New Record Keeping Requirements for FCMs, IBs, RFEDs and Certain CTAs to Become Effective on December 21, 2013
The CFTC has adopted amendments to CFTC Rule 1.35(a) which will expand the record keeping requirements of FCMs, IBs, RFEDs and a limited number of CTAs (CTAs who are members of designated contract markets or swap execution facilities) insofar as they will now need to keep records of oral communications with customers. Specifically, these registrants will be required to keep records of any oral communications, "provided or received containing 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, mobile device, or other digital or electronic media for a period of one year."
There are limited exceptions to the rule and introducing brokers who have generated $5 million or less in aggregate gross revenues from its IB activities in the last three years will be exempt from this record keeping requirement. Additionally, exemptive relief may also be granted by the CFTC Director of the Division of Swap Dealer and Intermediary Oversight ("DSIO") if the requirement to record oral communications is found to be technologically or economically impractical for a registrant under particular facts and circumstances. Additionally, registrants may reasonably rely on a DCM, SEF or another registrant to meet these record keeping requirements, but registrants will not escape regulatory liability in the event there is a violation of CFTC Rule 1.35(a).
CFTC Approves Final Rules for Enhanced Customer Protections
The CFTC has approved final rules intended to strengthen protections provided to customers and customer funds held at FCMs and DCOs. Specifically, the amended rules will require FCMs to: (1) adopt additional risk management written policies and procedures, (2) provide prompt electronic notice to the CFTC of any reportable FCM insolvency or other material event; (3) provide additional written general risk disclosures as well as disclosures concerning firm risks specific to that FCM; and (4) maintain residual interest in its customer accounts that is at least equal to its customers' aggregate undermargined amounts for the prior trade date as of a certain time the following day.
The deadline for meeting the residual interest amount will be phased in over time with the first deadline of 6:00 p.m. Eastern Time on the next business day after the trade date being required by November 14, 2014. The final rules also require the relevant SRO to conduct their FCM examinations in accordance with PCAOB audit standards and for the SRO's supervisory program over FCMs to include both controls and substantive testing. Finally, the SRO's examination program must be evaluated by an expert approved by the CFTC at least once every three years.