U.S. Commodity Futures Trading Commission (CFTC) Regulation 1.35 requires futures commission merchants (FCMs), retail foreign exchange dealers (RFEDs), introducing brokers (IBs) and members of a swap execution facility (SEF) or designated contract market (DCM) (each a Covered Person and collectively, Covered Persons) to keep full, complete and systematic records of all transactions relating to commodity interest transactions (i.e., futures, options, swaps and other instruments subject to the Commodity Exchange Act) and related cash or forward transactions. In December 2015, the CFTC adopted a final rule (the Final Rule)1 to amend CFTC Regulation 1.35 in light of concerns raised by market participants subject to this regulation. Specifically, the Final Rule amended Regulation 1.35 to clarify the form and manner in which certain records must be kept and to reduce certain recordkeeping requirements for commodity trading advisors (CTAs) and members of a SEF or DCM that are not registered, or required to register, with the CFTC (Unregistered Members). The Final Rule became effective upon its publication in the Federal Register on December 24, 2015. Below we summarize the Final Rule and its applicability to various market participants.
In 2012, the CFTC amended certain of its existing regulations in order to integrate those regulations within the framework of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Included among those amendments, the CFTC extended Regulation 1.35 to apply to swaps and members of a SEF.2
Various market participants raised concerns about the practical impact of these amendments to Regulation 1.35 and argued that the heightened recordkeeping obligations imposed by the regulation imposed an undue burden on market participants, particularly Unregistered Members. In response, on May 22, 2014, the CFTC’s Division of Market Oversight (DMO) granted Unregistered Members temporary no-action relief from the requirements to (i) retain text messages and (ii) maintain records, required to be kept under the rule, in a form and manner identifiable and searchable by transaction.3
On November 14, 2014, the CFTC issued for public comment a notice of proposed rulemaking to amend Regulation 1.35(a) (the Proposed Rule) that would have codified the no-action relief previously granted by DMO.4 Numerous market participants submitted comments to the CFTC on the Proposed Rule requesting that the CFTC amend and clarify certain aspects of the Proposed Rule.
The Final Rule
The CFTC adopted the Final Rule largely as it was proposed. Specifically, the Final Rule amended Regulation 1.35(a) to:
(i) Clarify that all records, except for records of oral and written communications leading to the execution of a commodity interest transaction and related cash or forward transactions, must be kept in a form and manner that allows for identification of a particular transaction;
(ii) Exclude Unregistered Members from the requirements to:
a. Keep written communications that lead to the execution of a commodity interest transaction and related cash or forward transactions;
b. Retain text messages5; and
c. Maintain records in a particular form and manner; and
(iii) Exclude CTAs from the oral recordkeeping requirement.
There are two key differences between the Final Rule and the Proposed Rule:
First, the CFTC provided greater clarity with respect to the form and manner in which certain records must be kept and maintained. Specifically, the CFTC noted that the Final Rule does not impose a specific methodology by which records must be searched or retrieved and does not require a Covered Person to convert its records to searchable electronic files or to electronically “tag” its records.6Rather, a Covered Person may maintain its records in a manner that it deems appropriate, as long as this manner permits prompt, accurate and reliable location, access and retrieval of any particular record, data or information.7
Second, the CFTC excluded Unregistered Members from the requirement to maintain written communications leading to the execution of a commodity interest transaction and related cash or forward transactions. Under the Proposed Rule, the CFTC proposed to exclude Unregistered Members from the requirements only to (i) retain text messages and (ii) maintain records in a particular form and manner.8 Accordingly, under amended Regulation 1.35, Unregistered Members need not retain pre-execution communications. Thus, going forward, Unregistered Members need only retain final records of their commodity interest transactions and related cash or forward transactions.
The Final Rule also reorganized the text of Regulation 1.35 to more clearly define the regulatory obligations of parties governed by Regulation 1.35. The CFTC noted that this reorganization was not intended to modify any regulatory obligations under Regulation 1.35.9