Final rules require tape recording by futures commission merchants, introducing brokers, retail foreign exchange dealers, and commodity trading advisors; affected CFTC registrants must implement systems to comply by December 21, 2013.
On December 21, 2012, the Commodity Futures Trading Commission (CFTC) published in the Federal Register final rules (Final Rules) for futures commission merchants (FCMs), larger introducing brokers (IBs), retail foreign exchange dealers (RFEDs), and commodity trading advisors (CTAs) that are members of a designated contract market (DCM) or swap execution facility (SEF). The Final Rules require the recording of oral communications that lead to the execution of a commodity interest transaction. The Final Rules also conform the recordkeeping rules for FCMs, IBs, and RFEDs related to futures and other commodity interests under CFTC Rule 1.35 to those applicable to swap dealers (SDs) and major swap participants (MSPs) related to swaps transactions. The Final Rules become effective on February 19, 2013, and compliance with the tape-recording requirements must be met by December 21, 2013.
Scope of the Recordkeeping Rule
In its Final Rules, the CFTC limited its tape-recording requirement and its recordkeeping requirement to oral communications and written communications that lead to the execution of a transaction in a commodity interest and related cash or forward transactions. The CFTC originally proposed that the tape-recording and recordkeeping requirements apply to all cash commodity transactions. The Final Rules define a "related cash or forward transaction" as a purchase or sale for immediate or deferred physical shipment or delivery of an asset related to a commodity interest where the commodity interest transaction and the related cash or forward transaction are used to hedge, mitigate the risk of, or offset one another.
The Final Rules impose recording rules for oral communications on the following entities: FCMs; IBs that have generated more than $5 million in total aggregate gross revenues over the preceding three years from their activities as an IB; RFEDs; and members of a DCM or SEF that are registered or required to be registered with the CFTC in any capacity, with the exception of floor traders, floor brokers trading for themselves, and commodity pool operators. The Final Rules require these entities to record all oral 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. The CFTC reiterated in the Adopting Release that any conversation, regardless of whether it occurs on a firm-provided or personal telephone, must be taped if the contents fall within the requirements of CFTC Rule 1.35. The Final Rules require that the recording be retained for one year from the date created. The Final Rules do not include the requirement that the recordings be separate electronic files, although they must still be searchable and identifiable by transaction.
The CFTC also clarified in the Final Rules that recordings of telephone calls do not violate any state or federal laws as long as the other parties to the call are informed that the call is being recorded. However, as a practical matter, all market participants should ensure that customers and counterparties have consented to the recording of all oral communications that may be subject to the Final Rules and should confirm the permissible methods of obtaining such consent under applicable state law.
The Final Rules require FCMs, IBs, RFEDs, and all members of a DCM or SEF, regardless of whether the member is required to be registered with the CFTC, to record and keep all written communications provided or received concerning quotes, solicitations, bids, offers, instructions, trading, and prices that lead to the execution of a transaction in commodity interests and related cash or forward transactions, whether communicated by facsimiles, instant messages, chat rooms, electronic mail, mobile devices, or other digital or electronic media. Written records must be retained for five years from the date created, with the records readily available for the first two years.
Firms must comply with the tape-recording requirements by December 21, 2013. The Final Rules, however, provide that an entity may request an alternative compliance date from the CFTC if it seeks in good faith to comply with the recording requirement but finds it "technologically or economically impracticable" to do so.
As a result of the Final Rules, most registered futures brokerage intermediaries will have to tape record all conversations leading to the execution of futures and other commodity interests. Affected CFTC registrants that do not currently have tape-recording systems will need to establish such systems by December 21, 2013, unless they are able to provide evidence to the CFTC that implementing such a system by the end of 2013 is technologically or economically impracticable for the firm.