United States: Swaps End-User Update - Recordkeeping Requirements

Last Updated: April 20 2014
Article by John S. Servidio, Karl M. Strait and Ryan D. Taylor

End-users that trade swaps on a DCM or SEF should be aware of their potential recordkeeping requirements under CFTC regulations. This update summarizes the recordkeeping obligations of end-users that are members of a DCM or SEF and reminds end-users of their more general swap recordkeeping requirements under Dodd-Frank.

Recordkeeping Requirements Under CFTC Regulation 1.35

On April 3, 2014, the Commodity Futures Trading Commission (CFTC) held a public roundtable to address issues concerning end-users and the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). The first panel of the roundtable discussed the recordkeeping obligations of end-users under CFTC Regulation 1.35. CFTC Regulation 1.35 requires that each "member of a designated contract market (DCM) or swap execution facility (SEF) shall keep full, complete, and systematic records, which include all pertinent data and memoranda, of all transactions relating to its business of dealing in commodity interests and related cash or forward transactions." The term "commodity interests" includes, among other transactions governed by the Commodity Exchange Act (CEA) and CFTC regulations, any swap as defined in the CEA or by the CFTC. Therefore, end-users that are members of a DCM or SEF are required to keep records of all documents and all oral and 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 telephone, voicemail, facsimile, instant messaging, chat rooms, electronic mail, mobile device, or other digital or electronic media. However, a member of a DCM or SEF that is not registered or required to be registered with the CFTC in any capacity is not required to keep records of oral communications.

Based on the comments made by panelists in the CFTC roundtable, many end-users are concerned with their ability to comply with the recordkeeping requirements under CFTC Regulation 1.35.

Not All "Members" Are Created Equal

A "member" of a DCM or SEF for purposes of the Regulation 1.35 recordkeeping requirements includes any entity that has "trading privileges" on a DCM or SEF. In the world of exchange-traded futures and options, being a "member" of a DCM (previously referred to simply as a "contract market") often meant that a market participant had, in addition to trading privileges, an equity interest and/or governance participation in the DCM. SEFs are another matter. End-users that have signed a participant or user agreement with a SEF, or that have been on-boarded to a SEF, should consider whether their trading privileges on, or access to, the SEF may constitute being a "member" of that SEF for the purposes of CFTC Regulation 1.35. End-users that are members of a DCM or SEF should review their recordkeeping activities to determine whether they comply with the CFTC Regulation 1.35 requirements.

All End-Users Have Recordkeeping Obligations Under Dodd-Frank

In addition to CFTC Regulation 1.35, end-users have general recordkeeping obligations under the Dodd-Frank swap data recordkeeping and reporting requirements. Since end-users are not typically the reporting counterparties for their swap transactions, some end-users may not be aware that Dodd-Frank recordkeeping requirements apply to them. For swaps entered on or after April 10, 2013, an end-user must keep full, complete and systematic records, together with all pertinent data and memoranda, with respect to each swap, including inter-affiliate swaps, to which the end-user, or an affiliate, is a counterparty. In addition, an end-user must retain all records demonstrating that it is entitled, with respect to any swap, to elect the end-user exception from the mandatory clearing requirement. End-users are required to retain records with respect to each swap throughout the life of the swap and for a period of at least five years following the final termination of the swap. End-users may keep records in either electronic or paper form, so long as they are retrievable within five business days. Records must be open to inspection by the CFTC and other regulators.

End-users also have recordkeeping obligations with respect to historical swaps that were outstanding at any time on or after July 21, 2010 (the Dodd-Frank enactment date). An end-user's recordkeeping obligations for a historical swap depend on when the swap was entered into and whether the swap expired or terminated before specified dates (April 25, 2011, or April 10, 2013) or was still outstanding on or after April 10, 2013.

In addition to records with respect to swaps, end-users also must keep similar records with respect to deliverable FX forwards and swaps, which have been excluded from the scope of Dodd-Frank for other specified purposes, but not from the reporting or recordkeeping requirements.

Please contact one of the authors, or your regular McGuireWoods lawyer, if you have any questions regarding CFTC Regulation 1.35 or other Dodd-Frank swap recordkeeping requirements.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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