CFTC Modernizes Recordkeeping Requirements
The U.S. Commodity Futures Trading Commission (CFTC) recently adopted amendments to CFTC Regulation 1.31 (Final Rule), which governs the recordkeeping obligations for any person required by the Commodity Exchange Act (CEA) or CFTC regulations to maintain such records, including registered commodity pool operators and commodity trading advisors. While the Final Rule amendments do not impose new or additional recordkeeping requirements under Regulation 1.31, the amendments of the Final Rule are largely intended to modernize and make technology neutral the form and manner in which regulatory records have been historically maintained. In response to comments from industry groups and other market participants, the Final Rule amendments are designed to provide greater flexibility regarding the retention and production of records in light of developments in technology over time. The new amendments will become effective on August 28, 2017.
Background on Regulation 1.31
Adopted by the CFTC in 1999, CFTC Regulation 1.31 addresses, among other things, the form and manner for retention and production of CFTC required records. The regulation has been largely unchanged since its adoption and a number of industry groups and other market participants have expressed concern to the CFTC that many of the provisions of the regulation are outdated and have created unnecessary expense to market participants in the maintenance of the required records. For example, the requirement that records be maintained in their native or originally created format and the requirement to engage a third-party technical consultant, or rely on outdated technology such as the requirement to retain any electronic record in a non-writable, non-erasable format (the “write once, read many” or “WORM requirement”). With the adoption of the Final Rule, the CFTC intended to reduce the expense burden on many market participants imposed by an outdated regulation as well as provide for additional flexibility in the adoption of new recordkeeping technologies by eliminating technology-specific requirements in the regulation.
Updated Terms and Definitions in the Final Rule
• Records Entity: Any person required by the CEA or CFTC regulations to keep regulatory records. The Final Rule makes clear that it has not created any new categories of record entities or imposed any new recordkeeping obligations on records entities.
• Regulatory Records: The term “books and records” in current Regulation 1.31 was replaced by the term “regulatory records” in the Final Rule. The CFTC distinguishes between electronic regulatory records and paper regulatory records. The term “regulatory records” includes “all books and records required to be kept” by the CEA or CFTC regulations, including data regarding corrections or alterations to such records. The term “electronic regulatory records” includes all regulatory records, other than those created and maintained exclusively on paper by a records entity, as well as any data necessary to access, search or display such records. Notably, the CFTC will require a records entity to maintain data about a regulatory record only after it is created (i.e., preliminary drafts of an agreement will not be required to be maintained).
Form of Retention and Duration
The Final Rule requires that regulatory records be maintained in a form and manner that will ensure the authenticity and reliability of the records and recordkeeping systems. While the Final Rule removes certain technical requirements applicable to electronic regulatory records, it also imposes additional controls with respect to the retention of such records. A records entity must establish systems and controls that:
• ensure the authenticity of electronic regulatory records and monitor compliance with CFTC requirements;
• ensure that electronic regulatory records can be produced including in the event of an emergency or other disruption to the entity’s record retention systems; and
• create and maintain an updated inventory that identities and describes each system that maintains the information necessary for accessing or producing electronic regulatory records.
The Final Rule requires a records entity to keep regulatory records generally for a period of five years from the date on which they were created. Other than certain types of pre-trade communication records (which the Final Rule now subjects to the general five year retention period ), a records entity is required to keep regulatory records of any swap or related cash or forward transaction from the date the regulatory record was created until the termination, maturity, expiration, transfer, assignment or novation date of the transaction plus five years. While electronic records are required to be “readily accessible” for the duration of this period, regulatory records exclusively created and maintained on paper, as in existing Regulation 1.31, need to be readily accessible only for two years.
Production of Regulatory Records
Regulatory records remain subject to inspection by the CFTC and the Department of Justice and such records must be promptly produced upon request.
Overview of Modernized Requirements
The Final Rules eliminate outdated technical requirements that had applied to electronic regulatory records, including:
• Native File Format: Records entities are no longer required to retain electronic regulatory records in the format in which the record was originally created.
• WORM Requirement: The Final Rules eliminate the WORM requirement based on the CFTC’s reasoning that such requirement was based on technology that is no longer supported or being actively utilized. Accordingly, the CFTC explained that the elimination of the requirement was designed, in large part, to permit records entities to use more flexible, updated forms of technology to accomplish the same task.
• Technical Consultant: The Final Rule eliminates the requirement that a record entity (i) enter into an arrangement with a third-party technical consultant and (ii) provide the technical consultant with access to and the ability to download information from the records entity’s electronic media storage to any acceptable medium.
• Hard copies. The Final Rule eliminates the requirement that certain paper records, such as trading cards and paper copies of electronically filed certified forms, be retained in hard copy.
The effective date of the Final Rule is August 28, 2017. It is important to note that the Final Rule amendments under CFTC Regulation 1.31 do not impose any new or additional recordkeeping requirements on market participants. The amendments are largely intended by the CFTC to modernize and update the manner in which regulatory records must be kept. In light of these changes, we encourage clients that are records entities to review the Final Rule requirements to determine whether their current recordkeeping practices satisfy the requirements of the Final Rule or whether certain modifications to current practices ought to be made. We will continue to update clients on any regulatory or market developments in this area.