of the rule simply by
communicating on a personal device
lacking recording capability. To be
clear, covered persons must ensure that
covered communications do not occur
on personal phones that lack recording
capability. And while the Commission
is not adopting any explicit safe harbors,
as a matter of course, the Commission
considers good faith compliance with
policies and procedures reasonably
designed to comply with the oral
communications recording rule as a
mitigating factor when exercising its
discretion in enforcement actions for
violation of the rule.
Regarding comments about the
existing NFA requirement that NFA
member firms with more than a certain
percentage of disciplined associated
persons must record all conversations
that they have with existing and
potential customers for two years, the
Commission believes that the NFA rule
has been effective at protecting the
markets and the public. However, as
discussed throughout, the Commission
does not view its final recording
requirement solely as a customer
protection rule. The amendments
adopted by this release are also a means
to protect the integrity of the markets by
aiding the Commission in detecting and
deterring market abuse, including
manipulation and false reporting.46
45 Significant technological advancements in
recent years, particularly with respect to the cost of
capturing and retaining copies of electronic
material, including telephone communications,
have made the prospect of establishing
recordkeeping requirements for digital and
electronic communications more economically
feasible and systemically prudent. Evidence of
these trends was examined in March 2008 by the
FSA, which studied the issue of mandating the
recording and retention of voice conversations and
electronic communications. The FSA issued a
Policy Statement detailing its findings and
ultimately implemented rules relating to the
recording and retention of such communications,
including a recent determination that all financial
service firms will be required to record any relevant
communication by employees on their work cell
phones. Similar rules that mandate recording of
certain voice and/or telephone conversations have
been promulgated by the Hong Kong Securities and
´
Futures Commission and by the Autorite des
´
Marches Financiers in France and have been
recommended by the International Organization of
Securities Commissions (IOSCO). FSA, ‘‘Policy
Statement: Telephone Recording: recording of voice
conversations and electronic communications’’
(March 2008).
46 Recorded telephone conversations have been
used in a number of the Commission’s enforcement
cases as evidence of market abuse. See, e.g.,
DiPlacido v. CFTC, 364 Fed.Appx. 657 (2d Cir.
2009); In re Barclays PLC, CFTC Docket No. 12–25
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The Commission disagrees with
commenters who stated that compliance
with the new recording requirement
would be illegal in certain
jurisdictions.47 Federal law does not
prohibit a person from recording a
telephone call where the person
recording the call is a party to the call
or one of the parties to the call has given
prior consent to being recorded.48 While
state laws differ regarding the ability to
record customer telephone
conversations, the difference exists in
the type of consent required to be given
before recording can occur. For
example, some states require the
consent of one party to the call and
others require the consent of all parties
to the call.49 Consent can be explicit or
implied. A customer will have provided
consent if, after being notified that the
call is being recorded, he or she
continues with the call.50 Therefore, a
covered participant will in all
circumstances be able to comply with
this final recording rule without
violating any other state or federal laws
by informing the other parties to the call
that the call is being recorded.51
Commenters also focused on the
relationship between the proposed
changes to regulation 1.35(a) and the
existing record retention obligations of
regulation 1.31 (Books and records;
keeping and inspection). Under
regulation 1.31, all books and records
required to be kept under the Act or by
(June 27, 2012); CFTC v. Optiver US LLC, 2012 WL
1632613 (S.D.N.Y. Apr. 19, 2012).
47 Commenters included Henderson & Lyman;
Amcot; and ICE.
48 See 18 U.S.C. 2511(2)(d) (Interception and
disclosure of wire, oral, or electronic
communications prohibited) (‘‘It shall not be
unlawful under this chapter for a person not acting
under color of law to intercept a wire, oral, or
electronic communication where such person is a
party to the communication or where one of the
parties to the communication has given prior
consent to such interception unless such
communication is intercepted for the purpose of
committing any criminal or tortious act in violation
of the Constitution or laws of the United States or
of any State.’’)
49 For example, under New York state law, only
one of the parties to the conversation must consent.
See NY CLS Penal § 250.00. Under California and
Illinois state laws, all parties to the conversation
must consent to the recording. See Cal. Pen. Code
§ 632; 720 ILCS 5/14–1.
50 See, e.g., Griggs-Ryan v. Smith, 904 F.2d
112,118 (1st Cir. 1990) (call recipient, previously
warned that all incoming calls were being recorded,
impliedly consented to interception); Kearney v.
Salomon Smith Barney, Inc., 45 Cal.Rptr.3d 730,
749 (Cal. 2006) (business that adequately advises all
parties to a telephone call, at the outset of the
conversation, of its intent to record the call would
not violate the statute prohibiting the recording of
telephone conversations without the consent of all
parties).
51 Moreover, if a state law were to conflict with
the recording requirement in regulation 1.35(a),
such a law would be preempted by regulation
1.35(a).
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the Commission’s regulations must be
kept for five years from the date thereof
and be readily accessible during the first
two years of the five-year period. Given
the proposed amendment to regulation
1.35(a) to include a requirement to
record all oral communications leading
to the execution of a commodity interest
or cash commodity transaction and that
all such recordings be retained pursuant
to regulation 1.31, records of oral
communications kept pursuant to
proposed regulation 1.35(a) would have
had to be kept for five years.52
Concerning the relationship between
regulations 1.31 and 1.35(a), the
Commission has determined to adopt a
retention period of one year for all
records of oral communications that
lead to the execution of a transaction in
a commodity interest. This modification
responds to comments stating that the
proposed retention period of five years
for records of oral communications was
too long. This also is consistent with the
final provision for SD and MSP oral
communications under new regulation
23.203(b)(2).53 In addition, the
Commission believes that the one-year
retention period for records of oral
communications will enable it to
adequately execute its enforcement
responsibilities under the Act and these
regulations, while minimizing the
storage costs imposed on affected
entities.
In specific response to Amcot’s
concern that the five-year retention
period for oral communications would
have been too burdensome to its farming
cooperative members, the Commission
notes that, due to the adopted revisions
to regulation 1.35(a), discussed above,
the requirement to record oral
communications likely will not apply to
a significant portion, if any, of Amcot’s
members.54 With respect to Encana’s
request for clarification concerning the
applicability of regulation 1.31 to
52 See
17 CFR 1.31
SD and MSP Recordkeeping Final Rule, 77
FR at 20204 (Apr. 3, 2012) (‘‘Provided, however,
that records of oral communications communicated
by telephone, voicemail, mobile device, or other
digital or electronic media pursuant to
§ 23.202(a)(1) and (b)(1) shall be kept for a period
of one year.’’).
54 The obligation to record oral communications
under final regulation 1.35(a)(1) will not apply to
(i) oral communications that lead solely to the
execution of a related cash or forward transaction;
(ii) oral communications by an FB that do not lead
to the purchase or sale for any other person of any
commodity for future delivery, security futures
product, swap, or commodity option authorized
under section 4c of the Commodity Exchange Act;
(iii) an IB that has generated over the preceding
three years $5 million or less in aggregate gross
revenues from its activities as an IB; (iv) an FT; (v)
a CPO; (vi) an SD; (vii) an MSP; or (viii) a DCM or
SEF member that is not registered or required to be
registered with the Commission in any capacity.
53 See
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commercial end-users, regulation 1.31
applies to all records required to be kept
by the Act or the Commission’s
regulations, such as records required to
be kept under regulations 1.35, 18.05
and 23.202. Therefore, Encana’s request
is better addressed in particular
response to those other recordkeeping
requirements than in a discussion of
how those records should be kept. In
response to CME’s comment that
although the Commission suggests that
the retention period for swaps applies
only to SDs and MSPs, as addressed in
proposed regulation 23.203(b), the
proposed amendment to regulation 1.31
is ambiguous in that it could be read to
apply to all entities, the Commission
clarifies that the final provision in
regulation 1.31 regarding the retention
period for records of swap transactions
is triggered by the type of record and not
the entity that is required to keep the
record. Therefore, although regulation
23.203(b) only applies to SDs and MSPs
with regard to their swap transactions,
the final corresponding provision in
regulation 1.31 applies to anyone who is
required by the Act or by Commission
regulations to keep records of swap or
related cash or forward transactions.
IV. Administrative Compliance
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A. Paperwork Reduction Act
Regulation 1.35(a) is being amended
to provide that certain Commission
registrants be required to record and
keep records of their oral
communications that lead to the
execution of a commodity interest
transaction and their written
communications that lead to the
execution of a commodity interest or
related cash or forward transaction,
similar to the requirement that SDs and
MSPs keep records of their oral and
written communications that lead to the
execution of swaps and related cash or
forward transactions. Only the oral
communications recordkeeping
amendments impose new information
recordkeeping requirements. These new
requirements constitute a collection of
information within the meaning of the
Paperwork Reduction Act of 1995
(‘‘PRA’’).55 Under the PRA, an agency
may not conduct or sponsor, and a
person is not required to respond to, a
collection of information unless it has
been approved by the Office of
Management and Budget (‘‘OMB’’) and
displays a currently valid control
number.56 This rulemaking contains
new collections of information, which
amend the existing collection of
55 44
U.S.C. 3501 et seq.
56 Id.
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information set forth in the ‘‘Adaptation
of Regulations to Incorporate Swaps’’
final rule,57 OMB Control Number
3038–0090, to add a new oral
communication recordkeeping
requirement that was not made part of
the earlier Final Adaptation Rule. The
Commission has submitted the Proposal
containing the oral communication
recordkeeping requirements that have
been separately addressed in this
release,58 this final rule release, and
supporting documentation to OMB for
review in accordance with 44 U.S.C.
3507(d) and 5 CFR 1320.11. Responses
to these information collections will be
mandatory.
With respect to all of the
Commission’s collections, the
Commission will protect proprietary
information according to the Freedom of
Information Act and 17 CFR part 145,
‘‘Commission Records and
Information.’’ In addition, section
8(a)(1) of the Act strictly prohibits the
Commission, unless specifically
authorized by the Act, from making
public ‘‘data and information that
would separately disclose the business
transactions or market positions of any
person and trade secrets or names of
customers.’’ The Commission also is
required to protect certain information
contained in a government system of
records according to the Privacy Act of
1974, 5 U.S.C. 552a.
1. Information To Be Provided by
Reporting Entities/Persons
a. Amendments to Regulation 1.35
(Records of Commodity Interest and
Related Cash or Forward Transactions)
i. Obligation To Develop and Maintain
Recordkeeping Policies and Controls
The final amendments to regulation
1.35(a) that require recordkeeping
related to oral communications will
require that each FCM, non-Small IB,
RFED, and DCM or SEF member that is
registered or required to be registered
with the Commission in any capacity,
except if registered as an FT, CPO, SD,
or MSP, retain all oral communications
provided or received concerning quotes,
solicitations, bids, offers, instructions,
trading, and prices, that lead to the
execution of a commodity interest
transaction, whether communicated by
telephone, voicemail, facsimile, instant
57 On November 2, 2012, the Commission
published in the Federal Register the Final
Adaptation Rule. The Final Adaptation Rule
promulgated the vast majority of the amendments
that the Proposal had introduced. However, in the
Final Adaptation Rule, the Commission stated that
it would address in a separate release certain of the
proposed changes to regulation 1.35 (i.e., the oral
communication recordkeeping requirements).
58 See 76 FR 33066, June 7, 2011.
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75533
messaging, chat rooms, electronic mail,
mobile device or other digital or
electronic media. The final amendments
to regulation 1.35(a) will also apply to
FBs who are members of a DCM or SEF.
However, FBs will only be required to
record oral communications that lead to
the purchase or sale for any person
other than the FB of any commodity for
future delivery, security futures
product, swap, or commodity option
authorized under section 4c of the Act.
In the Proposal, the Commission
anticipated that the aforementioned
registrants may incur certain one-time
start-up costs in connection with
establishing a system to record oral
communications. The Commission
estimated that the cost of procuring
systems to record these oral
communications would be $55,000 for
an average large entity that does not
already have such systems in place, and
estimated procurement costs of $10,000
for each small firm that does not already
have such systems in place. Following
publication of the Proposal, the
Commission researched these costs
further. As discussed below in the CostBenefit Considerations, the Commission
now estimates that the cost for
establishing a system to record oral
communications on mobile phones
using a cloud-based solution would be
$90 per phone line and that the cost for
establishing a system to record oral
communications on a landline using a
cloud-based solution would be $50 per
phone line. The Commission estimates
further that a small entity required to
comply will have 10 phone lines and
that a large entity required to comply
will have 1,000 phone lines. Thus, to
figure out the initial cost of establishing
a system for recording oral
communications, an entity will have to
multiply the number of phone lines by
the cost per line ($50 per landline and
$90 per mobile phone). The
Commission estimates each entity to
have 50% landlines and 50% mobile
phone lines. Therefore, the initial cost
for a small firm (10 phone lines) to
establish a system for recording oral
communications would be (5 × $50) + (5
× $90) or $700, and the initial cost for
a large firm (1,000 phone lines) would
be (500 × $50) + (500 × $90) or $70,000.
For purposes of the PRA, the
Commission has chosen to use an
average initial cost of $35,000.
Also in the Proposal, the Commission
estimated the burden hours associated
with these start-up costs to be 135 hours
for any entity that does not already have
a system in place. According to research
referenced in the previous paragraph,
the Commission now estimates that an
entity will not have to spend any time
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setting up a cloud-based solution for
recording oral communications on a
mobile phone or landline because the
entity will merely have to contract for
services from an outside vendor.
However, an entity will spend an
estimated range of 1 to 10 hours
arranging the services of an outside
vendor. If the entity chooses to negotiate
the vendor’s contract, the burden hours
will be towards the higher end of the
range.
The Commission also estimated in the
Proposal that one employee from each
affected entity would have to devote one
hour per trading day to ensure the
operation of the system to record oral
communications. Pursuant to the
research referred to above, the
Commission estimates that employees of
those entities who will be required to
record oral communications will not
have to spend any time each day to
ensure the operation of the system
because the Commission expects that
outside vendors would maintain the
system.
mstockstill on DSK4VPTVN1PROD with
ii. Comments Received
As indicated earlier in this rule, in the
Final Adaptation Rule, the Commission
stated that it would address in a
separate release certain of the proposed
changes to regulation 1.35 and related
amendments to regulation 1.31.59 In
response to the amendments to
regulation 1.35(a) in the Proposal, the
Commission received 35 comment
letters from a variety of institutions,
including DCMs, agricultural trade
associations, and agricultural
cooperatives.60 The Commission has
determined to adopt the Proposal’s
amendments to regulation 1.35(a), with
certain modifications, discussed above,
in order to address the comments the
Commission received. In addition, as
part of this final rulemaking, the
Commission is making certain related
modifications to the record retention
periods set forth in regulation 1.31. The
final rules provide for a retention period
of one year for all records of oral
communications that lead to the
execution of a transaction in a
commodity interest. This modification
responds to comments stating that the
proposed retention period of five years
for records of oral communications was
too long. This also is consistent with the
final provision for SD and MSP oral
communications under new regulation
23.203(b)(2).61 Moreover, in light of
59 See
supra section I.B.
are available in the comment file on
www.cftc.gov.
61 See SD and MSP Recordkeeping Final Rule, 77
FR at 20204 (‘‘Provided, however, that records of
60 Comments
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comments stating, among other things,
that it would be overly burdensome for
Small IBs and DCM members that do
not have customers to comply with the
oral communications recordkeeping
requirement, the Commission decided
to exclude these market participants
from the oral recordkeeping
amendments to regulation 1.35(a).
B. Regulatory Flexibility Act
The Regulatory Flexibility Act
(‘‘RFA’’) requires that agencies consider
whether the rules they propose will
have a significant economic impact on
a substantial number of small entities 62
and, if so, provide a regulatory
flexibility analysis respecting the
impact.63 The Commission is adopting a
substantive rule change to regulation
1.35(a). This substantive change would
affect FCMs, certain IBs,64 RFEDs, and
any member of a DCM or SEF who is
registered or required to be registered
with the Commission in any capacity
other than as an FT, CPO, SD, or MSP
by requiring them to keep records of all
oral communications leading to the
execution of a commodity interest
transaction.
1. FCMs and RFEDs
The Commission has previously
determined that registered FCMs and
RFEDs are not small entities for
purposes of the RFA.65 Accordingly, the
Chairman, on behalf of the Commission,
hereby certifies pursuant to 5 U.S.C.
605(b) that the final rules will not have
a significant economic impact on a
substantial number of small entities
with respect to these entities.
2. IBs
Regulation 1.35(a) may have a
significant economic impact on IBs with
annual receipts between $5 million and
oral communications communicated by telephone,
voicemail, mobile device, or other digital or
electronic media pursuant to § 23.202(a)(1) and
(b)(1) shall be kept for a period of one year.’’).
62 The Small Business Administration (SBA)
identifies (by North American Industry
Classification System codes) a small business size
standard of $7 million or less in annual receipts for
Subsector 523—Securities, Commodity Contracts,
and Other Financial Investments and Related
Activities. 13 CFR Ch. 1, § 121.201.
63 5 U.S.C. 601 et seq.
64 See note 2323, supra, for discussion of
definition of Small IB.
65 See Policy Statement and Establishment of
Definitions of ‘‘Small Entities’’ for Purposes of the
Regulatory Flexibility Act, 47 FR 18618, 18619
(Apr. 30, 1982) (DCMs, FCMs, and large traders)
(‘‘RFA Small Entities Definitions’’); Opting Out of
Segregation, 66 FR 20740, 20743 (Apr. 25, 2001)
(ECPs); Regulation of Off-Exchange Retail Foreign
Exchange Transactions and Intermediaries, 75 FR
55410, 55416 (Sept. 19, 2010) (RFEDs) (‘‘Retail
Forex Final Rules’’); and Position Limits for Futures
and Swaps; Final Rule and Interim Final Rule, 76
FR 71626, 71680 (Nov. 18, 2011) (SEFs).
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$7 million. The Commission provided
an initial regulatory flexibility analysis
in its proposed rulemaking for all IBs,
regardless of their size, as the proposed
rulemaking did not exclude any IBs
from the application of the requirement
to keep records of all oral
communications.66
As discussed above, this final rule
will involve substantive changes to
regulation 1.35(a), by requiring, among
others, non-Small IBs to record all oral
communications that lead to the
execution of a commodity interest
transaction. As indicated above, the
Commission provided an initial
regulatory flexibility analysis for IBs in
the Proposal, as required by 5 U.S.C.
603, because the oral recordkeeping
requirement under regulation 1.35(a), as
proposed, may have had a significant
economic impact on a significant
number of small IBs.67
The Commission has never previously
determined that IBs, as a registrant
category, are not ‘‘small entities’’ for the
purposes of the RFA. Instead,
historically, the Commission has
evaluated within the context of a
particular regulatory proposal whether
all or some affected IBs would be
considered to be small entities and, if
they are considered small entities, the
economic impact on them of the
particular regulation. Accordingly, the
Commission offers, pursuant to 5 U.S.C.
604, the following final regulatory
flexibility analysis.
a. A Statement of the Need for, and
Objectives of, the Rule
The primary objective of final
regulation 1.35(a) is to increase market
integrity by requiring IBs with greater
than $5 million in total aggregate gross
revenues over the preceding three years
to keep records of all oral
communications leading to the
execution of a commodity interest
transaction. This rule is necessary for
several reasons. First, it will protect the
integrity of the market as a whole by
aiding the Commission in detecting and
deterring market abuse, including
manipulation and false reporting.
Additionally, it will make enforcement
investigations more efficient by
preserving critical evidence that
otherwise may be lost to memory lapses
66 See the Proposal, 76 FR at 33079. To the extent
that small IBs were affected by the proposed rules,
the Commission conducted an initial regulatory
flexibility analysis. These final rules exclude Small
IBs, as defined above. The final rules have therefore
significantly reduced the number of IBs affected by
regulation 1.35(a). However, to the extent that
certain small IBs, for purposes of RFA, may be
affected by these rules, the Commission is
conducting a final regulatory flexibility analysis.
67 See the Proposal, 76 FR at 33079–80.
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and inconsistent recollections. This, in
turn, is expected to increase the success
of enforcement actions, which will
benefit customers, regulated entities,
and the markets as a whole.68 Moreover,
it also will protect customers from
abusive sales practices, protect
registrants from the risks associated
with transactional disputes, and allow
registrants to follow-up more effectively
on customer complaints of abuses by
their associated persons. Finally, final
regulation 1.35(a) provides regulatory
parity of futures and swaps markets
because the requirements of final
regulation 1.35(a) are consistent with
recently finalized regulations requiring
SDs and MSPs to keep records of all oral
communications leading to the
execution of a swap transaction or a
related cash or forward transaction.69
b. A Statement of the Significant Issues
Raised by the Public Comments in
Response to the Initial Regulatory
Flexibility Analysis, a Statement of the
Assessment of the Agency of Such
Issues, and a Statement of Any Changes
Made in the Proposed Rule as a Result
of Such Comments
mstockstill on DSK4VPTVN1PROD with
i. Significant Issues Raised by the Public
Comments in Response to the Initial
Regulatory Flexibility Analysis
Comments on the proposed
amendments to regulation 1.35(a)
primarily focused on the implications of
the proposed oral recordkeeping and
tagging requirements and, in particular,
on the portion of the Proposal requiring
all DCM and SEF members, including
commercial end-users and nonintermediaries, to keep records of their
cash commodity transactions. One
theme of the comments was that the
proposed oral communications
recordkeeping and tagging requirements
were overly burdensome.70 Commenters
were also concerned that the proposed
separate electronic file requirement was
open-ended, seemingly impossible to
68 In promulgating its own telephone recording
rule, the Financial Services Authority issued
guidance stating the following benefits: ‘‘(i)
Recorded communication may increase the
probability of successful enforcement; (ii) this
reduces the expected value to be gained from
committing market abuse; and (iii) this, in
principle, leads to increased market confidence and
greater price efficiency.’’ See Financial Services
Authority, ‘‘Policy Statement: Telephone
Recording: Recording of voice conversations and
electronic communications’’ (Mar. 2008).
69 See SD and MSP Recordkeeping Final Rule, 77
FR at 20203–04 (to be codified at 17 CFR
23.202(a)(1) and (b)(1)).
70 See, e.g., comments from Amcot
(overbreadthover breadth would be burdensome for
agricultural DCM members) and NIBA (at the very
least, small IBs should be exempt from the
proposed amendments to 1.35(a) because the
burden on such small entities would be too great).
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achieve,71 and overly burdensome.
Commenters also explained that it could
be difficult to link conversations
occurring over several days,72 and could
require the recording of all
conversations 73 because a call might
begin unrelated to a covered transaction
but eventually lead to a covered
transaction. Commenters sought a
reasonableness standard regarding oral
recordkeeping and a limitation to
exclude oral communications on mobile
telephones and argued that the new oral
communications recordkeeping
requirement would be illegal in certain
jurisdictions. Commenters also
requested that the proposal to record
and store oral communications should
be reviewed in the context of available
technology.
ii. Agency Assessment of Significant
Issues Raised by the Public Comments
in Response to the Initial Regulatory
Flexibility Analysis
The Commission carefully considered
the comments, determined that a
number of concerns and requested
alternatives had merit and, as a result,
made a number of adjustments in
response. In response to commenters’
concerns that the proposed amendments
were overly burdensome to nonintermediaries’ cash agricultural and
energy transactions, the Commission
has limited not only the oral
recordkeeping requirements of
regulation 1.35(a) to commodity interest
transactions, but also the existing
written recordkeeping requirements
therein to commodity interest and
related cash and forward transactions.
Some commenters expressed concerns
that the proposed revisions to regulation
1.35(a) would be unduly burdensome
for small entities and DCM and SEF
members who are commercial end-users
and non-intermediaries. In response, the
Commission has excluded Small IBs
(those IBs with less than $5 million in
total aggregate gross revenues over the
preceding three years) from the
application of the rules and certain
DCM and SEF members from the scope
of the new requirement to record oral
communications, namely FTs, CPOs,
SDs, and MSPs that would have been
obligated to comply by virtue of their
status as a DCM or SEF member.
Commenters also expressed the view
that the requirement to keep transaction
records in separate files identifiable by
transaction and counterparty is
overbroad, overly burdensome, costly,
and/or impossible to achieve. In
71 See
comment from FIA.
comment from CME.
73 See id.
72 See
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75535
response, the Commission has removed
the requirement that each transaction be
maintained as a separate electronic file.
In response to a request that covered
persons be able to rely on another
Commission registrant’s records to
satisfy their recordkeeping obligations,
the Commission provided for such
reliance in the final rules, to be
applicable only when the records being
kept are identical.
The Commission declined to amend
the Proposal in response to certain
comments. Although commenters
sought a reasonableness standard
regarding oral recordkeeping and a
limitation to exclude oral
communications on mobile telephones,
the Commission determined to retain
the provisions of the Proposal that any
covered communication must be
recorded, whether it occurs on a firmprovided or personal device.74
The Commission also has determined
not to amend the Proposal in response
to commenters stating that compliance
with the new oral communications
recordkeeping requirement would be
illegal in certain jurisdictions. It is not
a violation of federal law to record a
telephone call where the person
recording the call is a party to the call
or one of the parties to the call has given
prior consent to being recorded.75 While
state laws differ regarding the ability to
record customer telephone
conversations, the difference is in the
type of consent to recording required.
Therefore, the most a covered
participant will have to do to comply
with the final oral communications
recording rule without violating any
other state or federal laws is to obtain
the prior consent of the other parties to
the call to record the conversation. The
Commission also notes that DCM rules
currently require all floor personnel
who wear headsets to record their
conversations, so there is only an
incremental burden to the entities
already subject to those rules, such as
FBs.
iii. Changes Made in the Proposed Rule
as a Result of Such Comments
• In response to comments, the
Commission incorporated the following
modifications to the Proposal into final
regulation 1.35(a): Reduced the scope of
the obligation to record oral
74 As discussed in more detail above, significant
technological advancements in recent years,
particularly with respect to the cost of capturing
and retaining copies of electronic material,
including telephone communications, have made
the prospect of establishing recordkeeping
requirements for digital and electronic
communications more economically feasible and
systemically prudent.
75 See 18 U.S.C. 2511(2)(d).
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mstockstill on DSK4VPTVN1PROD with
communications as proposed by
limiting it to commodity interest
transactions; reduced the retention
period for records of oral
communications leading to a
commodity interest transaction from
five years to one; reduced the scope of
persons required to record oral
communications from FCMs, RFEDs, IBs
and all members of a DCM or SEF to
FCMs, RFEDs, IBs with total aggregate
gross revenues of at least $5 million
over the preceding three years, and any
member of a DCM or SEF registered or
required to be registered with the
Commission in any capacity, other than
FTs, CPOs, SDs, and MSPs (although
SDs and MSPs are required to comply
with regulations 23.202(a)(1) and (b)(1)
which require recordkeeping of certain
oral communications, among other
requirements); eliminated the tagging
requirement; and allowed for covered
persons to rely on the records of another
Commission registrant, where
appropriate (since reliance will not be
appropriate in all circumstances as
discussed in section III above) in
complying with their recording
obligations, while confirming that the
covered person will be liable for any
violation of the regulation.
iv. Response to ETA Comment Letter
Among other things, the Proposal
stated that, except for the proposed
revision to regulation 1.35(a) requiring
IBs to maintain records of voice
communications, the Proposal would
not have a significant economic effect
on a substantial number of small
entities. The Proposal included a
Regulatory Flexibility Analysis with
respect to the proposed requirement that
IBs maintain such records. That analysis
concluded with the determination to
treat equally all Commission registrants
transacting on behalf of customers with
respect to keeping records of oral
communications.
The ETA commented that the
Proposal failed to reflect that the vast
majority of the ETA’s constituents,
electrical utilities that the ETA believes
would be affected by the Proposal, are
‘‘small entities’’ and, therefore, that an
analysis under the RFA was required.
The ETA’s comment letter did not
specify which proposed provisions in
the instant rulemaking would affect its
members or into which affected entity
category or categories its members could
fall. Notably, the RFA does not obligate
the Commission to analyze the indirect
effects on persons not subject to the rule
itself. As the Commission understands,
those electrical utilities that may be
small entities will not be FCMs, RFEDs,
IBs with annual receipts of over $5
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million, or members of a DCM or SEF
transacting business with customers.
Rather, they most likely will be endusers of the transactions conducted, the
recorded rather than the recorders. As
such, there will be no direct, significant
economic impact on these electric
utilities. Rather, the impact will be
imposed on the entities through which
they may effect transactions.
c. A Description of and an Estimate of
the Number of Small Entities to Which
the Rule Will Apply or an Explanation
of Why No Such Estimate Is Available
An IB generally 76 is defined in CEA
section 1a(31)(A) as follows:
Any person (except an individual who
elects to be and is registered as an associated
person of a futures commission merchant)—
(i) Who—
(I) Is engaged in soliciting or in accepting
orders for—
(aa) The purchase or sale of any
commodity for future delivery, security
futures product, or swap;
(bb) Any agreement, contract, or
transaction described in section 2(c)(2)(C)(i)
or section 2(c)(2)(D)(i);
(cc) Any commodity option authorized
under section 4c; or
(dd) Any leverage transaction authorized
under section 19; and
(II) Does not accept any money, securities,
or property (or extend credit in lieu thereof)
to margin, guarantee, or secure any trades or
contracts that result or may result therefrom;
or
(ii) Who is registered with the Commission
as an introducing broker.77
As the Commission stated in the
initial Regulatory Flexibility Analysis,
there are an estimated 1,500 IBs
registered with the Commission at any
given time. As of June 30, 2012, there
were 1,431 registered IBs.78 The
Commission stated in the Proposal’s
Regulatory Flexibility Analysis that a
large percentage of registered IBs are
‘‘guaranteed’’ IBs,79 many of which may
be small entities.80 However, the
Commission estimates that limiting,
with respect to IBs, the scope of final
76 CEA section 1a(31)(B), 7 U.S.C. 1a(31)(B),
grants the Commission the authority to further
define the term IB.
77 7 U.S.C. 1a(31)(A).
78 Source: NFA.
79 A guaranteed IB (‘‘GIB’’) is an IB that ‘‘does not
have to maintain a partic[ul]ar level of net capital
but, instead, is guaranteed by a particular FCM/
RFED and is generally required to introduce all its
business to that FCM/RFED.’’ Independent IBs
‘‘must maintain adjusted net capital of at least
$45,000 but may introduce business to any
registered FCM/RFED.’’ NFA, What is the difference
between an independent IB and a guaranteed IB?,
available at https://www.nfa.futures.org/nfa-faqs/
registration_faqs/requirements-for-FCM-IBapplicants/what-is-difference-between-IIB-andGIB.html last visited Sept. 28, 2012.
80 According to the NFA, as of June 30, 2012,
there were 832 registered GIBs.
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regulation 1.35(a) to non-Small IBs
excludes more than 95% of registered
IBs from regulation 1.35’s oral
communications recordkeeping
requirement. Thus, the Commission
expects that no more than
approximately 75 registered IBs will be
subject to the final oral recordkeeping
requirements of regulation 1.35(a) at any
one time.
d. A Description of the Projected
Reporting, Recordkeeping, and Other
Compliance Requirements of the Rule,
Including an Estimate of the Classes of
Small Entities Which Will Be Subject to
the Requirement and the Type of
Professional Skills Necessary for
Preparation of the Report or Record
Regulation 1.35(a), as amended, will
require, among others, non-Small IBs to
record all oral communications that lead
to the execution of a commodity interest
transaction.81 The regulation is
primarily a recordkeeping requirement,
which will obligate covered IBs that do
not already do so to record their oral
communications 82 or the oral
communications of their traders and
sales forces. The final rules provide for
a retention period of one year for all
records of oral communications that
lead to the execution of a transaction in
a commodity interest. This modification
responds to comments stating that the
proposed retention period of five years
for records of oral communications was
too long. This also is consistent with the
final provision for SD and MSP oral
communications under new regulation
23.203(b)(2).
81 The Proposal had required recording of oral
communications that lead to the execution of a
commodity interest and cash commodity
transaction. See the Proposal, 77 FR at 33091.
82 Covered market participants will be allowed to
arrange with third parties, including DCMs, SEFs,
and FCMs, to have access to the DCMs’, SEFs’, or
other Commission registrants’ records and, to the
extent the records are duplicative of what would be
required ofby the covered entity under the rule,
may rely on such records to satisfy their own
recordkeeping obligations. The Commission
notesNote, however, that this does not relieve the
covered participant from liability for compliance
failures.
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e. A Description of the Steps the Agency
Has Taken To Minimize the Significant
Economic Impact on Small Entities
Consistent With the Stated Objectives of
Applicable Statutes, Including a
Statement of the Factual, Policy, and
Legal Reasons for Selecting the
Alternative Adopted in the Final Rule
and Why Each One of the Other
Significant Alternatives to the Rule
Considered by the Agency Which Affect
the Impact on Small Entities Was
Rejected
mstockstill on DSK4VPTVN1PROD with
In connection with adopting the final
rules, the Commission considered, as
alternatives, establishing different
compliance or reporting requirements
that take into account the resources
available to smaller entities, exempting
smaller entities from coverage of the
disclosure requirements, and clarifying,
consolidating, or simplifying disclosure
for small entities. In response to
comments that the proposed oral
communications recordkeeping
requirement would be overly
burdensome for small IBs, the
Commission dramatically scaled back
the scope of regulation 1.35(a) as it
applies to oral recordkeeping by IBs,
reducing by well more than half the
number of IBs expected to be subject to
the requirement. The Commission
further reduced the impact on IBs by
limiting the oral communications
recordkeeping requirement to
commodity interest transactions from
the proposed commodity interest and
cash commodity transactions.
Although commenters sought a
reasonableness standard regarding oral
recordkeeping and a limitation to
exclude oral communications on mobile
telephones, the Commission has
retained the provisions of the Proposal
that any covered communication must
be recorded, whether it occurs on a
firm-provided or personal device.83 The
Commission is, however, ameliorating
the impact thereof by stating that it will
consider good faith compliance with
policies and procedures reasonably
designed to comply with the oral
communications recording requirement
as a mitigating factor when exercising
its discretion for violations of the
requirement.
83 As discussed in more detail above, significant
technological advancements in recent years,
particularly with respect to the cost of capturing
and retaining copies of electronic material,
including telephone communications, have made
the prospect of establishing recordkeeping
requirements for digital and electronic
communications more economically feasible and
systemically prudent.
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C. Consideration of Costs and Benefits
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 the
following five broad areas of market and
public concern: (1) Protection of market
participants and the public; (2)
efficiency, competitiveness and
financial integrity of futures markets; (3)
price discovery; (4) sound risk
management practices; and (5) other
public interest considerations. The
Commission considers the costs and
benefits resulting from its discretionary
determinations with respect to the
section 15(a) factors.
1. Background
The markets subject to the jurisdiction
of the Commission have undergone a
significant transformation over the last
few decades, and particularly in the last
few years. Technological advances have
contributed to a tremendous growth in
trading volume in swaps as well as
other derivatives, including futures, as
well as the number and type of market
participants. Among other notable
changes, today’s derivative markets
include significant numbers of retail
customers that invest in the commodity
markets through a variety of means.
Markets are also more interconnected
than ever before, with order flow
distributed across multiple trading
centers. With this interconnectivity
comes not only positive efficiencies, but
also the potential for cross-market
manipulation that can be difficult to
detect and prove without ready access
to information evincing the intent of
those engaged in market activity. In
addition, the Commission notes that
requiring the recording and retention of
oral communications will serve as a
disincentive for covered entities to make
fraudulent or misleading
communications to their customers over
the telephone and could serve as a
meaningful deterrent against violations
such as trading ahead of customer
orders by providing a record of the time
that a customer’s telephone order is
received.
In July 2010, Congress passed the
Dodd-Frank Act which, among other
things, establishes a comprehensive
regime for the regulation of swaps. The
Dodd-Frank Act brings swaps under the
Commission’s jurisdiction and obligates
the Commission to adopt new
regulations related to registration and
regulation of SDs and MSPs, trade
execution and clearing requirements,
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75537
and swap data recordkeeping and real
time reporting. In section 731 of the
Dodd-Frank Act, Congress added CEA
section 4s to require the registration and
regulation of SDs and MSPs by the
Commission, including the
establishment of requirements for SDs
and MSPs to keep records of swap
transactions.84
In response to Congress’ act of
requiring that SDs and MSPs keep daily
trading records of their swaps, including
records of communications made by
telephone,85 and to be consistent with
the oral communications recordkeeping
requirement for SDs and MSPs in
connection with their swap and related
cash and forward transactions,86 the
Commission is exercising its discretion
to amend its regulations to require
FCMs, RFEDs, non-Small IBs (i.e., IBs
that have generated more than $5
million in aggregate gross revenues over
the preceding three years) 87 and
members of a DCM or SEF who are
registered or required to register with
the Commission in any capacity other
than FTs, CPOs, SDs, and MSPs to
record all oral communications that lead
to the execution of a transaction in a
commodity interest. FBs that are
members of a DCM or SEF are required
to record all oral communications that
lead to the purchase or sale for any
person other than the FB of any
commodity for future delivery, security
futures product, swap, or commodity
option authorized under section 4c of
the Act. In this way, the Commission is
affording the other markets subject to its
jurisdiction the same market integrity
and customer protections that Congress
afforded the swaps markets in the DoddFrank Act. The Commission recognizes
that these benefits are not without cost,
and has carefully considered both
benefits and costs in light of the
considerations provided in CEA section
15(a) and, where appropriate, adopted
alternatives to the Proposal that would
achieve similar benefits as proposed,
but at a lower cost.
2. Summary of the Final Rule
Prior to this amendment, regulation
1.35(a) specified which parties are
required to keep written records related
to commodity futures, commodity
options, and cash commodities, and
what information they are required to
record. The requirements of regulation
1.35(a) applied to FCMs, RFEDs, IBs,
and DCM members.
84 76
FR 33066.
7 U.S.C. 6s(g)(1).
86 See SD and MSP Recordkeeping Final Rule, 77
FR at 20203–04 (Regulation 23.202(a)(1) and (b)(1)).
87 See note 2323, supra, for discussion of
definition of Small IB.
85 See
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As discussed above, the Commission
is adopting a provision requiring certain
entities to record all oral
communications leading to the
execution of a transaction in a
commodity interest. Unlike existing
regulation 1.35(a), this new provision
will apply to FCMs, RFEDs, non-Small
IBs, and DCM and SEF members that are
registered or required to be registered
with the Commission in any capacity
other than as an FT, CPO, SD or MSP.
As described above, the Commission
considered adopting an exclusion for
certain FBs similar to the exclusion for
Small IBs, but determined to not adopt
such an exclusion, in part, because FBs
are parties to oral communications
relating to the means or methods by
which a trade will be executed.
However, the Commission did
determine to limit the application of the
rule to FBs so that an FB will only be
required to record their oral
communications that lead to the
purchase or sale for any person other
than the FB of any commodity for future
delivery, security futures product, swap,
or commodity option authorized under
section 4c of the CEA. This provision of
the final rule addressed commenter
concerns that the Proposal
inappropriately captured the oral
communications of certain members of
DCMs who currently are registered as
FBs, but are solely trading for their own
accounts, i.e., acting as FTs. In addition,
in response to comments regarding
implementation challenges associated
with oral recordkeeping requirements
for SDs and MSPs, the Commission is
extending the implementation deadline
to provide these entities with
approximately one year to comply
following the publication of the final
rule.88 This change provides entities
subject to regulation 1.35(a) with the
same amount of implementation time as
was made available to SDs and MSPs.89
The Commission believes that an
extended period for implementation is
warranted in order to ensure that
entities subject to this rule have
adequate time to address the
implementation challenges noted by
SIFMA, as discussed below.
mstockstill on DSK4VPTVN1PROD with
3. Benefits
By this action, the Commission
improves its ability to ensure the
88 See letter from SIFMA dated August 10, 2012,
Re: Request for No-Action Relief: Recordkeeping
Requirements under the Internal Business Conduct
Rules. Available at: [XXXX].
89 See Letter from the Division of Swap Dealer
and Intermediary Oversight of the CFTC to SIFMA,
dated Oct. 29, 2012, CFTC Letter No. 12–29.
Available at: https://www.cftc.gov/ucm/groups/
public/@lrlettergeneral/documents/letter/12–29.pdf.
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integrity of all the markets subject to its
jurisdiction and that customers are
similarly protected, whether they be
engaged in a swap with an SD, or a
futures transaction with an FCM.
As stated above, the markets subject
to the jurisdiction of the Commission
have undergone a significant
transformation over the last few
decades, and particularly in the last few
years. Technological advances have
contributed to a tremendous growth in
trading volume as well as the number
and type of market participants,
including significant numbers of retail
customers that invest in the commodity
markets through a variety of means.
Markets are also more interconnected
than ever before, with order flow
distributed across multiple trading
centers. This interconnectivity yields
important benefits but also presents
increased risk, including the potential
for cross-market manipulation where an
action in one market is purposefully
orchestrated to yield a desired outcome
in another market. Therefore, to ensure
that the integrity of the markets and
customers are similarly protected across
all markets subject to the Commission’s
jurisdiction, the Commission must have
similar access to information regardless
of whether the market participant is
registered, for example, as an SD or an
FCM.
• As the Commission explained when
adopting similar transactional level
recordkeeping requirements for SDs and
MSPs, the Commission believes these
recordkeeping requirements will protect
market participants and promote the
integrity of the markets by ensuring the
existence of an audit trail that includes
relevant oral communications. A strong
audit trail, among other things: Provides
a basis for efficiently resolving
transactional disputes; acts as a
disincentive to engage in unduly risky,
injurious, or illegal conduct in that the
conduct will be traceable; and in the
event such conduct does occur,
provides a mechanism for policing such
conduct, both internally as part of a
firm’s compliance efforts and externally
by regulators enforcing applicable laws
and regulations.
With respect to the latter-noted
benefit—enforcing applicable laws and
regulations—oral records have proven to
be no less, and in some cases perhaps
more, valuable than written records
alone.90
By requiring records of all
communications leading to a transaction
in a commodity interest, the public
benefits and the financial integrity of
the markets is protected because
90 See
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Frm 00030
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Sfmt 4700
additional documentation enhances the
Commission’s ability to detect and
enforce rule violations, including
manipulation and fraud. In particular,
records of oral communications related
to such transactions provide a record of
the facts and circumstances that give
rise to a violation that can be used in
enforcement proceedings to redress the
same. Effective enforcement of the
Commission’s regulations, particularly
those prohibiting fraud and
manipulation, protects market
participants and the public and
promotes the integrity of the markets
subject to the Commission’s
jurisdiction.
Notwithstanding the important,
practical benefits of the final rules, the
Commission has considered
commenters’ concerns regarding costs
and product availability.
4. Costs
The public comments related to
changes to regulation 1.35(a) can be
broken down into roughly four general
categories: Concerns about the costs of
compliance to firms,91 concerns about
the feasibility of complying with the
requirements of the regulation,92
concerns about market participants
choosing to exit the market or of a
market bifurcation,93 and privacy
concerns.94
Commenters cited a broad range of
compliance costs associated with setting
up and maintaining systems to record
and tag oral communications. One
commenter that is a recording
technology provider stated that it would
cost in the range of $50/month to record
a landline phone or $90/month to
record a mobile phone with minimal
91 See, e.g., FIA; NFA; ICE, Inc.; Hunton and
Williams, LLP; National Grain and Feed
Association, Land O’ Lakes; Minneapolis Grain
Exchange, Inc.; CME Group; Commodity Markets
Council; Barclay’s Capital; Amcot; Grain and Feed
Association of Illinois; Agribusiness Council of
Indiana; Minnesota Grain and Feed Association;
Agribusiness Association of Iowa; American
Petroleum Institute; Ohio AgriBusiness Association;
American Feed Industry Association; South Dakota
Grain and Feed Association; Natural Gas Supply
Association; Commodity Markets Council; Natural
Gas Supply Association; the Fertilizer Institute;
Kansas City Board of Trade; Oklahoma Grain and
Feed Association; Electric Power Supply
Association; Henderson & Lyman; Rocky Mountain
Agribusiness Association; American Cotton
Shippers Association.
92 See, e.g., Land O’Lakes; Minneapolis Grain
Exchange, Inc.; CME Group; Commodity Markets
Council.
93 See, e.g., National Grain and Feed Association;
Grain and Feed Association of Illinois; Agribusiness
Council of Indiana; Minnesota Grain and Feed
Association; Agribusiness Association of Iowa;
Ohio AgriBusiness Association; American Feed
Industry Association; Kansas City Board of Trade.
94 See, e.g., Virginia Nobbe; American Feed
Industry Association; Henderson and Lyman.
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mstockstill on DSK4VPTVN1PROD with
fixed setup costs. They also stated that
market participants may be able to
negotiate more favorable rates if they are
able to sign longer contracts, or if they
have a large number of phones and/or
landlines that need to be recorded.
While other commenters did not
provide per line estimates, they did
provide aggregate cost estimates that are
significantly higher than those cited
above.95
The Commission has considered that
the requirement to record and maintain
records of oral communications that
lead to the execution of commodity
interest transactions will create
additional costs for market participants
subject to the requirements. Those costs
include set-up costs to implement voice
recording technology on both landlines
and mobile phones, recurring costs
(such as a monthly fee per user or per
phone line to record), and the costs
incurred by data storage. Commenters
estimate that for participants using a socalled ‘‘cloud-based solution,’’ the
monthly fees would be approximately
$90/month/phone for mobile phones,
and approximately $50/month/line for
landlines. The setup costs, in each case,
are estimated to be roughly one month’s
subscription fees or less.96 Commenters
estimate that data storage costs are
likely to be approximately $13/month/
line.97
According to commenters, internal
recording solutions (i.e., ‘‘non-cloudbased solutions’’) typically entail more
significant implementation costs,
though those costs are likely to vary
widely based on existing technology,
and particularly on any existing
recording capabilities, that an entity
already has. The Commission does not
have adequate data to estimate the
number of entities that already have
recording capabilities, or the extent to
which such capabilities are deployed in
parts of the organization that would be
impacted by the oral recordkeeping
requirements in regulation 1.35.
95 For example, FIA cited expenditures on the
part of several of its members of between $300,000–
$600,000 to upgrade and maintain their landline
phones in order to record conversations and
estimated expenditures of anywhere from $160,000
to $2.5 million to record conversations on mobile
phones depending on firm size. Further, FIA cited
a fee of $500,000 to purchase licenses for ‘‘word
spotting’’ software to search and retrieve these oral
records. The Commercial Energy Working Group
stated that this compliance with the amended
regulation 1.35 could cause costs to firms to
‘‘increase exponentially’’ (they cited an
‘‘unidentified investment bank’’ in the UK that
spent $4.2 million each year to monitor its
Blackberry phones in response to a similar
Financial Services Authority mandate).
96 Compliant Phones.
97 Id.
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SIFMA, in response to the final oral
recordkeeping requirements for SDs and
MSPs, noted implementation challenges
related to recording calls made on both
landlines and cell phones, recording
calls outside the U.S., and the ability to
search and retrieve records of calls, and
requested additional time to address
those challenges.98
The Commission, mindful of the fact
that the entities subject to this rule will
likely face some of the same
implementation challenges, is providing
the same amount of time for entities
subject to regulation 1.35(a) to comply
as was afforded to SDs and MSPs to
comply with regulations 23.202(a)(1)
and (b)(1). In addition, 1.35(a)(4)(i)
permits entities seeking to comply in
good faith with the oral
communications recordkeeping
requirements of regulation 1.35(a)(1) to
submit a request for relief if compliance
is technologically or economically
impracticable for an affected entity prior
to the compliance deadline. The
Commission anticipates that the
additional time for implementation will
benefit entities subject to this rule by
providing more time to address the
challenges noted by SIFMA. Moreover,
it will create opportunities for entities
that are subject to this rule to benefit
from solutions developed by vendors
serving SDs and MSPs.
The Proposal included an additional
requirement that transaction records be
kept in separate electronic files
identifiable by transaction and
counterparty.99 In response to
98 See SD and MSP Recordkeeping Final Rule, 77
FR 20128. Based on SIFMA’s representations, the
Commission determined that relief from certain oral
recordkeeping requirements for SDs and MSPs is
warranted to address the issues presented, and
granted no-action relief to SDs and MSPs until
March 31, 2013.
Among other things, SIFMA stated that
implementing systems to record landline
conversations will require upgrades to data
retention infrastructure, testing that must occur on
nights and weekends, and overcoming difficulties
obtaining products and services. Further, they
stated that mobile phone recording technology has
‘‘not achieved the levels of stability, performance
and scalability that would be considered for
commercial grade products.’’ They stated that
shipping delays, testing and troubleshooting
challenges due to different time zones, legal
requirements, and ‘‘an apparent lack of recording
capabilities’’ in certain countries and uncertainty
about what transactions may be subject to the
requirements would delay efforts to implement
solutions in foreign offices. And last, they asserted
that limitations related to caller identification
technology and associated metadata would prevent
SDs and MSPs from rapidly implementing solutions
that would enable them to search and retrieve calls
related to specific counterparties or transactions.
99 With respect to the proposed requirement that
entities proactively identify which communications
relate to specific traders, trades, and counterparties
and then ‘‘tag’’ them as such, comments expressed
concerns regarding the reliability of technological
PO 00000
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75539
comments, the Commission is not
adopting that requirement, such that
firms are not required to keep records in
separate electronic files. Instead, firms
are only required to identify and
retrieve relevant records upon
Commission request. Therefore, the cost
associated with ‘‘tagging’’ of oral
communication records has been
eliminated. Relevant entities, however,
will need to be able to search and select
records related to a particular
transaction or counterparty when the
Commission requests them. The
Commission expects that this may be
done in one of two ways. Market
participants may use an electronic
means of scanning records by key word
or they may identify key words and
concepts in records manually by
listening to the recordings. In either
case, participants must be able to
identify and retrieve records if they are
required to do so by the Commission.
If, when recordings are requested by
the Commission, an entity chooses to
assign or hire personnel to listen to
recordings and identify those being
requested, the costs will vary
significantly depending on the number
and length of oral communications that
must be reviewed. These variables will,
in turn, be influenced by a host of other
factors, including: the number of
transactions or counterparties for which
relevant recordings must be identified;
the length of time across which
specified traders were active or
specified trades were likely discussed,
or the specified counterparties were in
contact with the entity from whom the
recordings are requested; the number of
oral communications that specified
traders or counterparties made during
the period that may be in question; and
the average length of each call. The
Commission estimates that in such
cases, an entity might dedicate
personnel to spend as little as 50 hours
reviewing recordings, or as much as
5,000 hours reviewing recordings. The
average wage for a compliance specialist
is $155.96 per hour and therefore the
cost for manual review, if an entity
chooses that option when the
solutions. For instance, the FIA writes, ‘‘We
understand that two software providers, NICE
Actimize and Nexidia, offer so-called ‘word
spotting’ programs’’ but that they believe that these
programs ‘‘are not foolproof and may identify less
than 50 percent of potentially relevant
conversations.’’ The Commercial Energy Working
Group stated that in lieu of an accurate software
solution, manual identification and retrieval of oral
records would require ‘‘as many as 3–5 analysts and
1–2 additional technical support personnel to
support transactions’’ for ‘‘a small or modest-sized
end-user commodity business’’ and that ‘‘the total
cost to a commodity business is likely to be in
excess of $1 million annually.’’
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Commission requests records, could
range from $7,800 to $780,000.100
Alternatively, the Commission is
aware that vendors that provide
recording services are also capable of
providing speech analytic search
capabilities for a set fee. For example,
one vendor estimated this cost at $40 to
$80 per user per month.101 According to
commenters, other entities may choose
to acquire speech analytics services that
can be housed internally rather than on
the vendor’s servers. Another vendor
stated that the costs would depend on
the number of hours sent through the
speech analytics device and that initial
deployment costs would likely range
from $160,000 to $1,500,000 for the
largest organizations with ongoing
annual fees that are approximately 18%
of the initial cost ($29,000—$270,000
per year). Alternatively, small entities
can implement a desktop solution with
the same analytics capabilities. The
initial license costs approximately
$25,000 per user and 18% ongoing
maintenance fees ($4,500 per year per
user).102 Another vendor estimated that
setup costs, including relevant licenses,
would range from $450,000 for a small
entity to $4,000,000 for a large entity,
and that annual maintenance costs
would range from $80,000 to
$800,000.103 These numbers assume
that entities do not yet have speech
analytics services being used in other
parts of the company’s operations that
could be expanded to include the oral
records required under this rule.
However, the Commission understands
that some of the largest financial entities
may already be customers of companies
that provide speech analytics services.
As a consequence, the costs for those
entities may be less than if they were
implementing speech analytics services
de novo.
In response to the Proposal, some
commenters expressed concern that the
imposition of more stringent
recordkeeping requirements on DCM
members could prompt a bifurcation in
the markets for certain services because
of the compliance cost advantage that
100 The average wage for a compliance specialist
is $155.96 [($58,303 per year)/(2,000 hours per year)
* 5.35 = $155.96]. For the purposes of the Cost
Benefit Considerations section, the Commission has
used wage estimates that are taken from the SIFMA
‘‘Report on Management and Professional Earnings
in the Securities Industry 2011’’ because industry
participants are likely to be more familiar with
them. Hourly costs are calculated assuming 2,000
hours per year and a multiplier of 5.35 to account
for overhead and bonuses. All totals calculated on
the basis of cost estimates are rounded to two
significant digits.
101 See Compliant Phones communication.
102 See Nexidia communication.
103 See NICE communication.
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market participants who are not DCM
members enjoy.104 They suggested that
entities that are DCM members might
stop offering services that make them
subject to the regulation 1.35
requirements.105
In the Proposal, the Commission
proposed to include FCMs, RFEDs, IBs,
and all DCM and SEF members under
the oral recordkeeping requirement and
also proposed that such recordkeeping
requirements would apply to all
transactions in commodity interests and
cash commodities. However, in the final
rule, the Commission amended
regulation 1.35(a) such that Small IBs
and members of DCMs and SEFs who
are not otherwise registered or required
to be registered with the Commission in
any capacity, as well as those members
registered as FTs, CPOs, SDs, and MSPs,
are not subject to the oral
communication recordkeeping
requirements under regulation 1.35(a).
The limiting principle for the
determination of which classes of
registrants must comply with the final
rule are, as discussed further above,
transactions by entities that could affect
both market integrity and customer
protection.
Finally, some commenters expressed
concern that if employees of a regulated
entity use personal phones (either
landline or mobile) for business
purposes, calls on those lines must be
recorded. Commenters stated privacy
concerns with the same. However,
simple solutions to protect employee
privacy do exist. For example,
depending on the policies of the firm, it
is possible for certain phone numbers to
be excluded from recording.106
Alternatively, the company could
institute a policy that employees are not
to conduct personal business on
recorded lines.
In addition, amendments in this final
rule will require SEF members to
comply with regulation 1.35, and it is
likely that some of those members will
not have been subject to regulation
1.35(a) previously. In addition to the
104 Several commenters submitted a form letter
addressing this point. Entities submitting this letter,
with minor modifications in some cases, include:
National Grain and Feed Association, Grain and
Feed Association of Illinois, Agribusiness Council
of Indiana, Minnesota Grain and Feed Association,
Agribusiness Association of Iowa, Ohio
AgriBusiness Association, South Dakota Grain and
Feed Association, Kansas City Board of Trade, and
Oklahoma Grain and Feed Association.
105 For instance, the Kansas City Board of Trade
writes that the operators of delivery warehouses are
often required to be DCM members and that the
added expense of compliance with regulation 1.35
could cause firms to withdraw from the business of
providing warehousing services, thereby decreasing
market competitiveness.
106 See Compliant Phones communication.
PO 00000
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Sfmt 4700
costs related to oral communications
recordkeeping, mentioned above, the
Commission estimates that SEF
members that are newly subject to
regulation 1.35(a) will spend additional
time each day compiling and
maintaining transaction records. The
Commission estimates that the cost of
that additional time is $236,000 to
$393,000 per entity per year.107
Also, the amendments in this final
rule will require FCMs, RFEDs, IBs, and
members of DCMs to comply with the
regulation 1.35(a) recordkeeping
requirements for any swap transactions
into which they enter. The Commission
estimates that such entities will spend
an additional 0.5 hours per swap
capturing and maintaining the records
required under regulation 1.35(a), and
therefore estimates that the per-swap
cost will be $83.00.108
4. Consideration of Alternatives
As compared to the Proposal, the
Commission has limited the range of
entities that are subject to the oral
recordkeeping requirement, narrowing it
to entities that could affect market
integrity and customer protection by
way of their function as intermediaries
for other parties. The Commission also
has limited the range of transactions
that are subject to the requirement from
commodity interest and cash
commodity transactions to commodity
interest transactions. Limiting the range
of entities that must record and keep
oral communications reduces the
number of entities that must bear the
costs of creating and maintaining
records required by regulation 1.35(a).
In particular, by excluding from the new
regulation 1.35(a) oral communications
recordkeeping provisions Small IBs and
DCM or SEF members that are registered
as FTs or CPOs, or SDs or MSPs (as SDs
and MSPs are covered by regulations
23.202(a)(1) and (b)(1)), or neither
registered nor required to be registered
with the Commission in any capacity,
certain entities such as agricultural
cooperatives, energy end-users and
other smaller entities that may transact
on DCMs and SEFs on their own behalf,
but not on behalf of customers, avoid
mandatory recordkeeping costs.
107 This is estimated to take 6–10 hours per day
(assuming 252 days per year) of the time of an office
services supervisor. The average wage for an office
services supervisor is $155.96 [($58,303 per year)/
(2,000 hours per year) * 5.35 = $155.96].
$155.95*6*252 = 235,812.31. $155.95*10*252 =
393,020.52.
108 This estimates 0.5 hours of time from an office
services supervisor. The average salary for an office
services supervisor is $165.25/hour [($61,776 per
year)/(2,000 hours per year) * 5.35 = $165.25 per
hour]. $165.25*0.5 = $82.63.
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As noted above, new regulation 1.35
will not require entities to keep records
in separate electronic files. Instead, the
amendments as adopted require only
that subject entities be able to identify
which records relate to specific parties
or transactions when requested to do so
by the Commission. Such requests are
infrequent for any one market
participant, and therefore the costs of
complying with them will be far less
than what would have been the case
under the proposed rule.
As described above, the Commission
considered alternatives to compliance,
including various safe harbors, but
determined not to adopt them. For
example, the Commission has
considered, but declines to adopt,
recommendations that it include a
‘‘reasonableness’’ standard because such
a standard could result in market
participants documenting policies and
procedures but failing to vigorously
monitor for compliance with the same.
The Commission also declines to adopt
this recommendation as inconsistent
with the requirements applicable to SDs
and MSPs under Part 23 of the
Commission’s regulations. Rather, the
Commission determines that it would be
more appropriate to consider good faith
compliance with policies and
procedures reasonably designed to
comply with the oral communications
recording rule as a mitigating factor
when exercising its enforcement
discretion with respect to violations of
the rule.
increasing the Commission’s ability to
detect and prosecute violations of the
Act and the Commission’s rules related
to fraud, manipulation and other
disruptive trade practices.
5. Consideration of Section 15(a) Factors
The Commission has not identified
any other public interest considerations
that could be impacted by the oral
communications recordkeeping rule
under regulation 1.35(a).
(1) a. Protection of Market Participants
and the Public
mstockstill on DSK4VPTVN1PROD with
The oral recordkeeping requirement
in regulation 1.35(a) will protect market
participants and the public by ensuring
the existence of an audit trail that
includes relevant oral communications.
A strong audit trail, among other things,
provides a basis for resolving
transactional disputes; acts as a
disincentive to engage in unduly risky,
injurious or illegal conduct in that the
conduct will be traceable; and in the
event such conduct does occur,
provides a mechanism for policing such
conduct, both internally as part of a
firm’s compliance efforts and externally
by regulators enforcing applicable laws
and regulations.
(2) b. Efficiency, Competitiveness, and
Financial Integrity of Futures Markets
Requiring records of all oral
communications leading to a transaction
in a commodity interest promotes the
efficiency, competitiveness and
financial integrity of the markets by
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16:08 Dec 20, 2012
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(3) c. Price Discovery
Neither the Commission nor
commenters have identified
consequences for price discovery that
are expected to result from this rule.
(4) d. Sound Risk Management Practices
The Commission believes that proper
recordkeeping—though likely to require
initial investment in recordkeeping and
other back office systems—is essential
to risk management because it facilitates
an entity’s awareness of its transactions,
positions, trading activity, internal
operations, and any complaints made
against it, among other things. Such
awareness supports sound internal risk
management policies and procedures
ensuring that decision-makers within
affected entities are fully informed
about the entity’s activities and can take
steps to mitigate and address significant
risks faced by the firm. When individual
market participants engage in sound risk
management practices the entire market
benefits. Accordingly, the Commission
believes that this final rule,
notwithstanding the potential costs
identified above, will promote the
public interest in sound risk
management.
(5) e. Other Public Interest
Considerations
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, under the authority of 7
U.S.C. 1 et seq., the Commodity Futures
Trading Commission hereby amends
Chapter I of Title 17 of the Code of
Federal Regulations as set forth below:
PART 1—GENERAL REGULATIONS
UNDER THE COMMODITY EXCHANGE
ACT
1. The authority citation for part 1
continues to read as follows:
■
PO 00000
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Fmt 4700
Sfmt 4700
75541
Authority: 7 U.S.C. 1a, 2, 2a, 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, as amended by Title VII of the DoddFrank Wall Street Reform and Consumer
Protection Act, Pub. L. 111–203, 124 Stat.
1376 (2010).
2. Amend § 1.31 by revising paragraph
(a)(1) to read as follows:
■
§ 1.31 Books and records; keeping and
inspection.
(a)(1) All books and records required
to be kept by the Act or by these
regulations 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; Provided, however, That records
of any swap or related cash or forward
transaction shall be kept until the
termination, maturity, expiration,
transfer, assignment, or novation date of
the transaction and for a period of five
years after such date. Records of oral
communications kept pursuant to
§§ 1.35(a) and 23.202(a)(1) and (b)(1) of
this chapter shall be kept for a period
of one year. All such books and records
shall be open to inspection by any
representative of the Commission, or the
United States Department of Justice. For
purposes of this section, native file
format means an electronic file that
exists in the format in which it was
originally created.
*
*
*
*
*
■ 3. Amend § 1.35 by revising the
section heading and paragraph (a) to
read as follows:
§ 1.35 Records of commodity interest and
related cash or forward transactions.
(a) Futures commission merchants,
retail foreign exchange dealers,
introducing brokers, and members of
designated contract markets or swap
execution facilities. (1) Each futures
commission merchant, retail foreign
exchange dealer, introducing broker,
and member of a designated contract
market or swap execution facility shall
keep full, complete, and systematic
records, which include all pertinent
data and memoranda, of all transactions
relating to its business of dealing in
commodity interests and related cash or
forward transactions. Included among
such records shall be all orders (filled,
unfilled, or canceled), trading cards,
signature cards, street books, journals,
ledgers, canceled checks, copies of
confirmations, copies of statements of
purchase and sale, and all other records,
which have been prepared in the course
of its business of dealing in commodity
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Federal Register / Vol. 77, No. 246 / Friday, December 21, 2012 / Rules and Regulations
interests and related cash or forward
transactions. Among such records each
member of a designated contract market
or swap execution facility must retain
and produce for inspection are all
documents on which trade information
is originally recorded, whether or not
such documents must be prepared
pursuant to the rules or regulations of
either the Commission, the designated
contract market or the swap execution
facility. For purposes of this section,
such documents are referred to as
‘‘original source documents.’’ Such
records shall be kept in a form and
manner identifiable and searchable by
transaction. Also included among the
records required to be kept by this
paragraph are all oral and written
communications provided or received
concerning quotes, solicitations, bids,
offers, instructions, trading, and prices
that lead to the execution of a
transaction in a commodity interest and
related cash or forward transactions,
whether communicated by telephone,
voicemail, facsimile, instant messaging,
chat rooms, electronic mail, mobile
device, or other digital or electronic
media; provided, however, the
requirement in this paragraph (a)(1) to
record oral communications shall not
apply to:
(i) Oral communications that lead
solely to the execution of a related cash
or forward transaction;
(ii) Oral communications provided or
received by a floor broker that do not
lead to the purchase or sale for any
person other than the floor broker of any
commodity for future delivery, security
futures product, swap, or commodity
option authorized under section 4c of
the Commodity Exchange Act;
(iii) An introducing broker that has
generated over the preceding three years
$5 million or less in aggregate gross
revenues from its activities as an
introducing broker;
(iv) A floor trader;
(v) A commodity pool operator;
(vi) A swap dealer;
(vii) A major swap participant; or
(viii) A member of a designated
contract market or swap execution
facility that is not registered or required
to be registered with the Commission in
any capacity.
(2) For purposes of paragraph (a)(1) of
this section, ‘‘related cash or forward
transaction’’ means a purchase or sale
for immediate or deferred physical
shipment or delivery of an asset related
to a commodity interest transaction
where the commodity interest
transaction and the related cash or
forward transaction are used to hedge,
mitigate the risk of, or offset one
another.
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16:08 Dec 20, 2012
Jkt 229001
(3) 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 § 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.
(4)(i) The Commission may in its
discretion establish an alternative
compliance schedule for the
requirement to record oral
communications under paragraph (a)(1)
of this section that is found to be
technologically or economically
impracticable for an affected entity that
seeks, in good faith, to comply with the
requirement to record oral
communications under paragraph (a)(1)
of this section within a reasonable time
period beyond the date on which
compliance by such affected entity is
otherwise required.
(ii) A request for an alternative
compliance schedule under paragraph
(a)(4)(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)(4)(i) of this section.
(iv) Relief granted under paragraph
(a)(4)(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
17, 2012, by the Commission.
Sauntia S. Warfield,
Assistant Secretary of the Commission.
Note: The following appendices will not
appear in the Code of Federal Regulations.
PO 00000
Frm 00034
Fmt 4700
Sfmt 4700
Appendices to Adaptation of
Regulations To Incorporate Swaps—
Commission Voting Summary and
Statements of Commissioners
Appendix 1—Commission Voting
Summary
On this matter, Chairman Gensler and
Commissioners Sommers, Chilton, O’Malia
and Wetjen voted in the affirmative; no
Commissioner voted in the negative.
Appendix 2—Statement of Chairman
Gary Gensler
I support the final rule to amend 1.31 and
1.35(a) of the Commodity Futures Trading
Commission’s (CFTC) regulations to conform
them to recordkeeping requirements for swap
dealers and major swap participants. The
rule enhances the Commission’s enforcement
program for the futures market to promote
market integrity and protect customers.
These conforming amendments integrate
the CFTC’s regulations with the Dodd-Frank
Wall Street Reform and Consumer Protection
Act (Dodd-Frank Act), which expanded the
scope of the Commodity Exchange Act to
include swaps.
As proposed, the rule would have required
members of a designated contract market
(DCM) or swap execution facility (SEF) to
record all oral communications that lead to
the execution of a transaction in a cash
commodity. The Commission received
numerous comments about the effect of such
a requirement on members of the agricultural
community that trade in cash commodities
and are not required to be registered with the
Commission other than, in some cases, as
floor traders.
In consideration of comments, the
Commission adopted modifications that
preserve the rule’s purpose without adversely
affecting the agricultural community. Only
those oral communications that lead to a
transaction in a commodity interest (i.e. a
commodity futures contract, commodity
option contract, foreign exchange contract, or
swap) will have to be recorded. Furthermore,
only FCMs, certain introducing brokers (IBs),
retail foreign exchange dealers (RFEDs), and
those members of a DCM or SEF who are
registered or required to be registered with
the Commission (except for floor traders,
commodity pool operators, swap dealers,
major swap participants, and floor brokers
who trade for themselves) will have to record
oral communications.
Market participants that must comply will
be required to record communications
relating to: Quotes, solicitations, bids, offers,
instructions, trading, and prices that lead to
the execution of a transaction in a
commodity interest. Methods of
communication that fall under the rule
include telephone, voicemail, facsimile,
instant messaging, electronic mail, mobile
device, or other digital or electronic media.
Thus, the rulemaking also clarifies that the
existing requirement under regulation 1.35(a)
to keep written records applies to electronic
written communications, such as emails and
instant messages. Records of oral
communications must be kept for one year.
The rule will make enforcement
investigations more efficient by preserving
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Federal Register / Vol. 77, No. 246 / Friday, December 21, 2012 / Rules and Regulations
critical evidence that otherwise may be lost
to memory lapses and inconsistent
recollections. The Commission will have
access to evidence of fraud and market
manipulation, which is expected to increase
the success of enforcement actions for the
benefit customers, market participants and
the markets. Moreover, it also will protect
customers from abusive sales practices, lower
the risk of transactional disputes and allow
registrants to follow-up more effectively on
customer complaints.
NATIONAL MEDIATION BOARD
changes wrought by the amended
statutory language. In the NPRM, the
Board also indicated its particular
interest in receiving comments
regarding the effect of the amendments
on the Board’s policies and practices
with respect to representation disputes
in mergers. The NPRM also stated that
the NMB may incorporate any
comments in a Final Rule in this
proceeding. On June 7, 2012, the Board
issued a correction to the text of the
proposed rules. On June 19, 2012, the
Board held an open public hearing to
solicit the views of interested parties on
the NPRM.
29 CFR Part 1206
II. Notice and Comment Period
[FR Doc. 2012–30691 Filed 12–20–12; 8:45 am]
BILLING CODE 6351–01–P
[Docket No. C–7034]
RIN 3140–ZA01
Representation Procedures and
Rulemaking Authority
National Mediation Board.
Final rule.
AGENCY:
ACTION:
In response to amendments to
the Railway Labor Act in the Federal
Aviation Administration Modernization
Reform Act of 2012, the National
Mediation Board amends its existing
regulations pertaining to representation
elections, run-off elections, and
rulemaking to reflect changes in
statutory language.
DATES: The final rule is effective
December 21, 2012.
FOR FURTHER INFORMATION CONTACT:
Mary Johnson, General Counsel,
National Mediation Board, 202–692–
5050, infoline@nmb.gov.
SUPPLEMENTARY INFORMATION:
mstockstill on DSK4VPTVN1PROD with
SUMMARY:
I. Background
On February 14, 2012, the Federal
Aviation Administration and
Modernization and Reform Act of 2012,
Public Law 112–0095 (FAA
Reauthorization) was signed into law.
The FAA Reauthorization contained,
inter alia, several amendments to the
Railway Labor Act (RLA or Act). The
changes contained in these amendments
require changes to the National
Mediation Board’s (NMB or Board)
existing Rules relating to run-off
elections, showing of interest
requirements, and rulemaking. On May
15, 2012, the NMB published a Notice
of Proposed Rulemaking (NPRM) in the
Federal Register inviting public
comments for 60 days on a proposal to
revise those rules to comply with the
statutory language. The Board invited
commenters to address the specific
amendments along with any other
matters they consider relevant to the
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16:08 Dec 20, 2012
Jkt 229001
In response to the NPRM, the NMB
received ten submissions during the
official comment period from trade and
professional associations, labor unions,
and members of Congress. Additionally,
the NMB received written and oral
comments from seven labor
organizations that participated in the
June 19, 2012 open public hearing. The
NMB has carefully considered all of the
comments and analyses of the proposed
changes and the impact of the amended
statutory language on its merger
procedures set forth in the Board’s
Representation Manual (Manual).
The overwhelming majority of the
substantive comments addressed the
applicability of the amended statutory
language providing that a showing of
interest of not less than 50 percent is
required to support an ‘‘application
requesting that an organization or
individual be certified as the
representative of any craft or class of
employees,’’ to representation disputes
in mergers. The preamble will focus on
the Board’s response to the arguments
raised in these comments.
III. Summary of Comments
The major comments received and the
Board’s responses to those comments
are as follows. The Board notes that it
is required to respond to significant
comments and, therefore, has not
addressed every issue raised in the
comments. See, e.g., Portland Cement
Ass’n v. Ruckelshaus, 486 F.2d 375, 394
(D.C. Cir. 1973) (‘‘[C]omments must be
significant enough to step over a
threshold requirement of materiality
before any lack of agency response or
consideration becomes of concern.’’).1
1 There were no comments related to the
proposed rules amending the Board’s rulemaking
procedures. In addition, there was only one
comment related to the run-off election procedures
under Proposed Rule 1206.1. Right to Work objects
to Rule 1206.1(c), arguing that new hires should be
permitted to vote in run-off elections. The language
of 1206.1(c) remains unchanged from the current
PO 00000
Frm 00035
Fmt 4700
Sfmt 4700
75543
A. Showing of Interest
The showing of interest requirements
applicable in mergers are set forth in the
Board’s Manual.2 Manual Section 19.1
defines a merger as ‘‘a consolidation,
merger, purchase, lease, operating
contract, acquisition of control, or
similar transaction of two or more
business entity.’’ The courts have long
recognized that the NMB, under Section
2, Ninth, has the authority to resolve
representation disputes arising from a
merger involving a carrier or carriers
covered by the RLA. Air Line Employees
Ass’n, Int’l v. Republic Airlines, Inc.,
798 F.2d 967 (7th Cir. 1986). An
organization or individual initiates this
process by filing an application
supported by evidence of representation
or a showing of interest. If, after an
investigation, the NMB determines that
a single transportation system exists, the
Board will proceed to resolve the
representation of the craft or class on
the merged carrier. The Board’s current
policy in mergers requires that
‘‘[i]ncumbent organizations or
individuals on the affected carrier(s)
must submit evidence of representation
or a showing of interest from at least
thirty-five (35) percent of the employees
in the craft or class.’’ Manual Section
19.601. The Manual further states that
the ‘‘rules regarding percentage of valid
authorizations in NMB Rule 1206.2 (29
CFR 1206.2) and bar rules in NMB Rule
1206.4 (29 CFR 1206.4) do not apply to
applications’’ in merger situations.
Manual Section 19.6.
In the oral and written statements
received at the June 19, 2012 public
meeting and in written comments
submitted pursuant to the NPRM,
commenters including the
Transportation Trades Department,
AFL–CIO (TTD), Brotherhood of
Locomotive Engineers and Trainmen
(BLET), International Association of
Machinists and Aerospace Workers
(IAM), Association of Flight
Attendants—CWA (AFA),
Transportation Workers Union of
America (TWU), and the International
Brotherhood of Teamsters (IBT) state
that neither the plain language of
Section 2, Twelfth nor the legislative
history indicate that Congress intended
the 50 percent showing of interest
requirement should apply to mergers.
rule. The Board has a long-standing policy of only
including employees who were eligible in the
initial election in the run-off election and will not
change that in this Final Rule.
2 The Manual is an internal statement of agency
policy and not a compilation of regularly
promulgated regulations having the force and effect
of law. Hawaiian Airlines v. NMB, 107 L.R.R.M.
3322 (D. Haw. 1979), aff’d without op. 659 F.2d
1088 (9th Cir. 1981).
E:\FR\FM\21DER1.SGM
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]]>Agencies
[Federal Register Volume 77, Number 246 (Friday, December 21, 2012)]
[Rules and Regulations]
[Pages 75523-75543]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-30691]
=======================================================================
-----------------------------------------------------------------------
COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 1
RIN 3038-AD53
Adaptation of Regulations To Incorporate Swaps--Records of
Transactions
AGENCY: Commodity Futures Trading Commission.
ACTION: Final rules.
-----------------------------------------------------------------------
SUMMARY: The Dodd-Frank Wall Street Reform and Consumer Protection Act
(``Dodd-Frank Act'' or ``DFA'') established a comprehensive new
statutory framework for swaps and security-based swaps. The Dodd-Frank
Act repeals some sections of the Commodity Exchange Act (``CEA'' or
``Act''), amends others, and adds a number of new provisions. The DFA
also requires the Commodity Futures Trading Commission (``CFTC'' or
``Commission'') to promulgate a number of rules to implement the new
framework. The Commission has proposed and finalized numerous rules to
satisfy its obligations under the DFA. This final rulemaking makes
certain conforming amendments to recordkeeping provisions of
regulations 1.31 and 1.35(a) to integrate these regulations more fully
with the new framework created by the Dodd-Frank Act.\1\ This final
rulemaking requires futures commission merchants (``FCMs''), certain
introducing brokers (``IBs''), retail foreign exchange dealers
(``RFEDs'') and certain other registrants
[[Page 75524]]
that are members of designated contract markets (``DCMs'') or swap
execution facilities (``SEFs'') to record all oral 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, whether communicated by telephone,
voicemail, mobile device, or other digital or electronic media, and to
keep those records for one year. This final rule also requires FCMs,
IBs, RFEDs, and all members of a DCM or SEF to record and keep all
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 or
related cash or forward transactions, whether communicated by
telephone, voicemail, facsimile, instant messaging, chat rooms,
electronic mail, mobile device, or other digital or electronic media,
and to keep those written records for five years.
---------------------------------------------------------------------------
\1\ All Commission regulations are in Chapter I of Title 17 of
the CFR.
DATES: Effective date: This final rule will become effective on
February 19, 2013. Compliance date: Each affected entity must comply
with the oral communications recordkeeping requirement in regulation
---------------------------------------------------------------------------
1.35(a)(1) (17 CFR 1.35(a)(1)) no later than December 21, 2013.
FOR FURTHER INFORMATION CONTACT: Katherine Driscoll, Associate
Director, 202-418-5544, kdriscoll@cftc.gov, Elizabeth Miller, Attorney-
Advisor, 202-418-5450, emiller@cftc.gov, Division of Swap Dealer and
Intermediary Oversight; Peter A. Kals, Special Counsel, 202-418-5466,
pkals@cftc.gov, Division of Clearing and Risk; David E. Aron, Counsel,
202-418-6621, daron@cftc.gov, Office of General Counsel; Alexis Hall-
Bugg, Attorney-Advisor, 202-418-6711, ahallbugg@cftc.gov, Division of
Market Oversight, Commodity Futures Trading Commission, Three Lafayette
Centre, 1151 21st Street NW., Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
I. Introduction
A. The Dodd-Frank Act
On July 21, 2010, President Obama signed the Dodd-Frank Act into
law.\2\ Title VII of the Dodd-Frank Act \3\ (``Title VII'') amended the
CEA \4\ to establish a comprehensive new regulatory framework for swaps
and security-based swaps. The legislation was enacted, among other
reasons, to reduce risk, increase transparency, and promote market
integrity within the financial system by, among other things: (1)
Providing for the registration and comprehensive regulation of swap
dealers (``SDs''), security-based swap dealers, major swap participants
(``MSPs''), and major security-based swap participants; (2) imposing
clearing and trade execution requirements on swaps and security-based
swaps, subject to certain exceptions; (3) creating rigorous
recordkeeping and real-time reporting regimes; and (4) enhancing the
rulemaking and enforcement authorities of the Commission with respect
to, among others, all registered entities and intermediaries subject to
the Commission's oversight.
---------------------------------------------------------------------------
\2\ See Dodd-Frank Wall Street Reform and Consumer Protection
Act, Public Law 111-203, 124 Stat. 1376 (2010). The text of the
Dodd-Frank Act is available at https://www.cftc.gov/LawRegulation/OTCDERIVATIVES/index.htm.
\3\ Pursuant to section 701 of the Dodd-Frank Act, Title VII may
be cited as the ``Wall Street Transparency and Accountability Act of
2010.''
\4\ 7 U.S.C. 1 et seq. (2006).
---------------------------------------------------------------------------
B. Proposed Changes to Regulation 1.35(a)--Records of Transactions
On June 7, 2011, the Commission published in the Federal Register a
notice of proposed rulemaking (the ``Proposal'') to apply its
regulations, regarding the activities of intermediaries and other DCM
members to the swaps activities of those persons, in conformance with
the Dodd-Frank Act.\5\ The Proposal provided for a 60-day public
comment period, which ended on August 8, 2011. The Proposal proposed to
conform the existing recordkeeping requirements of regulation 1.35(a)
to the recordkeeping requirements for SDs and MSPs, under what was then
proposed regulation 23.202(a)(1) and (b)(1),\6\ so that FCMs, IBs,
RFEDs, and DCM and SEF members would be required to record all oral and
written communications provided or received concerning quotes,
solicitations, bids, offers, instructions, trading, and prices, that
lead to the execution of transactions in a commodity interest \7\ or
cash commodity, whether communicated by telephone, voicemail,
facsimile, instant messaging, chat rooms, electronic mail, mobile
device, or other digital or electronic media. To be consistent with
what was then proposed regulation 23.202(a) and (b), the Proposal would
have amended regulation 1.35(a) by requiring that each record be
maintained in a separate electronic file identifiable by transaction
and counterparty. On November 2, 2012, the Commission published in the
Federal Register the Final Adaptation Rule.\8\ The Final Adaptation
Rule promulgated the vast majority of the amendments that the Proposal
had introduced. In the Final Adaptation Rule, the Commission stated
that it would address in a separate release certain of the proposed
changes to regulation 1.35 (i.e., those enumerated above) and related
amendments to regulation 1.31.\9\
---------------------------------------------------------------------------
\5\ Adaptation of Regulations to Incorporate Swaps, 76 FR 33066
(June 7, 2011) (``the Proposal'').
\6\ See the Proposal, 76 FR at 33067; Reporting, Recordkeeping,
and Daily Trading Records Requirements for Swap Dealers and Major
Swap Participants, 76 FR 76666, 76675 (Dec. 9, 2010) (Proposed
regulation 23.202(a)(1) would have required ``[e]ach swap dealer and
major swap participant [to] make and keep pre-execution trade
information, including, at a minimum, records of all oral and
written communications provided or received concerning quotes,
solicitations, bids, offers, instructions, trading, and prices, that
lead to the execution of a swap, whether communicated by telephone,
voicemail, facsimile, instant messaging, chat rooms, electronic
mail, mobile device or other digital or electronic media'').
\7\ The term ``commodity interest'' means: (1) any contract for
the purchase or sale of a commodity for future delivery; (2) any
contract, agreement or transaction subject to Commission regulation
under section 4c or 19 of the Act; (3) any contract, agreement or
transaction subject to Commission jurisdiction under section 2(c)(2)
of the Act; and (4) any swap as defined in the Act, by the
Commission, or jointly by the Commission and the Securities and
Exchange Commission. See Adaptation of Regulations to Incorporate
Swaps, 77 FR 66288, 66319 (Nov. 2, 2012) (``Final Adaptation Rule'')
(to be codified at 17 CFR 1.3(yy)).
\8\ Final Adaptation Rule, 77 FR 66288.
\9\ See id., 77 FR at 66288, 66296 n. 59, 66297 n. 63, and 66299
n. 72.
---------------------------------------------------------------------------
In response to the amendments to regulation 1.35(a) in the
Proposal, the Commission received 35 comment letters from a variety of
institutions, including DCMs, agricultural trade associations, and
agricultural cooperatives.\10\ The Commission has
[[Page 75525]]
determined to adopt the Proposal's amendments to regulation 1.35(a),
with certain modifications, discussed below, which address the comments
the Commission received. In addition, as part of this final rulemaking,
the Commission is making certain related modifications to the record
retention periods set forth in regulation 1.31. Finally, the final
amendments to regulations 1.31 and 1.35(a) are consistent with the
Commission's final rules concerning recordkeeping requirements for SDs
and MSPs (regulations 23.202(a) and (b) and 23.203(b)(2)).\11\
---------------------------------------------------------------------------
\10\ Commenters included: Agribusiness Council of Indiana;
American Cotton Shippers Association (``ACSA''); Amcot; American
Feed Industry Association (``AFIA''); American Gas Association;
American Petroleum Institute; Barclays Capital (``Barclays''); Mr.
Chris Barnard; Commodity Markets Council (``CMC''); Compliant Phones
(``Compliant''); Electric Power Supply Association (``EPSA'');
Electric Utility Trade Associations (National Rural Electric
Cooperative Association, American Public Power Association, Large
Public Power Council, and Edison Electric Institute) (``ETA'');
Encana; Falmouth Farm Supply; The Fertilizer Institute; Futures
Industry Association(``FIA''); Grain and Feed Association of
Illinois; Kansas City Board of Trade (``KCBT''); CME Group
(``CME''); Henderson & Lyman; IntercontinentalExchange, Inc.
(``ICE''); Land O'Lakes, Inc.; Minneapolis Grain Exchange
(``MGEX''); Minnesota Grain and Feed Association; National Grain and
Feed Association (``NGFA''); National Introducing Brokers
Association (``NIBA''); National Council of Farmer Cooperatives
(``NCFC''); National Futures Association (``NFA''); Natural Gas
Supply Association; Ohio Agribusiness Association; Oklahoma Grain
and Feed Association; Rocky Mountain Agribusiness Association
(``RMAA''); South Dakota Grain & Feed Association; and Working Group
of Commercial Energy Firms (``Commercial Energy Working Group'').
Comments are available in the comment file on www.cftc.gov. In the
Final Adaptation Rule, the Commission addressed those comments
unrelated to the proposed changes to regulation 1.35(a) concerning
records of oral and written communications. See Final Adaptation
Rule, 77 FR 66288.
\11\ See Swap Dealer and Major Swap Participant Recordkeeping,
Reporting, and Duties Rules; Futures Commission Merchant and
Introducing Broker Conflicts of Interest Rules; and Chief Compliance
Officer Rules for Swap Dealers, Major Swap Participants, and Futures
Commission Merchants, 77 FR 20128 (Apr. 3, 2012) (``SD and MSP
Recordkeeping Final Rule'') (adopting for SDs and MSPs reporting and
recordkeeping standards now found in 17 CFR 23.201-23.203).
---------------------------------------------------------------------------
II. Oral Communications and Other Recordkeeping Changes in the
Proposal; Comments Received
Under the Proposal, FCMs, IBs, RFEDs, and DCM and SEF members \12\
would be required to record 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 or cash commodity, whether
communicated by telephone, voicemail, facsimile, instant messaging,
chat rooms, electronic mail, mobile device, or other digital or
electronic media. Comments to these proposed amendments to regulation
1.35(a) primarily focused on: oral recordkeeping generally; the portion
of the proposed provisions that would have required all DCM and SEF
members, including commercial end-users and non-intermediaries, to keep
records of their cash commodity transactions; and the proposed
requirement that each record be maintained in a separately identifiable
electronic file identifiable by transaction and counterparty
(``tagging'').
---------------------------------------------------------------------------
\12\ A ``member'' is an individual, association, partnership,
corporation, or trust--(i) owning or holding membership in, or
admitted to membership representation on, a registered entity; or
(ii) having trading privileges on a registered entity. See Final
Adaptation Rule, 77 FR at 66316 (to be codified at 17 CFR 1.3(q)).
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A. Proposed Requirements To Record Oral Communications and Keep Them in
Separate Electronic Files Identifiable by Transaction and Counterparty
1. Comments on Oral Recordkeeping Generally
Commenters asserted that the proposed requirement for FCMs, IBs,
RFEDs, and DCM and SEF members to record oral communications that lead
to the execution of a commodity interest or cash commodity transaction
was too costly, impossible to satisfy, overly broad, and/or
unnecessary. ACSA, AFIA, Amcot, EPSA, ICE, and Land O'Lakes commented
that these proposed amendments were broad and ambiguous.\13\ AFIA, CME,
EPSA, MGEX, and the Commercial Energy Working Group argued that the
phrases ``concerning quotes, solicitations, bids'' and ``lead to the
execution of'' were vague and could encompass a great number of
communications. Amcot asserted that the overbreadth of the proposed
amendment would be burdensome for agricultural DCM members given that
there are a variety of settings, including grower meetings and on-site
visits, where a DCM member could have a discussion with an agricultural
producer that leads to a cash commodity or commodity interest
transaction. Land O'Lakes was unsure whether face-to-face conversations
would have to be recorded under the proposed requirement. ICE inquired
as to whether a general conversation about markets would be subject to
the proposed recording requirement if a transaction occurred later in
the day. AFIA stated that the risk of an incorrect interpretation would
fall on local grain producers.
---------------------------------------------------------------------------
\13\ FIA made a similar argument regarding the application of
the amendment to FCMs.
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Regarding application of the proposed requirement to telephone
conversations, Land O'Lakes and MGEX each argued that a DCM member
might not know in advance of a telephone call whether that call would
lead to a transaction. MGEX believed that this fact would require a DCM
member to record all conversations, which they argued would be
impossible. Land O'Lakes asserted that complying with the proposed
requirement could involve massive amounts of recording, thereby
deterring open communication between a DCM member and one of its
agricultural producers. The Commercial Energy Working Group commented
that proposed regulation 1.35(a) was too broad in that it could require
DCM members to record communications of attorneys and other ``middle
office'' personnel, and not just the communications of traders who are
directly involved in executing a transaction. CMC argued that the
Commission has substantially underestimated the considerable costs and
limited benefits associated with the recordkeeping requirements for DCM
and SEF members. CME does not believe firms can comply with the
proposed oral recordkeeping requirements with respect to mobile
telephones because, they stated, mobile telephone recording technology
is not well developed in the United States.
Regarding whether an oral communications recordkeeping requirement
is necessary, NCFC stated that the proposed requirement to record oral
communications is not necessary to achieve the Commission's stated goal
of protecting customers from abusive sales practices. CMC asserted that
current regulation 1.35(a)'s requirement to maintain written records of
commodity interest and cash commodity transactions suffices to prevent
market abuses. Amcot stated that the Commission failed to demonstrate
the inadequacy of its existing regulations. Henderson & Lyman, NFA, and
NIBA stated that the oral recordkeeping requirement is unnecessary
because NFA already requires certain FCMs and IBs with a history of
sales practice abuses to record calls made by their associated persons.
Henderson & Lyman stated that the NFA rule and NFA's related guidance
concerning communications are sufficient and cost-effective.
NIBA commented that all IBs, or at the very least small IBs, should
be exempt from the proposed amendments to regulation 1.35(a) because
the burden on such small entities would be too great. Henderson & Lyman
similarly commented that the proposed regulation would favor large IBs
over small IBs. Neither NIBA nor Henderson & Lyman, however, offered a
definition of ``small IB'' or provided any quantitative or qualitative
thresholds. Henderson & Lyman stated that it is unnecessary to have an
oral recording requirement for IBs because most IBs solicit customers
electronically rather than over the telephone. Henderson & Lyman also
stated that the focus on IBs was misplaced since misleading
communications come from marketing firms rather than from IBs. NIBA
further stated that the proposed amendment would be ineffective in
compelling IBs to record their calls since those who refuse to do so
will find a way to circumvent the regulation.
Falmouth Farm Supply had several concerns with the proposed
[[Page 75526]]
amendment, asserting that a grain business-DCM member recording its
telephone conversations with a farmer-supplier would amount to an
invasion of privacy and that grain producers do not need the
Commission's protection. CMC and ICE stated that it would be redundant
for a DCM or SEF member to comply with proposed regulation 1.35(a)
because the DCM or SEF member will have to engage an FCM clearing agent
for each transaction, and the FCM would have to comply with the
regulation.
2. Comments on the Proposed ``Tagging'' Requirement
CME, Barclays, Henderson & Lyman, NGFA, and NIBA stated that it
would be burdensome to comply with the proposed requirement to maintain
records as separate electronic files identifiable by counterparty and
transaction.\14\ FIA commented that the ``separate electronic file
requirement'' is open-ended and, on its face, impossible to
achieve.\15\ CME stated that potentially relevant conversations could
span several days and that it would be difficult to link conversations
to transactions. Therefore, CME commented, FCMs and IBs should only be
required to record and identify conversations immediately preceding an
order. FIA stated that a customer may decide to enter an order with an
FCM at any time, even if that was not the original purpose of the call.
According to FIA, this aspect of the futures business means that an FCM
would have to record all of its telephone calls to comply with proposed
regulation 1.35(a) and this would be difficult if not impossible.
Moreover, FIA stated that compliance would be impossible because one
could argue that any conversation pertains to a particular transaction.
Like CME, Barclays stated that the tagging requirement is vague,
potentially requiring an FCM to tag every communication that could ever
lead to a transaction. Barclays stated that it would be particularly
challenging to tag a telephone call when the firm is telephoned by a
counterparty; when parties discuss a transaction that the firm did not
originally anticipate; or when multiple transactions are discussed
during a particular call. According to Barclays, there is no technology
to automatically tag communications, so the firm would have to manually
tag over 2.4 billion electronic communications it sends and receives
every year. Barclays also stated that it is not aware of any
commercially available technology that would allow entities to tag
their telephone recordings by transactions and counterparty. Other
commenters expressed similar concern regarding the reliability and
availability of technological solutions for the proposed tagging
requirement. The Commercial Energy Working Group stated that, in lieu
of an accurate and commercially available software solution, manual
identification and retrieval of oral records would require as many as
three to five analysts and one to two additional technical support
personnel to support transactions for a small or modest-sized end-user
commodity business and that the total cost to a commodity business is
likely to be in excess of $1 million annually.
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\14\ NGFA's letter was supported by the other Grain and Feed
Associations, the Agribusiness Associations, Land O' Lakes, and
NCFC.
\15\ ACSA generally supported FIA's comment letter.
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According to Barclays, an FCM should be permitted to maintain
records in any manner so long as it is able to respond to Commission
inquiries in a timely and comprehensive fashion. The Commercial Energy
Working Group commented that a firm should only have to identify
communications as pertaining to a particular transaction if the
Commission requests that information. Moreover, the Commercial Energy
Working Group stated that it is unlikely that the Commission will
request such information, so DCM members should not have a general
obligation to tag conversations.\16\ The Commercial Energy Working
Group urged the Commission to allow market participants to make their
records searchable by transaction at the time the Commission requests
the records rather than require that all records be maintained on a
transaction-by-transaction basis in real-time.
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\16\ API generally supported the Commercial Energy Working
Group's comment letter.
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MGEX sought clarification as to whether the requirement in proposed
regulation 1.35(a) to maintain ``each transaction record in a separate
electronic file identifiable by transaction and counterparty'' requires
a file to be kept for each counterparty and for each transaction or
whether it suffices to keep one transaction file that is indexed by
counterparty and transaction. MGEX also stated that it would be
duplicative for a firm to keep records of both written and oral
communications if they contained substantially the same content.
3. Commenters' Suggested Revisions to the Oral Communications
Requirement
Commenters made suggestions about how the Commission should revise
the Proposal to limit the burden. NGFA suggested that if the Commission
adopts the proposed oral recordkeeping requirement, it should give FCMs
and IBs a generous compliance timetable and flexible implementation
options, particularly for smaller firms. CME, FIA, and MGEX asserted
that firms should only be required ``reasonably'' to comply with oral
recordkeeping requirements. MGEX suggested that a DCM member should
only be required reasonably to link a conversation to an executed
transaction. Barclays highlighted that the United Kingdom Financial
Services Authority (``FSA'') adopted a reasonableness standard for
compliance with its mobile telephone conversation recording
requirement.\17\ CME stated that a reasonableness standard is necessary
because of limited technology, particularly a lack of reliable search
mechanisms. According to CME, one way a firm should be able to comply
would be by having a policy prohibiting the use of mobile telephones to
solicit or accept orders. CME commented that the Commission fails to
provide evidence that the Proposal would be less effective with such a
``reasonableness'' standard than without it. CME stated that only firm-
provided landline and mobile telephones should be covered by the rule
as that would make the proposal consistent with foreign regulatory
regimes. ETA stated that the Commission fails to justify aligning its
recordkeeping requirements with those of other countries. CMC commented
that the Proposal's reference to the fact that 80% of large U.K.
financial services firms were already recording their traders'
telephone calls prior to the FSA's enactment of its voice recordkeeping
requirement is irrelevant to the burden that the Proposal would impose
on agricultural enterprises who are DCM members trading for their own
accounts and not on behalf of customers. FIA sought confirmation that
an FCM, IB, or other DCM or SEF member can satisfy the recordkeeping
requirements under regulation 1.35(a) by relying on record retention
performed by a DCM or SEF.
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\17\ In November 2011, the FSA rule requiring taping of mobile
telephones became effective. Under the rule, a firm is required,
``to take reasonable steps to record relevant conversations, and
keep a copy of relevant electronic communications, made with, sent
from or received on equipment: (1) Provided by the firm to an
employee or contractor; or (2) the use of which by an employee or
contractor has been sanctioned or permitted by the firm.'' See
Financial Services Authority, Conduct of Business Sourcebook,
Section 11.8 Recording telephone conversations and electronic
communications (June 2012, Release 126, 11.8.2).
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[[Page 75527]]
NFA recognized that audio recordings have been very useful to the
Commission in enforcement proceedings and stated that only those firms
that choose to record calls should have to maintain their recordings.
Acknowledging that some FCMs currently record their telephone calls,
FIA commented that, to the extent they do, recording is limited to
dedicated order desks and only required to be stored for no more than a
few days or weeks. FIA and MGEX asserted that the technology available
to comply with the Proposal was ``uncertain at best'' and, therefore,
the Proposal should be considered further in the context of available
technology and then re-proposed in a separate release.
EPSA suggested that a separate rulemaking should be published to
address changes to regulation 1.35(a) to give affected parties
reasonable notice. Amcot, Henderson & Lyman, and ICE asserted that the
Commission has not considered existing state and federal wiretapping
law and privacy laws in proposing these new requirements.
B. Proposed Requirement for All Members of a DCM or SEF To Record Oral
and Written Communications Leading to the Execution of Cash Commodity
Transactions
Three DCMs joined various agricultural and energy sector trade
organizations in opposing the Commission's proposed requirement to keep
oral communications, and existing requirement to keep written
communications, regarding cash market transactions on members of a DCM
or SEF who are non-financial entities and commercial end-users, and who
do not have customers.\18\ These commenters pointed out that including
a DCM member's cash transactions would require compliance by hundreds,
if not thousands, of agricultural and energy firms, including many who
do not have customers and do not themselves enter into futures or
swaps.\19\ EPSA and the Commercial Energy Working Group stated that
many of the affected entities in the energy sector would be small
entities that likely are unaware of the Proposal. Commenters asserted
that the requirement amounted to unauthorized regulation of the cash
market, which they asserted has always been carved out of the
Commission's jurisdiction.\20\ Commenters also stated that the Dodd-
Frank Act did not intend for the Commission to subject cash commodity
transactions to new recordkeeping requirements.\21\
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\18\ Commenters included ACSA, the Agribusiness Associations,
Amcot, CMC, Falmouth Farm Supply, the Grain and Feed Associations,
Land O'Lakes, NCFC, AGA, API, EPSA, ETA, the Commercial Energy
Working Group, ICE, KCBT, TFI, and MGEX.
\19\ In related commentary, the Commercial Energy Working Group
asked the Commission to clarify that the definition of ``member'' in
the final rule covers only those people holding equity interests in
a DCM that permit such holder to submit orders directly on the DCM's
floor (or an electronic equivalent).
\20\ Commenters included Agribusiness Council of Indiana;
Agribusiness Association of Ohio; EPSA; Grain and Feed Association
of Illinois; KCBT; Land `O Lakes; Minnesota Grain and Feed
Association; NCFC; NGFA; Oklahoma Grain and Feed Association; RMAA;
and the Commercial Energy Working Group.
\21\ Commenters included Amcot; CME; EPSA; FIA; and NCFC.
---------------------------------------------------------------------------
The Grain and Feed Association of Illinois, the Oklahoma Grain and
Feed Association, NCFC, and NGFA opposed the proposed revisions on the
grounds that the employees of a grain elevator that is a DCM member
would have to record calls and preserve emails with farmer producers
from whom they buy grain for cash and, thus, hundreds of employees of
grain storage and processing facilities would be significantly
burdened. As a result, these commenters stated, a grain elevator that
is a DCM member would be disadvantaged as compared to a grain elevator
that is not a DCM member as the non-member would not be burdened by the
compliance costs associated with proposed regulation 1.35(a). KCBT
asserted that this creates a discriminatory regulatory structure.
According to ICE, this outcome would deter firms from hedging
commercial risk on a DCM or SEF, thereby defeating the Dodd-Frank Act's
transparency objectives. NGFA and its affiliates argued that burdening
facilities owned by companies that are DCM members with the new rules
would create a bifurcation of the cash grain marketplace into
facilities required to comply with new recordkeeping requirements and
facilities owned and operated by companies who are not DCM members and,
therefore, not required to comply. KCBT stated that their rules (and
the rules of other DCMs) require that operators of registered delivery
warehouses be members, further stating that the regulatory
disincentives created by the application of proposed regulation 1.35(a)
to all DCM member cash transactions could affect not only DCM
expertise, but deliverable supplies and convergence. According to KCBT,
should DCM commercial members operating delivery warehouses decide to
withdraw from membership because of proposed regulation 1.35(a),
deliverable supplies would be negatively impacted and there would be
fewer deliverable supplies to foster convergence at delivery.
Amcot stated that neither it nor its members should be subject to
the proposed amendments because they do not transact with the public.
Similarly, the Commercial Energy Working Group commented that end-users
(i.e., DCM or SEF members trading for themselves) should not have to
comply with proposed regulation 1.35(a) because they do not trade for
customers and, therefore, pose minimal systemic risk. EPSA stated that
regulation 1.35(a) was never intended to burden end-users.
Several commenters objected to the Commission's regulation of
records of cash commodity transactions. KCBT stated that it did not
believe the Commission ever intended for regulation 1.35(a) to apply to
cash and cash forward transactions outside of those directly relating
to a regulated futures or swaps transaction. KCBT further stated that
it has always interpreted regulation 1.35(a) to cover only those
transactions for which a DCM member is acting as an agent for a
customer. Thus, according to KCBT, the only DCM members (who were not
otherwise FCMs or IBs) who would be required to comply would be floor
brokers (``FBs''); DCM members who trade for themselves would not be
covered. KCBT stated that it has also understood the ``related cash
transactions'' referenced by regulation 1.35(a) to refer only to those
transactions involving an exchange of a futures transaction for a
physical commodity.
The Commercial Energy Working Group asserted that, under the
proposed amendments to regulation 1.35(a), many of the entities that
transact on ICE, for example, would now be required to maintain records
pursuant to Commission rules without consideration of whether the
market users handle customer orders, which would be a departure from
the past for members of contract markets that are not FCMs, IBs, or
present on a trading floor. As a general matter, FIA argued that these
proposed amendments to regulation 1.35(a) are not necessary to
implement the Dodd-Frank Act and, therefore, they run counter to the
guiding principles set out in President Obama's January 2011 Executive
Order 13563, Improving Rulemaking and Regulatory Review.
ACSA, CMC, FIA, Henderson & Lyman, ICE, NFA, and NIBA stated that
the proposed amendments were inconsistent with the Commission's
proposed recordkeeping requirements for SDs and MSPs because they would
require FCMs, RFEDs, IBs, and members
[[Page 75528]]
of a DCM or SEF to record voice communications regardless of any other
recordkeeping requirement that captures the same information.
C. Relationship Between Regulations 1.31 and 1.35(a)
Amcot stated that it would be burdensome for its farmer-owned
cotton marketing cooperative members to retain recordings of telephone
calls for five years as the Commission proposed. CME commented that
conversations should only be retained for six months after the
execution of a transaction. FIA commented that the Commission failed to
provide a justification for requiring that a swap record be maintained
for the life of the swap plus five years. In contrast to other
commenters, Mr. Chris Barnard asserted that all records should be kept
indefinitely and scanned after two years, arguing that there is no
technological or practical reason to limit the record retention period.
Mr. Barnard specifically commented that records of voice communications
also should be kept indefinitely. To support the asserted usefulness of
such records, Mr. Barnard cited a 2009 IOSCO report stating that
telephone records could benefit enforcement investigations.\22\
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\22\ https://www.iosco.org/news/pdf/IOSCONEWS137.pdf.
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III. Final Rules
The markets subject to the jurisdiction of the Commission have
undergone a significant transformation over the last few decades, and
particularly in the last few years. Technological advances have
contributed to a tremendous growth in trading volume as well as the
number and type of market participants, including significant numbers
of retail customers that invest in the commodity markets through a
variety of means. Markets are also more interconnected than ever
before, with order flow distributed across multiple trading centers.
These changes require the Commission to adapt, and these final rules
are part of that adaptation.
The overarching purpose of the Commission's final rules is to
promote market integrity and protect customers. Requiring the recording
and retention of oral communications will serve as a disincentive for
covered entities to make fraudulent or misleading communications to
their customers over the telephone and could serve as a meaningful
deterrent against violations such as trading ahead of customer orders
by providing a record of the time that a customer's telephone order is
received. When the perspectives of the commenters are combined with the
Commission's own experiences regulating the markets subject to its
jurisdiction, a common theme emerges: The collection of and access to
searchable records, both oral and written, are indispensable tools the
Commission needs to ensure market integrity and protect customers.
Currently, many of the market participants that will be subject to the
final rules have such records by way of their business needs or other
regulatory requirements. Some commenters have urged the Commission to
rely on currently available information and not require more. While
existing information aids the Commission in discharging its regulatory
responsibility, the Commission believes current recordkeeping,
particularly in the area of oral recordkeeping, is limited, to varying
degrees, in availability, scope and effectiveness.
The final rules will significantly advance the Commission's efforts
to detect and deter abusive, disruptive, fraudulent and manipulative
acts and practices that seriously harm market integrity and customers.
In addition, the information that will be required as a result of this
rulemaking will benefit the Commission in its market analysis efforts,
such as investigating and preparing market reconstructions and
understanding causes of unusual market activity. Further, the
requirement that records be kept current and readily available
facilitates the timely pursuit of potential violations, which can be
important in seeking to freeze and recover any profits received from
illegal activity.
Notwithstanding the important policy and practical reasons for the
final rules, the Commission shares many of the commenters' concerns
regarding costs and the availability of relevant technology. Therefore,
as discussed below, the Commission is adopting alternatives to the
Proposal where doing so would achieve the Commission's objectives and
the benefits of promoting market integrity and protecting customers
albeit at lower cost. The Commission is also significantly extending
the amount of time entities have to come into compliance with the final
rule requiring the recording of oral communications. In so doing, the
entities subject to this rulemaking are afforded the same amount of
time as SDs and MSPs to come into compliance with analogous
requirements in regulations 23.202(a)(1) and (b)(1).
Regarding oral communications, in response to commenters' concerns
that the scope of the new requirement was too broad, the new
requirement to record oral communications will be limited to those oral
communications that lead to a transaction in a commodity interest. As
proposed, the oral communications recordkeeping requirement would have
applied to commodity interest and cash commodity transactions. In
response to comments asserting that the cost of implementing and
maintaining an oral communication recording system would be overly
burdensome for small entities and the commercial end-user, non-
intermediary members of a DCM or SEF, the Commission has determined to
exclude from the new requirement to record oral communications: Small
IBs\23\; the oral communications of an FB who is a member of a DCM or
SEF that do not lead to the purchase or sale for any person other than
the FB of any commodity for future delivery, security futures product,
swap, or commodity option authorized under section 4c of the Act; and
certain members of a DCM or SEF, including floor traders (``FTs''),\24\
commodity pool operators
[[Page 75529]]
(``CPOs''), SDs, MSPs,\25\ and members that are not registered or
required to be registered with the Commission in any capacity. As
proposed, the oral communications recording requirement would have
applied to FCMs, RFEDs, all IBs and all members of a DCM or SEF. These
exclusions are based on the Commission's experience that such entities
are either unlikely to or prohibited from having a customer interface
or an effect on market integrity. For example, while a Small IB takes
customer orders, they generally do not execute those orders, meaning
that they lack a direct market interface that could affect market
integrity. Further, as defined herein, a Small IB is unlikely to
generate the volume of market activity that the Commission would expect
could affect the integrity of the markets. Conversely, where an FT
could affect market integrity, they are prohibited from accepting
customer funds and are therefore excluded by the limiting principle of
customer protection.
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\23\ Final regulation 1.35(a) excludes from the oral
communications recordkeeping requirement any IB that has generated,
over the preceding three years, $5 million or less in aggregate
gross revenues from its activities as an IB (``Small IB''). All
other IBs with aggregate gross revenue exceeding $5 million will be
referred to as ``non-Small IBs.'' The Commission has previously
determined this to be an appropriate definition of a small IB. In
connection with regulation 1.71 (Conflicts of Interest Policies and
Procedures by Futures Commission Merchants and Introducing Brokers),
the Commission provided a separate regulatory standard for small
IBs, based on this definition, to lessen the compliance burden
imposed by the conflicts of interest requirements on such firms. See
SD and MSP Recordkeeping Final Rule, 77 FR at 20148. In that rule,
the Commission found that ``Section 4d(c) of the Act mandates the
establishment of `appropriate informational partitions' within FCMs
and IBs, and all such firms are bound by that statutory
requirement,'' and. It concluded that ``the size of an IB plays a
significant role in determining the appropriateness of such
partitions.'' Id. at 70149. Applying this new standard for IBs to
the instant final rulemaking, the Commission estimates that with
respect to IBs, limiting the scope of final regulation 1.35(a) to
IBs that are not small excludes more than 95% of IBs from the
regulation 1.35 oral communications recordkeeping requirement
adopted in this release. Thus, at present, the Commission expects
that no more than approximately 75 IBs will be subject to the final
oral recordkeeping requirements of regulation 1.35.
\24\ The Commission notes that certain FTs, although excluded
from the oral communications requirement in regulation 1.35(a), will
be required to record their oral communications concerning swap
transactions and their related cash and forward transactions,
pursuant to regulation 23.202(a)(1) and (b)(1). Pursuant to
regulation 23.200(i), a related cash or forward transaction means a
purchase or sale for immediate or deferred physical shipment or
delivery of an asset related to a swap where the swap and the
related cash or forward transaction are used to hedge, mitigate the
risk of, or offset one another. See SD and MSP Recordkeeping Final
Rule, 77 FR at 20202. The recently finalized definition of SD
(regulation 1.3(ggg)(iv)(H)) requires certain FTs who deal in swaps
to comply with regulation 23.202, as well as certain other
regulations in part 23, notwithstanding the fact that such FTs are
not required to register as SDs. See 17 CFR 1.3(ggg)(iv)(H), as
finalized by the Commission in Further Definition of ``Swap
Dealer,'' ``Security-Based Swap Dealer,'' ``Major Swap
Participant,'' ``Major Security-Based Swap Participant'' and
``Eligible Contract Participant,'' 77 FR 30596 (May 23, 2012).
\25\ As noted above, SDs and MSPs are subject to the oral
communications recording requirement in Part 23. See SD and MSP
Recordkeeping Final Rule, 77 FR at 20148 (to be codified at 17 CFR
23.202(a)(1) and (b)(1)). SDs and MSPs that are also registered in a
capacity covered by the oral communications recording requirement in
regulation 1.35(a) would be subject to the recording requirements in
both rules.
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While seeking to mitigate the costs of compliance for smaller
entities without compromising the Commission's objectives, the
Commission is not exempting Small IBs and other excluded participants
from the requirement to keep written records of covered information,
for example, given or received by telephone. For example, if a Small IB
receives a customer's order over the telephone, then the Small IB would
not be required to record the telephone call under the new provision in
regulation 1.35(a), but the Small IB would be required to keep a
written record of the order under both the existing requirement in
regulation 1.35(a) to keep and maintain records of ``all orders
(filled, unfilled, or cancelled)'' and the new requirement in
regulation 1.35(a) to keep records of ``instructions'' to place orders.
Therefore, although this rulemaking's definition of Small IB will
exclude most IBs from the requirement to record oral communications,
the Commission believes it can continue to promote market integrity and
protect customers because the same IBs will continue to be required to
keep written records under regulation 1.35(a). In addition, because
many of an IB's oral communications leading to a commodity interest
transaction are conducted with FCMs, those oral communications would be
recorded by the FCM.
The Commission has also considered whether FBs should be treated
similarly to IBs in drawing a distinction between large and small
entities.\26\ The Commission does not believe any similar distinction
is warranted. As Congress recognized by creating separate categories of
registrants, FBs and IBs perform different functions. While both
receive orders, an FB executes orders,\27\ and an IB transmits orders
for execution.\28\ Because FBs execute orders and can direct the manner
of the same without an intermediary, they can have a significant impact
on the integrity of the market.\29\ When an IB solicits or receives
order information from a customer through an oral communication, it
then will often communicate that information either to an FCM or FB.
Under the regulation as adopted, the FCM or FB would have to record the
oral communication with the IB. By contrast, an FB may have covered
communications with a customer who is not itself subject to a recording
requirement. The need for recording oral communications with FBs has
been independently recognized by several DCMs.\30\ DCM rules requiring
FBs to record oral communications do not make distinctions based on an
FB's size.
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\26\ Regarding FBs, KCBT stated that, ``it has always understood
1.35(a) to apply to members of DCMs * * * in order to capture and
monitor the activities of DCM members * * * dealing with customers
as agent for such transactions, namely registered FBs.''
\27\ An FB generally is defined in section 1a(22)(A) of the CEA,
7 U.S.C. 1a(22)(A), as: Any person--(--(i) who, in or surrounding
any pit, ring, post, or other place provided by a contract market
for the meeting of persons similarly engaged, shall purchase or sell
for any other person--(I) any commodity for future delivery,
security futures product, or swap; or (II) any commodity option
authorized under section 4c of the CEA; or (ii) who is registered
with the Commission as an FB.
\28\ An IB generally is defined in section 1a(31)(A) of the CEA,
7 U.S.C. 1a(31)(A), as: Any person (except an individual who elects
to be and is registered as an associated person of a futures
commission merchant) (i) who--(I) is engaged in soliciting or in
accepting orders for--(aa) the purchase or sale of any commodity for
future delivery, security futures product, or swap; (bb) any
agreement, contract, or transaction described in section
2(c)(2)(C)(i) or section 2(c)(2)(D)(i); (cc) any commodity option
authorized under section 4c; or (dd) any leverage transaction
authorized under section 19; and (II) does not accept any money,
securities, or property (or extend credit in lieu thereof) to
margin, guarantee, or secure any trades or contracts that result or
may result therefrom; or (ii) who is registered with the Commission
as an IB. See 7 U.S.C. 1a(31)(B).
\29\ See, e.g., In re DiPlacido, [2007-2009 Transfer Binder]
Comm. Fut. L. Rep. (CCH) ] 30,970 at 62,484 (CFTC Nov. 5, 2008),
summary affirmance, 364 Fed. Appx. 657 (2d Cir. 2009), cert. denied,
130 S.Ct. 1883 (2010) (records of FB's oral communications with
customer admitted as evidence in case concerning manipulation of
price of NYMEX electricity futures contracts).
\30\ For instance, CME Rule 536.G, Telephone Recordings, states:
Unless specifically exempted by the Market Regulation Department
or designated Exchange staff, all headset communications must be
voice recorded by the member or member firm authorized to use the
headset and all such recordings must be maintained for a minimum of
10 business days following the day on which the recording is made.
Members and member firms are permitted to utilize their own
recording devices, provided that the devices meet reasonable
standards with respect to quality and reliability. Alternatively,
members and member firms may utilize an Exchange administered voice
recording system for a fee.
CME Rulebook, Chapter 5 Trading Qualifications and Practices,
Rule 536 Recordkeeping Requirements for Pit, Globex, and Negotiated
Trades.
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To address commenter concerns that the proposed rule would capture
the oral communications of certain members of DCMs who currently are
registered as FBs, but are solely trading for their own accounts, i.e.,
acting as FTs.,\31\ the Commission has determined to limit an FB's
obligation to record its oral communications under regulation 1.35(a)
to those oral communications that lead to the purchase or sale for any
person other than the FB of any commodity for future delivery, security
futures product, swap, or commodity option authorized under section 4c
of the CEA. In this way, a registered FB operating as an FT (i.e., not
handling customer orders) will be treated the same as an FT under the
final rules.\32\
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\31\ An FT generally is defined in section 1a(23)(A) of the CEA,
7 U.S.C. 1a(23)(A), as: Any person--(i) who, in or surrounding any
pit, ring, post, or other place provided by a contract market for
the meeting of persons similarly engaged, purchases or sells solely
for such person's own account--(I) any commodity for future
delivery, security futures product, or swap; or (II) any commodity
option authorized under section 4c of the CEA; or (ii) who is
registered with the Commission as an FT.
\32\ See 17 CFR 3.4(a).
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In determining the applicability of the final rules to another
group of market participants that are DCM members, commodity trading
advisors (``CTAs''), the Commission has considered measures to again
tailor the oral communications recordkeeping requirements for CTAs to
mitigate the costs of compliance while achieving the twin objectives of
promoting market integrity and protecting customers. The Commission has
reduced the impact on CTAs by: Limiting the oral communications
recordkeeping requirement to commodity interest transactions (i.e., not
adopting the
[[Page 75530]]
proposal to include cash commodity transactions); reducing the record
retention period for all records of oral communications from 5 years to
1 year; permitting covered persons to contract with other Commission
registrants to retain the required records (provided that the records
retained by the contractor registrant are the same records, thus
allowing covered persons to avoid retaining the same records as other
Commission registrants); and removing the tagging requirement.\33\
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\33\ The Commission considered drawing a revenues-based
threshold for CTAs. However, given that CTAs do not have a capital
requirement it is not possible for the Commission to readily
determine the sizes of all registered CTAs and, therefore, the
Commission would not be able measure the impact that such a
threshold would have on CTAs. The Commission also considered, as an
alternative, limiting the types of oral communications that a CTA
must record in a similar manner to the way in which it has limited
the types of oral communications that an FB must record to brokering
communications. However, the Commission has determined that such a
limitation is a not a reasonable alternative to having all CTAs who
are members of a DCM or SEF record all oral communications that lead
to the execution of a commodity interest transaction. Indeed, the
limitation for FBs is appropriate for FBs, and not for other
registration categories, given the current regulatory regime for FBs
and FTs discussed above.
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The Commission understands that currently available technology for
recording oral communications may not be immediately accessible or may
involve a material cost outlay for an affected entity. However, the
Commission also anticipates that as the availability of this technology
increases over time, the costs to use such technology will decline
accordingly. Accordingly, to further conform regulation 1.35(a) with
the final recordkeeping rule for SDs and MSPs,\34\ and in response to
commenter request for a flexible compliance timetable, the Commission
is adopting a [November 28, 2013] compliance date and regulation
1.35(a)(4)(i) pursuant to which the Commission may, in its discretion,
establish an alternative compliance schedule for the requirement to
record oral communications under regulation 1.35(a)(1). Under new
regulation 1.35(a)(4)(i), compliance with the requirement to record
oral communications must be found to be technologically or economically
impracticable for an affected entity that seeks, in good faith, to
comply with the requirement. Pursuant to new regulation
1.35(a)(4)(iii), the Commission delegates to the Director of the
Division of Swap Dealer and Intermediary Oversight the authority to
exercise the Commission's discretion under regulation 1.35(a)(4)(i).
The purpose of new regulation 1.35(a)(4) is to facilitate the ability
of the Commission to provide a technologically practicable compliance
schedule for an affected entity that seeks to comply in good faith with
the oral communications recordkeeping requirements of regulation
1.35(a)(1). In order to obtain relief under new regulation 1.35(a)(4),
an affected entity must submit a request to the Commission. An affected
entity submitting a request for relief must specify the basis in fact
supporting its claim that compliance with the oral communications
recordkeeping requirement under regulation 1.35(a)(1) would be
technologically or economically impracticable. Such a request may
include a recitation of the specific costs and technical obstacles
particular to the entity seeking relief and the efforts the entity
intends to make in order to ensure compliance according to an
alternative compliance schedule. Relief granted under regulation
1.35(a)(4) shall not cause an affected entity to be out of compliance
or deemed in violation of any recordkeeping requirements. Such requests
for an alternative compliance schedule shall be acted upon within 30
days from the time such a request is received. If not acted upon within
the 30-day period, such request will be deemed approved.
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\34\ See 17 CFR 23.206, as adopted by the Commission in SD and
MSP Recordkeeping Final Rule.
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Regarding comments that the proposed amendments to regulation
1.35(a) were inconsistent with the Commission's proposed recordkeeping
requirements for SDs and MSPs because they would require FCMs, RFEDs,
IBs, and members of a DCM or SEF to record voice communications
regardless of any other recordkeeping requirement that captures the
same information, the Commission addressed these comments in the final
recordkeeping rules for SDs and MSPs, clarifying that, to the extent
pre-execution trade information does not include information
communicated by telephone, an SD or MSP is under no obligation to
create recordings of its telephone conversations. If, however, any of
this pre-execution trade information is communicated by telephone, the
SD or MSP must record such communications.\35\ This clarification is
consistent with the requirements under the revision to regulation 1.35
requiring that all oral communications be recorded regardless of
whether an audit trail can be established with other types of records.
In response to commenter inquiry about whether face-to-face
communications would have to be recorded under the final rule, the
Commission does not intend for the final rule to require the recording
of face-to-face conversations that do not occur over electronic,
digital or other media.
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\35\ See SD and MSP Recordkeeping Final Rule, 77 FR at 20130.
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2. Written Communications
Regarding written communications, the Commission has decided to
adopt the proposed amendment to regulation 1.35(a) to clarify that the
existing requirement to keep written records applies to electronic
written communications such as emails and instant messages, as
proposed. The Commission considered comments asserting that: The
requirement to keep ``electronic communications'' should not extend to
members of a DCM or SEF that do not handle customer orders; regulation
1.35(a) has never required DCM members to keep records of their
electronic communications relating to their cash commodity
transactions; and storing records of electronic communications would be
overly burdensome for these members. In response, the Commission notes
that the record retention requirements of existing regulation 1.35, as
confirmed by the Commission's Division of Market Oversight in 2009,
include all electronic forms of communication (emails, instant
messages, and any other form of communication created or transmitted
electronically).\36\ Thus, contrary to commenter assertions, the
recordkeeping obligations of regulation 1.35 currently require that all
DCM members keep electronic
[[Page 75531]]
communications. Therefore, the relevant portion of the proposed new
language (now being adopted by the Commission) ``all * * * written
communications * * * whether communicated by * * * instant messaging,
chat rooms, electronic email, mobile device, or other digital or
electronic media'' does not impose any new requirements on DCM members.
Instead, the new language clarifies the existing requirement for DCM
members to maintain electronic communications by enumerating the forms
of communications that the Commission intends to be covered by the
rule. In addition, as explained above, the final language relating to
written communications is consistent with the final recordkeeping rule
for SDs and MSPs.\37\
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\36\ See U.S. Commodity Futures Trading Commission, Division of
Market Oversight, Advisory for Futures Commission Merchants,
Introducing Brokers, and Members of a Contract Market over
Compliance with Recordkeeping Requirements, Feb. 5, 2009, (https://www.cftc.gov/ucm/groups/public/@industryoversight/documents/file/recordkeepingdmoadvisory0209.pdf) (footnotes omitted):
The Division of Market Oversight (``Division'') has become aware
that there is an industry misunderstanding of the record retention
requirements of Regulations 1.35 and 1.31 as it relates to
electronically conveyed records. The Division is issuing this
Advisory to address any industry misunderstanding of the
Commission's recordkeeping requirements applicable to futures
commission merchants (``FCMs''), introducing brokers (``IBs''), and
members of a designated contract market (``members''). With the
increased reliance in the futures industry on electronic media and
the use of personal electronic devices and communications technology
to facilitate the execution of transactions for both open outcry and
electronic trading, the Division is issuing this Advisory to correct
any misunderstandings and to make certain that the individuals and
entities subject to the Commission's recordkeeping requirements
maintain all electronic forms of communications, including email,
instant messages, and any other form of communication created or
transmitted electronically for all trading.
\37\ See SD and MSP Recordkeeping Final Rule, 77 FR at 20202-03
(17 CFR 23.202(a)(1) and (b)(1)).
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The Commission also has decided to change the proposed language in
regulation 1.35(a) which would have required an entity to keep records
of ``all transactions related to its business of dealing in commodity
interests and cash commodities'' to ``all transactions related to its
business of dealing in commodity interests \38\ and related cash and
forward transactions.'' This is different than existing regulation
1.35, which states ``commodity futures, retail forex transactions,
commodity options and cash commodities (including currencies).'' \39\
The final rule defines ``related cash or forward transaction'' as a
purchase or sale for immediate or deferred physical shipment or
delivery of an asset related to a commodity interest where the
commodity interest transaction and the related cash or forward
transaction are used to hedge, mitigate the risk of, or offset one
another.\40\ Because a forward is a type of cash transaction already
covered by existing regulation 1.35, amending regulation 1.35 to apply
to related forward transactions does not constitute an expansion of the
scope of existing regulation 1.35.\41\
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\38\ ``Commodity interest'' includes commodity futures, retail
forex, commodity options, and swaps. See Final Adaptation Rule, 77
FR at 66319 (to be codified at 17 CFR 1.3(yy)).
\39\ 17 CFR 1.35(a). Regulation 1.35(a) has included
transactions in ``cash commodities'' since as early as 1964:
Each futures commission merchant and each member of a contract
market shall keep full, complete, and systematic records, together
with all pertinent data and memoranda, of all transactions relating
to his business of dealing in commodity futures and cash commodities
* * *
17 CFR 1.35(a) (1964).
\40\ This definition of ``related cash or forward transaction''
mirrors the definition of the same term as it applies to swap
transactions for purposes of certain of an SD's or MSP's
recordkeeping obligations under Part 23 of the Commission's
regulations. See SD and MSP Recordkeeping Final Rule, 77 FR at
20202.
\41\ The Commission's glossary includes this definition of
``forward contract'':
A cash transaction common in many industries, including
commodity merchandising, in which a commercial buyer and seller
agree upon delivery of a specified quality and quantity of goods at
a specified future date. Terms may be more ``personalized'' than is
the case with standardized futures contracts (i.e., delivery time
and amount are as determined between seller and buyer). A price may
be agreed upon in advance, or there may be agreement that the price
will be determined at the time of delivery.
See CFTC Glossary, A Guide to the Language of the Futures
Industry, at https://www.cftc.gov/ConsumerProtection/EducationCenter/CFTCGlossary/glossary_f.html.
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To reflect these changes, the Commission also is changing the
proposed revision to the title of regulation 1.35 from ``Records of
Commodity Interest and Cash Commodity Transactions'' to ``Records of
Commodity Interest and Related Cash or Forward Transactions.''
In response to comments that the requirement to keep transaction
records in separate files identifiable by transaction and counterparty
is overbroad, overly burdensome, costly, and/or impossible to achieve,
the Commission is modifying the Proposal to remove the requirement that
each transaction be maintained as a separate electronic file. Instead,
the final rule will require that such records be kept in a form and
manner identifiable and searchable by transaction. This should be less
burdensome than the Proposal because it will allow those required to
comply to maintain searchable databases of the required records without
the added cost and time needed to compile the required records into
individual electronic files. It also is consistent with the final
recordkeeping rule for SDs and MSPs under regulation 23.202.\42\ As the
Commission noted in the final release for that rulemaking, regulation
23.202 does not require the raw data to be tagged with transaction and
counterparty identifiers so long as the recordkeeper can readily access
and identify records pertaining to a transaction or counterparty by
running a search of the raw data.\43\ Covered entities will be able to
comply with this obligation by using any of a number of different
solutions available, including commercially available products capable
of conducting speech analytics on recordings from both landlines and
mobile calls.
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\42\ See SD and MSP Recordkeeping Final Rule, 77 FR at 20130.
\43\ Id.
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FIA requested guidance on whether an FCM, IB, or other DCM or SEF
member can satisfy the recordkeeping requirements under regulation
1.35(a) by relying on record retention performed by a DCM or SEF,\44\
and other commenters similarly requested guidance on whether a covered
participant can rely on another Commission registrant's records to
satisfy its recordkeeping obligations. While complying with the final
rule is the responsibility of the covered participant and the covered
participant will be liable for failure to comply, depending on the type
of record and arrangements made for access, covered persons may
reasonably rely on a DCM, SEF or other Commission registrant to
maintain certain records on their behalf. For example, a member of a
DCM or SEF can rely on electronic order routing or order execution
systems of FCMs, DCMs, or SEFs to record the audit trail information it
enters into the system in accordance with Commission requirements, if
the covered person arranges to get access to such records in order to
satisfy requirements under the regulation. Reliance on another person,
however, will not relieve a covered person of responsibility for
compliance with the regulation. Reliance on a third party is only
appropriate where the records maintained by the third party duplicate
the information required to be kept by the regulation. For example, if
an FCM records its telephone calls with a covered IB, the IB need not
separately record the same calls if the IB and FCM agree that the FCM
will maintain the record and provide access to the IB. By contrast, if
a covered IB receives a customer order by telephone and then calls it
into the FCM, the covered IB must record its telephone call with the
customer, while the FCM records the call between the IB and FCM. For
other types of records, like instant messages and emails, it is
unlikely that covered persons will be able to rely on recordkeeping by
a third party because the third party recipient will not have a
complete record of the distribution of the message by the sender.
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\44\ FIA stated:
We interpret the Commission's statement to mean that, to the
extent a DCM or SEF records the relevant conversations of orders
transmitted for execution by telephone, a Commission registrant that
transmits such orders may rely on the DCM or SEF and is not required
to record such conversations and maintain such records separately.
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The Commission has considered commenter requests to adopt best
efforts approach to compliance, and require only the recording of
conversations on firm-provided mobile telephones, not personal devices.
The Commission declines these requests and reiterates that any
conversation the content of
[[Page 75532]]
which is described under the regulation must be recorded, regardless of
whether it occurs on a firm-provided or personal phone.\45\ It would be
contrary to the objectives of ensuring market integrity and customer
protection to allow circumvention of the rule simply by communicating
on a personal device lacking recording capability. To be clear, covered
persons must ensure that covered communications do not occur on
personal phones that lack recording capability. And while the
Commission is not adopting any explicit safe harbors, as a matter of
course, the Commission considers good faith compliance with policies
and procedures reasonably designed to comply with the oral
communications recording rule as a mitigating factor when exercising
its discretion in enforcement actions for violation of the rule.
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\45\ Significant technological advancements in recent years,
particularly with respect to the cost of capturing and retaining
copies of electronic material, including telephone communications,
have made the prospect of establishing recordkeeping requirements
for digital and electronic communications more economically feasible
and systemically prudent. Evidence of these trends was examined in
March 2008 by the FSA, which studied the issue of mandating the
recording and retention of voice conversations and electronic
communications. The FSA issued a Policy Statement detailing its
findings and ultimately implemented rules relating to the recording
and retention of such communications, including a recent
determination that all financial service firms will be required to
record any relevant communication by employees on their work cell
phones. Similar rules that mandate recording of certain voice and/or
telephone conversations have been promulgated by the Hong Kong
Securities and Futures Commission and by the Autorit[eacute] des
March[eacute]s Financiers in France and have been recommended by the
International Organization of Securities Commissions (IOSCO). FSA,
``Policy Statement: Telephone Recording: recording of voice
conversations and electronic communications'' (March 2008).
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Regarding comments about the existing NFA requirement that NFA
member firms with more than a certain percentage of disciplined
associated persons must record all conversations that they have with
existing and potential customers for two years, the Commission believes
that the NFA rule has been effective at protecting the markets and the
public. However, as discussed throughout, the Commission does not view
its final recording requirement solely as a customer protection rule.
The amendments adopted by this release are also a means to protect the
integrity of the markets by aiding the Commission in detecting and
deterring market abuse, including manipulation and false reporting.\46\
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\46\ Recorded telephone conversations have been used in a number
of the Commission's enforcement cases as evidence of market abuse.
See, e.g., DiPlacido v. CFTC, 364 Fed.Appx. 657 (2d Cir. 2009); In
re Barclays PLC, CFTC Docket No. 12-25 (June 27, 2012); CFTC v.
Optiver US LLC, 2012 WL 1632613 (S.D.N.Y. Apr. 19, 2012).
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The Commission disagrees with commenters who stated that compliance
with the new recording requirement would be illegal in certain
jurisdictions.\47\ Federal law does not prohibit a person from
recording a telephone call where the person recording the call is a
party to the call or one of the parties to the call has given prior
consent to being recorded.\48\ While state laws differ regarding the
ability to record customer telephone conversations, the difference
exists in the type of consent required to be given before recording can
occur. For example, some states require the consent of one party to the
call and others require the consent of all parties to the call.\49\
Consent can be explicit or implied. A customer will have provided
consent if, after being notified that the call is being recorded, he or
she continues with the call.\50\ Therefore, a covered participant will
in all circumstances be able to comply with this final recording rule
without violating any other state or federal laws by informing the
other parties to the call that the call is being recorded.\51\
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\47\ Commenters included Henderson & Lyman; Amcot; and ICE.
\48\ See 18 U.S.C. 2511(2)(d) (Interception and disclosure of
wire, oral, or electronic communications prohibited) (``It shall not
be unlawful under this chapter for a person not acting under color
of law to intercept a wire, oral, or electronic communication where
such person is a party to the communication or where one of the
parties to the communication has given prior consent to such
interception unless such communication is intercepted for the
purpose of committing any criminal or tortious act in violation of
the Constitution or laws of the United States or of any State.'')
\49\ For example, under New York state law, only one of the
parties to the conversation must consent. See NY CLS Penal Sec.
250.00. Under California and Illinois state laws, all parties to the
conversation must consent to the recording. See Cal. Pen. Code Sec.
632; 720 ILCS 5/14-1.
\50\ See, e.g., Griggs-Ryan v. Smith, 904 F.2d 112,118 (1st Cir.
1990) (call recipient, previously warned that all incoming calls
were being recorded, impliedly consented to interception); Kearney
v. Salomon Smith Barney, Inc., 45 Cal.Rptr.3d 730, 749 (Cal. 2006)
(business that adequately advises all parties to a telephone call,
at the outset of the conversation, of its intent to record the call
would not violate the statute prohibiting the recording of telephone
conversations without the consent of all parties).
\51\ Moreover, if a state law were to conflict with the
recording requirement in regulation 1.35(a), such a law would be
preempted by regulation 1.35(a).
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Commenters also focused on the relationship between the proposed
changes to regulation 1.35(a) and the existing record retention
obligations of regulation 1.31 (Books and records; keeping and
inspection). Under regulation 1.31, all books and records required to
be kept under the Act or by the Commission's regulations must be kept
for five years from the date thereof and be readily accessible during
the first two years of the five-year period. Given the proposed
amendment to regulation 1.35(a) to include a requirement to record all
oral communications leading to the execution of a commodity interest or
cash commodity transaction and that all such recordings be retained
pursuant to regulation 1.31, records of oral communications kept
pursuant to proposed regulation 1.35(a) would have had to be kept for
five years.\52\ Concerning the relationship between regulations 1.31
and 1.35(a), the Commission has determined to adopt a retention period
of one year for all records of oral communications that lead to the
execution of a transaction in a commodity interest. This modification
responds to comments stating that the proposed retention period of five
years for records of oral communications was too long. This also is
consistent with the final provision for SD and MSP oral communications
under new regulation 23.203(b)(2).\53\ In addition, the Commission
believes that the one-year retention period for records of oral
communications will enable it to adequately execute its enforcement
responsibilities under the Act and these regulations, while minimizing
the storage costs imposed on affected entities.
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\52\ See 17 CFR 1.31
\53\ See SD and MSP Recordkeeping Final Rule, 77 FR at 20204
(Apr. 3, 2012) (``Provided, however, that records of oral
communications communicated by telephone, voicemail, mobile device,
or other digital or electronic media pursuant to Sec. 23.202(a)(1)
and (b)(1) shall be kept for a period of one year.'').
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In specific response to Amcot's concern that the five-year
retention period for oral communications would have been too burdensome
to its farming cooperative members, the Commission notes that, due to
the adopted revisions to regulation 1.35(a), discussed above, the
requirement to record oral communications likely will not apply to a
significant portion, if any, of Amcot's members.\54\ With respect to
Encana's request for clarification concerning the applicability of
regulation 1.31 to
[[Page 75533]]
commercial end-users, regulation 1.31 applies to all records required
to be kept by the Act or the Commission's regulations, such as records
required to be kept under regulations 1.35, 18.05 and 23.202.
Therefore, Encana's request is better addressed in particular response
to those other recordkeeping requirements than in a discussion of how
those records should be kept. In response to CME's comment that
although the Commission suggests that the retention period for swaps
applies only to SDs and MSPs, as addressed in proposed regulation
23.203(b), the proposed amendment to regulation 1.31 is ambiguous in
that it could be read to apply to all entities, the Commission
clarifies that the final provision in regulation 1.31 regarding the
retention period for records of swap transactions is triggered by the
type of record and not the entity that is required to keep the record.
Therefore, although regulation 23.203(b) only applies to SDs and MSPs
with regard to their swap transactions, the final corresponding
provision in regulation 1.31 applies to anyone who is required by the
Act or by Commission regulations to keep records of swap or related
cash or forward transactions.
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\54\ The obligation to record oral communications under final
regulation 1.35(a)(1) will not apply to (i) oral communications that
lead solely to the execution of a related cash or forward
transaction; (ii) oral communications by an FB that do not lead to
the purchase or sale for any other person of any commodity for
future delivery, security futures product, swap, or commodity option
authorized under section 4c of the Commodity Exchange Act; (iii) an
IB that has generated over the preceding three years $5 million or
less in aggregate gross revenues from its activities as an IB; (iv)
an FT; (v) a CPO; (vi) an SD; (vii) an MSP; or (viii) a DCM or SEF
member that is not registered or required to be registered with the
Commission in any capacity.
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IV. Administrative Compliance
A. Paperwork Reduction Act
Regulation 1.35(a) is being amended to provide that certain
Commission registrants be required to record and keep records of their
oral communications that lead to the execution of a commodity interest
transaction and their written communications that lead to the execution
of a commodity interest or related cash or forward transaction, similar
to the requirement that SDs and MSPs keep records of their oral and
written communications that lead to the execution of swaps and related
cash or forward transactions. Only the oral communications
recordkeeping amendments impose new information recordkeeping
requirements. These new requirements constitute a collection of
information within the meaning of the Paperwork Reduction Act of 1995
(``PRA'').\55\ Under the PRA, an agency may not conduct or sponsor, and
a person is not required to respond to, a collection of information
unless it has been approved by the Office of Management and Budget
(``OMB'') and displays a currently valid control number.\56\ This
rulemaking contains new collections of information, which amend the
existing collection of information set forth in the ``Adaptation of
Regulations to Incorporate Swaps'' final rule,\57\ OMB Control Number
3038-0090, to add a new oral communication recordkeeping requirement
that was not made part of the earlier Final Adaptation Rule. The
Commission has submitted the Proposal containing the oral communication
recordkeeping requirements that have been separately addressed in this
release,\58\ this final rule release, and supporting documentation to
OMB for review in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11.
Responses to these information collections will be mandatory.
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\55\ 44 U.S.C. 3501 et seq.
\56\ Id.
\57\ On November 2, 2012, the Commission published in the
Federal Register the Final Adaptation Rule. The Final Adaptation
Rule promulgated the vast majority of the amendments that the
Proposal had introduced. However, in the Final Adaptation Rule, the
Commission stated that it would address in a separate release
certain of the proposed changes to regulation 1.35 (i.e., the oral
communication recordkeeping requirements).
\58\ See 76 FR 33066, June 7, 2011.
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With respect to all of the Commission's collections, the Commission
will protect proprietary information according to the Freedom of
Information Act and 17 CFR part 145, ``Commission Records and
Information.'' In addition, section 8(a)(1) of the Act strictly
prohibits the Commission, unless specifically authorized by the Act,
from making public ``data and information that would separately
disclose the business transactions or market positions of any person
and trade secrets or names of customers.'' The Commission also is
required to protect certain information contained in a government
system of records according to the Privacy Act of 1974, 5 U.S.C. 552a.
1. Information To Be Provided by Reporting Entities/Persons
a. Amendments to Regulation 1.35 (Records of Commodity Interest and
Related Cash or Forward Transactions)
i. Obligation To Develop and Maintain Recordkeeping Policies and
Controls
The final amendments to regulation 1.35(a) that require
recordkeeping related to oral communications will require that each
FCM, non-Small IB, RFED, and DCM or SEF member that is registered or
required to be registered with the Commission in any capacity, except
if registered as an FT, CPO, SD, or MSP, retain all oral communications
provided or received concerning quotes, solicitations, bids, offers,
instructions, trading, and prices, that lead to the execution of a
commodity interest transaction, whether communicated by telephone,
voicemail, facsimile, instant messaging, chat rooms, electronic mail,
mobile device or other digital or electronic media. The final
amendments to regulation 1.35(a) will also apply to FBs who are members
of a DCM or SEF. However, FBs will only be required to record oral
communications that lead to the purchase or sale for any person other
than the FB of any commodity for future delivery, security futures
product, swap, or commodity option authorized under section 4c of the
Act.
In the Proposal, the Commission anticipated that the aforementioned
registrants may incur certain one-time start-up costs in connection
with establishing a system to record oral communications. The
Commission estimated that the cost of procuring systems to record these
oral communications would be $55,000 for an average large entity that
does not already have such systems in place, and estimated procurement
costs of $10,000 for each small firm that does not already have such
systems in place. Following publication of the Proposal, the Commission
researched these costs further. As discussed below in the Cost-Benefit
Considerations, the Commission now estimates that the cost for
establishing a system to record oral communications on mobile phones
using a cloud-based solution would be $90 per phone line and that the
cost for establishing a system to record oral communications on a
landline using a cloud-based solution would be $50 per phone line. The
Commission estimates further that a small entity required to comply
will have 10 phone lines and that a large entity required to comply
will have 1,000 phone lines. Thus, to figure out the initial cost of
establishing a system for recording oral communications, an entity will
have to multiply the number of phone lines by the cost per line ($50
per landline and $90 per mobile phone). The Commission estimates each
entity to have 50% landlines and 50% mobile phone lines. Therefore, the
initial cost for a small firm (10 phone lines) to establish a system
for recording oral communications would be (5 x $50) + (5 x $90) or
$700, and the initial cost for a large firm (1,000 phone lines) would
be (500 x $50) + (500 x $90) or $70,000. For purposes of the PRA, the
Commission has chosen to use an average initial cost of $35,000.
Also in the Proposal, the Commission estimated the burden hours
associated with these start-up costs to be 135 hours for any entity
that does not already have a system in place. According to research
referenced in the previous paragraph, the Commission now estimates that
an entity will not have to spend any time
[[Page 75534]]
setting up a cloud-based solution for recording oral communications on
a mobile phone or landline because the entity will merely have to
contract for services from an outside vendor. However, an entity will
spend an estimated range of 1 to 10 hours arranging the services of an
outside vendor. If the entity chooses to negotiate the vendor's
contract, the burden hours will be towards the higher end of the range.
The Commission also estimated in the Proposal that one employee
from each affected entity would have to devote one hour per trading day
to ensure the operation of the system to record oral communications.
Pursuant to the research referred to above, the Commission estimates
that employees of those entities who will be required to record oral
communications will not have to spend any time each day to ensure the
operation of the system because the Commission expects that outside
vendors would maintain the system.
ii. Comments Received
As indicated earlier in this rule, in the Final Adaptation Rule,
the Commission stated that it would address in a separate release
certain of the proposed changes to regulation 1.35 and related
amendments to regulation 1.31.\59\ In response to the amendments to
regulation 1.35(a) in the Proposal, the Commission received 35 comment
letters from a variety of institutions, including DCMs, agricultural
trade associations, and agricultural cooperatives.\60\ The Commission
has determined to adopt the Proposal's amendments to regulation
1.35(a), with certain modifications, discussed above, in order to
address the comments the Commission received. In addition, as part of
this final rulemaking, the Commission is making certain related
modifications to the record retention periods set forth in regulation
1.31. The final rules provide for a retention period of one year for
all records of oral communications that lead to the execution of a
transaction in a commodity interest. This modification responds to
comments stating that the proposed retention period of five years for
records of oral communications was too long. This also is consistent
with the final provision for SD and MSP oral communications under new
regulation 23.203(b)(2).\61\ Moreover, in light of comments stating,
among other things, that it would be overly burdensome for Small IBs
and DCM members that do not have customers to comply with the oral
communications recordkeeping requirement, the Commission decided to
exclude these market participants from the oral recordkeeping
amendments to regulation 1.35(a).
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\59\ See supra section I.B.
\60\ Comments are available in the comment file on www.cftc.gov.
\61\ See SD and MSP Recordkeeping Final Rule, 77 FR at 20204
(``Provided, however, that records of oral communications
communicated by telephone, voicemail, mobile device, or other
digital or electronic media pursuant to Sec. 23.202(a)(1) and
(b)(1) shall be kept for a period of one year.'').
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B. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'') requires that agencies
consider whether the rules they propose will have a significant
economic impact on a substantial number of small entities \62\ and, if
so, provide a regulatory flexibility analysis respecting the
impact.\63\ The Commission is adopting a substantive rule change to
regulation 1.35(a). This substantive change would affect FCMs, certain
IBs,\64\ RFEDs, and any member of a DCM or SEF who is registered or
required to be registered with the Commission in any capacity other
than as an FT, CPO, SD, or MSP by requiring them to keep records of all
oral communications leading to the execution of a commodity interest
transaction.
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\62\ The Small Business Administration (SBA) identifies (by
North American Industry Classification System codes) a small
business size standard of $7 million or less in annual receipts for
Subsector 523--Securities, Commodity Contracts, and Other Financial
Investments and Related Activities. 13 CFR Ch. 1, Sec. 121.201.
\63\ 5 U.S.C. 601 et seq.
\64\ See note 2323, supra, for discussion of definition of Small
IB.
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1. FCMs and RFEDs
The Commission has previously determined that registered FCMs and
RFEDs are not small entities for purposes of the RFA.\65\ Accordingly,
the Chairman, on behalf of the Commission, hereby certifies pursuant to
5 U.S.C. 605(b) that the final rules will not have a significant
economic impact on a substantial number of small entities with respect
to these entities.
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\65\ See Policy Statement and Establishment of Definitions of
``Small Entities'' for Purposes of the Regulatory Flexibility Act,
47 FR 18618, 18619 (Apr. 30, 1982) (DCMs, FCMs, and large traders)
(``RFA Small Entities Definitions''); Opting Out of Segregation, 66
FR 20740, 20743 (Apr. 25, 2001) (ECPs); Regulation of Off-Exchange
Retail Foreign Exchange Transactions and Intermediaries, 75 FR
55410, 55416 (Sept. 19, 2010) (RFEDs) (``Retail Forex Final
Rules''); and Position Limits for Futures and Swaps; Final Rule and
Interim Final Rule, 76 FR 71626, 71680 (Nov. 18, 2011) (SEFs).
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2. IBs
Regulation 1.35(a) may have a significant economic impact on IBs
with annual receipts between $5 million and $7 million. The Commission
provided an initial regulatory flexibility analysis in its proposed
rulemaking for all IBs, regardless of their size, as the proposed
rulemaking did not exclude any IBs from the application of the
requirement to keep records of all oral communications.\66\
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\66\ See the Proposal, 76 FR at 33079. To the extent that small
IBs were affected by the proposed rules, the Commission conducted an
initial regulatory flexibility analysis. These final rules exclude
Small IBs, as defined above. The final rules have therefore
significantly reduced the number of IBs affected by regulation
1.35(a). However, to the extent that certain small IBs, for purposes
of RFA, may be affected by these rules, the Commission is conducting
a final regulatory flexibility analysis.
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As discussed above, this final rule will involve substantive
changes to regulation 1.35(a), by requiring, among others, non-Small
IBs to record all oral communications that lead to the execution of a
commodity interest transaction. As indicated above, the Commission
provided an initial regulatory flexibility analysis for IBs in the
Proposal, as required by 5 U.S.C. 603, because the oral recordkeeping
requirement under regulation 1.35(a), as proposed, may have had a
significant economic impact on a significant number of small IBs.\67\
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\67\ See the Proposal, 76 FR at 33079-80.
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The Commission has never previously determined that IBs, as a
registrant category, are not ``small entities'' for the purposes of the
RFA. Instead, historically, the Commission has evaluated within the
context of a particular regulatory proposal whether all or some
affected IBs would be considered to be small entities and, if they are
considered small entities, the economic impact on them of the
particular regulation. Accordingly, the Commission offers, pursuant to
5 U.S.C. 604, the following final regulatory flexibility analysis.
a. A Statement of the Need for, and Objectives of, the Rule
The primary objective of final regulation 1.35(a) is to increase
market integrity by requiring IBs with greater than $5 million in total
aggregate gross revenues over the preceding three years to keep records
of all oral communications leading to the execution of a commodity
interest transaction. This rule is necessary for several reasons.
First, it will protect the integrity of the market as a whole by aiding
the Commission in detecting and deterring market abuse, including
manipulation and false reporting. Additionally, it will make
enforcement investigations more efficient by preserving critical
evidence that otherwise may be lost to memory lapses
[[Page 75535]]
and inconsistent recollections. This, in turn, is expected to increase
the success of enforcement actions, which will benefit customers,
regulated entities, and the markets as a whole.\68\ Moreover, it also
will protect customers from abusive sales practices, protect
registrants from the risks associated with transactional disputes, and
allow registrants to follow-up more effectively on customer complaints
of abuses by their associated persons. Finally, final regulation
1.35(a) provides regulatory parity of futures and swaps markets because
the requirements of final regulation 1.35(a) are consistent with
recently finalized regulations requiring SDs and MSPs to keep records
of all oral communications leading to the execution of a swap
transaction or a related cash or forward transaction.\69\
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\68\ In promulgating its own telephone recording rule, the
Financial Services Authority issued guidance stating the following
benefits: ``(i) Recorded communication may increase the probability
of successful enforcement; (ii) this reduces the expected value to
be gained from committing market abuse; and (iii) this, in
principle, leads to increased market confidence and greater price
efficiency.'' See Financial Services Authority, ``Policy Statement:
Telephone Recording: Recording of voice conversations and electronic
communications'' (Mar. 2008).
\69\ See SD and MSP Recordkeeping Final Rule, 77 FR at 20203-04
(to be codified at 17 CFR 23.202(a)(1) and (b)(1)).
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b. A Statement of the Significant Issues Raised by the Public Comments
in Response to the Initial Regulatory Flexibility Analysis, a Statement
of the Assessment of the Agency of Such Issues, and a Statement of Any
Changes Made in the Proposed Rule as a Result of Such Comments
i. Significant Issues Raised by the Public Comments in Response to the
Initial Regulatory Flexibility Analysis
Comments on the proposed amendments to regulation 1.35(a) primarily
focused on the implications of the proposed oral recordkeeping and
tagging requirements and, in particular, on the portion of the Proposal
requiring all DCM and SEF members, including commercial end-users and
non-intermediaries, to keep records of their cash commodity
transactions. One theme of the comments was that the proposed oral
communications recordkeeping and tagging requirements were overly
burdensome.\70\ Commenters were also concerned that the proposed
separate electronic file requirement was open-ended, seemingly
impossible to achieve,\71\ and overly burdensome. Commenters also
explained that it could be difficult to link conversations occurring
over several days,\72\ and could require the recording of all
conversations \73\ because a call might begin unrelated to a covered
transaction but eventually lead to a covered transaction. Commenters
sought a reasonableness standard regarding oral recordkeeping and a
limitation to exclude oral communications on mobile telephones and
argued that the new oral communications recordkeeping requirement would
be illegal in certain jurisdictions. Commenters also requested that the
proposal to record and store oral communications should be reviewed in
the context of available technology.
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\70\ See, e.g., comments from Amcot (overbreadthover breadth
would be burdensome for agricultural DCM members) and NIBA (at the
very least, small IBs should be exempt from the proposed amendments
to 1.35(a) because the burden on such small entities would be too
great).
\71\ See comment from FIA.
\72\ See comment from CME.
\73\ See id.
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ii. Agency Assessment of Significant Issues Raised by the Public
Comments in Response to the Initial Regulatory Flexibility Analysis
The Commission carefully considered the comments, determined that a
number of concerns and requested alternatives had merit and, as a
result, made a number of adjustments in response. In response to
commenters' concerns that the proposed amendments were overly
burdensome to non-intermediaries' cash agricultural and energy
transactions, the Commission has limited not only the oral
recordkeeping requirements of regulation 1.35(a) to commodity interest
transactions, but also the existing written recordkeeping requirements
therein to commodity interest and related cash and forward
transactions.
Some commenters expressed concerns that the proposed revisions to
regulation 1.35(a) would be unduly burdensome for small entities and
DCM and SEF members who are commercial end-users and non-
intermediaries. In response, the Commission has excluded Small IBs
(those IBs with less than $5 million in total aggregate gross revenues
over the preceding three years) from the application of the rules and
certain DCM and SEF members from the scope of the new requirement to
record oral communications, namely FTs, CPOs, SDs, and MSPs that would
have been obligated to comply by virtue of their status as a DCM or SEF
member.
Commenters also expressed the view that the requirement to keep
transaction records in separate files identifiable by transaction and
counterparty is overbroad, overly burdensome, costly, and/or impossible
to achieve. In response, the Commission has removed the requirement
that each transaction be maintained as a separate electronic file. In
response to a request that covered persons be able to rely on another
Commission registrant's records to satisfy their recordkeeping
obligations, the Commission provided for such reliance in the final
rules, to be applicable only when the records being kept are identical.
The Commission declined to amend the Proposal in response to
certain comments. Although commenters sought a reasonableness standard
regarding oral recordkeeping and a limitation to exclude oral
communications on mobile telephones, the Commission determined to
retain the provisions of the Proposal that any covered communication
must be recorded, whether it occurs on a firm-provided or personal
device.\74\
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\74\ As discussed in more detail above, significant
technological advancements in recent years, particularly with
respect to the cost of capturing and retaining copies of electronic
material, including telephone communications, have made the prospect
of establishing recordkeeping requirements for digital and
electronic communications more economically feasible and
systemically prudent.
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The Commission also has determined not to amend the Proposal in
response to commenters stating that compliance with the new oral
communications recordkeeping requirement would be illegal in certain
jurisdictions. It is not a violation of federal law to record a
telephone call where the person recording the call is a party to the
call or one of the parties to the call has given prior consent to being
recorded.\75\ While state laws differ regarding the ability to record
customer telephone conversations, the difference is in the type of
consent to recording required. Therefore, the most a covered
participant will have to do to comply with the final oral
communications recording rule without violating any other state or
federal laws is to obtain the prior consent of the other parties to the
call to record the conversation. The Commission also notes that DCM
rules currently require all floor personnel who wear headsets to record
their conversations, so there is only an incremental burden to the
entities already subject to those rules, such as FBs.
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\75\ See 18 U.S.C. 2511(2)(d).
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iii. Changes Made in the Proposed Rule as a Result of Such Comments
In response to comments, the Commission incorporated the
following modifications to the Proposal into final regulation 1.35(a):
Reduced the scope of the obligation to record oral
[[Page 75536]]
communications as proposed by limiting it to commodity interest
transactions; reduced the retention period for records of oral
communications leading to a commodity interest transaction from five
years to one; reduced the scope of persons required to record oral
communications from FCMs, RFEDs, IBs and all members of a DCM or SEF to
FCMs, RFEDs, IBs with total aggregate gross revenues of at least $5
million over the preceding three years, and any member of a DCM or SEF
registered or required to be registered with the Commission in any
capacity, other than FTs, CPOs, SDs, and MSPs (although SDs and MSPs
are required to comply with regulations 23.202(a)(1) and (b)(1) which
require recordkeeping of certain oral communications, among other
requirements); eliminated the tagging requirement; and allowed for
covered persons to rely on the records of another Commission
registrant, where appropriate (since reliance will not be appropriate
in all circumstances as discussed in section III above) in complying
with their recording obligations, while confirming that the covered
person will be liable for any violation of the regulation.
iv. Response to ETA Comment Letter
Among other things, the Proposal stated that, except for the
proposed revision to regulation 1.35(a) requiring IBs to maintain
records of voice communications, the Proposal would not have a
significant economic effect on a substantial number of small entities.
The Proposal included a Regulatory Flexibility Analysis with respect to
the proposed requirement that IBs maintain such records. That analysis
concluded with the determination to treat equally all Commission
registrants transacting on behalf of customers with respect to keeping
records of oral communications.
The ETA commented that the Proposal failed to reflect that the vast
majority of the ETA's constituents, electrical utilities that the ETA
believes would be affected by the Proposal, are ``small entities'' and,
therefore, that an analysis under the RFA was required. The ETA's
comment letter did not specify which proposed provisions in the instant
rulemaking would affect its members or into which affected entity
category or categories its members could fall. Notably, the RFA does
not obligate the Commission to analyze the indirect effects on persons
not subject to the rule itself. As the Commission understands, those
electrical utilities that may be small entities will not be FCMs,
RFEDs, IBs with annual receipts of over $5 million, or members of a DCM
or SEF transacting business with customers. Rather, they most likely
will be end-users of the transactions conducted, the recorded rather
than the recorders. As such, there will be no direct, significant
economic impact on these electric utilities. Rather, the impact will be
imposed on the entities through which they may effect transactions.
c. A Description of and an Estimate of the Number of Small Entities to
Which the Rule Will Apply or an Explanation of Why No Such Estimate Is
Available
An IB generally \76\ is defined in CEA section 1a(31)(A) as
follows:
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\76\ CEA section 1a(31)(B), 7 U.S.C. 1a(31)(B), grants the
Commission the authority to further define the term IB.
Any person (except an individual who elects to be and is
registered as an associated person of a futures commission
merchant)--
(i) Who--
(I) Is engaged in soliciting or in accepting orders for--
(aa) The purchase or sale of any commodity for future delivery,
security futures product, or swap;
(bb) Any agreement, contract, or transaction described in
section 2(c)(2)(C)(i) or section 2(c)(2)(D)(i);
(cc) Any commodity option authorized under section 4c; or
(dd) Any leverage transaction authorized under section 19; and
(II) Does not accept any money, securities, or property (or
extend credit in lieu thereof) to margin, guarantee, or secure any
trades or contracts that result or may result therefrom; or
(ii) Who is registered with the Commission as an introducing
broker.\77\
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\77\ 7 U.S.C. 1a(31)(A).
As the Commission stated in the initial Regulatory Flexibility
Analysis, there are an estimated 1,500 IBs registered with the
Commission at any given time. As of June 30, 2012, there were 1,431
registered IBs.\78\ The Commission stated in the Proposal's Regulatory
Flexibility Analysis that a large percentage of registered IBs are
``guaranteed'' IBs,\79\ many of which may be small entities.\80\
However, the Commission estimates that limiting, with respect to IBs,
the scope of final regulation 1.35(a) to non-Small IBs excludes more
than 95% of registered IBs from regulation 1.35's oral communications
recordkeeping requirement. Thus, the Commission expects that no more
than approximately 75 registered IBs will be subject to the final oral
recordkeeping requirements of regulation 1.35(a) at any one time.
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\78\ Source: NFA.
\79\ A guaranteed IB (``GIB'') is an IB that ``does not have to
maintain a partic[ul]ar level of net capital but, instead, is
guaranteed by a particular FCM/RFED and is generally required to
introduce all its business to that FCM/RFED.'' Independent IBs
``must maintain adjusted net capital of at least $45,000 but may
introduce business to any registered FCM/RFED.'' NFA, What is the
difference between an independent IB and a guaranteed IB?, available
at https://www.nfa.futures.org/nfa-faqs/registration_faqs/requirements-for-FCM-IB-applicants/what-is-difference-between-IIB-and-GIB.html last visited Sept. 28, 2012.
\80\ According to the NFA, as of June 30, 2012, there were 832
registered GIBs.
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d. A Description of the Projected Reporting, Recordkeeping, and Other
Compliance Requirements of the Rule, Including an Estimate of the
Classes of Small Entities Which Will Be Subject to the Requirement and
the Type of Professional Skills Necessary for Preparation of the Report
or Record
Regulation 1.35(a), as amended, will require, among others, non-
Small IBs to record all oral communications that lead to the execution
of a commodity interest transaction.\81\ The regulation is primarily a
recordkeeping requirement, which will obligate covered IBs that do not
already do so to record their oral communications \82\ or the oral
communications of their traders and sales forces. The final rules
provide for a retention period of one year for all records of oral
communications that lead to the execution of a transaction in a
commodity interest. This modification responds to comments stating that
the proposed retention period of five years for records of oral
communications was too long. This also is consistent with the final
provision for SD and MSP oral communications under new regulation
23.203(b)(2).
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\81\ The Proposal had required recording of oral communications
that lead to the execution of a commodity interest and cash
commodity transaction. See the Proposal, 77 FR at 33091.
\82\ Covered market participants will be allowed to arrange with
third parties, including DCMs, SEFs, and FCMs, to have access to the
DCMs', SEFs', or other Commission registrants' records and, to the
extent the records are duplicative of what would be required ofby
the covered entity under the rule, may rely on such records to
satisfy their own recordkeeping obligations. The Commission
notesNote, however, that this does not relieve the covered
participant from liability for compliance failures.
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[[Page 75537]]
e. A Description of the Steps the Agency Has Taken To Minimize the
Significant Economic Impact on Small Entities Consistent With the
Stated Objectives of Applicable Statutes, Including a Statement of the
Factual, Policy, and Legal Reasons for Selecting the Alternative
Adopted in the Final Rule and Why Each One of the Other Significant
Alternatives to the Rule Considered by the Agency Which Affect the
Impact on Small Entities Was Rejected
In connection with adopting the final rules, the Commission
considered, as alternatives, establishing different compliance or
reporting requirements that take into account the resources available
to smaller entities, exempting smaller entities from coverage of the
disclosure requirements, and clarifying, consolidating, or simplifying
disclosure for small entities. In response to comments that the
proposed oral communications recordkeeping requirement would be overly
burdensome for small IBs, the Commission dramatically scaled back the
scope of regulation 1.35(a) as it applies to oral recordkeeping by IBs,
reducing by well more than half the number of IBs expected to be
subject to the requirement. The Commission further reduced the impact
on IBs by limiting the oral communications recordkeeping requirement to
commodity interest transactions from the proposed commodity interest
and cash commodity transactions.
Although commenters sought a reasonableness standard regarding oral
recordkeeping and a limitation to exclude oral communications on mobile
telephones, the Commission has retained the provisions of the Proposal
that any covered communication must be recorded, whether it occurs on a
firm-provided or personal device.\83\ The Commission is, however,
ameliorating the impact thereof by stating that it will consider good
faith compliance with policies and procedures reasonably designed to
comply with the oral communications recording requirement as a
mitigating factor when exercising its discretion for violations of the
requirement.
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\83\ As discussed in more detail above, significant
technological advancements in recent years, particularly with
respect to the cost of capturing and retaining copies of electronic
material, including telephone communications, have made the prospect
of establishing recordkeeping requirements for digital and
electronic communications more economically feasible and
systemically prudent.
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C. Consideration of Costs and Benefits
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
the following five broad areas of market and public concern: (1)
Protection of market participants and the public; (2) efficiency,
competitiveness and financial integrity of futures markets; (3) price
discovery; (4) sound risk management practices; and (5) other public
interest considerations. The Commission considers the costs and
benefits resulting from its discretionary determinations with respect
to the section 15(a) factors.
1. Background
The markets subject to the jurisdiction of the Commission have
undergone a significant transformation over the last few decades, and
particularly in the last few years. Technological advances have
contributed to a tremendous growth in trading volume in swaps as well
as other derivatives, including futures, as well as the number and type
of market participants. Among other notable changes, today's derivative
markets include significant numbers of retail customers that invest in
the commodity markets through a variety of means. Markets are also more
interconnected than ever before, with order flow distributed across
multiple trading centers. With this interconnectivity comes not only
positive efficiencies, but also the potential for cross-market
manipulation that can be difficult to detect and prove without ready
access to information evincing the intent of those engaged in market
activity. In addition, the Commission notes that requiring the
recording and retention of oral communications will serve as a
disincentive for covered entities to make fraudulent or misleading
communications to their customers over the telephone and could serve as
a meaningful deterrent against violations such as trading ahead of
customer orders by providing a record of the time that a customer's
telephone order is received.
In July 2010, Congress passed the Dodd-Frank Act which, among other
things, establishes a comprehensive regime for the regulation of swaps.
The Dodd-Frank Act brings swaps under the Commission's jurisdiction and
obligates the Commission to adopt new regulations related to
registration and regulation of SDs and MSPs, trade execution and
clearing requirements, and swap data recordkeeping and real time
reporting. In section 731 of the Dodd-Frank Act, Congress added CEA
section 4s to require the registration and regulation of SDs and MSPs
by the Commission, including the establishment of requirements for SDs
and MSPs to keep records of swap transactions.\84\
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\84\ 76 FR 33066.
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In response to Congress' act of requiring that SDs and MSPs keep
daily trading records of their swaps, including records of
communications made by telephone,\85\ and to be consistent with the
oral communications recordkeeping requirement for SDs and MSPs in
connection with their swap and related cash and forward
transactions,\86\ the Commission is exercising its discretion to amend
its regulations to require FCMs, RFEDs, non-Small IBs (i.e., IBs that
have generated more than $5 million in aggregate gross revenues over
the preceding three years) \87\ and members of a DCM or SEF who are
registered or required to register with the Commission in any capacity
other than FTs, CPOs, SDs, and MSPs to record all oral communications
that lead to the execution of a transaction in a commodity interest.
FBs that are members of a DCM or SEF are required to record all oral
communications that lead to the purchase or sale for any person other
than the FB of any commodity for future delivery, security futures
product, swap, or commodity option authorized under section 4c of the
Act. In this way, the Commission is affording the other markets subject
to its jurisdiction the same market integrity and customer protections
that Congress afforded the swaps markets in the Dodd-Frank Act. The
Commission recognizes that these benefits are not without cost, and has
carefully considered both benefits and costs in light of the
considerations provided in CEA section 15(a) and, where appropriate,
adopted alternatives to the Proposal that would achieve similar
benefits as proposed, but at a lower cost.
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\85\ See 7 U.S.C. 6s(g)(1).
\86\ See SD and MSP Recordkeeping Final Rule, 77 FR at 20203-04
(Regulation 23.202(a)(1) and (b)(1)).
\87\ See note 2323, supra, for discussion of definition of Small
IB.
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2. Summary of the Final Rule
Prior to this amendment, regulation 1.35(a) specified which parties
are required to keep written records related to commodity futures,
commodity options, and cash commodities, and what information they are
required to record. The requirements of regulation 1.35(a) applied to
FCMs, RFEDs, IBs, and DCM members.
[[Page 75538]]
As discussed above, the Commission is adopting a provision
requiring certain entities to record all oral communications leading to
the execution of a transaction in a commodity interest. Unlike existing
regulation 1.35(a), this new provision will apply to FCMs, RFEDs, non-
Small IBs, and DCM and SEF members that are registered or required to
be registered with the Commission in any capacity other than as an FT,
CPO, SD or MSP.
As described above, the Commission considered adopting an exclusion
for certain FBs similar to the exclusion for Small IBs, but determined
to not adopt such an exclusion, in part, because FBs are parties to
oral communications relating to the means or methods by which a trade
will be executed. However, the Commission did determine to limit the
application of the rule to FBs so that an FB will only be required to
record their oral communications that lead to the purchase or sale for
any person other than the FB of any commodity for future delivery,
security futures product, swap, or commodity option authorized under
section 4c of the CEA. This provision of the final rule addressed
commenter concerns that the Proposal inappropriately captured the oral
communications of certain members of DCMs who currently are registered
as FBs, but are solely trading for their own accounts, i.e., acting as
FTs. In addition, in response to comments regarding implementation
challenges associated with oral recordkeeping requirements for SDs and
MSPs, the Commission is extending the implementation deadline to
provide these entities with approximately one year to comply following
the publication of the final rule.\88\ This change provides entities
subject to regulation 1.35(a) with the same amount of implementation
time as was made available to SDs and MSPs.\89\ The Commission believes
that an extended period for implementation is warranted in order to
ensure that entities subject to this rule have adequate time to address
the implementation challenges noted by SIFMA, as discussed below.
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\88\ See letter from SIFMA dated August 10, 2012, Re: Request
for No-Action Relief: Recordkeeping Requirements under the Internal
Business Conduct Rules. Available at: [XXXX].
\89\ See Letter from the Division of Swap Dealer and
Intermediary Oversight of the CFTC to SIFMA, dated Oct. 29, 2012,
CFTC Letter No. 12-29. Available at: https://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/12-29.pdf.
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3. Benefits
By this action, the Commission improves its ability to ensure the
integrity of all the markets subject to its jurisdiction and that
customers are similarly protected, whether they be engaged in a swap
with an SD, or a futures transaction with an FCM.
As stated above, the markets subject to the jurisdiction of the
Commission have undergone a significant transformation over the last
few decades, and particularly in the last few years. Technological
advances have contributed to a tremendous growth in trading volume as
well as the number and type of market participants, including
significant numbers of retail customers that invest in the commodity
markets through a variety of means. Markets are also more
interconnected than ever before, with order flow distributed across
multiple trading centers. This interconnectivity yields important
benefits but also presents increased risk, including the potential for
cross-market manipulation where an action in one market is purposefully
orchestrated to yield a desired outcome in another market. Therefore,
to ensure that the integrity of the markets and customers are similarly
protected across all markets subject to the Commission's jurisdiction,
the Commission must have similar access to information regardless of
whether the market participant is registered, for example, as an SD or
an FCM.
As the Commission explained when adopting similar
transactional level recordkeeping requirements for SDs and MSPs, the
Commission believes these recordkeeping requirements will protect
market participants and promote the integrity of the markets by
ensuring the existence of an audit trail that includes relevant oral
communications. A strong audit trail, among other things: Provides a
basis for efficiently resolving transactional disputes; acts as a
disincentive to engage in unduly risky, injurious, or illegal conduct
in that the conduct will be traceable; and in the event such conduct
does occur, provides a mechanism for policing such conduct, both
internally as part of a firm's compliance efforts and externally by
regulators enforcing applicable laws and regulations.
With respect to the latter-noted benefit--enforcing applicable laws and
regulations--oral records have proven to be no less, and in some cases
perhaps more, valuable than written records alone.\90\
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\90\ See note 4646, supra.
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By requiring records of all communications leading to a transaction
in a commodity interest, the public benefits and the financial
integrity of the markets is protected because additional documentation
enhances the Commission's ability to detect and enforce rule
violations, including manipulation and fraud. In particular, records of
oral communications related to such transactions provide a record of
the facts and circumstances that give rise to a violation that can be
used in enforcement proceedings to redress the same. Effective
enforcement of the Commission's regulations, particularly those
prohibiting fraud and manipulation, protects market participants and
the public and promotes the integrity of the markets subject to the
Commission's jurisdiction.
Notwithstanding the important, practical benefits of the final
rules, the Commission has considered commenters' concerns regarding
costs and product availability.
4. Costs
The public comments related to changes to regulation 1.35(a) can be
broken down into roughly four general categories: Concerns about the
costs of compliance to firms,\91\ concerns about the feasibility of
complying with the requirements of the regulation,\92\ concerns about
market participants choosing to exit the market or of a market
bifurcation,\93\ and privacy concerns.\94\
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\91\ See, e.g., FIA; NFA; ICE, Inc.; Hunton and Williams, LLP;
National Grain and Feed Association, Land O' Lakes; Minneapolis
Grain Exchange, Inc.; CME Group; Commodity Markets Council;
Barclay's Capital; Amcot; Grain and Feed Association of Illinois;
Agribusiness Council of Indiana; Minnesota Grain and Feed
Association; Agribusiness Association of Iowa; American Petroleum
Institute; Ohio AgriBusiness Association; American Feed Industry
Association; South Dakota Grain and Feed Association; Natural Gas
Supply Association; Commodity Markets Council; Natural Gas Supply
Association; the Fertilizer Institute; Kansas City Board of Trade;
Oklahoma Grain and Feed Association; Electric Power Supply
Association; Henderson & Lyman; Rocky Mountain Agribusiness
Association; American Cotton Shippers Association.
\92\ See, e.g., Land O'Lakes; Minneapolis Grain Exchange, Inc.;
CME Group; Commodity Markets Council.
\93\ See, e.g., National Grain and Feed Association; Grain and
Feed Association of Illinois; Agribusiness Council of Indiana;
Minnesota Grain and Feed Association; Agribusiness Association of
Iowa; Ohio AgriBusiness Association; American Feed Industry
Association; Kansas City Board of Trade.
\94\ See, e.g., Virginia Nobbe; American Feed Industry
Association; Henderson and Lyman.
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Commenters cited a broad range of compliance costs associated with
setting up and maintaining systems to record and tag oral
communications. One commenter that is a recording technology provider
stated that it would cost in the range of $50/month to record a
landline phone or $90/month to record a mobile phone with minimal
[[Page 75539]]
fixed setup costs. They also stated that market participants may be
able to negotiate more favorable rates if they are able to sign longer
contracts, or if they have a large number of phones and/or landlines
that need to be recorded. While other commenters did not provide per
line estimates, they did provide aggregate cost estimates that are
significantly higher than those cited above.\95\
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\95\ For example, FIA cited expenditures on the part of several
of its members of between $300,000-$600,000 to upgrade and maintain
their landline phones in order to record conversations and estimated
expenditures of anywhere from $160,000 to $2.5 million to record
conversations on mobile phones depending on firm size. Further, FIA
cited a fee of $500,000 to purchase licenses for ``word spotting''
software to search and retrieve these oral records. The Commercial
Energy Working Group stated that this compliance with the amended
regulation 1.35 could cause costs to firms to ``increase
exponentially'' (they cited an ``unidentified investment bank'' in
the UK that spent $4.2 million each year to monitor its Blackberry
phones in response to a similar Financial Services Authority
mandate).
---------------------------------------------------------------------------
The Commission has considered that the requirement to record and
maintain records of oral communications that lead to the execution of
commodity interest transactions will create additional costs for market
participants subject to the requirements. Those costs include set-up
costs to implement voice recording technology on both landlines and
mobile phones, recurring costs (such as a monthly fee per user or per
phone line to record), and the costs incurred by data storage.
Commenters estimate that for participants using a so-called ``cloud-
based solution,'' the monthly fees would be approximately $90/month/
phone for mobile phones, and approximately $50/month/line for
landlines. The setup costs, in each case, are estimated to be roughly
one month's subscription fees or less.\96\ Commenters estimate that
data storage costs are likely to be approximately $13/month/line.\97\
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\96\ Compliant Phones.
\97\ Id.
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According to commenters, internal recording solutions (i.e., ``non-
cloud-based solutions'') typically entail more significant
implementation costs, though those costs are likely to vary widely
based on existing technology, and particularly on any existing
recording capabilities, that an entity already has. The Commission does
not have adequate data to estimate the number of entities that already
have recording capabilities, or the extent to which such capabilities
are deployed in parts of the organization that would be impacted by the
oral recordkeeping requirements in regulation 1.35.
SIFMA, in response to the final oral recordkeeping requirements for
SDs and MSPs, noted implementation challenges related to recording
calls made on both landlines and cell phones, recording calls outside
the U.S., and the ability to search and retrieve records of calls, and
requested additional time to address those challenges.\98\
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\98\ See SD and MSP Recordkeeping Final Rule, 77 FR 20128. Based
on SIFMA's representations, the Commission determined that relief
from certain oral recordkeeping requirements for SDs and MSPs is
warranted to address the issues presented, and granted no-action
relief to SDs and MSPs until March 31, 2013.
Among other things, SIFMA stated that implementing systems to
record landline conversations will require upgrades to data
retention infrastructure, testing that must occur on nights and
weekends, and overcoming difficulties obtaining products and
services. Further, they stated that mobile phone recording
technology has ``not achieved the levels of stability, performance
and scalability that would be considered for commercial grade
products.'' They stated that shipping delays, testing and
troubleshooting challenges due to different time zones, legal
requirements, and ``an apparent lack of recording capabilities'' in
certain countries and uncertainty about what transactions may be
subject to the requirements would delay efforts to implement
solutions in foreign offices. And last, they asserted that
limitations related to caller identification technology and
associated metadata would prevent SDs and MSPs from rapidly
implementing solutions that would enable them to search and retrieve
calls related to specific counterparties or transactions.
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The Commission, mindful of the fact that the entities subject to
this rule will likely face some of the same implementation challenges,
is providing the same amount of time for entities subject to regulation
1.35(a) to comply as was afforded to SDs and MSPs to comply with
regulations 23.202(a)(1) and (b)(1). In addition, 1.35(a)(4)(i) permits
entities seeking to comply in good faith with the oral communications
recordkeeping requirements of regulation 1.35(a)(1) to submit a request
for relief if compliance is technologically or economically
impracticable for an affected entity prior to the compliance deadline.
The Commission anticipates that the additional time for implementation
will benefit entities subject to this rule by providing more time to
address the challenges noted by SIFMA. Moreover, it will create
opportunities for entities that are subject to this rule to benefit
from solutions developed by vendors serving SDs and MSPs.
The Proposal included an additional requirement that transaction
records be kept in separate electronic files identifiable by
transaction and counterparty.\99\ In response to comments, the
Commission is not adopting that requirement, such that firms are not
required to keep records in separate electronic files. Instead, firms
are only required to identify and retrieve relevant records upon
Commission request. Therefore, the cost associated with ``tagging'' of
oral communication records has been eliminated. Relevant entities,
however, will need to be able to search and select records related to a
particular transaction or counterparty when the Commission requests
them. The Commission expects that this may be done in one of two ways.
Market participants may use an electronic means of scanning records by
key word or they may identify key words and concepts in records
manually by listening to the recordings. In either case, participants
must be able to identify and retrieve records if they are required to
do so by the Commission.
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\99\ With respect to the proposed requirement that entities
proactively identify which communications relate to specific
traders, trades, and counterparties and then ``tag'' them as such,
comments expressed concerns regarding the reliability of
technological solutions. For instance, the FIA writes, ``We
understand that two software providers, NICE Actimize and Nexidia,
offer so-called `word spotting' programs'' but that they believe
that these programs ``are not foolproof and may identify less than
50 percent of potentially relevant conversations.'' The Commercial
Energy Working Group stated that in lieu of an accurate software
solution, manual identification and retrieval of oral records would
require ``as many as 3-5 analysts and 1-2 additional technical
support personnel to support transactions'' for ``a small or modest-
sized end-user commodity business'' and that ``the total cost to a
commodity business is likely to be in excess of $1 million
annually.''
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If, when recordings are requested by the Commission, an entity
chooses to assign or hire personnel to listen to recordings and
identify those being requested, the costs will vary significantly
depending on the number and length of oral communications that must be
reviewed. These variables will, in turn, be influenced by a host of
other factors, including: the number of transactions or counterparties
for which relevant recordings must be identified; the length of time
across which specified traders were active or specified trades were
likely discussed, or the specified counterparties were in contact with
the entity from whom the recordings are requested; the number of oral
communications that specified traders or counterparties made during the
period that may be in question; and the average length of each call.
The Commission estimates that in such cases, an entity might dedicate
personnel to spend as little as 50 hours reviewing recordings, or as
much as 5,000 hours reviewing recordings. The average wage for a
compliance specialist is $155.96 per hour and therefore the cost for
manual review, if an entity chooses that option when the
[[Page 75540]]
Commission requests records, could range from $7,800 to $780,000.\100\
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\100\ The average wage for a compliance specialist is $155.96
[($58,303 per year)/(2,000 hours per year) * 5.35 = $155.96]. For
the purposes of the Cost Benefit Considerations section, the
Commission has used wage estimates that are taken from the SIFMA
``Report on Management and Professional Earnings in the Securities
Industry 2011'' because industry participants are likely to be more
familiar with them. Hourly costs are calculated assuming 2,000 hours
per year and a multiplier of 5.35 to account for overhead and
bonuses. All totals calculated on the basis of cost estimates are
rounded to two significant digits.
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Alternatively, the Commission is aware that vendors that provide
recording services are also capable of providing speech analytic search
capabilities for a set fee. For example, one vendor estimated this cost
at $40 to $80 per user per month.\101\ According to commenters, other
entities may choose to acquire speech analytics services that can be
housed internally rather than on the vendor's servers. Another vendor
stated that the costs would depend on the number of hours sent through
the speech analytics device and that initial deployment costs would
likely range from $160,000 to $1,500,000 for the largest organizations
with ongoing annual fees that are approximately 18% of the initial cost
($29,000--$270,000 per year). Alternatively, small entities can
implement a desktop solution with the same analytics capabilities. The
initial license costs approximately $25,000 per user and 18% ongoing
maintenance fees ($4,500 per year per user).\102\ Another vendor
estimated that setup costs, including relevant licenses, would range
from $450,000 for a small entity to $4,000,000 for a large entity, and
that annual maintenance costs would range from $80,000 to
$800,000.\103\ These numbers assume that entities do not yet have
speech analytics services being used in other parts of the company's
operations that could be expanded to include the oral records required
under this rule. However, the Commission understands that some of the
largest financial entities may already be customers of companies that
provide speech analytics services. As a consequence, the costs for
those entities may be less than if they were implementing speech
analytics services de novo.
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\101\ See Compliant Phones communication.
\102\ See Nexidia communication.
\103\ See NICE communication.
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In response to the Proposal, some commenters expressed concern that
the imposition of more stringent recordkeeping requirements on DCM
members could prompt a bifurcation in the markets for certain services
because of the compliance cost advantage that market participants who
are not DCM members enjoy.\104\ They suggested that entities that are
DCM members might stop offering services that make them subject to the
regulation 1.35 requirements.\105\
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\104\ Several commenters submitted a form letter addressing this
point. Entities submitting this letter, with minor modifications in
some cases, include: National Grain and Feed Association, Grain and
Feed Association of Illinois, Agribusiness Council of Indiana,
Minnesota Grain and Feed Association, Agribusiness Association of
Iowa, Ohio AgriBusiness Association, South Dakota Grain and Feed
Association, Kansas City Board of Trade, and Oklahoma Grain and Feed
Association.
\105\ For instance, the Kansas City Board of Trade writes that
the operators of delivery warehouses are often required to be DCM
members and that the added expense of compliance with regulation
1.35 could cause firms to withdraw from the business of providing
warehousing services, thereby decreasing market competitiveness.
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In the Proposal, the Commission proposed to include FCMs, RFEDs,
IBs, and all DCM and SEF members under the oral recordkeeping
requirement and also proposed that such recordkeeping requirements
would apply to all transactions in commodity interests and cash
commodities. However, in the final rule, the Commission amended
regulation 1.35(a) such that Small IBs and members of DCMs and SEFs who
are not otherwise registered or required to be registered with the
Commission in any capacity, as well as those members registered as FTs,
CPOs, SDs, and MSPs, are not subject to the oral communication
recordkeeping requirements under regulation 1.35(a). The limiting
principle for the determination of which classes of registrants must
comply with the final rule are, as discussed further above,
transactions by entities that could affect both market integrity and
customer protection.
Finally, some commenters expressed concern that if employees of a
regulated entity use personal phones (either landline or mobile) for
business purposes, calls on those lines must be recorded. Commenters
stated privacy concerns with the same. However, simple solutions to
protect employee privacy do exist. For example, depending on the
policies of the firm, it is possible for certain phone numbers to be
excluded from recording.\106\ Alternatively, the company could
institute a policy that employees are not to conduct personal business
on recorded lines.
---------------------------------------------------------------------------
\106\ See Compliant Phones communication.
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In addition, amendments in this final rule will require SEF members
to comply with regulation 1.35, and it is likely that some of those
members will not have been subject to regulation 1.35(a) previously. In
addition to the costs related to oral communications recordkeeping,
mentioned above, the Commission estimates that SEF members that are
newly subject to regulation 1.35(a) will spend additional time each day
compiling and maintaining transaction records. The Commission estimates
that the cost of that additional time is $236,000 to $393,000 per
entity per year.\107\
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\107\ This is estimated to take 6-10 hours per day (assuming 252
days per year) of the time of an office services supervisor. The
average wage for an office services supervisor is $155.96 [($58,303
per year)/(2,000 hours per year) * 5.35 = $155.96]. $155.95*6*252 =
235,812.31. $155.95*10*252 = 393,020.52.
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Also, the amendments in this final rule will require FCMs, RFEDs,
IBs, and members of DCMs to comply with the regulation 1.35(a)
recordkeeping requirements for any swap transactions into which they
enter. The Commission estimates that such entities will spend an
additional 0.5 hours per swap capturing and maintaining the records
required under regulation 1.35(a), and therefore estimates that the
per-swap cost will be $83.00.\108\
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\108\ This estimates 0.5 hours of time from an office services
supervisor. The average salary for an office services supervisor is
$165.25/hour [($61,776 per year)/(2,000 hours per year) * 5.35 =
$165.25 per hour]. $165.25*0.5 = $82.63.
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4. Consideration of Alternatives
As compared to the Proposal, the Commission has limited the range
of entities that are subject to the oral recordkeeping requirement,
narrowing it to entities that could affect market integrity and
customer protection by way of their function as intermediaries for
other parties. The Commission also has limited the range of
transactions that are subject to the requirement from commodity
interest and cash commodity transactions to commodity interest
transactions. Limiting the range of entities that must record and keep
oral communications reduces the number of entities that must bear the
costs of creating and maintaining records required by regulation
1.35(a). In particular, by excluding from the new regulation 1.35(a)
oral communications recordkeeping provisions Small IBs and DCM or SEF
members that are registered as FTs or CPOs, or SDs or MSPs (as SDs and
MSPs are covered by regulations 23.202(a)(1) and (b)(1)), or neither
registered nor required to be registered with the Commission in any
capacity, certain entities such as agricultural cooperatives, energy
end-users and other smaller entities that may transact on DCMs and SEFs
on their own behalf, but not on behalf of customers, avoid mandatory
recordkeeping costs.
[[Page 75541]]
As noted above, new regulation 1.35 will not require entities to
keep records in separate electronic files. Instead, the amendments as
adopted require only that subject entities be able to identify which
records relate to specific parties or transactions when requested to do
so by the Commission. Such requests are infrequent for any one market
participant, and therefore the costs of complying with them will be far
less than what would have been the case under the proposed rule.
As described above, the Commission considered alternatives to
compliance, including various safe harbors, but determined not to adopt
them. For example, the Commission has considered, but declines to
adopt, recommendations that it include a ``reasonableness'' standard
because such a standard could result in market participants documenting
policies and procedures but failing to vigorously monitor for
compliance with the same. The Commission also declines to adopt this
recommendation as inconsistent with the requirements applicable to SDs
and MSPs under Part 23 of the Commission's regulations. Rather, the
Commission determines that it would be more appropriate to consider
good faith compliance with policies and procedures reasonably designed
to comply with the oral communications recording rule as a mitigating
factor when exercising its enforcement discretion with respect to
violations of the rule.
5. Consideration of Section 15(a) Factors
(1) a. Protection of Market Participants and the Public
The oral recordkeeping requirement in regulation 1.35(a) will
protect market participants and the public by ensuring the existence of
an audit trail that includes relevant oral communications. A strong
audit trail, among other things, provides a basis for resolving
transactional disputes; acts as a disincentive to engage in unduly
risky, injurious or illegal conduct in that the conduct will be
traceable; and in the event such conduct does occur, provides a
mechanism for policing such conduct, both internally as part of a
firm's compliance efforts and externally by regulators enforcing
applicable laws and regulations.
(2) b. Efficiency, Competitiveness, and Financial Integrity of Futures
Markets
Requiring records of all oral communications leading to a
transaction in a commodity interest promotes the efficiency,
competitiveness and financial integrity of the markets by increasing
the Commission's ability to detect and prosecute violations of the Act
and the Commission's rules related to fraud, manipulation and other
disruptive trade practices.
(3) c. Price Discovery
Neither the Commission nor commenters have identified consequences
for price discovery that are expected to result from this rule.
(4) d. Sound Risk Management Practices
The Commission believes that proper recordkeeping--though likely to
require initial investment in recordkeeping and other back office
systems--is essential to risk management because it facilitates an
entity's awareness of its transactions, positions, trading activity,
internal operations, and any complaints made against it, among other
things. Such awareness supports sound internal risk management policies
and procedures ensuring that decision-makers within affected entities
are fully informed about the entity's activities and can take steps to
mitigate and address significant risks faced by the firm. When
individual market participants engage in sound risk management
practices the entire market benefits. Accordingly, the Commission
believes that this final rule, notwithstanding the potential costs
identified above, will promote the public interest in sound risk
management.
(5) e. Other Public Interest Considerations
The Commission has not identified any other public interest
considerations that could be impacted by the oral communications
recordkeeping rule under regulation 1.35(a).
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, under the authority of 7
U.S.C. 1 et seq., the Commodity Futures Trading Commission hereby
amends Chapter I of Title 17 of the Code of Federal Regulations 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, 2a, 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, as
amended by Title VII of the Dodd-Frank Wall Street Reform and
Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376 (2010).
0
2. Amend Sec. 1.31 by revising paragraph (a)(1) to read as follows:
Sec. 1.31 Books and records; keeping and inspection.
(a)(1) All books and records required to be kept by the Act or by
these regulations 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; Provided, however, That records
of any swap or related cash or forward transaction shall be kept until
the termination, maturity, expiration, transfer, assignment, or
novation date of the transaction and for a period of five years after
such date. Records of oral communications kept pursuant to Sec. Sec.
1.35(a) and 23.202(a)(1) and (b)(1) of this chapter shall be kept for a
period of one year. All such books and records shall be open to
inspection by any representative of the Commission, or the United
States Department of Justice. For purposes of this section, native file
format means an electronic file that exists in the format in which it
was originally created.
* * * * *
0
3. Amend Sec. 1.35 by revising the section heading and paragraph (a)
to read as follows:
Sec. 1.35 Records of commodity interest and related cash or forward
transactions.
(a) Futures commission merchants, retail foreign exchange dealers,
introducing brokers, and members of designated contract markets or swap
execution facilities. (1) Each futures commission merchant, retail
foreign exchange dealer, introducing broker, and member of a designated
contract market or swap execution facility shall keep full, complete,
and systematic records, which include all pertinent data and memoranda,
of all transactions relating to its business of dealing in commodity
interests and related cash or forward transactions. Included among such
records shall be all orders (filled, unfilled, or canceled), trading
cards, signature cards, street books, journals, ledgers, canceled
checks, copies of confirmations, copies of statements of purchase and
sale, and all other records, which have been prepared in the course of
its business of dealing in commodity
[[Page 75542]]
interests and related cash or forward transactions. Among such records
each member of a designated contract market or swap execution facility
must retain and produce for inspection are all documents on which trade
information is originally recorded, whether or not such documents must
be prepared pursuant to the rules or regulations of either the
Commission, the designated contract market or the swap execution
facility. For purposes of this section, such documents are referred to
as ``original source documents.'' Such records shall be kept in a form
and manner identifiable and searchable by transaction. Also included
among the records required to be kept by this paragraph are all oral
and written communications provided or received concerning quotes,
solicitations, bids, offers, instructions, trading, and prices that
lead to the execution of a transaction in a commodity interest and
related cash or forward transactions, whether communicated by
telephone, voicemail, facsimile, instant messaging, chat rooms,
electronic mail, mobile device, or other digital or electronic media;
provided, however, the requirement in this paragraph (a)(1) to record
oral communications shall not apply to:
(i) Oral communications that lead solely to the execution of a
related cash or forward transaction;
(ii) Oral communications provided or received by a floor broker
that do not lead to the purchase or sale for any person other than the
floor broker of any commodity for future delivery, security futures
product, swap, or commodity option authorized under section 4c of the
Commodity Exchange Act;
(iii) An introducing broker that has generated over the preceding
three years $5 million or less in aggregate gross revenues from its
activities as an introducing broker;
(iv) A floor trader;
(v) A commodity pool operator;
(vi) A swap dealer;
(vii) A major swap participant; or
(viii) A member of a designated contract market or swap execution
facility that is not registered or required to be registered with the
Commission in any capacity.
(2) For purposes of paragraph (a)(1) of this section, ``related
cash or forward transaction'' means a purchase or sale for immediate or
deferred physical shipment or delivery of an asset related to a
commodity interest transaction where the commodity interest transaction
and the related cash or forward transaction are used to hedge, mitigate
the risk of, or offset one another.
(3) 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.
(4)(i) The Commission may in its discretion establish an
alternative compliance schedule for the requirement to record oral
communications under paragraph (a)(1) of this section that is found to
be technologically or economically impracticable for an affected entity
that seeks, in good faith, to comply with the requirement to record
oral communications under paragraph (a)(1) of this section within a
reasonable time period beyond the date on which compliance by such
affected entity is otherwise required.
(ii) A request for an alternative compliance schedule under
paragraph (a)(4)(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)(4)(i) of this section.
(iv) Relief granted under paragraph (a)(4)(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 17, 2012, by the
Commission.
Sauntia S. Warfield,
Assistant Secretary of the Commission.
Note: The following appendices will not appear in the Code of
Federal Regulations.
Appendices to Adaptation of Regulations To Incorporate Swaps--
Commission Voting Summary and Statements of Commissioners
Appendix 1--Commission Voting Summary
On this matter, Chairman Gensler and Commissioners Sommers,
Chilton, O'Malia and Wetjen voted in the affirmative; no
Commissioner voted in the negative.
Appendix 2--Statement of Chairman Gary Gensler
I support the final rule to amend 1.31 and 1.35(a) of the
Commodity Futures Trading Commission's (CFTC) regulations to conform
them to recordkeeping requirements for swap dealers and major swap
participants. The rule enhances the Commission's enforcement program
for the futures market to promote market integrity and protect
customers.
These conforming amendments integrate the CFTC's regulations
with the Dodd-Frank Wall Street Reform and Consumer Protection Act
(Dodd-Frank Act), which expanded the scope of the Commodity Exchange
Act to include swaps.
As proposed, the rule would have required members of a
designated contract market (DCM) or swap execution facility (SEF) to
record all oral communications that lead to the execution of a
transaction in a cash commodity. The Commission received numerous
comments about the effect of such a requirement on members of the
agricultural community that trade in cash commodities and are not
required to be registered with the Commission other than, in some
cases, as floor traders.
In consideration of comments, the Commission adopted
modifications that preserve the rule's purpose without adversely
affecting the agricultural community. Only those oral communications
that lead to a transaction in a commodity interest (i.e. a commodity
futures contract, commodity option contract, foreign exchange
contract, or swap) will have to be recorded. Furthermore, only FCMs,
certain introducing brokers (IBs), retail foreign exchange dealers
(RFEDs), and those members of a DCM or SEF who are registered or
required to be registered with the Commission (except for floor
traders, commodity pool operators, swap dealers, major swap
participants, and floor brokers who trade for themselves) will have
to record oral communications.
Market participants that must comply will be required to record
communications relating to: Quotes, solicitations, bids, offers,
instructions, trading, and prices that lead to the execution of a
transaction in a commodity interest. Methods of communication that
fall under the rule include telephone, voicemail, facsimile, instant
messaging, electronic mail, mobile device, or other digital or
electronic media. Thus, the rulemaking also clarifies that the
existing requirement under regulation 1.35(a) to keep written
records applies to electronic written communications, such as emails
and instant messages. Records of oral communications must be kept
for one year.
The rule will make enforcement investigations more efficient by
preserving
[[Page 75543]]
critical evidence that otherwise may be lost to memory lapses and
inconsistent recollections. The Commission will have access to
evidence of fraud and market manipulation, which is expected to
increase the success of enforcement actions for the benefit
customers, market participants and the markets. Moreover, it also
will protect customers from abusive sales practices, lower the risk
of transactional disputes and allow registrants to follow-up more
effectively on customer complaints.
[FR Doc. 2012-30691 Filed 12-20-12; 8:45 am]
BILLING CODE 6351-01-P
