CFTC tightens recordkeeping rule

- Cash commodity transactions not affected. - Oral communications must be kept for one year. - Rule allows CFTC to preserve evidence i

IN steps to crack down on the futures market and implement the financial reform bill, the Commodity Futures Trading Commission (CFTC) approved a final rule Dec. 17 to enhance its futures market enforcement program by establishing a requirement to record all oral communications that lead to the execution of a transaction in a commodity interest, whether communicated by telephone, voicemail, mobile device or other digital or electronic media.

"The rule will make enforcement investigations more efficient by preserving critical evidence that otherwise may be lost to memory lapses and inconsistent recollections," CFTC chairman Gary Gensler said. "The commission will have access to evidence of fraud and market manipulation, which is expected to increase the success of enforcement actions for the benefit of customers, market participants and the markets."

Gensler added that the enhanced recordkeeping requirements will also protect customers from abusive sales practices, lower the risk of transactional disputes and allow registrants to follow up on customer complaints more effectively.

As proposed, the rule included oral communications that lead to the execution of a transaction in a commodity interest or a cash commodity. The commission received many comments regarding the effect of this requirement on members of the agricultural community. CFTC is adopting the proposal, with modifications, to preserve its purpose without adversely affecting the agricultural community, Gensler said.

The proposed rule caused concern in the countryside that any individuals or entities that purchase grain in the cash market would have to record their oral communications. CFTC said this generally will not be the case.

Randy Gordon, president of the National Grain & Feed Assn., said the organization's Risk Management Committee is reserving judgment until the final rule is published.

However, he acknowledged that important improvements were made, and "we're optimistic that most onerous elements of this rule have been corrected and that elevators and feed manufacturers entering into forward cash contracts will not be adversely affected."

Under the final rule, only those oral communications that lead to a transaction in a commodity interest will have to be recorded, and oral communications are required only from certain market participants that are registered or required to be registered with CFTC. A commodity interest generally is a contract for commodity futures or options, a retail foreign exchange transaction or a swap. A commodity interest does not include a cash commodity transaction.

As proposed, the rule would have required all members of a designated contract market (DCM) or swap execution facility (SEF) to record oral communications, regardless of their registration status or role in the market.

"The final rule will impact a lesser number of market participants than was proposed," CFTC noted.

The final rule amends regulation 1.35(a) to require futures commission merchants (FCMs), certain introducing brokers with aggregate gross revenue exceeding $5 million over the preceding three years, retail foreign exchange dealers and certain members of DCMs or SEFs to record all oral communications. These market participants will be required to record quotes, solicitations, bids, offers, instructions, trading and prices that lead to the execution of a transaction in a commodity interest.

The rule-making also clarifies that the existing requirement under regulation 1.35(a) to keep written records applies to electronic written communications such as emails and instant messages. Records of oral communications must be kept for one year.

The rule allows CFTC to preserve critical evidence in enforcement investigations that will help protect customers.

CFTC voted 5-0 via seriatim to approve the final rule, which will become effective 60 days after publication in the Federal Register. Covered entities will have until 365 days after publication of the final rule to comply with the oral communications recordkeeping requirement.

Volume:84 Issue:53

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