NFA Notice: New Recordkeeping Requirements (with comments from Lofchie and from Hollingsworth Consulting)

The National Futures Association ("NFA") released a notice regarding new recordkeeping requirements under NFA Compliance Rule 2-10(a) ("Recordkeeping") and CFTC Rule 1.35(a) ("Records of Commodity, Interest and Related Cash or Forward Transactions"), as well as guidance for other CFTC registrants on complying with the new recordkeeping requirements.

NFA Compliance Rule 2-10(a) provides that each member should maintain records which are necessary and appropriate to conduct its business, including the records required to be kept by CFTC Rule 1.35(a). CFTC Rule 1.35(a) was amended in December 2012 to include certain oral communications in the required records that FCMs, certain IBs and RFEDs must maintain, and the Rule becomes effective on December 21, 2013. The notice explains these new recordkeeping requirements and also provides guidance for when covered FCMs, IBs or RFEDs may reasonably rely upon a designated contract market, swap execution facility, or other CFTC registrant to maintain certain records on their behalf.

Lofchie Comment: The comment below emphasizes the expense of the rule. I would also point out the following language in the notice:"Regulation 1.35(a)(4)(i) provides that the CFTC's Director of the Division of Swap Dealer and Intermediary Oversight (DSIO) may establish an alternative compliance schedule if the requirement to record oral communications is found to be technologically or economically impracticable for an affected entity that seeks, in good faith, to comply with the requirement. DSIO has informed NFA that each affected [firm] must submit a request for relief to DSIO (and not NFA) [meeting certain specified conditions] including: factual basis why its claim that compliance with the oral communications recordkeeping requirement is technologically or economically impracticable. . . CFTC Regulation 1.35(a)(4)(ii) provides that a firm's request for relief shall be acted upon within 30 days or it shall be deemed approved."In light of the significant expense of complying the rule (even assuming that such compliance is technologically feasible), firms are advised to consider submitting an application for relief.

Hollingsworth Comment*:As it is impossible to determine, at the outset of any conversation, whether the conversation could "lead to the execution of a transaction in a commodity interest," any reasonable attempt to comply with this rule necessarily will involve tape-recording every conversation. This practical reality was raised in the comment letters, but appears to have gone unaddressed in the CFTCs cost-benefit analysis, which rests largely on the questionable assumption that only a limited number of conversations fall within the rule's scope. The CFTCs cost-benefit analysis relies on the idea that recorded conversations may be helpful in future enforcement actions, which is almost certainly the case. The more relevant question, which the adopting release does not address, is whether past enforcement actions have been hindered by a lack of recorded conversations in a manner that would justify the significant expense and operational burdens of compliance with this rule.

See: NFA Notice I-13-25. See also: Adaptation of Regulations To Incorporate Swaps—Records of Transactions; CFTC Final Rule (77 FR 75523, Dec. 21, 2012).Related News: "CFTC Announces Approval of Final Rule on Recordkeeping (with Lofchie Comment)" (Dec. 17, 2012).