United States: CFTC Adopts Tape-Recording And Recordkeeping Rules

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.

Footnotes

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.

Copyright 2013. Morgan, Lewis & Bockius LLP. All Rights Reserved.

This article is provided as a general informational service and it should not be construed as imparting legal advice on any specific matter.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions