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CFTC Adaptation of Regulations to Incorporate Swaps - Records of Transactions (Final Rule; Fed. Reg. Version) (with Lofchie Comment)

NOTE: THIS NEWS ITEM WAS ORIGINALLY POSTED ON THE CABINET ON DECEMBER 17, ALBEIT WITHOUT THE FINAL RULE ATTACHED AS IT WAS NOT YET AVAILABLE. THE DESCRIPTION AND COMMENTS BELOW ARE FROM THE ORIGINAL NEWS ITEM, BUT WE HAVE ALSO ATTACHED THE FINAL RELEASE. IN ADDITION TO THE DISCUSSION BELOW, WE HAD ALSO PUBLISHED A BRIEF CAUTION WARNING FIRMS OF THE SOME OF THE STATE LAW REQUIREMENTS ON TAPING OF PHONE CONVERSATIONS, TO WHICH WE LINK HERE.

The CFTC announced that it has approved a final rule to expand the CFTC's recordkeeping requirements. The announced rule change will amend CFTC Rules 1.35(a) (Records of Cash Commodity, Futures, and Option Transactions) and 1.31 (Books and Records; Keeping and Inspection) to conform them to recordkeeping requirements for SDs and MSPs under Dodd-Frank.

  • The final rule amends Rule 1.35(a) to require that FCMs, IBs with aggregate gross revenue exceeding $5 million over the preceding three years, retail fx dealers ("RFEDs"), and certain members of designated contract markets ("DCMs") and swap execution facilities ("SEFs") record all oral communications. As to oral communications, these market participants will be required to record 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.
  • Rule 1.31 is being amended to require that records of oral communications be kept for one year.
  • Under the final rule, subject firms must 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. For purposes of the final rule, 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 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.
  • Records of written communications must be retained for 5 years and be readily available for the first 2 years (as per existing CFTC Rule 1.31).
  • According to the CFTC, under the final rule (unlike the proposed rule), records will not have to be kept in separate electronic files identifiable by transaction and counterparty. Instead, the final rule will require that such records be kept in a form and manner identifiable and searchable by transaction. According to the CFTC, those required to comply will be allowed to maintain searchable databases of the required records without the added cost and time needed to compile the required records into individual electronic files.

As originally proposed, the rule would have included oral communications that lead to the execution of a transaction in a cash commodity, as well as in a swap. The final rule is narrower in not applying to transactions, and also applies to a somewhat narrower class of persons.

According to the CFTC, the rule is intended to help the CFTC "preserve critical evidence in enforcement investigations that will help protect customers."

Effective date: February 19, 2013.

Lofchie Comment: The CFTC seems to be touting this rule adoption as a kinder and gentler version of the original rule proposal. As for me, I don't actually understand how firms are going to develop searchable databases of oral communications when the communications relate to indeterminate transactions that may or may not ever occur. Further, if a firm discusses one transaction with a client, and then does three transactions that are on different terms entirely, what does one do with the original discussion; how does a firm decide whether that discussion related to any of the three actual transactions? Nor do I understand why the database format required by the rule is so much lighter an obligation than that of maintaining individual electronic files? Isn't each item in the database distinguishable from the rest? To me, this requirement looks enormously expensive, and I don't understand how compliance can be achieved. (On the other hand, I never understood how those guys in Star Trek were able to travel as beams of light, so quite likely I am missing some recent technology development.)

On the bright side, I am very much hoping that this rule change will lead to millions of dollars in legal work in advising when an oral communication is deemed to lead to a transaction.

View Final Rule here (links externally to GPO website).
See: Questions and Answers: Adaptation of Regulations to Incorporate Swaps – Records of Transactions.
See also: Fact Sheet: Adaptation of Regulations to Incorporate Swaps – Records of Transactions; Chairman Gensler's Statement of Support.

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