E*Trade Securities LLC and E*Trade Clearing LLC, Commodity Futures Trading Commission-registered future commission merchants, agreed to settle CFTC charges that they failed to keep electronic audit trail logs reflecting certain of their customers’ orders between October 2009 and January 25, 2014. According to the CFTC, during this time, the respondents used a third-party vendor to provide its front-end order routing system for its customers. The respondents, said the CFTC, mistakenly believed that the vendor retained electronic audit trail logs of all orders that they could access at any time; however, the vendor destroyed all records after 10 days, according to the CFTC. The vendor, charged the CFTC, had previously advised the respondents that they were responsible for downloading and retaining all electronic audit trail logs. The E*Trade entities voluntarily reported their error to the CFTC and began correctly retaining the records beginning January 26, 2014. The two E*Trade entities agreed to jointly and severally pay a fine to the CFTC of US $280,000 to resolve this matter.
Compliance Weeds: CME Group Rule 536B.2 (click here to access) requires clearing members guaranteeing a client that has direct market access to maintain or cause to be maintained an electronic audit trail for such client that includes certain minimum information. These audit trails must be kept for at least five years. However, the same rule authorizes a clearing member not to keep the electronic audit trail of its direct access clients that are other clearing members or equity member firms. To take advantage of this option, a clearing member must notify its clearing member or equity member client that it is their obligation to maintain the electronic audit trail — thus excusing the guarantor clearing member from maintaining the record itself. However, as a result of a December 2015 amendment to this rule, this authority does not relieve a guarantor clearing member “from compliance with the applicable recordkeeping provisions of CFTC Regulations, including Regulation 1.31 or 1.35.” As I wrote in December 2014 when this rule was amended, “[t]he odd wording of this new sentence seems to imply the CFTC may believe that clearing member FCMs have an obligation to retain electronic audit trails they otherwise are not required to keep under the applicable CME Group rule—a trick even the great Harry Houdini likely could not master!” (Click here to access CFTC Rule 1.31 and here for CFTC Rule 1.35.) Earlier this month, the CFTC proposed overhauling its records retention rule to eliminate many existing antiquated requirements and to be “technology neutral” in order to accommodate future advances in recordkeeping technology. (Click here for detail in the article “New Records Retention Regime for 21st Century Proposed by CFTC” in the January 16, 2017 edition of Bridging the Week.)