On April 25, 2014, the Commodity Futures Trading Commission
(CFTC) extended time-limited no-action relief for certain asset
manager members of swap execution facilities (SEFs) and designated
contract markets (DCMs) from the oral recordkeeping requirement of
CFTC Regulation 1.35(a) in connection with the execution of
swaps.1 This no-action relief expires on December 31,
2014.
CFTC Regulation 1.35(a), which was amended in 2012 following the
passage of the Dodd-Frank Act, requires that each member of a DCM
or SEF keep 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,
including "all oral communications 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."2 The oral communications recordkeeping
requirement effectively includes all oral communications leading to
the execution of a swap other than face-to-face communication. The
rule became effective on December 21, 2013.3
The CFTC Regulation 1.35(a) oral communications requirement does
not apply to commodity pool operators (CPOs) and members of a DCM
or SEF that are not registered or required to be registered with
the CFTC in any capacity. Commodity trading advisors (CTAs),
however, are not among the exempted entities. While all asset
managers that are members of a SEF or DCM or registered as a CPO or
CTA are subject to CFTC Regulation 1.35, only those registered as
CTAs are subject to the oral recordkeeping requirement. The
CFTC had previously provided relief from the oral communications
requirement for CTAs that are members of SEFs4 and for
CTAs that are members of trueEX, a DCM.5 The relief
granted under both of these letters was set to expire on May 1,
2014. The latest no-action relief extends until December 31,
2014 the relief previously granted and expands the scope of
applicable persons to include all CTAs that are members of a SEF or
DCM.
CFTC Regulation 1.35—and in particular the oral recordkeeping
requirements—has remained a significant concern for asset
managers that are members of a SEF or DCM. The extension is no
doubt welcomed by the industry. It only delays, however, the
effectiveness of what will remain an operationally and financially
burdensome rule for asset managers. The CFTC is aware of the
concerns regarding the rule; indeed, the April 25, 2014 no-action
relief is largely in response to discussions with industry trade
groups and a comment letter by the Asset Management Group (AMG) of
the Securities Industry and Financial Markets Association (SIFMA).
In the comment letter, SIFMA AMG requested the exemption of asset
managers from all aspects of Regulation 1.35(a).6
The latest CFTC no-action relief only temporarily alleviates the
concerns raised by the oral recordkeeping requirements. It remains
to be seen how the CFTC will permanently resolve asset manager
concerns regarding the rule. The expectation is that postponement
will give the CFTC additional time to address industry concerns and
allow it to evaluate further the costs and benefits of the
rule. In the meantime, it will allow CTAs additional time to
consider compliance measures. It will also allow asset
managers that are CPOs additional time to evaluate whether CTA
registration is necessary or whether they may be able to deregister
as CTAs.
1 See CFTC Letter No. 14-60, Time-Limited
No-Action Relief for Certain Members of Swap Execution Facilities
and Designated Contract Markets from the Requirements to Record
Oral Communications, Pursuant to Commission Regulation 1.35(a), in
Connection with the Execution of Swap Transactions (Apr. 25, 2014),
available at: http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/14-60.pdf.
2 17 C.F.R. 1.35(a)(1).
3 See Adaptation of Regulations to
Incorporate Swaps, 77 Fed. Reg. 75,523 (December 21, 2012).
4 See CFTC Letter No. 13-77, Time-Limited
No-Action Relief for Certain Members of Swap Execution Facilities
from the Requirement to Record Oral Communications Pursuant to
Commission Regulation 1.35(a) (Dec. 20, 2013), available at: http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/13-77.pdf.
5 See CFTC Letter No. 14-33, Time-Limited
No-Action Relief for Certain Members of a Designated Contract
Market from the Requirement to Record Oral Communications, Pursuant
to Commission Regulation 1.35(a), in Connection with the Execution
of Swap Transactions (Mar. 21, 2014), available at: http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/14-33.pdf.
6 See SIFMA AMG Comment Letter re: CFTC
Staff Public Roundtable to Discuss Dodd-Frank End-User Issues and
Request for Interpretative Guidance and Relief on Application of
Rule 1.35(a) to Asset Managers (Apr. 17, 2014).
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