- CFTC Modernizes Recordkeeping Standards
- July 3, 2017 | Authors: James M. Cain; Raymond A. Ramirez; Kristen N. Bertch
- Law Firm: Eversheds Sutherland (US) LLP - Washington Office
On May 30, 2017, the Commodity Futures Trading Commission (CFTC) adopted final rules to amend its existing regulation 1.31 (Regulation 1.31). Regulation 1.31 sets forth the form and manner in which all records retained in accordance with the Commodity Exchange Act (CEA) and CFTC regulations must be maintained and produced. Importantly, the CFTC emphasized that its amendments to Regulation 1.31 are not intended to create new recordkeeping burdens for market participants. Rather, the amendments to Regulation 1.31 are designed to modernize, and make technology neutral, the form and manner in which records, that are already required to be maintained, must be kept.1 Compliance with amended Regulation 1.31 will be required beginning on August 28, 2017.
Generally, the CFTC’s changes to Regulation 1.31 go a long way to address market participants’ concerns that it was outdated and impractical.2 These concerns were voiced particularly after Regulation 1.31 was broadened to apply to swaps. Overall, the existing recordkeeping systems of many market participants will satisfy the requirements of the amended rule because amended Regulation 1.31 provides records entities with greater flexibility to choose how their regulatory records will be maintained. However, market participants should review their existing recordkeeping systems to confirm that this is the case.
Key Aspects of Amended Regulation 1.31
Amended Regulation 1.31 was adopted to recognize that recordkeeping has evolved significantly from a paper-based system to electronically stored information systems. The CFTC intends for amended Regulation 1.31 to be technology neutral so that it may withstand future advances in technology.
The scope of amended Regulation 1.31 is dictated by several key defined terms. The first is “records entity,” which means any person who is required to keep records under the CEA or CFTC regulations. This definition captures both persons who are registered with the CFTC in some capacity, e.g., commodity pool operators, commodity trading advisors and swap dealers, as well as persons who are not registered with the CFTC in any capacity, i.e., end-users.
The amended regulation also defines the term “regulatory records” which, in effect, encompasses any records required to be kept by the CEA or CFTC regulations. The term “regulatory records” is broad and would include electronic records (i.e., all regulatory records other than those exclusively created and maintained on paper), metadata and any data (i) necessary to access, search or display such books and records, or (ii) describing how and when such books and records were created, formatted or modified.
A. Duration of Retention
Amended Regulation 1.31 restates retention period requirements currently set forth in existing Regulation 1.31. A records entity is still required to keep regulatory records of any swap or related cash or forward transaction from the date the regulatory record was created until the termination, maturity, expiration, transfer, assignment or novation date of the transaction, and for a period of not less than five years after such date. A records entity that is required to retain oral communications is required to keep regulatory records of such oral communications for a period of not less than one year from the date of such communication.
All other regulatory records are required to be retained for five years from the date of the record’s creation, unless the regulatory record is exclusively created and maintained on paper, in which case there is a two-year retention period. All regulatory records must be readily accessible during their retention periods.
It should be noted that the duration of retention requirements imposed by amended Regulation 1.31 are not intended to supersede any duration of retention requirements imposed by other CFTC regulations.
B. Form and Manner of Retention
Amended Regulation 1.31 adopts a general standard that requires each records entity to retain all regulatory records in a form and manner necessary to ensure the authenticity and reliability of the records and recordkeeping systems. For electronic regulatory records, the CFTC imposes additional controls, requiring each records entity to:
1. Adopt systems that maintain security, signature and data as necessary to ensure the authenticity of the information contained in regulatory records and to monitor compliance with the CEA and CFTC regulations;
2. Adopt systems that ensure the records entity is able to produce regulatory records in accordance with Regulation 1.31, and ensure the availability of regulatory records in the event of an emergency or other disruption of the records entity’s record retention systems; and
3. Create and maintain an up-to-date inventory that identifies and describes each system that maintains information necessary for accessing or producing regulatory records.
The CFTC and the Department of Justice (DOJ) retain the right to inspect the books and records maintained in accordance with Regulation 1.31.
C. Other Matters
The CFTC made several changes to Regulation 1.31 to facilitate the retention of electronic records.
Amended Regulation 1.31 no longer requires electronic records to be siloed from an entity’s other electronic records, and there is no express requirement that a records entity establish, maintain or implement written policies and procedures to ensure compliance with the requirements of Regulation 1.31. However, if a person retains electronic records, it will need to: (i) ensure that its recordkeeping system complies with Regulation 1.31; and (ii) keep an inventory that identifies and describes such system. This inventory constitutes a required record in and of itself that must be maintained, and potentially produced to the CFTC or DOJ, in accordance with Regulation 1.31.
The CFTC has removed the existing requirement of Regulation 1.31 that a records entity enter into an arrangement with a third-party technical consultant (technical consultant) and provide the technical consultant with access to, and the ability to download information from, the records entity’s electronic storage media. Consistent with this, amended Regulation 1.31 eliminates the existing requirement that the technical consultant file with the CFTC an acceptable undertaking regarding its ability and willingness to provide the CFTC and DOJ with access to the information contained on the record entity’s electronic storage media. If a records entity chooses to use a technical consultant, the records entity would remain responsible for compliance with the CEA and CFTC regulations.
Lastly, amended Regulation 1.31 removes the existing requirement that any person utilizing electronic storage media provide a written representation to the CFTC prior to the use of the system, certifying that the system satisfies the requirements of CFTC Regulation 1.31, and where applicable, if the system was using storage media other than optical disk or CD–ROM.
Form of Regulatory Records. Given that amended Regulation 1.31 eliminates the requirement for regulatory records to be retained in a specific form and manner, amended Regulation 1.31 no longer requires the retention of certain paper records, such as trading cards and paper copies of electronically filed certified forms, nor does it require that electronic records be kept in their native file format. Allowing records to be stored in different formats enables market participants to choose the file format that best suits their needs. Accordingly, and for example, it is now clear that the retention of records in portable document format, i.e., as PDFs, is acceptable under Regulation 1.31.
1 In addition to complying with Regulation 1.31, market participants may be subject to certain entity, trading activity, or transaction reporting obligations and are required to comply with such obligations to the extent applicable.
2 For reference, Regulation 1.31 was last updated in 1999.