The U.S. Commodity Futures Trading Commission (CFTC) held an open meeting in early November 2014 at which it discussed and proposed, among other agenda items, amendments to rules regarding recordkeeping related to commodity interest and related cash and forward transactions (Covered Transactions).1 The Proposed Rule would amend the CFTC’s existing recordkeeping requirements under Regulation 1.35(a), thereby exempting commodity trading advisors (CTAs) from needing to keep and maintain records of oral communications related to Covered Transactions.
Current Rule and Historical Context
The current rule, in relevant part, includes a requirement that CTAs registered or required to be registered as such that are also members of a designated contract market (DCM, a traditional commodity exchange) or a swap execution facility (SEF, the new swaps trading platform) keep records of all oral communications related to Covered Transactions. The version of the rule in effect prior to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) only applied to futures commission merchants (FCMs), introducing brokers, retail foreign exchange dealers, and members of DCMs. Historically, very few buy-side commodity interest market participants (which includes CTAs, commodity pool operators, and proprietary traders, among others) were members of DCMs, a status that was generally reserved for trade execution intermediaries such as FCMs and other clearing members of DCMs. Therefore the applicability of the recordkeeping requirements contained in the previous version of the rule were limited in applicability to the buy-side.
The Dodd-Frank Act mandated the establishment of SEFs. With regard to SEFs, the CFTC has determined that any person or entity trading directly on a SEF is considered a “member” of that SEF. Since many registered CTAs trade for their clients directly on SEFs rather than through an FCM thereby making those registered CTAs SEF “members”, the current rule—which is drafted to apply to both DCM and SEF members—has the potential to apply to almost all registered CTAs. Given that many CTAs have discretionary authority over client accounts and interact with other market participants already subject to the oral recording requirement, the rule would potentially create duplicative and expensive recordkeeping and compliance obligations.
Since the final rulemaking on Regulation 1.35(a), the CFTC has received comments from CTAs that are members of a DCM or SEF that the final rule is overly burdensome and inappropriate in its application to CTAs. On April 3, 2014, the CFTC staff held the Public Roundtable to Discuss Dodd-Frank End-User Issues. One CTA stated that, as a fiduciary that manages assets on a discretionary basis, a CTA’s investment decisions are made independently by the CTA based on a client’s investment guidelines, rather than ongoing communication with the client.2 As such, the oral recordkeeping provision of Regulation 1.35(a) would not further the interest of customer protection with respect to CTAs.
Time-Limited CFTC No-Action Relief
On March 21, 2014, the CFTC’s Division of Swap Dealer and Intermediary Oversight and Division of Market Oversight issued a no-action letter which provided time-limited no-action relief to CTAs that are members of DCMs and SEFs from the requirement to record oral communications in connection with the execution of swaps. The relief was set to expire on May 1, 2014, but was extended until December 31, 2014.3
Proposed Permanent Relief
The Proposed Rule would codify and expand the currently-effective no-action relief. The Proposed Rule would expand this relief to all types of Covered Transactions, not just swaps, and would do so regardless of whether a registered CTA would have been subject to the current rule because of its membership on a DCM or a SEF. The Proposed Rule would only affect the oral recordkeeping requirements under Regulation 1.35(a); therefore, CTAs would remain subject to the written and other recordkeeping requirements of Regulation 1.35(a) as well as other applicable recordkeeping requirements under Regulations 1.31, 4.23, and 4.7.