Aiming to reduce needless regulatory costs on America’s farmers, grain elevators and other commercial end-users of the commodity markets, the U.S. Commodity Futures Trading Commission (CFTC) recently amended a record-keeping rule that had caused major headaches for unregistered members.
The December 2015 change to CFTC Regulation 1.35(a) was aimed at solving problems in the previous version of the measure, which was characterized by a CFTC Commissioner as “unworkable” and levied compliance costs described by market participants as “prohibitively expensive.”
Record-keeping: What’s different?
The amended regulation is beneficial for hedgers and other commercial end-users of the commodity markets who are not registered in any capacity with the CFTC but who nonetheless hold membership or trading privileges on an exchange (for example, through a designated contract market or a swap execution facility).
It is not uncommon for commodity dealers and end-users who engage in hedging in the ordinary course of business to hold membership or trading privileges on an exchange in order to reduce transaction costs. However, many of those dealers and end-users are neither registered nor required to be registered with the CFTC in any capacity. (We’ll refer to them in this article as “unregistered members.”)
Prior to the amended regulation, CFTC regulations did not distinguish unregistered members from exchange members who are registered with the CFTC in some capacity (e.g., introducing brokers). All dealers and end-users, registered or not, who held membership or trading privileges on an exchange, were subject to onerous record-keeping requirements.
The amended regulation provides three areas of record-keeping relief to unregistered members:
- Unregistered members are now excused from maintaining records in any particular form or manner. Although unregistered members must continue to maintain certain records (as further described below), there is no longer any requirement as to the form or manner in which the records are kept.
- Unregistered members are not required to retain text messages. In the interpretative release accompanying the amended regulation, the CFTC noted that “many end users told the [CFTC] that text messages were a primary means of communication for their commodity trading businesses,” so this change provides welcome relief to end-users.
- Finally, although unregistered members must keep records of their trades (on the exchange and the related cash and forward market trades), they are no longer required to maintain records of the written communications that lead to the execution of such trades. In the release accompanying the amended regulation, the CFTC acknowledged the difficulty in parsing and tracking communications that might lead to the execution of a trade, concluding that “the nature of the activities of many [u]nregistered [m]embers in the commodity interest markets—which activities predominantly involve the hedging of risks associated with their commercial businesses—does not justify the burden [u]nregistered [m]embers may have in identifying and retaining records of communications that lead to the execution of commodity interest and related cash or forward transactions.”
The amended regulation was enacted following input from a number of end-user organizations and trade groups such as the American Gas Association, Commodity Markets Council, Commercial Energy Working Group, Coalition of Physical Energy Companies, Edison Electric Institute, Federal Home Loan Banks, Investment Adviser Association and others.