[Federal Register Volume 80, Number 247 (Thursday, December 24, 2015)]
[Rules and Regulations]
[Pages 80247-80257]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-32416]


=======================================================================
-----------------------------------------------------------------------

COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 1

RIN 3038-AE23


Records of Commodity Interest and Related Cash or Forward 
Transactions

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: The Commodity Futures Trading Commission (the ``Commission'' 
or ``CFTC'') is amending Commission Regulation 1.35(a) to: Provide that 
all records required to be maintained under this regulation must be 
maintained in a form and manner which permits prompt, accurate and 
reliable location, access, and retrieval of any particular record, 
data, or information; clarify that all records, except records of oral 
and written communications leading to the execution of a commodity 
interest transaction and related cash or forward transactions, must be 
kept in a form and manner that allows for identification of a 
particular transaction; exclude members of designated contract markets 
(``DCMs'') and of swap execution facilities (``SEFs'') that are not 
registered or required to register with the Commission (``Unregistered 
Members'') from the requirements to keep written communications that 
lead to the execution of a commodity interest transaction and related 
cash or forward transactions, keep text messages, and keep records in a 
particular form and manner; and exclude commodity trading advisors 
(``CTAs'') from the oral recordkeeping requirement (``Final Rule'').

DATES: Effective December 24, 2015.

FOR FURTHER INFORMATION CONTACT: Katherine Driscoll, Associate Chief 
Counsel, (202) 418-5544, kdriscoll@cftc.gov; August A. Imholtz III, 
Special Counsel, (202) 418-5140, aimholtz@cftc.gov; or Lauren Bennett, 
Special Counsel, (202) 418-5290, lbennett@cftc.gov, Division of Swap 
Dealer and Intermediary Oversight, Commodity Futures Trading 
Commission, 1155 21st Street NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION: 

I. Background

    The Commission amended Regulation 1.35(a) in December 2012 as part 
of a series of rulemakings intended to integrate certain existing 
Commission rules more fully with the framework created by the Dodd-
Frank Wall Street Reform and Consumer Protection Act for swap dealers 
and major swap participants (the ``2012 Amendment'').\1\
---------------------------------------------------------------------------

    \1\ See Adaptation of Regulations to Incorporate Swaps--Records 
of Transactions, 77 FR 75523 (December 21, 2012) (``2012 Amendment 
Adopting Release'').
---------------------------------------------------------------------------

    Regulation 1.35(a) requires each futures commission merchant 
(``FCM''), retail foreign exchange dealer (``RFED''), introducing 
broker (``IB''), and member of a DCM or of a SEF to keep full, 
complete, and systematic records of all transactions relating to its 
business of dealing in commodity interest and related cash or forward 
transactions.\2\ The Commodity Exchange Act (``CEA'') defines 
``member'' as an individual, association, partnership, corporation, or 
trust--(i) owning or holding membership in, or admitted to membership 
representation on, the registered entity \3\ or derivatives transaction 
execution facility; or (ii) having trading privileges on the registered 
entity or derivatives transaction execution facility.\4\
---------------------------------------------------------------------------

    \2\ 17 CFR 1.35(a)(1).
    \3\ The term ``registered entity'' is defined in CEA section 
1a(40) to include both DCMs and SEFs. See CEA sections 1a(40)(A) 
(DCMs) and (D) (SEFs).
    \4\ 7 U.S.C. 1a(34).
---------------------------------------------------------------------------

    Regulation 1.35(a) requires FCMs, RFEDs, IBs, and members of a DCM 
or of a SEF to keep records of written communications that lead to the 
execution of a commodity interest transaction and related cash or 
forward transactions. Additionally, Regulation 1.35(a) includes a 
requirement to keep records of certain oral communications, which 
applies to each FCM, RFED, large IB (defined as an IB that has 
generated over $5 million in aggregate gross revenues over the 
preceding three years from its activities as an IB), and member of a 
DCM or of a SEF that is registered or required to register with the 
Commission as a floor broker (``FB'') (only with regard to acting as an 
agent for a non-affiliated client) or as a CTA.\5\ Unlike the written 
recordkeeping requirement that applies to both commodity interest 
transactions and related cash or forward transactions, the oral 
recordkeeping requirement is limited to commodity interest 
transactions.\6\ The scope of records covered by Regulation 1.35(a) 
includes communications by telephone, voicemail, facsimile, instant 
messaging, chat rooms, electronic mail, mobile device, or other digital 
or electronic media.\7\ These communications include text messages. 
Regulation 1.35(a) also mandates that all records be kept in a form and 
manner identifiable and searchable by transaction.
---------------------------------------------------------------------------

    \5\ As stated in the 2012 Amendment, the oral recordkeeping 
requirement in Regulation 1.35(a) does not apply to: (i) Oral 
communications that lead solely to the execution of a related cash 
or forward transaction; (ii) oral communications provided or 
received by a floor broker that do not lead to the purchase or sale 
for any person other than the floor broker of any commodity for 
future delivery, security futures product, swap, or commodity option 
authorized under section 4c of the Commodity Exchange Act; (iii) an 
introducing broker that has generated over the preceding three years 
$5 million or less in aggregate gross revenues from its activities 
as an introducing broker; (iv) a floor trader; (v) a commodity pool 
operator; (vi) a swap dealer; (vii) a major swap participant; or 
(viii) a member of a DCM or SEF that is not registered or required 
to be registered with the Commission in any capacity. 17 CFR 
1.35(a)(1).
    \6\ 17 CFR 1.35(a)(1).
    \7\ Id.

---------------------------------------------------------------------------

[[Page 80248]]

    The 2012 Amendment became effective on February 19, 2013.\8\ 
Shortly thereafter, a variety of market participants began raising 
concerns regarding the practical impact of the rule, including its 
impact on non-financial commercial end-users. Commission staff hosted 
an End-User Roundtable Discussion on April 3, 2014 to discuss these 
concerns with affected parties. Commission staff subsequently issued 
no-action letters that addressed certain of the issues with the 2012 
Amendment. CFTC Staff Letter No. 14-72 provided temporary no-action 
relief to Unregistered Members, relieving them from the requirements to 
(i) maintain text messages; and (ii) maintain records in a form and 
manner identifiable and searchable by transaction.\9\ CFTC Staff Letter 
No. 14-60 provided temporary no-action relief to CTAs that are members 
of a DCM or of a SEF, relieving them from the requirement to maintain 
records of oral communications in connection with the execution of 
swaps.\10\ CFTC Staff Letter No. 14-147 extended the temporary no-
action relief provided to CTAs in CFTC Staff Letter No. 14-60, and 
expanded the scope of the relief to include oral communications that 
lead to the execution of a commodity interest transaction, in addition 
to communications that lead to the execution of a swap transaction.\11\
---------------------------------------------------------------------------

    \8\ 2012 Amendment Adopting Release at 75524.
    \9\ CFTC Staff Letter No. 14-72, available at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/14-72.pdf.
    \10\ CFTC Staff Letter No. 14-60, available at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/14-60.pdf.
    \11\ CFTC Staff Letter No. 14-147, available at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/14-147.pdf. Commission staff recently extended the relief in CFTC Staff 
Letter No. 14-147 until the effective date of any final Commission 
action with respect to the Proposed Amendment. See CFTC Staff Letter 
No. 15-65, available at http://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/15-65.pdf.
---------------------------------------------------------------------------

II. The Proposal

    On November 14, 2014, the Commission published for comment in the 
Federal Register a proposal to amend Regulation 1.35(a) (the ``Proposed 
Amendment'' or ``Proposal'') to: (i) Provide that all records required 
to be maintained under the regulation must be searchable; (ii) clarify 
that all records must be kept in a form and manner that allows for 
identification of a particular transaction, except that records of oral 
and written communications leading to the execution of a commodity 
interest transaction and related cash or forward transactions are not 
required to be kept in a form and manner that allows for the 
identification of a particular transaction; (iii) exclude Unregistered 
Members from the requirements to retain text messages and to maintain 
records in a particular form and manner; and (iv) exclude CTAs from the 
oral recordkeeping requirement.\12\
---------------------------------------------------------------------------

    \12\ See Notice of proposed rulemaking: Records of Commodity 
Interest and Related Cash or Forward Transactions, 79 FR 68140 
(November 14, 2014).
---------------------------------------------------------------------------

III. Discussion

    The Commission received 18 comment letters in response to the 
Proposal. The commenters represented a variety of interests, including 
eight commercial end-user trade groups, five advisor and broker trade 
groups, two exchanges, one technology vendor, one mortgage lending 
association, and one self-regulatory organization.\13\ After carefully 
considering all of the comments received, the Commission is adopting 
the Final Rule largely as proposed, with two exceptions. First, the 
Commission is clarifying the requirements governing the form and manner 
in which records must be kept. Second, the Commission is excluding 
Unregistered Members from the requirement to keep written 
communications that lead to the execution of a commodity interest 
transaction and related cash or forward transactions (in addition to 
adopting the proposed exclusions of Unregistered Members from the 
requirements to retain text messages and to maintain records in a 
particular form and manner).\14\
---------------------------------------------------------------------------

    \13\ Comment letters were received from American Gas Association 
(``AGA''), Commodity Markets Council (``CMC''), Commercial Energy 
Working Group (``CEWG''), Coalition of Physical Energy Companies 
(``COPE''), Edison Electric Institute (``EEI''), Federal Home Loan 
Banks (``FHLB''), Investment Adviser Association (``IAA''), 
Intercontinental Exchange (``ICE''), Investment Company Institute 
(``ICI''), International Energy Credit Association (``IECA''), 
Managed Funds Association (``MFA''), Minneapolis Grain Exchange 
(``MGEX''), National Rural Electric Cooperative Association and 
American Public Power Association (Joint letter, ``NRECA & APPA''), 
National Council of Farmer Cooperatives (``NCFC''), National Futures 
Association (``NFA''), National Introducing Brokers Association 
(``NIBA''), Asset Management Group of the Securities Industry and 
Financial Markets Association (``SIFMA AMG''), Voitrax Corporation 
(``Voitrax''). Public comments may be viewed on the Commission's Web 
site at: http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1538.
    \14\ NFA and NIBA both requested that the Commission consider 
raising the revenue threshold that exempts small introducing brokers 
from the requirement to record oral communications. Neither proposed 
a specific alternate threshold. The Commission is not revising the 
revenue threshold for defining ``small'' introducing brokers for the 
purposes of the rule, as such a revision is outside of the scope of 
this rulemaking.
---------------------------------------------------------------------------

A. Proposal To Clarify the ``Identifiable'' and ``Searchable'' 
Requirements of the Rule Generally and To No Longer Require That Pre-
Trade Communications Be Identifiable by Transaction

    Regulation 1.35(a) mandates that required records, including 
records of oral and written communications that lead to the execution 
of a transaction, be maintained in a form and manner ``identifiable and 
searchable by transaction.'' \15\ Prior to the publication of the 
Proposed Amendment, the Commission received numerous requests for 
guidance regarding compliance with this form and manner 
requirement.\16\ Therefore, the Commission proposed to clarify the rule 
by stating that all required records must be searchable, but not 
``searchable by transaction.'' \17\ The Commission further proposed to 
replace the requirement in Regulation 1.35(a) that records be 
``identifiable'' with the requirement that records be ``kept in a form 
and manner that allows for the identification of a particular 
transaction.'' \18\
---------------------------------------------------------------------------

    \15\ 17 CFR 1.35(a)(1).
    \16\ See Proposal at 68143.
    \17\ Id.
    \18\ Id.
---------------------------------------------------------------------------

    In considering the Proposed Amendment, the Commission noted that 
access to searchable pre-trade communications is an important element 
of its oversight of the derivatives market and enforcement of 
Commission rules and regulations.\19\ The Commission recognized, 
however, that keeping these records in a form and manner that allows 
for the identification of a particular transaction could pose 
significant challenges to some market participants.\20\ Therefore, the 
Commission also proposed to amend Regulation 1.35(a) to state that, 
although they still must be searchable, records of oral and written 
communications that lead to the execution of a transaction are not 
required to be kept in a form and manner that allows for identification 
of a particular transaction.\21\ This proposed change meant that market 
participants would not have to link or otherwise identify a record of a 
communication that leads to the execution of a transaction with a 
particular transaction.
---------------------------------------------------------------------------

    \19\ Id.
    \20\ Id.
    \21\ Id.
---------------------------------------------------------------------------

i. Comments on Form and Manner Generally
    Many commenters generally supported the proposed changes to the 
form and manner requirements of the

[[Page 80249]]

rule, although some stated that the Commission should further clarify 
certain terms. AGA stated that the ``searchable'' and ``identifiable'' 
components of the Proposed Amendment are undefined terms that could 
create confusion. SIFMA AMG recommended that the Commission adopt an 
interpretation of ``searchable'' that is similar to the approach of the 
Securities and Exchange Commission (``SEC''), which does not prescribe 
any particular methodology. SIFMA AMG argued that this flexible 
application of the term would enable firms to adopt new technology and 
preserve records in a cost-effective manner without impeding regulatory 
oversight.
    Voitrax, a technology company, did not support the Proposed 
Amendment, stating that it was developing low-cost technology which 
would make the rule's existing requirement that records be 
``identifiable and searchable by transaction'' both feasible and cost-
effective. Voitrax stated that the Proposed Amendment's standalone 
requirement that records be searchable (rather than indexed) is not 
cost-effective, and that ``at higher volumes searching becomes 
infeasible.'' Voitrax also noted that it had devoted significant 
resources to creating software to address the requirements in the 2012 
Amendment, and if the Proposed Amendment is finalized, there may be a 
disincentive for companies to invest in technology solutions related to 
regulatory requirements in the future.
    In the Commission's view, records are ``searchable'' when they are 
kept in a form and manner which permits prompt, accurate and reliable 
location, access, and retrieval of any particular record, data, or 
information.\22\ Therefore, with respect to the form and manner in 
which records are required to be kept, the Commission is replacing the 
term ``searchable'' with the phrase ``maintained in a form and manner 
which permits prompt, accurate and reliable location, access, and 
retrieval of any particular record, data, or information.'' Further, 
the Commission is clarifying that for the purpose of this rule, records 
``allow for identification of a particular transaction'' when a market 
participant can identify those records that pertain to a particular 
transaction.
---------------------------------------------------------------------------

    \22\ The Commission observes that these requirements are 
substantially similar to those contained in the SEC rules for 
investment adviser recordkeeping. See 17 CFR 275.204-2(g)(2).
---------------------------------------------------------------------------

    The Commission notes that the Final Rule does not require market 
participants to convert their records to searchable electronic 
databases. Rather, the Final Rule is deliberately drafted in a way that 
permits market participants subject to the rule to keep their paper and 
electronic records in a manner which they deem prudent and appropriate 
for their particular business. There is no prescribed methodology under 
Regulation 1.35(a) by which records must be searched or retrieved, so 
long as those searches yield prompt, accurate and reliable location, 
access, and retrieval of any particular record, data, or information.
    The Commission has carefully considered Voitrax's comment opposing 
the Proposed Amendment, but disagrees with Voitrax's contention that 
the requirement that records be searchable is not cost-effective, and 
is also infeasible at high volumes. As explained above, the Commission 
notes that the Final Rule does not prescribe any particular methodology 
or corresponding technology with which records must be searchable; 
rather, the rule can be satisfied using a variety of approaches with 
varying costs. The Commission also acknowledges Voitrax's concern that 
the Commission's changes to an existing rule may create a disincentive 
for some firms to develop technology to address Commission rules. Any 
rule amendment may have some effect on market participants, as well as 
the vendors that support those market participants. In this case, the 
Commission has tailored the rule to address some concerns that market 
participants have presented in a manner consistent with the overall 
purpose of the rule. Although Voitrax disagreed with the Proposed 
Amendment, the Commission believes that the Final Rule preserves the 
core market integrity and customer protection aspects of the rule, 
while reducing certain elements of the recordkeeping obligations 
imposed by the rule.\23\
---------------------------------------------------------------------------

    \23\ The Commission notes that the technology described in 
Voitrax's Comment Letter may still be useful in helping market 
participants comply with the form and manner requirements prescribed 
in the Final Rule.
---------------------------------------------------------------------------

ii. Comments Addressing Regulation 1.31
    Regulation 1.35(a) states that market participants ``shall retain 
the records required to be kept by this section in accordance with the 
requirements of Sec.  1.31.'' \24\ Although the Commission did not 
propose to amend Regulation 1.31 in connection with the Proposed 
Amendment, several commenters raised concerns regarding the perceived 
incompatibility of Regulation 1.35(a) and Regulation 1.31.\25\ In 
particular, many commenters stated that the requirement under 
Regulation 1.35(a) that records be ``searchable'' conflicts with the 
requirement in Regulation 1.31 that records be maintained in native 
file format.\26\ Some commenters stated that reconciling these 
requirements was ``impossible'' or ``practically impossible,'' while 
another commenter stated that it would require a substantial investment 
in technology to obtain such functionality.\27\
---------------------------------------------------------------------------

    \24\ 17 CFR 1.35(a)(1).
    \25\ See AGA, CMC, EEI, IAA, MFA, MGEX, and SIFMA AMG Comment 
Letters. See also 17 CFR 1.31. Regulation 1.31 sets forth the form 
and manner in which all books and records required to be kept by the 
Commodity Exchange Act or Commission Rules must be maintained. Among 
other things, it mandates that records ``shall be kept in their 
original form (for paper records) or native file format (for 
electronic records) for a period of five years from the date thereof 
and shall be readily accessible during the first 2 years of the 5-
year period.'' The rule also requires all market participants who 
exclusively use electronic storage for some or all of their records 
to employ at least one third-party technical consultant to manage 
the storage of those records. Some Unregistered Members raised 
interpretive questions regarding Regulation 1.31, a rule which they 
may not otherwise be subject to absent their inclusion in Regulation 
1.35.
    \26\ See CMC, IAA, MFA, MGEX, and SIFMA AMG Comment Letters.
    \27\ See CMC, MFA, and MGEX Comment Letters.
---------------------------------------------------------------------------

    Commenters proposed several solutions to address these perceived 
inconsistencies. AGA suggested that Regulation 1.35(a) should not 
contain any form and manner requirements, and that form and manner 
should be dictated solely by Regulation 1.31. Further, AGA proposed a 
safe harbor for end-users to rely on the record retention performed by 
a DCM, SEF, or a CFTC-registered counterparty, with respect to any of 
the records required under Rules 1.35(a) and 1.31. They proposed that 
in the absence of a safe harbor, the Commission should add language to 
the rule stating that it would consider ``good faith compliance'' with 
recordkeeping rules as a mitigating factor when exercising its 
enforcement authority. CMC proposed that members of DCMs or of SEFs 
that are not fiduciaries should be excluded from the requirement that 
records required to be maintained pursuant to Regulation 1.35(a) be 
kept in accordance with Regulation 1.31. MGEX proposed eliminating the 
``searchable'' and ``identifiable'' requirements from Regulation 
1.35(a). As an alternative, they supported keeping the searchable 
requirement in Regulation 1.35(a) in conjunction with a significant 
amendment to Regulation 1.31 regarding the storage of electronic 
communications.
    MFA noted that it, along with IAA and the Alternative Investment 
Management Association (``AIMA''), submitted to the Commission a 
petition

[[Page 80250]]

for rulemaking (``1.31 Petition'') to amend Regulation 1.31 to be, 
among other things, ``more flexible with regard to permitted formats.'' 
\28\ MFA stated that in the event the Proposed Amendment is finalized 
prior to any Commission action regarding the 1.31 Petition, the 
Commission should provide interim relief to CPOs and CTAs that are 
members of a DCM or of a SEF from the requirements of Regulation 1.31. 
They also suggested that the Commission grant substituted compliance 
with the SEC's electronic recordkeeping requirements for those CFTC-
registered CTAs and CPOs that are also SEC-registered investment 
advisers. Absent this relief, MFA asserted that these entities ``will 
have to institute recordkeeping requirements that are obsolete or 
unworkable.'' Similarly, SIFMA AMG requested that the Commission grant 
temporary no-action relief to all asset managers that are members of a 
DCM or of a SEF, including all CPOS and CTAs, from compliance with Rule 
1.31 pending the Commission's consideration of the 1.31 Petition.
---------------------------------------------------------------------------

    \28\ See Petition for Rulemaking to Amend CFTC Regulations 1.31, 
4.7(b), and (c), 4.23 and 4.33, attached to MFA Comment Letter.
---------------------------------------------------------------------------

    The Commission is aware that some commenters are concerned with the 
relationship between the requirements of Regulations 1.35(a) and 1.31. 
The Commission notes that most of the comments in this area centered on 
perceived inconsistencies with the requirement in Regulation 1.35(a) 
that records be searchable. The Commission believes that the 
clarification of the form and manner requirements of Regulation 
1.35(a), as stated above, should allay some commenters' concerns 
regarding compliance with both rules. Searchable records are 
indispensable to the Commission's ability to conduct surveillance 
inquiries and investigations in an efficient and effective manner for 
the protection of customers and ensuring market integrity. For example, 
searchable records facilitate the timely pursuit of potential 
violations, which can be important in seeking to freeze and recover any 
customer funds received from illegal activity or address market 
disruptions. As noted above, the Commission reiterates that the Final 
Rule does not require market participants to convert their records to 
searchable electronic databases. Rather, this rule was deliberately 
drafted in a way that permits market participants to maintain their 
paper and electronic records in a manner which they deem prudent and 
appropriate for their particular business. There is no prescribed 
methodology under Regulation 1.35(a) by which records must be searched 
or retrieved, so long as those searches yield prompt, accurate and 
reliable location, access, and retrieval of any particular record, 
data, or information.

B. Proposal To Exclude Unregistered Members From the Requirements To 
Retain Text Messages and To Maintain Required Records in a Particular 
Form and Manner

i. Text Messages and the Form and Manner Requirement
    Regulation 1.35(a) generally mandates that the market participants 
subject to its requirements retain records that are transmitted by, 
among other things, telephone, mobile device, or other digital or 
electronic media.\29\ This includes text messages.\30\ Prior to the 
publication of the Proposed Amendment, many end-users told the 
Commission that text messages were a primary means of communication for 
their commodity trading businesses. They stated, however, that it was 
prohibitively expensive to retain those records.\31\ In considering the 
Proposed Amendment, the Commission observed that its oversight of the 
derivatives market would not be unduly affected if Unregistered Members 
were not required to retain text messages.\32\ Therefore, the 
Commission proposed to exclude Unregistered Members from the 
requirements in Regulation 1.35(a) to retain text messages.
---------------------------------------------------------------------------

    \29\ 17 CFR 1.35(a)(1).
    \30\ Id.
    \31\ See Proposal at 68143.
    \32\ Id.
---------------------------------------------------------------------------

    As discussed above, Regulation 1.35(a) also requires that all 
records be kept in a form and manner that is ``identifiable and 
searchable by transaction.'' \33\ Prior to the publication of the 
Proposed Amendment, many end-users stated that it was difficult to 
maintain their records in this particular format due to the nature of 
the relationship between their cash or forward transactions and their 
trading and hedging practices in the derivatives market.\34\ The 
Commission had previously stated that the requirements that records be 
``searchable'' and ``identifiable'' do not require entities to link all 
of their transactions in commodity interests to related cash or forward 
transactions by a specific identifier.\35\ However, in considering the 
Proposed Amendment, the Commission noted that these form and manner 
requirements may nonetheless impose additional burdens on some 
Unregistered Members.\36\ The Commission recognized that excluding 
Unregistered Members from the requirement to maintain their records in 
a particular form and manner may impose an incremental burden on the 
Commission. However, the Commission observed that as long as those 
entities were required to retain their records, this exclusion would 
not unduly compromise the Commission's ability to oversee the 
derivatives market.\37\ Therefore, the Commission also proposed to 
exclude Unregistered Members from the requirement in Regulation 1.35(a) 
to maintain records in a particular form and manner.\38\
---------------------------------------------------------------------------

    \33\ 17 CFR 1.35(a)(1).
    \34\ See Proposal at 68143.
    \35\ Id.
    \36\ Id.
    \37\ Id.
    \38\ Id.
---------------------------------------------------------------------------

    In response, the Commission received comments from representatives 
of commercial end-users in the agriculture and energy industry, two 
exchanges, one advisor trade group, and a mortgage lending 
association.\39\ These commenters were supportive of these aspects of 
the Proposal related to Unregistered Members, but all contended that 
the Commission did not go far enough in its proposed relief.
---------------------------------------------------------------------------

    \39\ See CMC, NCFC, AGA, CEWG, COPE, EEI, IECA, NRECA & APPA, 
ICE, MGEX, SIFMA AMG and FHLB Comment Letters.
---------------------------------------------------------------------------

    Regarding the proposal to exclude Unregistered Members from the 
requirement to keep text messages, several commenters asked the 
Commission to clarify the term ``text message.'' \40\ AGA requested 
that the Commission eliminate what it characterized as the ``arbitrary 
distinction'' the rule makes between text messages and other forms of 
real-time communications, including instant messaging and chat rooms. 
EEI, IECA, NRECA, and APPA requested further guidance on what types of 
communications qualify as text messages. In response to commenter 
requests to define the ``text message,'' the Commission is clarifying 
that the term ``text message,'' for the purposes of this rule, means 
any written communication sent from one telephone number to one or more 
telephone numbers by short message service (``SMS'') or multimedia 
messaging service (``MMS''), and not those written communications 
exchanged by proprietary messaging services. Proprietary messaging 
services are internet-based, which enables users to send and store 
messages interchangeably on mobile devices and

[[Page 80251]]

computers, whereas SMS and MMS messages are traditionally only sent and 
stored on a mobile device.
---------------------------------------------------------------------------

    \40\ See AGA, EEI, IECA, and NRECA & APPA Comment Letters.
---------------------------------------------------------------------------

    Given that some Unregistered Members have informed the Commission 
that they conduct their commodity interest and related cash or forward 
transactions primarily via text message, it may be unduly burdensome to 
require them to implement the additional technology to allow these 
messages to be stored on computers. Registered market participants, on 
the other hand, tend to rely more heavily on other forms of 
communication to execute commodity interest transactions and related 
cash or forward transactions. To the extent these registered market 
participants choose to avail themselves of the ability to use text 
messages, they could more easily expand their existing communications 
retention infrastructure to include text message storage.
ii. Written Communications That Lead to the Execution of a Transaction
    Commenters representing commercial end-users also raised issues 
regarding an element of the existing rule which the Commission had not 
proposed to change. Specifically, the commenters addressed the 
requirement that firms maintain records of communications that ``lead 
to'' the execution of a commodity interest transaction and related cash 
or forward transactions. Several commenters stated that market 
participants cannot readily identify which communications will ``lead 
to'' the execution of transactions in commodity interests and related 
cash or forward transactions. Market participants therefore may be 
forced to retain every communication related to their commodity trading 
business.\41\ AGA stated that the ``cumbersome and costly'' requirement 
to retain all communications that lead to the execution of a 
transaction will deter market participants from participating on 
exchanges. AGA and CEWG suggested that Unregistered Members should not 
have to retain records of pre-trade communications; rather, they should 
only be required to retain written records of a final agreement or 
those that contain the material economic terms of a transaction.
---------------------------------------------------------------------------

    \41\ See AGA, MGEX, CEWG, CMC, IECA and ICI Comment Letters.
---------------------------------------------------------------------------

    The Commission has previously stated that records of communications 
that lead to the execution of a transaction can serve to protect market 
participants and promote the integrity of the markets.\42\ However, the 
Commission is persuaded that the nature of the activities of many 
Unregistered Members in the commodity interest markets--which 
activities predominantly involve the hedging of risks associated with 
their commercial businesses--does not justify the burden Unregistered 
Members may have in identifying and retaining records of communications 
that lead to the execution of commodity interest and related cash or 
forward transactions. The Commission therefore has determined that 
Unregistered Members should not be required to keep records of written 
communications that lead to the execution of a commodity interest 
transaction and related cash or forward transactions. Instead, 
Unregistered Members will only be required to keep records of their 
transactions.
---------------------------------------------------------------------------

    \42\ See 2012 Amendment Adopting Release at 75538.
---------------------------------------------------------------------------

    In addition to the comments addressed above, nine commenters 
representing a variety of commercial interests requested that 
Unregistered Members be excluded from the rule altogether.\43\ Several 
commenters argued that the rule is simply too burdensome for 
Unregistered Members, particularly for Unregistered Members that are 
commercial end-users.\44\ MGEX argued that the rule places a 
significant burden upon those Unregistered Members that are individuals 
that trade only for themselves, have purchased a membership for 
investment purposes, and/or only engage in low-risk commercial hedging. 
COPE and EEI stated that the Commission's recordkeeping rules relating 
to swaps and to large trader reporting already impose sufficient 
recordkeeping obligations on Unregistered Members, making compliance 
with Regulation 1.35(a) unnecessary. Multiple commenters asserted that 
the rule should only apply to intermediaries. Several commenters stated 
that the rule discourages Unregistered Members from membership on DCMs 
and SEFs. Finally, several commenters argued that there is no statutory 
basis for including Unregistered Members in the rule.\45\
---------------------------------------------------------------------------

    \43\ See CMC, CEWG, COPE, EEG, FHLB, ICE, IECA, and NRECA & APPA 
Comment Letters.
    \44\ See CMC, IECA, MGEX, and NCFC Comment Letters.
    \45\ See CMC, IECA, and MGEX Comment Letters.
---------------------------------------------------------------------------

    As far as Regulation 1.35(a) may present unique issues for 
Unregistered Members, the Commission is tailoring this Final Rule to 
accommodate those issues. Specifically, Unregistered Members do not 
have to keep records of written communications that lead to the 
execution of a commodity interest transaction and related cash or 
forward transactions. They do not have to keep text messages and they 
do not have to maintain records in any particular form and manner. The 
Commission understands that Unregistered Members may wish to be 
excluded from Regulation 1.35(a) entirely. The Commission has already 
determined, however, that Unregistered Members are properly subject to 
the rule.\46\ The policy reasons for this determination that were 
enunciated in 2012 continue to apply.\47\ The recordkeeping 
requirements of Regulation 1.35(a), including those imposed on 
Unregistered Members, are an important component of the Commission's 
efforts to ensure fair, orderly and efficient markets, and to detect 
and deter abusive, disruptive, fraudulent, and manipulative acts that 
can harm market integrity and customers.\48\
---------------------------------------------------------------------------

    \46\ 2012 Amendment Adopting Release at 75525. The issues that 
commenters have raised regarding Unregistered Members, as summarized 
immediately above, are largely the same as the issues that were 
raised by commenters, and considered by the Commission, in 2012. Id. 
at 75527.
    \47\ Id. at 75528.
    \48\ Id.
---------------------------------------------------------------------------

C. Proposal To Exclude Commodity Trading Advisors From the Requirement 
To Record and Maintain Oral Communications

    Regulation 1.35(a) requires CTAs that are members of a DCM or of a 
SEF to record all oral communications that lead to the execution of a 
transaction in a commodity interest.\49\ In considering the Proposed 
Amendment, the Commission noted that many CTAs who are members of a DCM 
or of a SEF have discretionary trading authority over customers' 
accounts and, therefore would not have routine telephone conversations 
with customers that lead to the execution of a transaction in a 
commodity interest.\50\ The Commission noted, however, that some CTAs 
may execute an order on behalf of a customer on a non-discretionary 
basis.\51\ The Commission stated that capturing customer orders was 
consistent with the regulatory goals of Regulation 1.35(a), although 
the costs of recording and keeping oral communications weighs against 
the benefit of achieving those goals.\52\ The Commission stated that 
the same was not true with respect to the costs of recording and 
maintaining written records, which the Commission understood to be 
significantly less than the costs of recording and maintaining

[[Page 80252]]

oral communications.\53\ Therefore, the Commission proposed to amend 
Regulation 1.35(a) to exclude CTAs from the requirement to record oral 
communications that lead to the execution of a transaction in a 
commodity interest.
---------------------------------------------------------------------------

    \49\ 17 CFR 1.35(a)(1).
    \50\ See Proposal at 68143.
    \51\ Id.
    \52\ Id.
    \53\ Id.
---------------------------------------------------------------------------

    In response to the Proposed Amendment and its effects on CTAs, the 
Commission received comments from representatives of five advisor and 
broker trade groups, one self-regulatory organization, and one 
exchange.\54\ The commenters were supportive of this aspect of the 
Proposed Amendment, with most noting that CTAs and CPOs trade primarily 
on a discretionary basis, and therefore have little to no communication 
with customers regarding transactions. In addition, some commenters 
stated that CTAs are subject to extensive ``analogous'' recordkeeping 
requirements under Regulation 4.33 and SEC rules for investment 
advisers, which makes compliance with the oral recordkeeping 
requirement of Regulation 1.35(a) unnecessary and unduly 
burdensome.\55\ No commenters suggested that the Commission refrain 
from excusing CTAs from the requirement to record oral communications 
that lead to the execution of a transaction in a commodity interest.
---------------------------------------------------------------------------

    \54\ See IAA, ICI, MFA, SIFMA AMG, NIBA, NFA, and MGEX Comment 
Letters.
    \55\ See IAA, ICI, MFA, and SIFMA AMG Comment Letters.
---------------------------------------------------------------------------

    Commenters also requested that the Commission provide CTAs with 
additional relief from the requirements of Regulation 1.35(a). IAA and 
ICI cited the reasons the Commission offered to exclude CTAs and CPOs 
from oral recordkeeping to argue that asset managers should be excluded 
from Regulation 1.35(a) entirely. For example, IAA and ICI stated that 
CTAs and CPOs act on a discretionary basis and have little to no 
communication with customers regarding orders. They also noted that any 
discussions CTAs and CPOs may have with market intermediaries regarding 
orders are captured by those intermediaries, making CTAs' and CPOs' 
records duplicative. Further, they noted that CTAs and CPOs are already 
subject to extensive recordkeeping rules under CFTC, SEC and state 
regulations. SIFMA AMG argued that the relief that the Commission staff 
provided to Unregistered Members, by excusing them from the 
requirements to retain text messages and to maintain other required 
records in a particular form and manner should be expanded to include 
all asset managers. SIFMA AMG stated that asset managers, including 
registered CTAs and CPOs, utilize text messages in a similar capacity 
as Unregistered Members. SIFMA AMG stated that the technology does not 
exist to maintain text messages pursuant to the rule. SIFMA AMG also 
argued that the costs associated with these recordkeeping obligations 
will ``almost certainly'' reduce the liquidity that asset managers 
provide to the swap markets. Further, as noted above, SIFMA AMG 
observed that asset managers are also subject to extensive regulation 
under other CFTC, SEC and state regulations.
    The Commission has carefully considered commenters' requests that, 
in addition to the proposed relief from oral recordkeeping 
requirements, the Commission grant CTAs relief from the written 
recordkeeping requirements of Regulation 1.35(a). The Commission has 
stated in the past that access to searchable written records is an 
important tool the Commission needs to ensure market integrity and 
protect customers.\56\ As some commenters have acknowledged, CTAs 
already maintain extensive written records that are analogous to those 
required by the rule.\57\ The Commission's interest in ensuring 
customer protection and market integrity justifies the incremental 
costs to maintain these and other records pursuant to Regulation 
1.35(a).
---------------------------------------------------------------------------

    \56\ See 2012 Amendment Adopting Release at 75528.
    \57\ See IAA, ICI, MFA, and SIFMA AMG Comment Letters.
---------------------------------------------------------------------------

    In response to SIFMA AMG's request to extend the relief granted to 
Unregistered Members to all asset managers, the Commission notes that 
asset managers are uniquely situated compared to Unregistered Members, 
in that asset managers may act as intermediaries.\58\ As such, an asset 
manager's written records are more critical to the Commission's 
interest in promoting customer protection than those of Unregistered 
Members. The Commission nonetheless recognizes the burdens that CTAs 
face when complying with Regulation 1.35(a), and has alleviated some of 
that burden by excluding them entirely from the oral recordkeeping 
requirements of the rule. Therefore, the Commission is adopting the 
Final Rule as proposed.
---------------------------------------------------------------------------

    \58\ CFTC Staff Letter No. 14-72 granted relief to Unregistered 
Members from the requirements to retain text messages and to 
maintain records in a particular form and manner. The Proposal 
sought to codify that relief.
---------------------------------------------------------------------------

D. Reorganization of Paragraph (a) of Commission Regulation 1.35

    The final rule text of paragraph (a) of Commission Regulation 1.35 
as adopted in this release has been reorganized to provide greater 
clarity regarding the regulatory obligations of affected Commission 
registrants and Unregistered Members. To this end, the reorganized rule 
text defines separate categories of required records and then 
separately specifies for each type of Commission registrant, and for 
Unregistered Members, the category or categories of records each is 
required to keep. For the avoidance of doubt, other than as modified by 
the amendments to paragraph (a) of Commission Regulation 1.35 that the 
Commission is adopting in this release, the Commission reiterates that 
the text of paragraph (a) has only been reorganized; the reorganized 
rule text is not intended to modify the regulatory obligations of 
Commission registrants or Unregistered Members under Commission 
Regulation 1.35(a) in any other respect.

IV. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act requires that Federal agencies 
consider whether the rules they propose will have a significant 
economic impact on a substantial number of small entities and, if so, 
they must provide a regulatory flexibility analysis respecting the 
impact.\59\ Whenever an agency publishes a general notice of proposed 
rulemaking for any rule, pursuant to the notice-and-comment provisions 
of the Administrative Procedure Act\60\ a regulatory flexibility 
analysis or certification typically is required.\61\ The Commission 
stated in the Proposal that, if adopted, the Proposal would not have a 
significant economic impact on affected entities because it would 
relieve them from certain regulatory obligations that would otherwise 
apply to them. Specifically, the Final Rule provides relief from 
certain recordkeeping requirements in Regulation 1.35(a), and the Final 
Rule does not impose any new regulatory obligations on affected 
persons. Commenters agreed that the Proposal would decrease regulatory 
burdens on certain market participants. No commenter stated that the 
Proposal would impose any new regulatory obligations on affected 
persons.
---------------------------------------------------------------------------

    \59\ 5 U.S.C. 601 et seq.
    \60\ 5 U.S.C. 553. The Administrative Procedure Act is found at 
5 U.S.C. 500 et seq.
    \61\ See 5 U.S.C. 601(2), 603-05.

---------------------------------------------------------------------------

[[Page 80253]]

    Accordingly, the Chairman, on behalf of the Commission, hereby 
certifies pursuant to 5 U.S.C. 605(b) that the rule amendment adopted 
herein will not have a significant economic impact on a substantial 
number of small entities.\62\
---------------------------------------------------------------------------

    \62\ The Chairman made the same certification in the Proposed 
Amendment.
---------------------------------------------------------------------------

B. Paperwork Reduction Act

    As the Commission stated in the Proposal, this rulemaking does not 
impose any new recordkeeping or information collection requirements, or 
other collections of information that require approval of the Office of 
Management and Budget under the Paperwork Reduction Act (``PRA''). All 
recordkeeping or information collection requirements relevant to the 
subject of this rulemaking, or discussed herein, already exist under 
current law. The title for this collection of information is 
``Adaptation of Regulations to Incorporate Swaps--Records of 
Transactions,'' OMB control number 3038-0090. The Commission invited 
public comment on the accuracy of its estimate that no additional 
recordkeeping or information collection requirements or changes to 
existing collection requirements would result from the Proposed 
Amendment. The Commission did not receive any comments that addressed 
whether additional recordkeeping or information collection requirements 
or changes to existing collection requirements would result from the 
adoption of the Proposal. Nevertheless, the Commission notes that the 
final rule will reduce the current burden of OMB control number 3038-
0090. Accordingly, the Commission will, by separate action, publish in 
the Federal Register a notice and request for comment on the amended 
PRA burden associated with the final rule, and submit to OMB an 
information collection request to amend the information collection, in 
accordance with 44 U.S.C. 3506(c)(2)(A) and 5 CFR 1320.8(d).

C. Cost-Benefit Considerations

    Section 15(a) of the CEA requires the Commission to consider the 
costs and benefits of its actions before promulgating a regulation 
under the CEA or issuing certain orders. Section 15(a) further 
specifies that the costs and benefits shall be evaluated in light of 
five broad areas of market and public concern: (1) protection of market 
participants and the public; (2) efficiency, competitiveness, and 
financial integrity of futures markets; (3) price discovery; (4) sound 
risk management practices; and (5) other public interest 
considerations. In adopting the Final Rule, the Commission has 
considered the costs and benefits resulting from its discretionary 
determinations with respect to the Section 15(a) factors, and sought 
comments from interested persons regarding the nature and extent of 
such costs and benefits.
    In summary, as the Commission stated in the 2012 Amendment, the 
records (as well as the form and manner in which such records must be 
kept) under Regulation 1.35 are an important component of the 
Commission's efforts to ensure fair, orderly and efficient markets, and 
to detect and deter abusive, fraudulent and manipulative acts and 
practices that can harm market integrity and customers. In furthering 
the important policy and practical objectives of the rule, the 
Commission carefully considered the potential impact on the market and 
market participants. The adoption of the Final Rule reflects the 
agency's efforts to consider the need to promote market integrity and 
protect customers, while mitigating potential cost to market 
participants, and in particular, commercial end-users.
1. Background
    The Commission is amending Regulation 1.35(a) to: (i) Provide that 
all records that are required to be maintained under this regulation 
must be maintained in a form and manner which permits prompt, accurate 
and reliable location, access, and retrieval of any particular record, 
data, or information; (ii) clarify that the requirement that records be 
kept in a form and manner identifiable by transaction means that the 
records must be kept in a form and manner that allows for 
identification of a particular transaction, except that records of oral 
and written communications leading to the execution of a commodity 
interest transaction and related cash or forward transactions are not 
required to be kept in a form and manner that allows for identification 
of a particular transaction; (iii) exclude Unregistered Members of DCMs 
and of SEFs from the requirements to: keep written communications that 
lead to the execution of a commodity interest transaction and related 
cash or forward transactions; keep text messages; and keep records in a 
particular form and manner; and (iv) exclude commodity trading advisors 
CTAs from the oral recordkeeping requirement. The Commission stated in 
the Proposal that the baseline for this cost and benefit consideration 
is the existing Regulation 1.35(a). While CFTC Staff Letters 14-72 and 
14-147, as discussed above, currently provide no-action relief that is 
substantially similar to much of the relief the Final Rule provides to 
certain Commission registrants and Unregistered Members, the Commission 
believes that CFTC Staff Letters 14-72 and 14-147 should not set or 
affect the baseline from which the Commission considered the costs and 
benefits of the Final Rule. This is because, as they indicate, CFTC 
Staff Letters 14-72 and 14-147 do not necessarily represent the 
position or view of the Commission or any other office or division of 
the Commission.
    The Commission invited comments from the public on all aspects of 
its preliminary consideration of the costs and benefits associated with 
the Proposal, and the Cost-Benefit Considerations section of the 
Proposal included specific questions regarding certain aspects of 
potential costs or potential benefits associated with the Proposal. 
While those who commented on the Proposal generally did not 
specifically address the Cost-Benefit Considerations section of the 
Proposal, certain of the comments raised issues that relate to the 
Commission's cost-benefit considerations. Accordingly, although the 
Commission has addressed those comments above in connection with the 
specific proposed regulatory provision of the Proposal to which they 
referred, the Commission is also addressing those comments in the 
discussion that follows.
2. Costs
    The Commission stated in the Proposal that it would not impose any 
new or additional costs directly upon affected market participants, but 
instead would reduce some of the regulatory burdens and associated 
costs that Regulation 1.35(a) imposes upon them. The Commission stated 
that it is difficult to quantify what costs, if any, the Proposed 
Amendment would impose upon other market participants, the markets 
themselves, or the general public. The Commission observed, however, 
that one possible cost associated with the Proposed Amendment would be 
that certain market participants, such as CTAs that are members of a 
DCM or of a SEF and Unregistered Members, would no longer be required 
to keep certain types of records that may be useful for the Commission 
in exercising its oversight of the markets, including for market 
surveillance, enforcement, and ensuring market integrity. The 
Commission invited public comments on the costs of the Proposal.

[[Page 80254]]

    No commenter attempted to quantify the costs, if any, associated 
with the Proposal. Two commenters specifically stated that the Proposal 
would not affect market oversight.\63\ Additionally, some commenters 
representing advisor trade groups noted that CTAs and CPOs are subject 
to extensive recordkeeping obligations under other CFTC, SEC and state 
regulations that are substantially similar to the requirements of 
Regulation 1.35(a). Therefore, the commenters that addressed this issue 
agreed that the Proposal would not significantly impact the 
Commission's ability to oversee the markets. The majority of commenters 
stated that the Proposal would reduce the regulatory burdens and costs 
associated with Regulation 1.35(a).
---------------------------------------------------------------------------

    \63\ CEWG and IECA Comment Letters.
---------------------------------------------------------------------------

    Many commenters argued, however, that the Proposal should have 
provided additional relief to Unregistered Members, especially those 
Unregistered Members that are commercial end-users. These commenters 
argued that this lack of additional relief would cause some end-users 
to avoid membership on DCMs and SEFs, resulting in increased 
transaction costs for those entities. These commenters also argued that 
such additional costs may cause market participants to conduct some 
swap transactions away from SEFs, which would, in turn, decrease market 
transparency and the Commission's ability to oversee the markets. As 
explained above, in adopting the Final Rule that provides additional 
relief to Unregistered Members, the Commission has attempted to address 
some of the concerns raised by end-users, which in turn should mitigate 
the impact of the rule on the broader market.
    Finally, Voitrax commented that the Commission's changes to an 
existing rule may create a disincentive for some firms to develop 
technology to address Commission rules. Any rule amendment may have 
some effect on market participants, as well as the vendors that support 
those market participants. In this case, the Commission has tailored 
the rule to address some concerns that market participants have 
presented in a manner consistent with the overall purpose of the rule. 
However, the Commission believes that the Final Rule preserves the core 
market integrity and customer protection aspects of the rule, while 
reducing the recordkeeping obligations imposed by the rule.\64\ The 
Commission therefore believes the costs associated with the Final Rule, 
to the extent that such costs exist, are negligible.
---------------------------------------------------------------------------

    \64\ The Commission notes that the technology described in 
Voitrax's Comment Letter may still be useful in helping market 
participants comply with the form and manner requirements prescribed 
in the Final Rule.
---------------------------------------------------------------------------

3. Benefits
    The Commission stated in the Proposal that it would have a direct 
and tangible benefit for those market participants that are excused 
from certain aspects of the recordkeeping obligations of Regulation 
1.35(a). The Commission reduced the burden of Regulation 1.35(a) by 
excluding CTAs and Unregistered Members from certain aspects of the 
rule. The Commission replaced the requirement that records be 
searchable by transaction with the more general requirement that 
records be searchable. The Commission observed that it may be difficult 
to quantify what other benefits the Proposal may have for other market 
participants, the markets themselves, or the general public. The 
Commission invited public comments on the benefits of the Proposal. In 
response to those comments, the Commission is further reducing the 
burden of Regulation 1.35(a) by replacing the term ``searchable'' that 
was in the Proposal with the phrase ``maintained in a form and manner 
which permits prompt, accurate and reliable location, access, and 
retrieval of any particular record, data, or information.'' No 
commenters attempted to quantify the benefits associated with the 
Proposal. Commenters generally agreed that the Proposal would reduce 
recordkeeping costs for certain market participants. The Commission 
believes the benefits associated with the Final Rule, which are 
difficult to quantify in the aggregate, will be realized in different 
ways by different market participants affected by the rule depending on 
the precise nature of their business and the attendant recordkeeping 
obligations that accompany that business.
4. Section 15(a)
    Section 15(a) of the CEA requires the Commission to consider the 
effects of its actions in light of the following five factors:
a. Protection of Market Participants and the Public
    The Commission stated in the Proposal that it would reduce some of 
the regulatory burdens on certain market participants. The Commission 
recognizes that there may be a trade-off between reducing regulatory 
burdens and ensuring that the recordkeeping obligations Rule 1.35(a) 
imposes upon those market participants subject to the rule are 
sufficient to support the effort by the Commission to fulfill its 
regulatory mission. As noted above, the Proposal would relieve certain 
market participants from the requirement under Regulation 1.35(a) to 
keep certain types of records that can be useful for the Commission in 
exercising its oversight of the markets, including for market 
surveillance, enforcement, and ensuring market integrity. The 
Commission invited public comment on these issues.
    No commenter stated that the Proposal would adversely affect the 
ability of the Commission to provide effective oversight of the 
markets. Two commenters specifically stated that the Proposal would not 
affect market oversight.\65\ Additionally, some commenters representing 
advisor trade groups noted that CTAs and CPOs are subject to extensive 
recordkeeping obligations under other CFTC, SEC and state regulations 
that are substantially similar to the requirements of Regulation 
1.35(a). Therefore, the commenters that addressed this issue agreed 
that the Proposal would not significantly impact the Commission's 
ability to oversee the markets. The Commission agrees with commenters 
that its access to records will remain sufficient to protect market 
participants and the public.
---------------------------------------------------------------------------

    \65\ CEWG and IECA Comment Letters.
---------------------------------------------------------------------------

    Some commenters argued that that the Proposal did not go far enough 
in relieving burdens on commercial end-users, which they argue creates 
a disincentive to transact on DCMs and SEFs, thereby lowering market 
transparency. As explained above, in adopting the Final Rule that 
provides additional relief to Unregistered Members, the Commission has 
attempted to address some of the concerns raised by end-users, which in 
turn should mitigate the impact of the rule on the broader market.
b. Efficiency, Competitiveness, and Integrity of Markets
    The Amendments to Rule 1.35(a) are intended, in part, to reduce 
some of the regulatory burdens on certain market participants and end-
users. The Commission invited public comment on whether the Proposed 
Amendment, if adopted, would actually decrease these regulatory 
burdens, and whether the decreased regulatory burdens would result in 
increased resource-allocation efficiency and competition without 
compromising market integrity.
    Commenters generally stated that the Proposal would decrease the 
regulatory burdens on affected market participants. No commenters 
addressed whether the relief provided in the Proposed Amendment would 
result in increased

[[Page 80255]]

efficiency and competition among market participants. No commenter 
stated that the Proposal would compromise market integrity. In fact, no 
commenters addressed whether the Proposal would affect market 
integrity.
    The Commission believes that the Final Rule will decrease the 
regulatory burdens on affected market participants. The Commission 
believes that this should result in increased resource-allocation 
efficiency for market participants overall. The Commission believes 
that the Final Rule should not have any effect on competition. Finally, 
the Commission believes that the Final Rule will not compromise market 
integrity. The Final Rule is narrowly tailored to provide relief to 
certain market participants with respect to certain types of records. 
This targeted relief does not unduly compromise the recordkeeping 
requirements of Regulation 1.35(a), the CEA, or other Commission 
Regulations.
    Some commenters stated that the lack of sufficient relief provided 
in the Proposed Amendment would cause many market participates to avoid 
utilizing SEFs. Further, one commenter stated that costs associated 
with these recordkeeping obligations will ``almost certainly'' reduce 
the liquidity that asset managers provide to the swap markets. Many 
commenters agreed that although the Proposal decreased the regulatory 
burdens on Unregistered Members, it did not go far enough, resulting in 
decreased resource-allocation efficiency of the markets. As explained 
above, in adopting the Final Rule that provides additional relief to 
Unregistered Members, the Commission has attempted to address some of 
the concerns raised by end-users, which in turn should mitigate the 
impact of the rule on the broader market.
c. Price Discovery
    The Commission stated that the Proposed Amendment would not have 
any effect on price discovery. The Commission invited public comments 
regarding what effect, if any, the Proposed Amendment would have on 
price discovery. Only one commenter addressed price discovery, stating 
that the Proposal would not have any effect on price discovery.\66\ The 
Commission has no basis to believe that the Final Rule will have any 
effect on price discovery.
---------------------------------------------------------------------------

    \66\ IECA Comment Letter.
---------------------------------------------------------------------------

d. Sound Risk Management
    The Proposal is intended, in part, to reduce some of the regulatory 
burdens on certain market participants. The Commission invited public 
comment on whether the Proposed Amendment would have any effect on the 
risk management practices of market participants and end-users. 
Commenters agreed that the Proposed Amendment would, if adopted, 
decrease regulatory burdens on certain market participants. Commenters 
did not address whether these decreased regulatory burdens would have 
an effect on market participants' risk management practices. One 
commenter stated that the Proposed Amendment did not provide sufficient 
relief to Unregistered Members that are commercial end-users, which 
they assert perpetuates a disincentive for these firms to transact on 
SEFs.\67\ The commenter argues that any disincentive to SEF utilization 
decreases the risk management options that are available to 
Unregistered Members. As explained above, in adopting the Final Rule 
that provides additional relief to Unregistered Members, the Commission 
has attempted to address some of the concerns raised by end-users, 
which in turn should mitigate the impact of the rule on the broader 
market.
---------------------------------------------------------------------------

    \67\ IECA Comment Letter.
---------------------------------------------------------------------------

e. Other Public Interest Considerations
    The Commission did not identify any other public interest 
considerations for this rulemaking, nor were any identified by 
commenters.

List of Subjects in 17 CFR Part 1

    Agricultural commodity, Agriculture, Brokers, Committees, Commodity 
futures, Conflicts of interest, Consumer protection, Definitions, 
Designated contract markets, Directors, Major swap participants, 
Minimum financial requirements for intermediaries, Reporting and 
recordkeeping requirements, Swap dealers, Swaps.

    For the reasons stated in the preamble, the Commodity Futures 
Trading Commission amends 17 CFR part 1 as set forth below:

PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

0
1. The authority citation for part 1 continues to read as follows:

    Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h, 
6i, 6k, 6l, 6m, 6n, 6o, 6p, 6r, 6s, 7, 7a-1, 7a-2, 7b, 7b-3, 8, 9, 
10a, 12, 12a, 12c, 13a, 13a-1, 16, 16a, 19, 21, 23, and 24 (2012).


0
2. In Sec.  1.35, revise paragraphs (a)(1) through (4) and add 
paragraphs (a)(5) through (9) to read as follows:


Sec.  1.35  Records of commodity interest and related cash or forward 
transactions.

    (a) * * *
    (1) Futures commission merchants, retail foreign exchange dealers, 
and certain introducing brokers. Each futures commission merchant, 
retail foreign exchange dealer, and introducing broker that has 
generated over the preceding three years more than $5 million in 
aggregate gross revenues from its activities as an introducing broker, 
shall:
    (i) Keep full, complete, and systematic records (including all 
pertinent data and memoranda) of all transactions relating to its 
business of dealing in commodity interests and related cash or forward 
transactions, which shall include all orders (filled, unfilled, or 
canceled), trading cards, signature cards, street books, journals, 
ledgers, canceled checks, copies of confirmations, copies of statements 
of purchase and sale, and all other records, which have been prepared 
in the course of its business of dealing in commodity interests and 
related cash or forward transactions (for purposes of this section, all 
records described in this paragraph (a)(1)(i) are referred to as 
``commodity interest and related records'');
    (ii) If such person is a member of a designated contract market or 
swap execution facility, retain and produce for inspection all 
documents on which trade information is originally recorded, whether or 
not such documents must be prepared pursuant to the rules or 
regulations of either the Commission, the designated contract market or 
the swap execution facility (for purposes of this section, all records 
described in this paragraph (a)(1)(ii) are referred to as ``original 
source documents,'' and, together with commodity interest and related 
records, ``transaction records''); and
    (iii) Keep 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 any related cash or forward transactions (but not oral 
communications that lead solely to the execution of a related cash or 
forward transaction), whether transmitted by telephone, voicemail, 
facsimile, instant messaging, chat rooms, electronic mail, mobile 
device, or other digital or electronic media (for purposes of this 
section, all communications described in this paragraph (a)(1)(iii) are 
referred to as ``oral pre-trade communications'' if transmitted orally 
or as ``written pre-trade communications'' if transmitted in writing, 
and all such communications

[[Page 80256]]

are referred to collectively as ``pre-trade communications'').
    (2) Registered members of designated contract markets or swap 
execution facilities. Each introducing broker that is not subject to 
paragraph (a)(1) of this section and is a member of a designated 
contract market or swap execution facility, and each member of a 
designated contract market or swap execution facility that is 
registered or required to be registered with the Commission as a floor 
trader, commodity pool operator, commodity trading advisor, swap 
dealer, or major swap participant, shall keep:
    (i) All transaction records; and
    (ii) All written pre-trade communications.
    (3) Other introducing brokers. Each introducing broker that is not 
subject to paragraph (a)(1) or (2) of this section shall keep:
    (i) All commodity interest and related records; and
    (ii) All written pre-trade communications.
    (4) Floor broker members of designated contract markets or swap 
execution facilities. Each member of a designated contract market or 
swap execution facility that is registered or required to be registered 
with the Commission as a floor broker shall keep:
    (i) All transaction records;
    (ii) All written pre-trade communications; and
    (iii) All oral pre-trade communications that lead to the purchase 
or sale of any commodity for future delivery, security futures product, 
swap, or commodity option authorized under section 4c of the Commodity 
Exchange Act for the account of any person other than such floor 
broker.
    (5) Form and manner. All records required to be kept pursuant to 
paragraphs (a)(1), (2), (3), and (4) of this section shall be kept in a 
form and manner that:
    (i) Permits prompt, accurate, and reliable location, access, and 
retrieval of any particular record, data, or information; and
    (ii) Other than pre-trade communications, allows for identification 
of a particular transaction.
    (6) Unregistered members of designated contract markets or swap 
execution facilities. Each member of a designated contract market or 
swap execution facility that is not registered or required to be 
registered with the Commission in any capacity, shall keep all 
transaction records; provided that such records need not include 
transmissions by short message service (SMS) or multimedia messaging 
service (MMS).
    (7) Definition of related cash or forward transaction. For purposes 
of this section, ``related cash or forward transaction'' means a 
purchase or sale for immediate or deferred physical shipment or 
delivery of an asset related to a commodity interest transaction where 
the commodity interest transaction and the related cash or forward 
transaction are used to hedge, mitigate the risk of, or offset one 
another.
    (8) Other requirements. Each futures commission merchant, retail 
foreign exchange dealer, introducing broker, and member of a designated 
contract market or swap execution facility shall retain the records 
required to be kept by this section in accordance with the requirements 
of Sec.  1.31, and produce them for inspection and furnish true and 
correct information and reports as to the contents or the meaning 
thereof, when and as requested by an authorized representative of the 
Commission or the United States Department of Justice.
    (9) Alternative Compliance Schedule. (i) The Commission may in its 
discretion establish an alternative compliance schedule for the 
requirement to record oral communications under paragraph (a)(1) or (4) 
of this section that is found to be technologically or economically 
impracticable for an affected entity that seeks, in good faith, to 
comply with the requirement to record oral communications under 
paragraph (a)(1) or (4) of this section within a reasonable time period 
beyond the date on which compliance by such affected entity is 
otherwise required.
    (ii) A request for an alternative compliance schedule under 
paragraph (a)(9)(i) of this section shall be acted upon within 30 days 
from the time such a request is received, or it shall be deemed 
approved.
    (iii) The Commission hereby delegates to the Director of the 
Division of Swap Dealer and Intermediary Oversight or such other 
employee or employees as the Director may designate from time to time, 
the authority to exercise the discretion. Notwithstanding such 
delegation, in any case in which a Commission employee delegated 
authority under this paragraph believes it appropriate, he or she may 
submit to the Commission for its consideration the question of whether 
an alternative compliance schedule should be established. The 
delegation of authority in this paragraph shall not prohibit the 
Commission, at its election, from exercising the authority set forth in 
paragraph (a)(9)(i) of this section.
    (iv) Relief granted under paragraph (a)(9)(i) of this section shall 
not cause an affected entity to be out of compliance or deemed in 
violation of any recordkeeping requirements.
* * * * *

    Issued in Washington, DC, on December 18, 2015, by the 
Commission.
Christopher J. Kirkpatrick,
Secretary of the Commission.

    Note: The following appendices will not appear in the Code of 
Federal Regulations.

Appendices to Records of Commodity Interest and Related Cash or Forward 
Transactions--Commission Voting Summary, Chairman's Statement, and 
Commissioner's Statement

Appendix 1--Commission Voting Summary

    On this matter, Chairman Massad and Commissioners Bowen and 
Giancarlo voted in the affirmative. No Commissioner voted in the 
negative.

Appendix 2--Statement of Chairman Timothy G. Massad

    Today, the Commission is adopting significant changes to a rule 
that will reduce recordkeeping obligations for commercial end-users. 
The changes ensure that the rule strikes an appropriate balance 
between the costs of recordkeeping and the benefits to market 
oversight. This will help ensure that businesses as well as farmers 
and ranchers that depend on the derivatives markets are able to 
continue using them effectively and efficiently.
    Commercial end-users were not the cause of the crisis, and 
should not bear the burdens of reforms designed to rein in systemic 
risk. Since I became Chairman, the CFTC has taken a number of 
actions to fine-tune our rules to ensure they do not impose 
unintended burdens on those who use the derivatives markets to hedge 
commercial risk. Today, I'm pleased to support another final rule 
that makes important strides towards that goal.
    This final rule amends recordkeeping requirements set forth 
under Commission Regulation 1.35. This regulation requires various 
types of market participants to keep written and oral records of 
their commodity interest and related cash or forward transactions. 
It is very important to our efforts to ensure our markets are 
strong, transparent, and operate free of fraud and manipulation.
    This rule was first implemented in 1948. CFTC made changes to 
this regulation in 2012, to ensure it accurately reflected evolution 
of the market and changes in the CFTC's jurisdiction. But we have 
been evaluating the rule since then, and we have determined that for 
some market participants, the costs of complying with certain 
aspects of the changes may exceed the potential benefits. Throughout 
this process, we have benefitted from the input of many commercial 
businesses and other market participants. We appreciate their 
feedback.

[[Page 80257]]

    Today's final rule clarifies that members of exchanges and swap 
execution facilities not registered with the Commission--typically, 
end-users--do not have to keep pre-trade communications or text 
messages. Further, it simplifies the requirements for keeping 
records of final transactions. The amended rule also states that 
commodity trading advisors do not have to record oral communications 
regarding their transactions.
    I believe this rule is an important change that will reduce 
recordkeeping burdens on end-users, and I applaud my fellow 
commissioners for their unanimous support.

Appendix 3--Statement of Commissioner J. Christopher Giancarlo

    I am pleased to support this final rule that revises Rule 1.35. 
In the end, after numerous iterations, several comment periods, 
significant legislative interest from Congress, and months of 
negotiating, the Commodity Futures Trading Commission (``CFTC'' or 
``Commission'') thankfully listened to the concerns of market 
participants. I am appreciative of the CFTC staff's diligent work 
over the past few months to make key revisions to this rule. Fixing 
this regulation was one of the first issues that I raised with my 
fellow Commissioners upon my arrival at the CFTC. I believe we have 
now produced a more workable rule that will not impose needless 
regulatory costs on America's agricultural producers, grain elevator 
operators or energy producers, to name a few.
    As background, the Commission revised long-standing Rule 1.35 in 
2012 despite the fact that the Dodd-Frank Act \1\ contained no 
mandate to change the CFTC's recordkeeping rules.\2\ The revised 
rule proved to be unworkable. Its publication was followed by 
requests for no-action relief and a public roundtable at which 
entities impacted by the rule voiced their inability to tie all 
communications leading to the execution of a transaction to a 
particular transaction or transactions. End-user exchange members 
pointed out that business that was once conducted by telephone had 
moved to text messaging, so the carve out in the rule for oral 
communications had little utility. They pointed out that it was 
simply not technologically feasible to keep pre-trade text messages 
in a form and manner ``identifiable and searchable by transaction.'' 
Further, bipartisan Congressional action on the rule's unworkable 
nature made it clear that the Commission should re-open the rule to 
lessen the burden on market participants not registered with the 
CFTC.\3\
---------------------------------------------------------------------------

    \1\ Dodd-Frank Wall Street Reform and Consumer Protection Act, 
Public Law 111-203, 124 Stat. 1376 (2010).
    \2\ See Adaptation of Regulations to Incorporate Swaps-Records 
of Transactions, 77 FR 75523 (Dec. 21, 2012), available at https://www.gpo.gov/fdsys/pkg/FR-2012-12-21/pdf/2012-30691.pdf.
    \3\ See H.R. 4413, the Customer Protection and End-User Relief 
Act, Sec. 353 (113th Congress) and H.R. 2289, the Commodity End-User 
Relief Act, Sec. 308 (114th Congress).
---------------------------------------------------------------------------

    In November 2014, the CFTC did propose changes to Rule 1.35.\4\ 
Unfortunately, I could not support that proposal because it did not 
go far enough in addressing concerns about the feasibility and cost 
of compliance.\5\ It continued to contain provisions that were 
overly burdensome in practice for certain covered entities. For 
example, the proposal kept 2012 rule revisions that required the 
keeping of all oral and written records that lead to the execution 
of a transaction in a commodity interest and related cash or forward 
transaction, in a form and manner ``identifiable and searchable by 
transaction.'' \6\ This ``searchable'' requirement also conflicted 
with the requirements of Commission Rule 1.31, which applies to all 
books and records required to be kept by the Commodity Exchange Act 
and Commission regulations.
---------------------------------------------------------------------------

    \4\ See Records of Commodity Interest and Related Cash or 
Forward Transactions, 79 FR 68140 (Nov. 14, 2014), available at 
http://www.cftc.gov/idc/groups/public/@lrfederalregister/documents/file/2014-26983a.pdf.
    \5\ See id. at 68147-148 (Dissenting Statement of Commissioner 
J. Christopher Giancarlo).
    \6\ See supra note 4.
---------------------------------------------------------------------------

    Appropriately, the final revisions to Rule 1.35 address many of 
the issues raised in my year-old dissent. End-user exchange members 
that are not registered or required to be registered with the 
Commission now must only keep transaction records, which is a 
logical and prudent course of regulatory policy. Text messages are 
also excluded from the recordkeeping requirement for end-users, but 
communications through internet-based messaging services must be 
kept on file. I anticipate that this distinction will generate 
interesting public commentary.\7\
---------------------------------------------------------------------------

    \7\ As finalized, the rule excludes text messages based on SMS 
and MMS technology, but includes internet-based messaging services 
such as iPhone messages because they are easier to store and 
retrieve on computers. While this outcome is puzzling and not 
technologically neutral, the best manner to ensure compliance with 
CFTC regulations is education on our rules.
---------------------------------------------------------------------------

    Aside from the technical points of the final rule, it is 
appropriate to comment on the skyrocketing compliance costs 
associated with trading in American commodity markets. There is an 
undeniable need for the CFTC to police these markets and root out 
fraud and abuse. Confidence and trust in our markets is essential so 
that farmers, manufacturers and other end-users can safely hedge 
their risks and costs of production. Yet, agricultural 
intermediaries, particularly small futures commission merchants, are 
being squeezed by the prolonged environment of low interest rates 
and increased regulatory burdens. Regulators must always balance the 
public's interest in collecting commercial information for use in 
investigations and enforcement, against costs and burdens placed on 
American commerce and industry and the jobs they generate. In this 
protracted period of weak economic growth with an enormous number of 
Americans out of the workforce, we must scrupulously avoid needless 
red tape and compliance costs that are invariably passed along 
through higher costs for everyday items like a loaf of bread or a 
gallon of gasoline, milk or winter heating oil.
    I believe the final Rule 1.35 generally gets the balance right. 
Yet, I must give a plain and simple warning: The elimination of 
unnecessary recordkeeping burdens provided in this final rule will 
be paradoxically tossed aside for many small market participants if 
Regulation Automated Trading (``Regulation AT'') is finalized as 
proposed.\8\ Under Regulation AT, many unregistered market 
participants would be forced to register for the first time with the 
CFTC as ``floor traders'' due to the broad definition of 
``algorithmic trading.'' \9\ As new floor traders, these market 
participants would then be subject to heighted recordkeeping 
requirements under Rule 1.35, such as keeping all ``written 
communications provided or received concerning quotes, bids, offers, 
instructions, trading, and prices that lead to the execution of a 
transaction.'' \10\ As I said in my statement accompanying the 
Notice of Proposed Rulemaking for Regulation AT, I encourage market 
participants to carefully review and consider the compliance and 
cost consequences of that potential new regulatory regime and 
compare it to today's common-sense revisions to Rule 1.35.
---------------------------------------------------------------------------

    \8\ See CFTC Notice of Proposed Rulemaking (3038-AD52), 
Regulation Automated Trading (Dec. 14, 2015), available at http://www.cftc.gov/idc/groups/public/@newsroom/documents/file/federalregister112415.pdf.
    \9\ See definition of ``Algorithmic Trading'' in proposed 
Commission regulation 1.3(zzzz), which is very broad and would 
appear to capture market participants using off-the-shelf type 
automated systems or simple excel spreadsheets to automate trading.
    \10\ Emphasis added; see Commission Rule 1.35(a)(1)(iii) 
(defining ``written pre-trade communications'') and Rule 
1.35(a)(2)(ii) (requiring all ``floor traders'' to keep all 
``written pre-trade communications'').
---------------------------------------------------------------------------

    As I have mentioned in the past, I have been fortunate during my 
time as a Commissioner to visit with agricultural and energy 
producers and intermediaries in Illinois, Indiana, Iowa, Minnesota, 
Texas, Louisiana and Kentucky. The common refrain I hear again and 
again is that Washington does not listen to everyday Americans. It 
imposes rules and regulations without regard to their obvious impact 
on ordinary people. Well, I believe this rule benefits from 
listening to those concerns and is a step in the right direction. I 
am hopeful that it is an indicator of future action by the CFTC that 
more readily takes to heart these common concerns in all of our 
regulatory actions.

[FR Doc. 2015-32416 Filed 12-23-15; 8:45 am]
BILLING CODE 6351-01-P