On May 22, 2014, the CFTC staff provided no-action relief to members of swap execution facilities (“SEF”s) and designated contract markets (“DCM”s) who are not registered or required to be registered with the CFTC in any capacity (“Covered Members”) from certain recordkeeping requirements relating to text messages and to record storage format.1 According to CFTC Acting Chairman Mark Wetjen, the relief comes in an effort to promote trading on SEFs and DCMs by reducing “unworkable and costly recording requirements” on end-users.2
Acting Chairman Wetjen concurrently announced two other actions, stating that these collective actions are an effort to reduce the “negative, unintended consequences” that market regulations may have on commercial end-users. The two other actions are (i) a proposed rule amendment to adjust the de minimis threshold for determining if an entity that enters into swaps with utility special entities must register as a swap dealer,3 and (ii) a roundtable and reopening of the comment period on the proposed rules on position limits and aggregation of the position limits, specifically in relation to hedging of physical commodities by commercial market participants.4
The three CFTC actions are summarized below.
Relief From Recording Text Messages and Record Searchability Requirements
The no-action letter grants limited relief to Covered Members from certain recordkeeping requirements under Regulation 1.35(a).5 As amended, Regulation 1.35(a) requires certain entities to 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… in a form and manner identifiable and searchable by transaction, [including] 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.6
The CFTC’s relief is in response to a letter written to the CFTC by the Commodity Markets Council (“CMC”) in December 2013 (“CMC December 2013 Letter”) and public comments made during and after a roundtable in April 2014. The CMC expressed that while text messages, instant messaging and other electronic communications have replaced telephone conversations as the primary mode of communication for Covered Members, Covered Members have not found a technology solution for searching, retaining and archiving the communications in a way that is not cost-prohibitive.7 End-users additionally expressed to the CFTC that this challenge exists particularly with respect to text messages. Moreover, the Federal Home Loan Banks asserted that they are concerned about their ability to meet the searchability requirement of Regulation 1.35(a) with respect to cash or forward transactions related to, or executed in connection with, their swap transactions.8
As a result, the CFTC staff has granted limited relief to Covered Members from keeping digital or electronic written communications, specifically with respect to text messages. Covered Members will still be required to keep all other written records, including other types of electronic and digital media, such as emails and instant messages.9 Further relief is granted to Covered Members from keeping written records of all transactions relating to their business of dealing in commodity interests and related cash or forward transactions in a form and manner identifiable and searchable by transaction.
The relief is described as time-limited, and will apply until the effective date of any CFTC action in response to the CMC December 2013 Letter, which may include a rulemaking, an order, or a decision to take no further action.10
Position Limit Comment Period Extension
In a concurrent action, the CFTC staff announced that a public roundtable will be held on June 19, 2014 to consider certain issues regarding position limits for physical commodity derivatives. The CFTC is re-opening the comment period for the proposed rules on speculative position limits and related aggregation.11 The comment period on these proposed amendments will reopen on June 12, 2014 and end on July 3, 2014.12
The current Part 150 position limits regime applies to futures and option contracts in nine enumerated agricultural commodities,123while the proposed rule aims to establish speculative position limits for 28 exempt and agricultural commodity futures and option contracts and physical commodity swaps that are economically equivalent to such contracts.14 In addition, the proposed rule on aggregation changes the rules regarding which accounts and positions must be aggregated for the purpose of determining compliance with the position limit levels.15
Comments should be limited to the issues of hedges of a physical commodity by a commercial enterprise, including:
- gross hedging;
- cross-commodity hedging;
- anticipatory hedging;
- the process for obtaining a non-enumerated exemption;
- the setting of spot month limits in physical-delivery and cash-settled contracts and a conditional spot-month limit exemption;
- the setting of non-spot limits for wheat contracts;
- the aggregation exemption for certain ownership interests of greater than 50% in an owned entity; and
- aggregation based on substantially identical trading strategies.
- Proposed Rule Amendment on Utility Swaps
The third concurrently announced action proposes to amend current regulations to permit an entity, when trying to determine whether it must register as a swap dealer, to exclude utility operations-related swaps with utility special entities when calculating whether it has exceeded the de minimis threshold specific to “special entities.”16 The CFTC is seeking comments on the proposal; the comment period will close 30 days after the proposal is published in the Federal Register.