On May 23, 2017, the Commodity Futures Trading Commission (CFTC) unanimously approved proposed amendments to the recordkeeping obligations set forth in CFTC Regulation 1.31 (Recordkeeping Rule) which is applicable to all CFTC registered entities and other persons required to maintain records under the Commodity Exchange Act (CEA). The final amendments are intended to modernize the Recordkeeping Rule by making the form and manner in which regulatory records must be kept technology-neutral. The amendments provide recordkeepers with greater flexibility regarding the retention and production of CFTC regulatory records. The CFTC indicated that it does not believe the amendments impose any new recordkeeping requirements on any recordkeeper, and existing recordkeeping methods remain valid for compliance with the amended Recordkeeping Rule should a recordkeeper choose not to take advantage of the less-prescriptive, principles based approach of the amended Recordkeeping Rule. The final amendments also reorganized the Recordkeeping Rule for ease of understanding, including by adopting new definitions. The amendments represent a long-awaited and generally positive modernization of important CFTC rules that have often frustrated market participants. The effective date for the amended Recordkeeping Rule is August 28, 2017.
Other than amendments to incorporate swaps, the Recordkeeping Rule was last substantively amended in 1999. Unsurprisingly, the rule contained specific requirements both industry groups and the CFTC found outdated and irrelevant, given the pace of technological innovation and changes to industry best practices. Specifically, the Recordkeeping Rule required paper records to be kept in their original form and electronic records to be kept in the format in which they were first created (i.e., “native file format”) Electronic records were required to be stored exclusively in “write once, read-many” or “WORM” format — technology that was cutting edge in 1999, but has since become obsolete — and recordkeepers who use only electronic media to store records were required to hire third-party technical consultants that were capable of furnishing the CFTC with electronic records upon request. These outdated requirements often forced recordkeepers to choose between compliance with the letter of the law and the use of new technology and current best practices. Given the growth of in-house information technology departments, the requirement to hire a technology consultant was simply an unnecessary burden and expense.
Form and Manner of Record Retention
The amendments address perceived outdated and irrelevant obligations imposed by the current Recordkeeping Rule by eliminating technology-specific requirements and, instead, focus on the general integrity and availability of regulatory records. Amendments eliminate references to specific media formats and eliminate the requirements to: retain records in their “native file format”; store electronic records in WORM format; and hire the required third-party technical consultants. The amendments also are intended to “future proof” the Recordkeeping Rule by making the form and manner in which regulatory records must be retained technology neutral.
The CFTC introduced a new definition of “regulatory records” that clearly states that all prior versions of any regulatory record must be retained, no matter how modified, rather than specifying any specific storage format. To ensure the integrity of such records, the definition includes the “metadata” that identifies the manner in which a record has been altered. All regulatory records are subject to the same general standard that records be retained in a form and manner necessary to ensure their authenticity and reliability. For electronic regulatory records, the deletion of form-specific media requirements is replaced by a requirement that such records be stored in systems that “maintain security, signature, and data as necessary to ensure the authenticity of the information contained in regulatory records.” To ensure the availability of records, the rule requires that such systems ensure that records be available in the event of an emergency or other disruption and that the relevant system be capable of creating up-to-date inventories of regulatory records.
The amendments are intended to serve the same policy function as the native file format and WORM requirements by ensuring that information is preserved as it was first recorded and is not susceptible to being altered, without making the Recordkeeping Rule itself susceptible to becoming outdated due to technological changes. For example, the rule will permit market participants to utilize new technology for recordkeeping. Recordkeepers should note that that operators of whatever recordkeeping systems are developed will need to verify that their systems adequately maintain the “security, signature, and data necessary to ensure the authenticity” of the information contained therein and that they will be able to satisfy the record production requirements discussed below.
Other Aspects of the Amendments
Inspection and Production of Records. The amendments make no change in the requirement for a records entity to produce records to the Department of Justice. However, the amendments differentiate between the production of paper and electronic regulatory records. Both types of records must be produced “promptly” upon request, a relaxation of the current requirement to produce records stored on micrographic or electronic media immediately upon request. However, for non-paper records, the amendments require the CFTC to specify the form and medium in which the production must be made. If a records entity cannot promptly produce the record in the requested form and medium, the records entity may produce the record in an alternative manner sufficient for the CFTC to inspect the record. The CFTC previously stressed in the proposing release that it is not sufficient to reduce electronic records to paper or portable document format (PDF) format, because the CFTC must be able to evaluate the integrity of the electronic records via the associated metadata. The ability of a records entity to produce the original record in lieu of a copy is preserved.
Duration of Retention of Records. The amendments reduce the duration of retention for regulatory records of pre-execution trade information involving swaps and related cash and forward transactions to only five years after their creation rather than the prior standard of the life of the instrument plus five years. However, records of post-execution trade information involving swaps or related cash or forward transactions, must still be maintained for the life of the instrument plus five years. The amendments makes no substantive changes in the retention periods for the other categories of records (i.e., records of oral communications of such transactions, paper records regardless of category and all other regulatory records).
Written Representation. The amendments eliminate as outdated the current requirement to provide a written representation to the CFTC prior to using electronic storage media other than optical disks/CD-ROMs that affirms that the media satisfies the requirements of the Recordkeeping Rule.
Hard Copy Paper Records. The amendments eliminate as outdated the current requirement to keep certain paper records such as time cards and electronically filed certified forms in hard copy. This is consistent with the amendments’ general elimination of any required form and manner of retaining regulatory records.
The amended Recordkeeping Rule becomes effective August 28, 2017.