68140 Federal Register / Vol. 79, No. 220 / Friday, November 14, 2014 / Proposed Rules 

1 17 CFR 145.9. The Commission’s regulations are 

found at 17 CFR Ch. I (2013) and can be accessed 

through the Commission’s Web site at www.cftc.gov. 

2See Adaptation of Regulations to Incorporate 

Swaps—Records of Transactions, 77 FR 75523 (Dec. 

21, 2012) (‘‘Final Rule Adopting Release’’). 

3 17 CFR 1.35(a)(1). 

4 7 U.S.C. 1a(34). The CEA can be accessed 

through the Commission’s Web site. 

5As stated in the Final Rule, the oral 

recordkeeping requirement in Regulation 1.35(a) 

does not apply to: (i) Oral communications that lead 

solely to the execution of a related cash or forward 

transaction; (ii) oral communications provided or 

received by a floor broker that do not lead to the 

purchase or sale for any person other than the floor 

broker of any commodity for future delivery, 

security futures product, swap, or commodity 

option authorized under section 4c of the 

Commodity Exchange Act; (iii) an introducing 

broker that has generated over the preceding three 

years $5 million or less in aggregate gross revenues 

from its activities as an introducing broker; (iv) a 

floor trader; (v) a commodity pool operator; (vi) a 

swap dealer; (vii) a major swap participant; or (viii) 

a member of a DCM or SEF that is not registered 

or required to be registered with the Commission 

in any capacity. 17 CFR 1.35(a)(1). 

6 17 CFR 1.35(a)(1). 

7 Id. 

8Final Rule Adopting Release at 75524. 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Part 1 

RIN 3038–AE23 

Records of Commodity Interest and 

Related Cash or Forward Transactions 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Notice of proposed rulemaking. 

SUMMARY: The Commodity Futures 

Trading Commission (the 

‘‘Commission’’ or ‘‘CFTC’’) is proposing 

to amend Commission Rule 1.35(a) (the 

‘‘Proposal’’) to: provide that all records 

required to be maintained under this 

regulation must be searchable; clarify 

that all records be kept in a form and 

manner that allows for identification of 

a particular transaction, except that 

records of oral and written 

communications leading to the 

execution of a transaction in a 

commodity interest and related cash or 

forward transactions are not required to 

be kept in a form and manner that 

allows for identification of a particular 

transaction; exclude unregistered 

members of designated contract markets 

(‘‘DCMs’’) and swap execution facilities 

(‘‘SEFs’’) from the requirements to retain 

text messages and to maintain records in 

a particular form and manner; and 

exclude commodity trading advisors 

(‘‘CTAs’’) from the oral recordkeeping 

requirement. 

DATES: Comments must be received on 

or before January 13, 2015. 

ADDRESSES: You may submit comments, 

identified by RIN 3038–AE23, by any of 

the following methods: 

• Agency Web site, via its Comments 

Online process: http://

comments.cftc.gov. Follow the 

instructions for submitting comments 

through the Web site. 

• Mail: Send to Christopher 

Kirkpatrick, Secretary of the 

Commission, Commodity Futures 

Trading Commission, Three Lafayette 

Centre, 1155 21st Street NW., 

Washington, DC 20581. 

• Hand Delivery/Courier: Same as 

Mail, above. 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

Please submit your comments using 

only one of these methods. 

All comments must be submitted in 

English, or if not, accompanied by an 

English translation. Comments will be 

posted as received to http://

www.cftc.gov. You should submit only 

information that you wish to make 

available publicly. If you wish the 

Commission to consider information 

that you believe is exempt from 

disclosure under the Freedom of 

Information Act, a petition for 

confidential treatment of the exempt 

information may be submitted according 

to the procedures set forth in § 145.9 of 

the Commission’s regulations.1

The Commission reserves the right, 

but shall have no obligation, to review, 

pre-screen, filter, redact, refuse or 

remove any or all of your submission 

from www.cftc.gov that it may deem to 

be inappropriate for publication, such as 

obscene language. All submissions that 

have been redacted or removed that 

contain comments on the merits of the 

rulemaking will be retained in the 

public comment file and will be 

considered as required under the 

Administrative Procedure Act and other 

applicable laws, and may be accessible 

under the Freedom of Information Act. 

FOR FURTHER INFORMATION CONTACT: Gary 

Barnett, Director, (202) 418–6700, 

gbarnett@cftc.gov; Katherine Driscoll, 

Associate Director, (202) 418–5544, 

kdriscoll@cftc.gov; August A. Imholtz 

III, Special Counsel, (202) 418–5140, 

aimholtz@cftc.gov; or Lauren Bennett, 

Attorney-Advisor, (202) 418–5290, 

lbennett@cftc.gov, Division of Swap 

Dealer and Intermediary Oversight, 

Commodity Futures Trading 

Commission, Three Lafayette Centre, 

1155 21st Street NW., Washington, DC 

20581. 

SUPPLEMENTARY INFORMATION: 

I. Background 

A. Commission Recordkeeping 

Requirements for Certain Market 

Participants 

On December 21, 2012, the 

Commission published a final 

rulemaking, which amended the 

recordkeeping provisions of 

Commission Regulation 1.35(a) to 

integrate the rule more fully with the 

framework created by the Dodd-Frank 

Wall Street Reform and Consumer 

Protection Act for swap dealers and 

major swap participants (the ‘‘Final 

Rule’’).2 The Final Rule requires each 

futures commission merchant (‘‘FCM’’), 

retail foreign exchange dealer (‘‘RFED’’), 

introducing broker (‘‘IB’’), and member 

of a DCM or SEF to keep full, complete, 

and systematic records of all 

transactions relating to its business of 

dealing in commodity interest and 

related cash or forward transactions.3

The Commodity Exchange Act (‘‘CEA’’) 

defines ‘‘member’’ as an individual, 

association, partnership, corporation, or 

trust—(i) owning or holding 

membership in, or admitted to 

membership representation on, the 

registered entity or derivatives 

transaction execution facility; or (ii) 

having trading privileges on the 

registered entity or derivatives 

transaction execution facility.4

The Final Rule includes a 

requirement to keep records of all oral 

communications, which applies to each 

FCM, RFED, large IB (defined as an IB 

that has generated over $5 million in 

aggregate gross revenues over the 

preceding three years from its activities 

as an IB), and member of a DCM or SEF 

that is registered or required to register 

with the Commission as a floor broker 

(‘‘FB’’) (only with regard to acting as an 

agent for a non-affiliated client) or as a 

CTA.5 Unlike the written recordkeeping 

requirement that applies to transactions 

in a commodity interest and related 

cash or forward transactions, the oral 

recordkeeping requirement is limited to 

transactions in a commodity interest.6

The scope of Regulation 1.35(a) under 

the Final Rule includes communications 

made via telephone, voicemail, 

facsimile, instant messaging, chat 

rooms, electronic mail, mobile device, 

or other digital or electronic media.7

These communications include text 

messages. The Final Rule also mandates 

that such records be kept in a form and 

manner identifiable and searchable by 

transaction. 

The Final Rule became effective on 

February 19, 2013, with a December 21, 

2013 compliance date for the oral 

recordkeeping requirement.8

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Federal Register / Vol. 79, No. 220 / Friday, November 14, 2014 / Proposed Rules 68141 

9Adoption of Regulations to Incorporate Swaps, 

76 FR 33066 (July 7, 2011). 

10See Final Rule Adopting Release at 75524. 

These comments can be found on the Commission’s 

Web site at http://comments.cftc.gov/Public

Comments/CommentList.aspx?id=1037. 

11Final Rule Adopting Release at 75527. 

12 Id. 

13 Id. 

14Under the Final Rule, members of a DCM or 

SEF that are not registered or required to register 

with the Commission in any capacity are not 

required to record and keep oral communications. 

Because floor traders and commodity pool operators 

do not face customers, the Commission chose to 

exempt them as well from the oral recordkeeping 

requirement. 17 CFR 1.35(a)(1). 

15Final Rule Adopting Release at 75528. 

16Public Roundtable to Discuss Dodd-Frank EndUser Issues, Commodity Futures Trading 

Commission (Apr. 3, 2014), available at: http://

www.cftc.gov/ucm/groups/public/@newsroom/

documents/file/transcript040314.pdf (‘‘End-User 

Roundtable Transcript’’). 

17See CFTC Staff Letter No. 13–77, Time-Limited 

No-Action Relief for Certain Members of Swap 

Execution Facilities from the Requirement to 

Record Oral Communications Pursuant to 

Commission Regulation 1.35(a) (Dec. 20, 2013), 

available at: http://www.cftc.gov/ucm/groups/

public/@lrlettergeneral/documents/letter/13-77.pdf 

(‘‘CFTC Staff Letter No. 13–77’’); CFTC Staff Letter 

No. 14–33, Time-Limited No-Action Relief for 

Certain Members of a Designated Contract Market 

from the Requirement to Record Oral 

Communications, Pursuant to Commission 

Regulation 1.35(a), in Connection with the 

Execution of Swap Transactions (Mar. 21, 2014), 

available at: http://www.cftc.gov/ucm/groups/

public/@lrlettergeneral/documents/letter/14-33.pdf 

(‘‘CFTC Staff Letter No. 14–33’’); CFTC Staff Letter 

No. 14–60, Time-Limited No-Action Relief for 

Certain Members of Swap Execution Facilities and 

Designated Contract Markets from the Requirement 

to Record Oral Communications, Pursuant to 

Commission Regulation 1.35(a), in Connection with 

the Execution of Swap Transactions (Apr. 25, 2014), 

available at: http://www.cftc.gov/ucm/groups/

public/@lrlettergeneral/documents/letter/14-60.pdf 

(‘‘CFTC Staff Letter No. 14–60’’); CFTC Staff Letter 

No. 14–72, Time-Limited No-Action Relief for 

Members of Designated Contract Markets and Swap 

Execution Facilities that Are Not Registered with 

the Commission from the Requirement to Record 

Written Communications, Pursuant to Commission 

Regulation 1.35(a), in Connection with the 

Execution of a Transaction in a Commodity Interest 

and Related Cash or Forward Transactions (May 22, 

2014), available at: http://www.cftc.gov/ucm/

groups/public/@lrlettergeneral/documents/letter/

14-72.pdf (‘‘CFTC Staff Letter No. 14-72’’). 

18See End-User Roundtable Transcript. 

19 Id. at 55. 

20See id. 

21See id. 

22See id. at 14–16. 

23 Id. at 64–65. 

24 Id. 

25See SIFMA AMG and MFA Letter, Request for 

Interpretive Guidance on Application of Rule 

1.35(a) to Asset Managers (Dec. 10, 2013), available 

at http://www.sifma.org/issues/item.aspx

?id=8589946605 and CFTC Staff Letter No. 13–77. 

B. Comments Received on the 2011 

Proposed Amendments to Regulation 

1.35(a) 

Prior to promulgating the Final Rule, 

on June 7, 2011, the Commission 

published proposed changes to 

Regulation 1.35(a) and sought public 

comment on those proposed changes 

(the ‘‘2011 Proposed Rule’’).9 In 

response, the Commission received 35 

comment letters from a variety of 

institutions.10 Many commenters 

opposed the Proposed Rule’s written 

and oral recordkeeping requirements for 

members of a DCM or SEF that are 

commercial end-users and nonintermediaries.11 The commenters on 

the 2011 Proposed Rule generally 

argued that entities that do not trade for 

customers pose minimal risk to the 

market, and should therefore not be 

subject to what they believed to be the 

costly recordkeeping burdens outlined 

in the proposed changes to Regulation 

1.35(a).12 Some commenters also 

suggested that the proposed 

recordkeeping provisions could 

potentially deter some end-users from 

hedging commercial risk on a DCM or 

SEF, thereby ‘‘defeating the Dodd-Frank 

Act’s transparency objectives.’’ 13

After carefully considering the 

comments to the 2011 Proposed Rule, 

the Commission excluded commercial 

end-users and non-intermediaries from 

the oral recordkeeping provisions.14 The 

Commission did not exclude those same 

market participants from the written 

recordkeeping requirements of 

Regulation 1.35(a), concluding that the 

Final Rule would ‘‘significantly advance 

the Commission’s efforts to detect and 

deter abusive, disruptive, fraudulent 

and manipulative acts and practices that 

seriously harm market integrity and 

customers.’’ 15

Since the Final Rule was promulgated 

on December 21, 2012, the Commission 

has received additional comments from 

a wide range of commercial end-users 

and CTAs that are members of a DCM 

or SEF that the Final Rule, and in some 

instances Regulation 1.35(a) as it existed 

before the Commission promulgated the 

Final Rule, is overly burdensome and 

inappropriate in its application to endusers and to CTAs. Subsequently, on 

April 3, 2014, the Commission staff held 

a Public Roundtable to Discuss DoddFrank End-User Issues 16 (the ‘‘End-User 

Roundtable’’). In addition, Commission 

staff has provided certain market 

participants with relief from particular 

aspects of the Final Rule.17 Both the 

End-User Roundtable and staff relief are 

described below. 

C. End-User Roundtable 

On April 3, 2014, Commission staff 

hosted the End-User Roundtable to 

discuss, among other things, the impact 

of the amendments to Regulation 1.35(a) 

on various market participants. One of 

the primary issues discussed at the 

roundtable was the fact that many 

market end-users are subject to 

Regulation 1.35(a) simply by virtue of 

having trading privileges on a DCM or 

SEF.18 One roundtable participant noted 

that many end-users that have trading 

privileges rely on text messages to 

communicate to market intermediaries 

their interest to engage in commodity 

interests and related cash and forward 

transactions.19 Some roundtable 

participants stated it is prohibitively 

expensive to retain text messages.20

Many roundtable commenters also 

noted that, given the nature of their 

business, it is very difficult to maintain 

required written records in a manner 

identifiable and searchable by 

transaction.21 As explained by one enduser participant, because they do not 

manage their positions on a transactionby-transaction basis, but on a portfolio 

basis, they are not able to identify the 

extent to which certain records must be 

kept for certain transactions.22

The End-User Roundtable also 

addressed the oral recordkeeping 

requirement for members of a DCM or 

SEF that are CTAs. One CTA participant 

stated that as a fiduciary that manages 

assets on a discretionary basis, a CTA’s 

investment decisions are made 

independently by the CTA based on a 

client’s investment guidelines, rather 

than ongoing communications with the 

client.23 The CTA participant therefore 

observed that the oral recordkeeping 

provision of Regulation 1.35(a) would 

not further the interest of customer 

protection with respect to CTAs.24

D. CFTC Letter No. 13–77 

On December 10, 2013, the Asset 

Management Group of the Securities 

Industry and Financial Markets 

Association (‘‘SIFMA AMG’’) and the 

Managed Funds Association (‘‘MFA’’) 

submitted a letter to the CFTC Division 

of Swap Dealer and Intermediary 

Oversight (‘‘DSIO’’) seeking interpretive 

guidance and relief that would confirm 

their view that those asset managers, 

including CTAs, that participate on a 

SEF would not be members of a SEF for 

purposes of the Final Rule, or for 

guidance or relief that would otherwise 

exempt asset managers from the Final 

Rule.25 In the alternative, SIFMA AMG 

and MFA sought additional time to 

allow asset managers that are members 

of SEFs to come into compliance with 

the Final Rule. In response, DSIO and 

the Division of Market Oversight 

(together, the ‘‘Divisions’’) issued a noaction letter on December 20, 2013 

granting relief to CTAs that are members 

of SEFs from the requirement under the 

Final Rule to record oral 

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26 Id. 

27See CFTC Staff Letter No. 14–33. 

28 Id. 

29See SIFMA AMG Letter, CFTC Staff Public 

Roundtable to Discuss Dodd-Frank End-User Issues 

and Request for Interpretative Guidance and Relief 

on Application of Rule 1.35(a) to Asset Managers 

(Apr. 17, 2014), available at: http://www.sifma.org/ 

issues/item.aspx?id=8589948677, and CFTC Staff 

Letter No. 14–60. 

30 Id. 

31See CFTC Staff Letter No. 14–60. SIFMA’s letter 

requested relief from the oral and written 

recordkeeping requirements of the regulation, but 

the Divisions addressed the request for relief solely 

with respect to oral communications. 

32See CMC Letter, Request for Interpretive 

Guidance—Rule 1.35 Contained Within the Final 

Rules on Adaptation of Regulations to Incorporate 

Swaps—Records of Transactions (Dec. 12, 2013), 

available at: http://www.commoditymkts.org/wpcontent/uploads/2014/05/CMC-Rule-1.35- 

Interpretive-Guidance-Request-Letter12.12.2013a.pdf, and CFTC Staff Letter No. 14–72. 

33 Id. 

34 Id. 

35The proposed amendment to Regulation 1.35(a) 

does not modify, limit, restrict or reduce the 

obligations that exist under Regulation 1.31 to 

produce required records in native file format, and 

to produce those records in such a manner as to 

preserve the full functionality that may be available 

in native file format. 

36 17 CFR 1.35(a)(1). 

communications.26 That relief was set to 

expire on May 1, 2014. The Divisions 

believed that additional time for these 

asset managers was warranted given that 

SEFs had only recently begun 

publishing their rulebooks, and the 

requestors’ representations that asset 

managers needed more time to adjust 

their recordkeeping processes in order 

to comply with the Final Rule. 

E. CFTC Letter No. 14–33 

On March 21, 2014, trueEX, a 

registered DCM and provisionally 

registered SEF, submitted a letter to the 

Divisions requesting relief on behalf of 

CTAs that are members of trueEX from 

the requirement under the Final Rule to 

record oral communications that lead to 

the execution of swap transactions on 

trueEX DCM.27 In response to the 

trueEX request, and citing to the relief 

in CFTC Letter No. 13–77 granted to 

CTAs that are members of SEFs, the 

Divisions issued no-action relief to 

CTAs that are members of trueEX DCM 

from the requirement to record oral 

communications that lead to the 

execution of swap transactions on 

trueEX DCM.28 That relief was set to 

expire on May 1, 2014. 

F. CFTC Letter No. 14–60 

On April 17, 2014, SIFMA AMG 

submitted another letter to the Divisions 

requesting exemptive relief from the 

recordkeeping requirements of 

Regulation 1.35(a) for asset managers 

that are members of SEFs or DCMs in 

connection with the execution of 

swaps.29 SIFMA AMG contended that 

the costs of compliance associated with 

the rule’s oral and written 

recordkeeping requirements for asset 

managers significantly outweighed the 

benefits.30

The Divisions considered SIFMA 

AMG’s concerns in relation to the prior 

no-action relief granted to asset 

managers and comments from the recent 

end-user roundtable discussion, and 

issued a no-action letter on April 25, 

2014 which provides no-action relief to 

CTAs that are members of SEFs or 

DCMs from the requirement to record 

oral communications in connection 

with the execution of swaps. This relief 

will expire on December 31, 2014.31

G. CTFC Letter No. 14–72 

On December 12, 2013, the 

Commodity Markets Council (‘‘CMC’’) 

submitted a request (‘‘CMC Request’’) 

for interpretive guidance to the 

Divisions regarding the electronic 

recordkeeping requirements of 

Regulation 1.35(a) on behalf of members 

of DCMs and SEFs that are not 

registered or required to register with 

the Commission in any capacity 

(‘‘Unregistered Members’’).32 CMC 

stated that although text messaging and 

other electronic communications had 

become the primary mode of 

communication for Unregistered 

Members, these firms had encountered 

difficulties in securing a technology 

solution for storing and searching those 

records.33

The Divisions considered this concern 

in conjunction with similar comments 

raised at the End-User Roundtable 

discussion regarding the ‘‘searchability’’ 

requirement, and granted limited noaction relief to Unregistered Members 

from the requirements under Regulation 

1.35(a) to: (i) Retain text messages, and 

(ii) store required records in a form and 

manner identifiable and searchable by 

transaction.34 Under the no-action 

letter, the relief for Unregistered 

Members will remain effective until any 

final Commission action with respect to 

the CMC Request, including a 

rulemaking, order, or a determination 

not to take action. 

II. The Proposal 

The Commission carefully considered 

all of the comments submitted prior to 

the adoption of the Final Rule. In 

drafting the Final Rule, the Commission 

aimed to address its goals of promoting 

market integrity and customer 

protection with the consequential 

burdens imposed on market 

participants. In light of the concerns 

raised at the End-User Roundtable and 

letters to the Commission from the 

public requesting guidance and 

exemptive relief, the Commission is 

considering further amendments to 

Regulation 1.35(a). In response to 

several requests from market 

participants for guidance on how to 

comply with the requirement under 

Regulation 1.35(a) that records be 

‘‘identifiable and searchable by 

transaction,’’ the Commission is 

proposing to amend the language of 

Regulation 1.35(a) to: (i) provide that all 

records that are required to be 

maintained under this regulation must 

be searchable; and (ii) clarify that all 

such records must be kept in a form and 

manner that allows for identification of 

a particular transaction, except that 

records of oral and written 

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 and 

related cash or forward transactions are 

required to be searchable, but need not 

be kept in a form and manner that 

allows for identification of a particular 

transaction.35

The Commission also understands 

that compliance with some aspects of 

the rule imposes burdens on certain 

Unregistered Members and CTAs. The 

Commission also has a particular 

interest in protecting customers who 

engage with intermediaries to access the 

commodities markets. Thus, the 

Commission is proposing to exclude 

Unregistered Members from the 

requirement to retain text messages, and 

from the requirement to maintain 

records in a particular form and manner. 

The Commission also recognizes that 

many CTAs who are members of DCMs 

or SEFs and have discretionary trading 

authority do not have routine 

discussions with end-clients regarding 

transactions in commodity interests, 

and is therefore proposing to further 

balance CTAs’ recordkeeping burden by 

excluding them from the oral 

recordkeeping requirement of 

Regulation 1.35(a). 

A. Proposing To Amend Regulation 

1.35(a) To Clarify the ‘‘Identifiable’’ and 

‘‘Searchable’’ Requirements of the Rule 

Generally 

Regulation 1.35(a) mandates that 

required records be maintained in a 

form and manner ‘‘identifiable and 

searchable by transaction.’’ 36 The 

Commission has received several 

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37 17 CFR 1.35(a)(1). 

38 7 U.S.C. 1a(34). 

39See CFTC Letter 14–72 and End-User 

Roundtable Transcript at 55. 

40See End-User Roundtable Transcript. 41 17 CFR 1.35(a)(1). 

requests from market participants for 

guidance on how to comply with this 

requirement. The Commission is now 

proposing that all required records must 

be searchable, but not ‘‘searchable by 

transaction.’’ The current rule also states 

that all required records be ‘‘identifiable 

by transaction.’’ The Commission is 

clarifying that this means records must 

be kept in a form and manner that 

allows for identification of a particular 

transaction, with certain exception, as 

described below. 

B. Proposing That Records of Oral and 

Written Communications That Lead to 

the Execution of a Transaction Be 

Searchable, But Not Kept in a Form and 

Manner That Allows for Identification of 

a Particular Transaction 

As it does for all records, Regulation 

1.35(a) states that records of all oral and 

written 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 and related cash or 

forward transactions, whether 

communicated by telephone, voicemail, 

facsimile, instant messaging, chat 

rooms, electronic mail, mobile device, 

or other digital or electronic media, be 

kept in a form and manner identifiable 

and searchable by transaction. The 

Commission has received several 

requests from market participants for 

guidance on how to comply with this 

requirement. The Commission believes 

that access to these oral and written 

communications is necessary for the 

Commission to oversee and monitor the 

derivatives market and to enforce 

Commission rules and regulations. The 

Commission therefore is not altering the 

existing requirements that covered 

entities maintain these records in a 

searchable format. The Commission 

therefore is proposing to amend 

Regulation 1.35(a) to clarify that records 

of oral and written 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 and related cash or 

forward transactions are required to be 

searchable, but are not required to be 

kept in a form and manner that allows 

for identification of a particular 

transaction. This means that there 

would be no requirement for a market 

participant to link or otherwise identify 

a record of a communication that leads 

to the execution of a transaction with a 

particular transaction. 

C. Proposing To Exclude Unregistered 

Members of Designated Contract 

Markets or Swap Execution Facilities 

From the Requirements To Retain Text 

Messages and To Maintain Required 

Records in a Particular Form and 

Manner 

Pursuant to the Final Rule, FCMs, 

RFEDs, IBs, and all members of DCMs 

or SEFs must retain written records of 

commodity interests and related cash or 

forward transactions.37 The CEA defines 

‘‘member’’ as an individual, association, 

partnership, corporation, or trust (i) 

owning or holding membership in, or 

admitted to membership representation 

on, the registered entity or derivatives 

transaction execution facility; or (ii) 

having trading privileges on the 

registered entity or derivatives 

transaction execution facility.38

For various reasons relating to the 

nature of their market activity, many 

end-user market participants that meet 

this definition of member are not 

registered or required to register with 

the Commission. Many of these endusers have noted that text messaging is 

their primary method of communication 

regarding commodity interest 

transactions and related cash or forward 

transactions.39 These end-users have 

further stated that it is prohibitively 

expensive for them, in light of their 

business, to retain text messages.40

Accordingly, the Proposal would 

exclude Unregistered Members from the 

requirement under Regulation 1.35(a) to 

retain text messages. Although text 

messages are a primary means of 

communication for a significant number 

of Unregistered Members, certain other 

Unregistered Members (e.g., commodity 

trading firms) do not rely on text 

messages to the same extent to transact 

in commodity interests and related cash 

and forward transactions. Because all 

Unregistered Members must retain all 

other required written records and 

electronic communications, the 

Commission believes that its ability to 

properly oversee and monitor the 

derivatives market is not unduly 

affected. In addition, the Commission 

notes that the Proposal does not change 

the written recordkeeping requirement 

for all registered members, including 

with respect to text messages. 

Some end-users subject to the Final 

Rule also have stated that maintaining 

the required written records in a manner 

that is identifiable and searchable by 

transaction is difficult given the nature 

of the relationship between their cash or 

forward transactions and their trading 

and hedging practices in the derivatives 

markets. The Commission notes that the 

‘‘searchable’’ and ‘‘identifiable’’ 

requirements do not require covered 

entities to link all of their transactions 

in commodity interests to related cash 

or forward transactions (e.g., their 

hedges with related hedged positions) 

by a specific identifier. Nonetheless, the 

Commission recognizes that the 

proposed requirement that covered 

entities keep records in a searchable 

format and in a form and manner that 

allows for identification of a particular 

transaction may pose additional 

burdens on those Unregistered Members 

who manage their positions on an 

aggregate basis. Therefore, the Proposal 

also would exclude Unregistered 

Members from these requirements. The 

Commission understands that these 

exclusions may result in an incremental 

burden on the Commission, if it is 

required to search through these 

records. The Commission believes, 

however, that as long as Unregistered 

Members maintain their records, this 

Proposal would not unduly compromise 

the Commission’s ability to oversee and 

monitor the derivatives market and to 

enforce Commission rules and 

regulations. 

D. Proposing To Exclude Commodity 

Trading Advisors From the Requirement 

To Record and Maintain Oral 

Communications 

The Final Rule requires, among other 

things, that all CTAs that are members 

of a DCM or SEF record all oral 

communications that lead to the 

execution of a transaction in a 

commodity interest.41 The Proposal 

would exclude members of a DCM or 

SEF that are CTAs from this oral 

recordkeeping obligation. Removing 

CTAs from the requirement to record 

and keep oral communications, as with 

removing unregistered members of a 

DCM or SEF from certain aspects of the 

written recordkeeping requirements, is 

consistent with the Commission’s goals 

of balancing its interest in protecting 

customers and ensuring market 

integrity, with the burdens of affected 

market participants. The Commission 

understands that many CTAs who are 

members of a DCM or SEF have 

discretionary trading authority over 

their customers’ accounts and, therefore, 

those CTAs would not be having routine 

telephone conversations with customers 

that lead to the execution of an order on 

a DCM or SEF. Nevertheless, the 

Commission is not proposing to remove 

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68144 Federal Register / Vol. 79, No. 220 / Friday, November 14, 2014 / Proposed Rules 

42 5 U.S.C. 601 et seq. 

43 5 U.S.C. 553. The Administrative Procedure 

Act is found at 5 U.S.C. 500 et seq. 

44See 5 U.S.C. 601(2), 603–05. 45 44 U.S.C. 3501 et seq. 

members of a DCM or SEF that are CTAs 

from the written recordkeeping 

requirements of 1.35(a) because certain 

CTAs may receive orders from 

customers that the CTAs then execute 

on behalf of the customer on a nondiscretionary basis, or may receive 

instructions changing or limiting their 

discretionary authority. Although the 

Commission believes it is consistent 

with the regulatory goals of Rule 1.35(a) 

to ensure that customer 

communications regarding orders be 

captured, the cost of recording and 

keeping oral communications weighs 

against the benefits of achieving these 

goals. The same cannot be said for the 

costs of recording and maintaining 

written records, which costs the 

Commission understands to be 

significantly less than the same costs 

regarding oral communications. 

III. Request for Comments 

The Commission seeks comment on 

all aspects of this Proposal. In 

particular, the Commission seeks 

comment on the following questions: 

1. What are the potential effects of 

removing the requirement that records 

of oral and written 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 and related cash or 

forward transactions are not required to 

be kept in a form and manner that 

allows for identification of a particular 

transaction? 

2. What are the potential effects of 

excluding Unregistered Members from 

the requirement to retain text messages? 

3. Is existing technology for storing 

text messages cost prohibitive for 

Unregistered Members to use? Are there 

other impediments to using this 

technology? 

4. What are the potential effects of 

excluding Unregistered Members from 

the requirements to store required 

records in a form and manner that is 

searchable and in a form and manner 

that allows for identification of a 

particular transaction? 

5. Rather than excluding all 

Unregistered Members from these 

aspects of the written recordkeeping 

obligations of the rule, would the 

interests of promoting customer 

protection and minimizing 

recordkeeping burdens be better 

balanced by excluding only small 

Unregistered Members from these 

requirements? If so, how would ‘‘small’’ 

Unregistered Members be defined? 

6. Would the exclusion of text 

messages from the written records 

requirement for all Unregistered 

Members incentivize Unregistered 

Members, especially commodity trading 

firms, to switch their method of 

communication? If so, should the 

Commission use a certain threshold in 

setting this exclusion, ensuring that the 

Commission can continue to properly 

oversee and monitor the derivatives 

market and enforce Commission rules 

and regulations? 

7. What is the potential effect on the 

market of excluding members of DCMs 

or SEFs that are CTAs from the oral 

recordkeeping requirement of the Final 

Rule? 

8. Is there a significant difference in 

the administrative burden of the oral 

recordkeeping requirement of 

Regulation 1.35(a) for large and small 

CTAs that would warrant exclusion of 

small CTAs, but not large CTAs? 

9. If so, how would ‘‘large’’ CTAs be 

defined? 

10. Would the Proposal impact the 

Commission’s ability to carry out its 

market oversight responsibilities with 

regard to the overall derivatives market? 

If so, how? 

11. Does the Proposal serve the public 

interest? In what ways? 

IV. Related Matters 

A. Regulatory Flexibility Act 

The Regulatory Flexibility Act 42

requires that Federal agencies consider 

whether the rules they propose will 

have a significant economic impact on 

a substantial number of small entities 

and, if so, they must provide a 

regulatory flexibility analysis reflecting 

the impact. Whenever an agency 

publishes a general notice of proposed 

rulemaking for any rule, pursuant to the 

notice-and-comment provisions of the 

Administrative Procedure Act 43 a 

regulatory flexibility analysis or 

certification typically is required.44 The 

Proposal, if adopted, will not have a 

significant economic impact on affected 

persons because the Proposal will 

relieve them from certain regulatory 

obligations that would otherwise apply 

to them. Specifically, the (proposed) 

amendment to 1.35(a) would provide 

relief from certain elements of the 

existing recordkeeping requirements of 

that section, and the Proposal would not 

impose any new regulatory obligations 

on the affected persons. Thus, the 

Proposal would not have any 

appreciable economic impact on 

affected entities. 

Accordingly, the Chairman, on behalf 

of the Commission, hereby certifies 

pursuant to 5 U.S.C. 605(b) that the 

Proposal will not have a significant 

economic impact on a substantial 

number of small entities. 

B. Paperwork Reduction Act 

The Proposal will not impose any 

new recordkeeping or information 

collection requirements, or other 

collections of information that require 

approval of the Office of Management 

and Budget under the Paperwork 

Reduction Act (‘‘PRA’’).45 All 

recordkeeping or information collection 

requirements relevant to the subject of 

this proposed rulemaking, or discussed 

herein, already exist under current law. 

The title for this collection of 

information is ‘‘Adaptation of 

Regulations to Incorporate Swaps— 

Records of Transactions,’’ OMB control 

number 3038–0090. This collection of 

information is not expected to be 

impacted by the rule amendment 

proposed herein, as the calculations 

which are already reflected in the 

burden estimate are not expected to 

appreciably change because of the relief 

provided in the Proposal. The PRA 

burden hours associated with this 

collection of information are therefore 

not expected to be increased or reduced 

as a result of the amendment proposed. 

Accordingly, the PRA does not apply. 

The Commission invites public 

comment on the accuracy of its estimate 

that no additional recordkeeping or 

information collection requirements or 

changes to existing collection 

requirements would result from the 

amendments proposed herein. 

C. Cost-Benefit Considerations 

Section 15(a) of the CEA requires the 

Commission to consider the costs and 

benefits of its actions before 

promulgating a regulation under the 

CEA or issuing certain orders. Section 

15(a) further specifies that the costs and 

benefits shall be evaluated in light of 

five broad areas of market and public 

concern: (1) Protection of market 

participants and the public; (2) 

efficiency, competitiveness, and 

financial integrity of futures markets; (3) 

price discovery; (4) sound risk 

management practices; and (5) other 

public interest considerations. The 

Commission considers the costs and 

benefits resulting from its discretionary 

determinations with respect to the 

section 15(a) factors. 

1. Background 

The Commission is proposing an 

amendment to Regulation 1.35(a) which 

would: (i) Provide that all records that 

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are required to be maintained under this 

regulation must be searchable; (ii) 

clarify that all records be kept in a form 

and manner that allows for 

identification of a particular transaction, 

except that records of oral and written 

communications leading to the 

execution of a transaction in a 

commodity interest and related cash or 

forward transactions are not required to 

be kept in a form and manner that 

allows for identification of a particular 

transaction; (iii) exclude unregistered 

members of DCMs and SEFs from the 

requirements to retain text messages and 

to maintain records in a particular form 

and manner; and (iv) exclude CTAs 

from the oral recordkeeping 

requirement. 

The Commission believes that the 

baseline for this cost and benefit 

consideration is the existing rule 

1.35(a). While CFTC Staff Letters 14–60 

and 14–72, as discussed above, 

currently provide no-action relief that is 

substantially similar to the relief the 

proposed amendments provide to 

certain market participants and end 

users, the Commission preliminarily 

believes that CFTC Staff Letters 14–60 

and 14–72 should not set or affect the 

baseline from which the Commission 

considered the costs and benefits of the 

Proposal. This is because, as they 

indicate, CFTC Staff Letters 14–60 and 

14–72 do not necessarily represent the 

position or view of the Commission or 

any other office or division of the 

Commission. 

2. Costs 

The Commission believes that the 

Proposal will not impose any additional 

costs upon those affected market 

participants and end users, but instead 

will reduce some of the regulatory 

burdens and associated costs that 

Regulation 1.35(a) imposes upon them. 

The Commission preliminarily believes 

that it may be difficult to quantify what 

costs the Proposal imposes upon other 

market participants, the markets 

themselves, or the general public. The 

Commission preliminarily believes that 

one of the costs associated with the 

Proposal will be that certain market 

participants and end-users will no 

longer be required to create and 

maintain certain types of records that 

are useful for the Commission in 

exercising its oversight of the markets, 

including for market surveillance, 

enforcement, and ensuring market 

integrity. Comments are invited 

regarding the extent of all of these costs, 

and any other costs that would result 

from adoption of the Proposal, 

including estimates of monetary or other 

measurements thereof. 

3. Benefits 

The Commission believes that the 

Proposal will have a tangible benefit for 

those market participants and end-users 

that are excluded from some of the 

regulatory burdens and associated costs 

of Regulation 1.35(a) under the 

Proposal. The Commission 

preliminarily believes that it may be 

difficult to quantify what other benefits 

the Proposal may have for other market 

participants, the markets themselves, or 

the general public. Comments are 

sought regarding these benefits and any 

other benefits resulting from adoption of 

the Proposal, and to the extent they can 

be quantified, estimates of the monetary 

or other value thereof. 

4. Section 15(a) 

Section 15(a) of the CEA requires the 

Commission to consider the effects of its 

actions in light of the following five 

factors: 

a. Protection of Market Participants and 

the Public 

The proposed amendments to Rule 

1.35(a) are intended, in part, to reduce 

some of the regulatory burdens on 

certain market participants and endusers. The Commission recognizes that 

there may be a trade-off between 

reducing regulatory burdens while at 

the same time ensuring that the 

recordkeeping obligations Rule 1.35(a) 

imposes upon market participants and 

end users are sufficient to support the 

effort by the Commission to fulfill its 

regulatory mission. Are the scope and 

reach of the proposed amendments 

appropriate to achieve these goals? 

Under the proposed amendments to 

Rule 1.35(a) certain market participants 

and end-users will no longer be required 

to create and maintain certain types of 

records that would be useful for the 

Commission in exercising its oversight 

of the markets, including for market 

surveillance, enforcement, and ensuring 

market integrity. What effect, if any, will 

the proposed amendments have on the 

ability of the Commission to obtain 

information necessary to effectively 

oversee the markets and investigate and 

prosecute misconduct? 

b. Efficiency, Competitiveness, and 

Integrity of Markets 

The proposed amendments to Rule 

1.35(a) are intended, in part, to reduce 

some of the regulatory burdens on 

certain market participants and endusers. Will the proposed amendments 

actually decrease the regulatory burdens 

on certain market participants and endusers? If so, will this result in increased 

efficiency and competition among endusers, without compromising market 

integrity? 

What effect, if any, will the proposed 

amendments to Rule 1.35(a) have on the 

ability of customers to trade in efficient, 

competitive, and liquid markets? 

Will the proposed amendments to 

Rule 1.35(a) reduce the regulatory 

burdens for unregistered end-users that 

are DCM or SEF members? If so, will 

reducing this regulatory burden increase 

or decrease the efficiency, 

competitiveness and integrity of the 

markets? 

c. Price Discovery 

The Commission preliminarily 

believes that the proposed amendments 

will not have any effect on price 

discovery. The Commission recognizes 

that, under the Proposal, certain market 

participants and end-users will no 

longer be required to create and 

maintain certain types of records that 

may be useful for the Commission in 

exercising its oversight of the markets, 

including for market surveillance, 

enforcement, and ensuring market 

integrity. Might this be perceived as a 

reduction in Commission surveillance 

or enforcement capability that 

potentially could result in increased 

market misconduct that ultimately 

affects price discovery? 

d. Sound Risk Management 

The proposed amendments to Rule 

1.35(a) are intended, in part, to reduce 

some of the regulatory burdens on 

certain market participants and endusers. Will the proposed amendments 

actually decrease the regulatory burdens 

on certain market participants and endusers? If so, what effect, if any, will this 

have on the risk management practices 

of market participants and end-users? 

e. Other Public Interest Considerations 

The Commission has not identified 

any other public purpose considerations 

for this rulemaking. 

5. Request for Comment 

The Commission invites comments 

from the public on all aspects of its 

preliminary consideration of costs and 

benefits associated with the Proposal. 

The Commission also invites comments 

from the public on all aspects of its 

preliminary consideration of the five 

factors that the Commission is required 

to consider under Section 15(a) of the 

CEA. The questions below relate to 

areas that the Commission preliminarily 

believes may be relevant. In addressing 

these or any other aspect of the 

Commission’s preliminary assessment, 

commenters are encouraged to submit 

any data or other information that they 

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68146 Federal Register / Vol. 79, No. 220 / Friday, November 14, 2014 / Proposed Rules 

46Pursuant to CEA section 2(i) this rule will 

apply to swaps activities outside the United States 

to the extent they meet the requirements of that 

section. See 7 U.S.C. 2(i). 

may have quantifying or qualifying the 

costs and benefits of the Proposal. 

a. What are the costs and benefits to 

market participants, if any, associated 

with the Proposal? Please explain and, 

to the extent possible, quantify these 

costs. 

b. What are the costs and benefits to 

the public, if any, associated with the 

Proposal? Please explain and, to the 

extent possible, quantify these costs. 

c. To what extent does the Proposal 

protect market participants and the 

public? How, if at all, could the 

Proposal be altered to better protect 

market participants and the public? 

d. How, if at all, does the Proposal 

affect the efficiency, competitiveness, 

and financial integrity of markets? 

e. How, if at all, does the Proposal 

affect price discovery? 

f. How, if at all, does the Proposal 

affect sound risk management for 

market participants and end-users? 

g. How, if at all, does the Proposal 

affect the public interest? 

h. What are the costs and benefits to 

market participants and the public, if 

any, associated with the application of 

this rule for activities outside of the 

United States? Please explain, and to the 

extent possible, quantify these costs.46

List of Subjects in 17 CFR Part 1 

Agricultural commodity, Agriculture, 

Brokers, Committees, Commodity 

futures, Conflicts of interest, Consumer 

protection, Definitions, Designated 

contract markets, Directors, Major swap 

participants, Minimum financial 

requirements for intermediaries, 

Reporting and recordkeeping 

requirements, Swap dealers, Swaps. 

For the reasons stated in the 

preamble, the Commodity Futures 

Trading Commission proposes to amend 

17 CFR chapter I as set forth below: 

PART 1—GENERAL REGULATIONS 

UNDER THE COMMODITY EXCHANGE 

ACT 

■ 1. The authority citation for part 1 

continues to read as follows: 

Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 

6d, 6e, 6f, 6g, 6h, 6i, 6k, 6l, 6m, 6n, 6o, 6p, 

6r, 6s, 7, 7a–1, 7a–2, 7b, 7b–3, 8, 9, 10a, 12, 

12a, 12c, 13a, 13a–1, 16, 16a, 19, 21, 23, and 

24 (2012). 

■ 2. In § 1.35, revise paragraph (a) to 

read as follows: 

§ 1.35 Records of commodity interest and 

related cash or forward transactions. 

(a) Futures commission merchants, 

retail foreign exchange dealers, 

introducing brokers, and members of 

designated contract markets or swap 

execution facilities. (1) Each futures 

commission merchant, retail foreign 

exchange dealer, introducing broker, 

and member of a designated contract 

market or swap execution facility shall 

keep full, complete, and systematic 

records, which include all pertinent 

data and memoranda, of all transactions 

relating to its business of dealing in 

commodity interests and related cash or 

forward transactions. Included among 

such records shall be all orders (filled, 

unfilled, or canceled), trading cards, 

signature cards, street books, journals, 

ledgers, canceled checks, copies of 

confirmations, copies of statements of 

purchase and sale, and all other records, 

which have been prepared in the course 

of its business of dealing in commodity 

interests and related cash or forward 

transactions. Among such records each 

member of a designated contract market 

or swap execution facility must retain 

and produce for inspection are all 

documents on which trade information 

is originally recorded, whether or not 

such documents must be prepared 

pursuant to the rules or regulations of 

either the Commission, the designated 

contract market or the swap execution 

facility. For purposes of this section, 

such documents are referred to as 

‘‘original source documents.’’ Also 

included among the records required to 

be kept by this paragraph are all oral 

and written 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 and related cash or 

forward transactions, whether 

communicated by telephone, voicemail, 

facsimile, instant messaging, chat 

rooms, electronic mail, mobile device, 

or other digital or electronic media. 

(2) Form and manner. (i) All records 

required to be kept pursuant to 

paragraph (a)(1) of this section shall be 

searchable; and 

(ii) All records required to be kept 

pursuant to paragraph (a)(1) of this 

section shall be kept in a form and 

manner that allows for identification of 

a particular transaction, except for 

records of all oral and written 

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 and 

related cash or forward transactions, 

whether communicated by telephone, 

voicemail, facsimile, instant messaging, 

chat rooms, electronic mail, mobile 

device, or other digital or electronic 

media. 

(3) Provided, however, for a member 

of a designated contract market or swap 

execution facility that is not registered 

or required to register with the 

Commission in any capacity, records 

required to be kept pursuant to 

paragraph (a)(1) of this section: 

(i) Are not required to be kept 

pursuant to paragraph (a)(2) of this 

section; and 

(ii) Do not include text messages sent 

or received by such member. 

(4) Provided, however, the 

requirement in paragraph (a)(1) of this 

section to record oral communications 

shall not apply to: 

(i) Oral communications that lead 

solely to the execution of a related cash 

or forward transaction; 

(ii) Oral communications provided or 

received by a floor broker that do not 

lead to the purchase or sale for any 

person other than the floor broker of any 

commodity for future delivery, security 

futures product, swap, or commodity 

option authorized under section 4c of 

the Commodity Exchange Act; 

(iii) An introducing broker that has 

generated over the preceding three years 

$5 million or less in aggregate gross 

revenues from its activities as an 

introducing broker; 

(iv) A floor trader; 

(v) A commodity pool operator; 

(vi) A commodity trading advisor; 

(vii) A swap dealer; 

(viii) A major swap participant; or 

(ix) A member of a designated 

contract market or swap execution 

facility that is not registered or required 

to be registered with the Commission in 

any capacity. 

(5) For purposes of paragraph (a)(1) of 

this section, ‘‘related cash or forward 

transaction’’ means a purchase or sale 

for immediate or deferred physical 

shipment or delivery of an asset related 

to a commodity interest transaction 

where the commodity interest 

transaction and the related cash or 

forward transaction are used to hedge, 

mitigate the risk of, or offset one 

another. 

(6) Each futures commission 

merchant, retail foreign exchange 

dealer, introducing broker, and member 

of a designated contract market or swap 

execution facility shall retain the 

records required to be kept by this 

section in accordance with the 

requirements of § 1.31, and produce 

them for inspection and furnish true 

and correct information and reports as 

to the contents or the meaning thereof, 

when and as requested by an authorized 

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representative of the Commission or the 

United States Department of Justice. 

(7) (i) The Commission may in its 

discretion establish an alternative 

compliance schedule for the 

requirement to record oral 

communications under paragraph (a)(1) 

of this section that is found to be 

technologically or economically 

impracticable for an affected entity that 

seeks, in good faith, to comply with the 

requirement to record oral 

communications under paragraph (a)(1) 

of this section within a reasonable time 

period beyond the date on which 

compliance by such affected entity is 

otherwise required. 

(ii) A request for an alternative 

compliance schedule under paragraph 

(a)(7)(i) of this section shall be acted 

upon within 30 days from the time such 

a request is received, or it shall be 

deemed approved. 

(iii) The Commission hereby delegates 

to the Director of the Division of Swap 

Dealer and Intermediary Oversight or 

such other employee or employees as 

the Director may designate from time to 

time, the authority to exercise the 

discretion. Notwithstanding such 

delegation, in any case in which a 

Commission employee delegated 

authority under this paragraph believes 

it appropriate, he or she may submit to 

the Commission for its consideration the 

question of whether an alternative 

compliance schedule should be 

established. The delegation of authority 

in this paragraph shall not prohibit the 

Commission, at its election, from 

exercising the authority set forth in 

paragraph (a)(7)(i) of this section. 

(iv) Relief granted under paragraph 

(a)(7)(i) of this section shall not cause an 

affected entity to be out of compliance 

or deemed in violation of any 

recordkeeping requirements. 

* * * * * 

Issued in Washington, DC, on November 4, 

2014, by the Commission. 

Christopher J. Kirkpatrick, 

Secretary of the Commission. 

Note: The following appendices will 

not appear in the Code of Federal 

Regulations. 

Appendices to Records of Commodity 

Interest and Related Cash or Forward 

Transactions—Commission Voting 

Summary, Chairman’s Statement, and 

Commissioner’s Statement 

Appendix 1—Commission Voting Summary 

On this matter, Chairman Massad and 

Commissioners Wetjen and Bowen voted in 

the affirmative. Commissioner Giancarlo 

voted in the negative. 

Appendix 2—Statement of Chairman 

Timothy G. Massad 

I support the Staff’s recommendation to 

amend CFTC Regulation 1.35. One of my 

priorities has been to fine-tune our rules to 

make sure they work as intended and do not 

impose undue burdens or unintended 

consequences, particularly for the 

nonfinancial commercial businesses that use 

these markets to hedge commercial risks. 

Consistent with that goal, the proposed 

amendment is designed to make sure that the 

farmers, ranchers, manufacturers, and other 

commercial companies who depend on the 

derivatives markets can continue to use them 

efficiently and effectively. 

Regulation 1.35 requires various types of 

market participants to keep written and oral 

records of transactions. This record keeping 

is very important to our efforts to police the 

markets and insure integrity and 

transparency. 

Regulation 1.35 has been on the books 

since 1948, and we have updated it from time 

to time in light of changes in marketplace 

practices as well as the scope of our 

jurisdiction. After the Commission amended 

this rule in December 2012 and the Staff 

observed implementation of these changes, 

the Staff determined that the costs of 

complying with certain aspects of the rule for 

some market participants might exceed the 

potential benefits, and the Staff granted no 

action relief. Specifically, the Staff said that 

regarding written records, members of DCMs 

and SEFs that are not registered with the 

Commission do not have to keep text 

messages or store their other records in a 

manner that is identifiable and searchable by 

transaction. Regarding oral communications, 

Staff said that commodity trading advisors do 

not have to record oral communications 

regarding their swap transactions. 

The costs of maintaining the records that 

our rules require market participants to keep 

will ultimately be reflected in the transaction 

costs incurred by all customers, and so we 

must always keep the costs in balance with 

the benefit to market oversight. Today, we are 

simply proposing to revise the rule so that it 

reads consistent with that staff no action 

relief and to provide a slight expansion of 

some of that relief so that CTAs do not have 

to record any oral communications. We are 

also proposing to clarify one aspect of the 

rule that has generated confusion. This 

pertains to the requirement that records must 

be identifiable and searchable by transaction 

and what ‘‘identifiable and searchable’’ 

means. 

Appendix 3—Dissenting Statement of 

Commissioner J. Christopher Giancarlo 

I respectfully dissent from the Commodity 

Futures Trading Commission’s (CFTC or 

Commission) approval of the proposed rule 

on Records of Commodity Interest and 

Related Cash or Forward Transactions, 

commonly known as Rule 1.35. 

In 2012, the CFTC revised Rule 1.35. The 

rule currently requires the keeping of all oral 

and written records that lead to the execution 

of a transaction in a commodity interest and 

related cash or forward transaction, in a form 

and manner ‘‘identifiable and searchable by 

transaction.’’ This recordkeeping must be 

done (with certain carve outs) by futures 

commission merchants (FCMs), retail foreign 

exchange dealers (RFEDs), introducing 

brokers (IBs), and members of designated 

contract markets (DCMs) and swap execution 

facilities (SEFs). 

The revised rule proved to be unworkable. 

Its publication was followed by requests for 

no-action relief and a public roundtable at 

which entities covered by the rule voiced 

their inability to tie all communications 

leading to the execution of a transaction to 

a particular transaction or transactions. Enduser exchange members pointed out that 

business that was once conducted by 

telephone had moved to text messaging, so 

the carve out in the rule for oral 

communications had little utility. They 

pointed out that it was simply not feasible 

technologically to keep pre-trade text 

messages in a form and manner ‘‘identifiable 

and searchable by transaction.’’ 

The proposed revisions to Rule 1.35 go a 

long way towards addressing the difficulties 

presented by the current rule. Unfortunately, 

they do not go far enough. The proposed rule 

text raises unanswered questions. It 

continues to contain provisions that may be 

difficult to comply with or overly 

burdensome in practice for certain covered 

entities. In my opinion, many of the 

problems that remain stem from imprecise 

legal drafting and undefined terms. 

Section (a)(1) of the proposed rule 

identifies the records that must be kept by a 

covered entity, which include ‘‘all pertinent 

data and memoranda, of all transactions 

relating to its business of dealing in 

commodity interests and related cash or 

forward transactions. Included among such 

records shall be all orders (filled, unfilled, or 

canceled), trading cards, signature cards, 

street books, journals, ledgers, canceled 

checks, copies of confirmations, copies of 

statements of purchase and sale, and all other 

records, which have been prepared in the 

course of its business of dealing in 

commodity interests and related cash or 

forward transactions.’’ Also included among 

the records required to be kept by Section 

(a)(1) are ‘‘all oral and written 

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 and related cash or 

forward transactions, whether communicated 

by telephone, voicemail, facsimile, instant 

messaging, chat rooms, electronic mail, 

mobile device, or other digital or electronic 

media.’’ 

Section (a)(2)(i) of the proposed rule 

requires that all of the above records be 

‘‘searchable.’’ Section (a)(2)(ii) requires that 

they be ‘‘kept in a form and manner that 

allows for identification of a particular 

transaction, except for records of all oral and 

written 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 and related cash or 

forward transactions.’’ 

Members of DCMs and SEFs that are not 

registered or required to register with the 

Commission are carved out from the 

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68148 Federal Register / Vol. 79, No. 220 / Friday, November 14, 2014 / Proposed Rules 

1Commission regulations referred to herein are 

found at 17 CFR Ch. 1 (2012). Commission 

regulations are accessible on the Commission’s Web 

site, www.cftc.gov. 

requirements that records be searchable and 

kept in a form and manner that allows for 

identification of a particular transaction, thus 

those requirements apply to FCMs, RFEDs, 

IBs, and members of DCMs and SEFs that are 

required to register with the Commission, 

such as commodity trading advisors (CTAs). 

Section (a)(6) of the proposal requires 

covered entities to retain Rule 1.35 records in 

accordance with Rule 1.31. Rule 1.31 (which 

applies to all books and records required to 

be kept by the Commodity Exchange Act and 

Commission regulations) contains detailed 

requirements regarding the form and manner 

in which records must be maintained and 

produced. It states, among other things, that 

paper records shall be kept in their original 

form, and that electronic records shall be 

kept in their native file format. See Rule 

1.31(a)(1). It also requires that records be 

produced ‘‘in a form specified by any 

representative of the Commission.’’ Id. Thus, 

Rule 1.35, on the one hand, identifies the 

particular records that must be kept, while 

Rule 1.31, on the other hand, sets the form 

and manner in which such records must be 

maintained and produced. But the proposal 

mixes things up by adding to Rule 1.35 

(where they do not belong) new requirements 

for most covered entities regarding form and 

manner—that the records allow for 

identification of a particular transaction and 

be ‘‘searchable,’’ a term that is not defined. 

While it is likely that electronic records 

kept in their native file format are searchable, 

it is not clear what ‘‘searchable’’ means when 

it comes to paper records such as canceled 

checks, signed account agreements, and 

paper orders. Does the proposal require that 

a record of a wire transfer received by an 

FCM to cover margin for multiple positions 

be kept in a form and manner that allows for 

identification of each potential transaction? 

Will a small FCM embedded in a grain 

elevator have to keep copies of checks 

received from farmers in some sort of 

searchable format tied to specific 

transactions? What if the farmer’s check 

mistakenly references the wrong transactions 

and the FCM doesn’t catch it? Is the FCM 

now in breach of our rules? Will FCMs and 

IBs need to hire a paper records 

‘‘searchability’’ staff just to tie records to 

individual transactions in the event, but not 

the certainty, that someday the CFTC will 

want those records? At what cost to them and 

to American markets and end-users? 

I am also concerned that although the 

proposal provides relief to asset managers, 

such as CTAs, from the oral record keeping 

requirements, its adoption would continue to 

burden them with unnecessary costs and 

potentially discourage them from becoming 

members of SEFs. A comment letter filed by 

SIFMA’s Asset Management Group after the 

public roundtable stated, for example, that a 

requirement similar to Rule 1.31’s 

requirement that any digital storage medium 

or system must ‘‘preserve the records 

exclusively in a non-rewritable, non-erasable 

format,’’ see Rule 1.31(b)(1)(ii)(A), also 

known as ‘‘WORM,’’ was rejected by the 

Securities and Exchange Commission when 

considering amending its own recordkeeping 

requirements for registered investment 

advisers and registered investment 

companies because the costs associated with 

preserving records in that manner 

outweighed the benefits. SIFMA AMG Letter 

(Apr. 17, 2014), available at: http://www.

sifma.org/issues/item.aspx?id=8589948677. 

I encourage all affected parties to give us 

detailed comments on the proposal, with 

emphasis on the intersection between Rule 

1.35 and Rule 1.31, and how the proposed 

searchability and identification by 

transaction requirements will work in 

practice. I encourage the public to make us 

listen once again to their concerns about the 

costs and benefits of this particular rule set. 

I am also interested in answers to the 

following questions: 

1. The proposal excludes unregistered 

exchange members from the requirement to 

retain text messages. Is the scope of this 

exclusion appropriate? Do the impediments 

for storing text messages in a searchable 

format extend to persons beyond 

unregistered members? 

2. While unregistered members would not 

be required under the proposal to keep 

records in a searchable format, or in a form 

and manner that allows for identification of 

a particular transaction, they still would be 

required to keep all Rule 1.35 records, 

including all written communications 

(except text messages) provided or received 

concerning quotes, solicitations, bids, offers, 

instructions, trading, and prices that lead to 

the execution of a transaction in a 

commodity interest and related cash or 

forward transactions. FCMs, IBs, RFEDs and 

registered exchange members must keep such 

records (including text messages) in a 

searchable format. What are the costs 

associated with keeping such records in 

accordance with Rule 1.31? Is leading to the 

execution of a transaction the appropriate 

scope of this particular recordkeeping 

requirement? Should the scope be narrowed 

or broadened? If so, why? 

3. Are there any technological 

impediments to the oral recordkeeping 

requirements of Rule 1.35(a)? 

4. Is there a need to revise Rule 1.31 given 

advancements in technology and current 

business practices? 

Although I do not support today’s 

proposal, I am hopeful that after thoughtful 

consideration of the comments, the 

Commission will promulgate a final rule that 

is precise in its meaning and terms and that 

appropriately balances compliance costs with 

the need to effectively regulate the markets 

we oversee. 

[FR Doc. 2014–26983 Filed 11–13–14; 8:45 am] 

BILLING CODE 6351–01–P 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Part 1 

RIN 3038–AE22 

Residual Interest Deadline for Futures 

Commission Merchants 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Notice of proposed rulemaking. 

SUMMARY: The Commodity Futures 

Trading Commission (‘‘Commission’’ or 

‘‘CFTC’’) is proposing to revise the 

Residual Interest Deadline in 

Commission Rule 1.22. The amendment 

would remove the December 31, 2018 

termination date for the phased-in 

compliance schedule for futures 

commission merchants (‘‘FCMs’’) and 

provide assurance that the Residual 

Interest Deadline would only be revised 

through a separate Commission 

rulemaking. 

DATES: Comments must be received on 

or before January 13, 2015. 

ADDRESSES: You may submit comments, 

identified by RIN 3038–AE22, by any of 

the following methods: 

• Agency Web site, via its Comments 

Online process: http://

comments.cftc.gov. Follow the 

instructions for submitting comments 

through the Web site. 

• Mail: Send to Christopher 

Kirkpatrick, Secretary of the 

Commission, Commodity Futures 

Trading Commission, Three Lafayette 

Centre, 1155 21st Street NW., 

Washington, DC 20581. 

• Hand Delivery/Courier: Same as 

Mail, above. 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

Please submit your comments using 

only one of these methods. 

All comments must be submitted in 

English, or if not, accompanied by an 

English translation. Comments will be 

posted as received to http://

www.cftc.gov. You should submit only 

information that you wish to make 

available publicly. If you wish the 

Commission to consider information 

that may be exempt from disclosure 

under the Freedom of Information Act, 

a petition for confidential treatment of 

the exempt information may be 

submitted according to the procedures 

set forth in § 145.9 of the Commission’s 

regulations.1

The Commission reserves the right, 

but shall have no obligation, to review, 

pre-screen, filter, redact, refuse or 

remove any or all of your submission 

from www.cftc.gov that it may deem to 

be inappropriate for publication, such as 

obscene language. All submissions that 

have been redacted or removed that 

contain comments on the merits of the 

rulemaking will be retained in the 

public comment file and will be 

considered as required under the 

Administrative Procedure Act and other 

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