United States: One Consequence of Becoming a SEF Member - Increased Recordkeeping Requirements

We wanted to raise awareness on a point that has not received much attention to date: increased recordkeeping requirements for SEF members. At the outset, many SEFs use the term "participant" synonymously with "member." So, if you are one of the many swap market participants who have received a "Participant Agreement" in the past month, then this posting applies to you.

In December 2012, The CFTC amended Rule 1.35(a)(1) to include SEFs and SEF members. Now that the SEF rules have been finalized, and SEFs are operating, the recordkeeping requirements are beginning to apply to many end users. CFTC Rule 1.35(a)(1) details recordkeeping requirements for both written and oral records, but the CFTC exempted many entities from maintaining oral records (i.e., recording phone lines). The written recordkeeping requirement remains for all SEF members. These written recordkeeping requirements exceed what is required for OTC swaps.

Written Records

All SEF members are subject to the recordkeeping requirements of CFTC Rule 1.35(a)(1) for written records. The general recordkeeping requirement of CFTC Rule 1.35(a)(1) uses language similar to the swap recordkeeping requirements, but provides further detail as to what records must be kept. In addition to the OTC swap recordkeeping rules, a SEF member must also keep:

  • "original source documents," or all documents on which trade information is originally recorded;
  • full, complete, and systematic records for any cash or forward transactions related to (i.e., hedged by) the swap;
  • its written records in a form and manner identifiable and searchable by transaction; and
  • all 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 facsimile, instant messaging, chat rooms, electronic mail, mobile device, or other digital or electronic media.

Significantly for energy companies, commodity trading firms, corporate entities, and anyone using swaps as hedging instruments, the recordkeeping requirements will apply to cash commodity transactions hedged by a swap or a future.

As a related side note, these written recordkeeping requirements also apply to any member of a futures exchange, including any non-clearing member.

Oral Records/Phone Recording

CFTC Rule 1.35 also obligates SEF members to maintain oral records (i.e., recorded line requirements), but it provides exemptions from maintaining oral records to the following types of entities:

  • entities that are not registered or required to be registered with the CFTC (for example, a bank engaging in a de minimis amout of swap dealing, an unregulated commodity trading firm, or an energy company);
  • commodity pool operators ("CPOs");
  • swap dealers;
  • major swap participants; 
  • floor traders; and 
  • introducing brokers with $5 million or less in aggregate gross revenues from their activities as an introducing broker over the past three years.

Notably absent from the exempted entities are stand alone (i.e., non-CPO) commodity trading advisors.

Additionally, oral records do not have to be kept for communication that lead solely to the execution of a related cash or forward transaction.

Oral records include: 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. It is worth noting that for certain media (i.e., instant messaging and e-mail) that the nature of the communication, rather than the medium, will determine whether it is an oral or written communication. (Query what happens if  a voicemail is attached to an e-mail as a .wav file?)

Retention Periods

Records kept under CFTC Rule 1.35(a)(1) must be kept pursuant to Rule 1.31. As with OTC swap recordkeeping, the written records required to be kept under CFTC Rule 1.35(a)(1) must be kept for the life of the transaction plus five years, or if not related to a transaction then for five years. Oral records must be kept for one year.

What to do Now

Now that SEFs are registered and operating, many people are beginning to become SEF members (i.e., "participants"). Moreover, SEFs have begun to make submissions to the CFTC to determine that certain interest rate swaps and credit default index swaps are available to trade and should be required to be traded on a SEF (see a summary of the first such submission here). Compliance managers should review the regulatory status of their firms to determine if they will have to keep oral records as a SEF member. Moreover, compliance policies should be updated, as needed, to ensure that all email, IM's, text messages and other electronic communications are being captured with respect to swaps, futures and related cash commodity transactions. In particular, we note that in the final rule, the CFTC explicitly rejected limiting the recording to firm provided mobile devices, so this would include communications sent on an employee's personal devices to the extent that such communication would otherwise fall under CFTC Rule 1.35(a)(1) requirements.

As a final note, given the choice between using a voice broker and a SEF, CFTC Rule 1.35(a)(1) places a larger recordkeeping burden on using a SEF (a consequence that we doubt was intended).

Good day. Good recording. TSR

We wanted to raise awareness on a point that has not received much attention to date: increased recordkeeping requirements for SEF members. At the outset, many SEFs use the term "participant" synonymously with "member." So, if you are one of the many swap market participants who have received a "Participant Agreement" in the past month, then this posting applies to you.

In December 2012, The CFTC amended Rule 1.35(a)(1) to include SEFs and SEF members. Now that the SEF rules have been finalized, and SEFs are operating, the recordkeeping requirements are beginning to apply to many end users. CFTC Rule 1.35(a)(1) details recordkeeping requirements for both written and oral records, but the CFTC exempted many entities from maintaining oral records (i.e., recording phone lines). The written recordkeeping requirement remains for all SEF members. These written recordkeeping requirements exceed what is required for OTC swaps.

Written Records

All SEF members are subject to the recordkeeping requirements of CFTC Rule 1.35(a)(1) for written records. The general recordkeeping requirement of CFTC Rule 1.35(a)(1) uses language similar to the swap recordkeeping requirements, but provides further detail as to what records must be kept. In addition to the OTC swap recordkeeping rules, a SEF member must also keep:

  • "original source documents," or all documents on which trade information is originally recorded;
  • full, complete, and systematic records for any cash or forward transactions related to (i.e., hedged by) the swap;
  • its written records in a form and manner identifiable and searchable by transaction; and
  • all 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 facsimile, instant messaging, chat rooms, electronic mail, mobile device, or other digital or electronic media.

Significantly for energy companies, commodity trading firms, corporate entities, and anyone using swaps as hedging instruments, the recordkeeping requirements will apply to cash commodity transactions hedged by a swap or a future.

As a related side note, these written recordkeeping requirements also apply to any member of a futures exchange, including any non-clearing member.

Oral Records/Phone Recording

CFTC Rule 1.35 also obligates SEF members to maintain oral records (i.e., recorded line requirements), but it provides exemptions from maintaining oral records to the following types of entities:

  • entities that are not registered or required to be registered with the CFTC (for example, a bank engaging in a de minimis amout of swap dealing, an unregulated commodity trading firm, or an energy company);
  • commodity pool operators ("CPOs");
  • swap dealers;
  • major swap participants; 
  • floor traders; and 
  • introducing brokers with $5 million or less in aggregate gross revenues from their activities as an introducing broker over the past three years.

Notably absent from the exempted entities are stand alone (i.e., non-CPO) commodity trading advisors.

Additionally, oral records do not have to be kept for communication that lead solely to the execution of a related cash or forward transaction.

Oral records include: 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. It is worth noting that for certain media (i.e., instant messaging and e-mail) that the nature of the communication, rather than the medium, will determine whether it is an oral or written communication. (Query what happens if  a voicemail is attached to an e-mail as a .wav file?)

Retention Periods

Records kept under CFTC Rule 1.35(a)(1) must be kept pursuant to Rule 1.31. As with OTC swap recordkeeping, the written records required to be kept under CFTC Rule 1.35(a)(1) must be kept for the life of the transaction plus five years, or if not related to a transaction then for five years. Oral records must be kept for one year.

What to do Now

Now that SEFs are registered and operating, many people are beginning to become SEF members (i.e., "participants"). Moreover, SEFs have begun to make submissions to the CFTC to determine that certain interest rate swaps and credit default index swaps are available to trade and should be required to be traded on a SEF (see a summary of the first such submission here). Compliance managers should review the regulatory status of their firms to determine if they will have to keep oral records as a SEF member. Moreover, compliance policies should be updated, as needed, to ensure that all email, IM's, text messages and other electronic communications are being captured with respect to swaps, futures and related cash commodity transactions. In particular, we note that in the final rule, the CFTC explicitly rejected limiting the recording to firm provided mobile devices, so this would include communications sent on an employee's personal devices to the extent that such communication would otherwise fall under CFTC Rule 1.35(a)(1) requirements.

As a final note, given the choice between using a voice broker and a SEF, CFTC Rule 1.35(a)(1) places a larger recordkeeping burden on using a SEF (a consequence that we doubt was intended).

Good day. Good recording. TSR

This article is presented for informational purposes only and is not intended to constitute legal advice.

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