CFTC Adopts Tape-Recording and Recordkeeping Rules

by Morgan Lewis
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Final rules require tape recording by futures commission merchants, introducing brokers, retail foreign exchange dealers, and commodity trading advisors; affected CFTC registrants must implement systems to comply by December 21, 2013.

On December 21, 2012, the Commodity Futures Trading Commission (CFTC) published in the Federal Register final rules (Final Rules) for futures commission merchants (FCMs), larger introducing brokers (IBs), retail foreign exchange dealers (RFEDs), and commodity trading advisors (CTAs) that are members of a designated contract market (DCM) or swap execution facility (SEF). The Final Rules require the recording of oral communications that lead to the execution of a commodity interest transaction.[1] The Final Rules also conform the recordkeeping rules for FCMs, IBs, and RFEDs related to futures and other commodity interests under CFTC Rule 1.35 to those applicable to swap dealers (SDs) and major swap participants (MSPs) related to swaps transactions.[2] The Final Rules become effective on February 19, 2013, and compliance with the tape-recording requirements must be met by December 21, 2013.

Scope of the Recordkeeping Rule

In its Final Rules, the CFTC limited its tape-recording requirement and its recordkeeping requirement to oral communications and written communications that lead to the execution of a transaction in a commodity interest and related cash or forward transactions. The CFTC originally proposed that the tape-recording and recordkeeping requirements apply to all cash commodity transactions.[3] The Final Rules define a "related cash or forward transaction" as a purchase or sale for immediate or deferred physical shipment or delivery of an asset related to a commodity interest where the commodity interest transaction and the related cash or forward transaction are used to hedge, mitigate the risk of, or offset one another.

Oral Communications

The Final Rules impose recording rules for oral communications on the following entities: FCMs; IBs that have generated more than $5 million in total aggregate gross revenues over the preceding three years from their activities as an IB; RFEDs; and members of a DCM or SEF that are registered or required to be registered with the CFTC in any capacity, with the exception of floor traders, floor brokers trading for themselves, and commodity pool operators.[4] The Final Rules require these entities to record all oral 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.[5] The CFTC reiterated in the Adopting Release that any conversation, regardless of whether it occurs on a firm-provided or personal telephone, must be taped if the contents fall within the requirements of CFTC Rule 1.35. The Final Rules require that the recording be retained for one year from the date created. The Final Rules do not include the requirement that the recordings be separate electronic files, although they must still be searchable and identifiable by transaction.

The CFTC also clarified in the Final Rules that recordings of telephone calls do not violate any state or federal laws as long as the other parties to the call are informed that the call is being recorded.[6] However, as a practical matter, all market participants should ensure that customers and counterparties have consented to the recording of all oral communications that may be subject to the Final Rules and should confirm the permissible methods of obtaining such consent under applicable state law.

Written Communications

The Final Rules require FCMs, IBs, RFEDs, and all members of a DCM or SEF, regardless of whether the member is required to be registered with the CFTC, to record and keep all written communications provided or received concerning quotes, solicitations, bids, offers, instructions, trading, and prices that lead to the execution of a transaction in commodity interests and related cash or forward transactions, whether communicated by facsimiles, instant messages, chat rooms, electronic mail, mobile devices, or other digital or electronic media. Written records must be retained for five years from the date created, with the records readily available for the first two years.

Compliance Dates

Firms must comply with the tape-recording requirements by December 21, 2013. The Final Rules, however, provide that an entity may request an alternative compliance date from the CFTC if it seeks in good faith to comply with the recording requirement but finds it "technologically or economically impracticable" to do so.

Implications

As a result of the Final Rules, most registered futures brokerage intermediaries will have to tape record all conversations leading to the execution of futures and other commodity interests.[7] Affected CFTC registrants that do not currently have tape-recording systems will need to establish such systems by December 21, 2013, unless they are able to provide evidence to the CFTC that implementing such a system by the end of 2013 is technologically or economically impracticable for the firm.


[1]. Adaptation of Regulations to Incorporate Swaps—Records of Transactions, 77 Fed. Reg. 75,523 (Dec. 21, 2012) (to be codified 17 C.F.R. pt. 1), available here [hereinafter Adopting Release].

[2]. See Swap Dealer and Major Swap Participant Recordkeeping, Reporting, and Duties Rules; Futures Commission Merchant and Introducing Broker Conflicts of Interest Rules; and Chief Compliance Officer Rules for Swap Dealers, Major Swap Participants, and Futures Commission Merchants, 77 Fed. Reg. 20,128 (Apr. 3, 2012) (to be codified at 17 C.F.R. pts. 1, 3, 23), available here [hereinafter SD and MSP Recordkeeping Final Rule].

[3]. See Adaptation of Regulations to Incorporate Swaps, Proposed Rules, 76 Fed. Reg. 33,066 (June 7, 2011), available here.

[4]. CTAs that are members of a DCM or SEF are not excluded from the tape-recording requirement. CFTC Rule 1.3(q) defines a "member" of a DCM or SEF as, among other things, a person "having trading privileges" on the DCM or SEF. Accordingly, a CTA that has trading privileges by means of direct market access will be subject to the tape-recording requirement.

[5]. A "commodity interest" includes a commodity futures contract, a retail foreign exchange transaction, a commodity options contract, and a swap (which includes cash-settled currency forwards and currency swaps). A commodity interest does not include investments in physical commodities, such as metals (e.g., bullion), agricultural products and energy products (e.g., barrels of oil), or a spot transaction in those commodities, but it does include an over-the-counter forward contract to buy and sell physical commodities (e.g., energy forwards) unless such forward contract is between commercial market participants in connection with their commercial business.

[6]. Federal law does not prohibit a person from recording a telephone call where the person recording the call is a party to the call or one of the parties to the call has given prior consent to being recorded. State laws require different types of consent before a person can record customer telephone conversations. The CFTC noted that, even if a state law were to conflict with the recordkeeping requirement in CFTC Rule 1.35(a), such a law would be preempted by CFTC Rule 1.35(a). Adopting Release at 75,532, n.51.

[7]. CFTC registrants have not before been subject to tape-recording requirements solely because of their status as a registrant. For example, National Futures Association (NFA) Compliance Rule 2-9 and Interpretive Notice 9021, Compliance Rule 2-9: Enhanced Supervisory Requirements, provides that an NFA member must, among other things, tape record conversations with customers and potential customers only if the member firm employs a significant number of associated persons or has principals that have been associated with firms either barred from the futures industry or disciplined within the previous five years for deceptive telemarketing or promotional practices.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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