Futures commission merchants, introducing brokers and members of designated contract markets must preserve e-mail messages, instant messages and other records concerning commodity futures, commodity options and cash commodities.
On February 6, 2009, the Division of Market Oversight (Division) of the U.S. Commodity Futures Trading Commission (CFTC) issued an important advisory addressing the recordkeeping requirements applicable to commodity market participants. Citing the agency’s need to carry out its enforcement and market oversight responsibilities, the Division declared that futures commission merchants (FCMs), introducing brokers (IBs) and members of designated contract markets must preserve e-mail messages, instant messages and other records concerning commodity futures, commodity options and cash commodities that are created or retained in an electronic format, pursuant to the CFTC’s recordkeeping regulations. The CFTC’s advisory only addresses the medium of documents it intends to include within the scope of the rule. It does not expand the categories of documents required to be retained (e.g., documents relating to futures versus cash transactions).
Commission Regulation 1.35 prescribes certain recordkeeping requirements for transactions involving futures, options and cash commodities. The Rule mandates that each FCM, IB and member of a contract market must “keep full, complete, and systematic records, together with all pertinent data and memoranda, of all transactions relating to its business of dealing in commodity futures, commodity options and cash commodities.” Commission Regulation 1.31, in turn, requires these entities to maintain such records for a period of five years, and further specifies that the records must be readily accessible during the first two years of the five-year period.
Until this advisory, there was some question concerning whether the CFTC viewed Rule 1.35 as encompassing e-mail and instant message communications. Although the Rule enumerates a number of documents that must be preserved (e.g., orders, trading cards, signature cards, street books, journals, ledgers, cancelled checks), it does not expressly list electronic communications, such as e-mails or instant messages.
This advisory comes in the wake of a recent amendment to the rules of the New York Mercantile Exchange (NYMEX) relating to the recordkeeping requirements applicable to exchange members. Upon review of initial iterations of the amendment, the Division grew concerned that the NYMEX’s language might lead market participants to believe that Rule 1.35 does not apply to electronic communications. As a result, the Division pressed NYMEX to amend its rule once more to clarify that exchange members must keep records in accordance with Rule 1.35, including any electronic communications falling within the scope of the regulation. Separately, the Division issued its advisory to inform the industry about its view on the scope of Rule 1.35.
To date, the courts have not addressed the issue of whether the agency’s recordkeeping requirements apply to electronic communications. Likewise, the courts have not squarely addressed the substantive reach of the Rule, e.g., to what extent the CFTC’s recordkeeping requirements apply to the cash commodity transactions of exchange members. The CFTC touched on the issue in a 2002 settlement involving alleged false natural gas price reporting by Dynegy Marketing & Trade and West Coast Power LLC. The allegations in that case also included an alleged violation of the CFTC’s recordkeeping requirements for failure to keep certain records relating to physical natural gas transactions. Although the respondents neither admitted nor denied these allegations, and agency settlements are not precedential, the order appeared to reflect a view by the CFTC and its Division of Enforcement that certain commodity trading in physical markets is subject to the recordkeeping requirements of Rule 1.35. Notably, however, the CFTC did not include any similar findings in subsequent false price reporting speaking orders. This omission led market participants to believe that the CFTC was re-examining the correctness of its expansive reading of Rule 1.35. It will be interesting to see if the courts agree with the Division of Market Oversight’s advisory on e-mails and instant messages.