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
 
In association with
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
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.