CFTC Adopts Amendments to Recordkeeping Rules to Provide Relief to End-Users
Commentary by Steven Lofchie
The CFTC unanimously approved a final rule to amend CFTC Rule 1.35(a) ("Records of Commodity Interest and Related Cash or Forward Transactions") to reduce certain recordkeeping requirements imposed on end-users. Much of the rulemaking codifies existing no-action relief provided by the CFTC staff.
Specifically, the final rule:
- excludes members of a designated contract market ("DCM") or swap execution facility ("SEF") that are not CFTC-registrants from the requirement to keep certain written recordkeeping requirements, including written pre-trade communications and transaction records transmitted via text messages;
- excludes commodity trading advisors that are members of a DCM or SEF from the requirement to keep records of oral pre-trade communications;
- permits CFTC-registrants to keep their paper and electronic records in a manner they deem prudent and appropriate for their particular business rather than requiring conversion to searchable electronic databases;
- requires pre-trade oral records to be maintained in some circumstances, but the requirement that the communications be traceable to a particular transaction was deleted: it is only required that such records be "searchable"; and
- defines separate categories of required records and then separately specifies for each type of CFTC-registrant, and for DCMs and SEFs that are not CFTC-registrants, the category or categories of records each is required to keep.
In a supporting statement, CFTC Commissioner J. Christopher Giancarlo (who voted against the proposal), said he thought that the final rule "gets the balance right," and noted that certain of the issues with the proposal he noted in his dissent were addressed in the final rulemaking.
Commentary
Kudos to the current Commissioners for doing a bit of clean-up. Hopefully, more of this to come.
As to the deletion of the requirement that pre-trade oral communications be traceable to a particular transaction, the release states (at page 7): the CFTC "noted that access to searchable pre-trade communications is an important element of its oversight of the derivatives market and enforcement of Commission rules and regulations. The Commission recognized, however, that keeping these records in a form and manner that allows for the identification of a particular transaction could pose significant challenges to some market participants."
This explanation for the deletion of the requirement could strike one as somewhat funny, in a dry sort of way. The true reason that the requirement was problematic was not that it was difficult: rather it was, as a practical matter, impossible. Further, it was not difficult for just "some market participants"; as a practical matter, it was impossible for all market participants.
That a rule requirement was adopted that cannot be accomplished at any realistic price is a good indicator that other adopted requirements should be subject to review and repeal.