On January 12, 2017, the Commodity Futures Trading Commission (CFTC) proposed to amend its recordkeeping requirements set forth in Regulation 1.31. The CFTC’s proposed amendments are intended to implement advances in information technology and adopt technologically neutral rules that anticipate developments such as blockchain or distributed ledger technology. CFTC Regulation 1.31 currently requires that “all books and records … be kept in their original form (for paper records) or native file format (for electronic records) for a period of five years from the date thereof and shall be readily accessible during the first two years of the five-year period.”
In this age where terabytes of storage easily fit in one’s pocket, our rules should not refer to microfiche or require paper records.” – CFTC Chairman Massad
The CFTC’s proposed amendments would modernize recordkeeping requirements by making Regulation 1.31 principles-based. The CFTC would accomplish this by replacing references to “books and records” with “regulatory records” and clarifying that regulatory record means all books and records …, including any record of any correction or other amendment to such books and records; provided that, with respect to such books and records stored electronically, regulatory records shall also include all data produced and stored electronically that describes, directly or indirectly, the characteristics of such books and records, including, without limitation, data that describes how, when, and, if relevant, by whom such electronically stored information was collected, created, accessed, modified or formatted (i.e. data about data or “metadata”). According to the CFTC, the ability to access a trader’s metadata is integral to its inspection and investigative functions. Finally, given the new principles-based definition of regulatory records, the CFTC proposed to remove the existing requirement to preserve records exclusively in a non-rewritable, non-erasable format (i.e. “write once, read many”, or “WORM” format) and delete the technologically-ancient definitions of “native file format”, “micrographic media”, and “electronic storage media.” End users and buy-side firms have found compliance with the CFTC’s WORM requirement to be burdensome. Eliminating the need to store records in a dated WORM format should result in substantial cost savings.
The CFTC’s proposal would not change recordkeeping time periods and would also retain requirements to establish written policies and procedures for recordkeeping obligations, including appropriate training of officers and personnel responsible for ensuring compliance with recordkeeping rules. However, the amendments would modernize recordkeeping and storage obligations and pave the first step in a regulatory path forward for market participants to realize one of the benefits of blockchain technology. The CFTC proposed amendments would also further align Regulation 1.31 with the SEC’s technology neutral recordkeeping obligations for broker-dealers under SEC Rule 17a-4 and investment advisors under SEC Rule 204-2(g). In sum, the CFTC’s proposed amendments should reduce compliance burden, provide for more regulatory consistency and help facilitate the development of blockchain and other innovations in financial technology.