[Federal Register Volume 79, Number 220 (Friday, November 14, 2014)]
[Proposed Rules]
[Pages 68140-68148]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-26983]



[[Page 68140]]

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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.

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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:
    <bullet> Agency Web site, via its Comments Online process: http://comments.cftc.gov. Follow the instructions for submitting comments 
through the Web site.
    <bullet> Mail: Send to Christopher Kirkpatrick, Secretary of the 
Commission, Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street NW., Washington, DC 20581.
    <bullet> Hand Delivery/Courier: Same as Mail, above.
    <bullet> 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 Sec.  145.9 of the Commission's regulations.\1\
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    \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.
_____________________________________-

    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, <a href="/cdn-cgi/l/email-protection#2b4c494a59454e5f5f6b484d5f48054c445d"><span class="__cf_email__" data-cfemail="563134372438332222163530223578313920">[email protected]</span></a>; Katherine Driscoll, Associate Director, (202) 
418-5544, <a href="/cdn-cgi/l/email-protection#8ae1eef8e3f9e9e5e6e6cae9ecfee9a4ede5fc"><span class="__cf_email__" data-cfemail="771c13051e0414181b1b371411031459101801">[email protected]</span></a>; August A. Imholtz III, Special Counsel, 
(202) 418-5140, <a href="/cdn-cgi/l/email-protection#89e8e0e4e1e6e5fdf3c9eaeffdeaa7eee6ff"><span class="__cf_email__" data-cfemail="6f0e06020700031b152f0c091b0c41080019">[email protected]</span></a>; or Lauren Bennett, Attorney-Advisor, 
(202) 418-5290, <a href="/cdn-cgi/l/email-protection#016d63646f6f64757541626775622f666e77"><span class="__cf_email__" data-cfemail="2b47494e45454e5f5f6b484d5f48054c445d">[email protected]</span></a>, 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\
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    \2\ See 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.
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    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.
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    \5\ As 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.
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    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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    \8\ Final Rule Adopting Release at 75524.

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[[Page 68141]]

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 non-
intermediaries.\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\
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    \9\ Adoption of Regulations to Incorporate Swaps, 76 FR 33066 
(July 7, 2011).
    \10\ See Final Rule Adopting Release at 75524. These comments 
can be found on the Commission's Web site at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1037.
    \11\ Final Rule Adopting Release at 75527.
    \12\ Id.
    \13\ Id.
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    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\
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    \14\ Under 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).
    \15\ Final Rule Adopting Release at 75528.
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    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 end-users and to CTAs. 
Subsequently, on April 3, 2014, the Commission staff held a Public 
Roundtable to Discuss Dodd-Frank 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.
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    \16\ Public Roundtable to Discuss Dodd-Frank End-User 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'').
    \17\ See 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'').
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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\
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    \18\ See End-User Roundtable Transcript.
    \19\ Id. at 55.
    \20\ See id.
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    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 end-user participant, because they do not manage their 
positions on a transaction-by-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\
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    \21\ See id.
    \22\ See id. at 14-16.
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    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\
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    \23\ Id. at 64-65.
    \24\ Id.
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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 no-action 
letter on December 20, 2013 granting relief to CTAs that are members of 
SEFs from the requirement under the Final Rule to record oral

[[Page 68142]]

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.
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    \25\ See 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.
    \26\ Id.
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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.
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    \27\ See CFTC Staff Letter No. 14-33.
    \28\ Id.
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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\
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    \29\ See 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.
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    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\
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    \31\ See 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.
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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\
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    \32\ See 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/wp-content/uploads/2014/05/CMC-Rule-1.35-Interpretive-Guidance-Request-Letter-12.12.2013a.pdf, and CFTC Staff Letter No. 14-72.
    \33\ Id.
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    The Divisions considered this concern in conjunction with similar 
comments raised at the End-User Roundtable discussion regarding the 
``searchability'' requirement, and granted limited no-action 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.
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    \34\ Id.
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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\
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    \35\ The 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.
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    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

[[Page 68143]]

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.
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    \36\ 17 CFR 1.35(a)(1).
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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\
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    \37\ 17 CFR 1.35(a)(1).
    \38\ 7 U.S.C. 1a(34).
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    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 end-users 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.
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    \39\ See CFTC Letter 14-72 and End-User Roundtable Transcript at 
55.
    \40\ See End-User Roundtable Transcript.
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    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

[[Page 68144]]

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 
non-discretionary 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.
---------------------------------------------------------------------------

    \41\ 17 CFR 1.35(a)(1).
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \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.
    \44\ See 5 U.S.C. 601(2), 603-05.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \45\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

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

[[Page 68145]]

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 end-users. 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 end-users. Will the proposed amendments actually decrease the 
regulatory burdens on certain market participants and end-users? If so, 
will this result in increased efficiency and competition among end-
users, 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 end-users. Will the proposed amendments actually decrease the 
regulatory burdens on certain market participants and end-users? 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

[[Page 68146]]

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\
---------------------------------------------------------------------------

    \46\ Pursuant 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).
---------------------------------------------------------------------------

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

0
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).

0
2. In Sec.  1.35, revise paragraph (a) to read as follows:


Sec.  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 Sec.  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

[[Page 68147]]

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. End-user 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

[[Page 68148]]

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


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