[Federal Register Volume 77, Number 246 (Friday, December 21, 2012)]
[Rules and Regulations]
[Pages 75523-75543]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-30691]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 1

RIN 3038-AD53


Adaptation of Regulations To Incorporate Swaps--Records of 
Transactions

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rules.

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SUMMARY: The Dodd-Frank Wall Street Reform and Consumer Protection Act 
(``Dodd-Frank Act'' or ``DFA'') established a comprehensive new 
statutory framework for swaps and security-based swaps. The Dodd-Frank 
Act repeals some sections of the Commodity Exchange Act (``CEA'' or 
``Act''), amends others, and adds a number of new provisions. The DFA 
also requires the Commodity Futures Trading Commission (``CFTC'' or 
``Commission'') to promulgate a number of rules to implement the new 
framework. The Commission has proposed and finalized numerous rules to 
satisfy its obligations under the DFA. This final rulemaking makes 
certain conforming amendments to recordkeeping provisions of 
regulations 1.31 and 1.35(a) to integrate these regulations more fully 
with the new framework created by the Dodd-Frank Act.\1\ This final 
rulemaking requires futures commission merchants (``FCMs''), certain 
introducing brokers (``IBs''), retail foreign exchange dealers 
(``RFEDs'') and certain other registrants

[[Page 75524]]

that are members of designated contract markets (``DCMs'') or swap 
execution facilities (``SEFs'') to record all oral 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, whether communicated by telephone, 
voicemail, mobile device, or other digital or electronic media, and to 
keep those records for one year. This final rule also requires FCMs, 
IBs, RFEDs, and all members of a DCM or SEF to record and keep all 
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 or 
related cash or forward transactions, whether communicated by 
telephone, voicemail, facsimile, instant messaging, chat rooms, 
electronic mail, mobile device, or other digital or electronic media, 
and to keep those written records for five years.
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    \1\ All Commission regulations are in Chapter I of Title 17 of 
the CFR.

DATES: Effective date: This final rule will become effective on 
February 19, 2013. Compliance date: Each affected entity must comply 
with the oral communications recordkeeping requirement in regulation 
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1.35(a)(1) (17 CFR 1.35(a)(1)) no later than December 21, 2013.

FOR FURTHER INFORMATION CONTACT: Katherine Driscoll, Associate 
Director, 202-418-5544, kdriscoll@cftc.gov, Elizabeth Miller, Attorney-
Advisor, 202-418-5450, emiller@cftc.gov, Division of Swap Dealer and 
Intermediary Oversight; Peter A. Kals, Special Counsel, 202-418-5466, 
pkals@cftc.gov, Division of Clearing and Risk; David E. Aron, Counsel, 
202-418-6621, daron@cftc.gov, Office of General Counsel; Alexis Hall-
Bugg, Attorney-Advisor, 202-418-6711, ahallbugg@cftc.gov, Division of 
Market Oversight, Commodity Futures Trading Commission, Three Lafayette 
Centre, 1151 21st Street NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

I. Introduction

A. The Dodd-Frank Act

    On July 21, 2010, President Obama signed the Dodd-Frank Act into 
law.\2\ Title VII of the Dodd-Frank Act \3\ (``Title VII'') amended the 
CEA \4\ to establish a comprehensive new regulatory framework for swaps 
and security-based swaps. The legislation was enacted, among other 
reasons, to reduce risk, increase transparency, and promote market 
integrity within the financial system by, among other things: (1) 
Providing for the registration and comprehensive regulation of swap 
dealers (``SDs''), security-based swap dealers, major swap participants 
(``MSPs''), and major security-based swap participants; (2) imposing 
clearing and trade execution requirements on swaps and security-based 
swaps, subject to certain exceptions; (3) creating rigorous 
recordkeeping and real-time reporting regimes; and (4) enhancing the 
rulemaking and enforcement authorities of the Commission with respect 
to, among others, all registered entities and intermediaries subject to 
the Commission's oversight.
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    \2\ See Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Public Law 111-203, 124 Stat. 1376 (2010). The text of the 
Dodd-Frank Act is available at http://www.cftc.gov/LawRegulation/OTCDERIVATIVES/index.htm.
    \3\ Pursuant to section 701 of the Dodd-Frank Act, Title VII may 
be cited as the ``Wall Street Transparency and Accountability Act of 
2010.''
    \4\ 7 U.S.C. 1 et seq. (2006).
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B. Proposed Changes to Regulation 1.35(a)--Records of Transactions

    On June 7, 2011, the Commission published in the Federal Register a 
notice of proposed rulemaking (the ``Proposal'') to apply its 
regulations, regarding the activities of intermediaries and other DCM 
members to the swaps activities of those persons, in conformance with 
the Dodd-Frank Act.\5\ The Proposal provided for a 60-day public 
comment period, which ended on August 8, 2011. The Proposal proposed to 
conform the existing recordkeeping requirements of regulation 1.35(a) 
to the recordkeeping requirements for SDs and MSPs, under what was then 
proposed regulation 23.202(a)(1) and (b)(1),\6\ so that FCMs, IBs, 
RFEDs, and DCM and SEF members would be required to record all oral and 
written communications provided or received concerning quotes, 
solicitations, bids, offers, instructions, trading, and prices, that 
lead to the execution of transactions in a commodity interest \7\ or 
cash commodity, whether communicated by telephone, voicemail, 
facsimile, instant messaging, chat rooms, electronic mail, mobile 
device, or other digital or electronic media. To be consistent with 
what was then proposed regulation 23.202(a) and (b), the Proposal would 
have amended regulation 1.35(a) by requiring that each record be 
maintained in a separate electronic file identifiable by transaction 
and counterparty. On November 2, 2012, the Commission published in the 
Federal Register the Final Adaptation Rule.\8\ The Final Adaptation 
Rule promulgated the vast majority of the amendments that the Proposal 
had introduced. In the Final Adaptation Rule, the Commission stated 
that it would address in a separate release certain of the proposed 
changes to regulation 1.35 (i.e., those enumerated above) and related 
amendments to regulation 1.31.\9\
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    \5\ Adaptation of Regulations to Incorporate Swaps, 76 FR 33066 
(June 7, 2011) (``the Proposal'').
    \6\ See the Proposal, 76 FR at 33067; Reporting, Recordkeeping, 
and Daily Trading Records Requirements for Swap Dealers and Major 
Swap Participants, 76 FR 76666, 76675 (Dec. 9, 2010) (Proposed 
regulation 23.202(a)(1) would have required ``[e]ach swap dealer and 
major swap participant [to] make and keep pre-execution trade 
information, including, at a minimum, records of all oral and 
written communications provided or received concerning quotes, 
solicitations, bids, offers, instructions, trading, and prices, that 
lead to the execution of a swap, whether communicated by telephone, 
voicemail, facsimile, instant messaging, chat rooms, electronic 
mail, mobile device or other digital or electronic media'').
    \7\ The term ``commodity interest'' means: (1) any contract for 
the purchase or sale of a commodity for future delivery; (2) any 
contract, agreement or transaction subject to Commission regulation 
under section 4c or 19 of the Act; (3) any contract, agreement or 
transaction subject to Commission jurisdiction under section 2(c)(2) 
of the Act; and (4) any swap as defined in the Act, by the 
Commission, or jointly by the Commission and the Securities and 
Exchange Commission. See Adaptation of Regulations to Incorporate 
Swaps, 77 FR 66288, 66319 (Nov. 2, 2012) (``Final Adaptation Rule'') 
(to be codified at 17 CFR 1.3(yy)).
    \8\ Final Adaptation Rule, 77 FR 66288.
    \9\ See id., 77 FR at 66288, 66296 n. 59, 66297 n. 63, and 66299 
n. 72.
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    In response to the amendments to regulation 1.35(a) in the 
Proposal, the Commission received 35 comment letters from a variety of 
institutions, including DCMs, agricultural trade associations, and 
agricultural cooperatives.\10\ The Commission has

[[Page 75525]]

determined to adopt the Proposal's amendments to regulation 1.35(a), 
with certain modifications, discussed below, which address the comments 
the Commission received. In addition, as part of this final rulemaking, 
the Commission is making certain related modifications to the record 
retention periods set forth in regulation 1.31. Finally, the final 
amendments to regulations 1.31 and 1.35(a) are consistent with the 
Commission's final rules concerning recordkeeping requirements for SDs 
and MSPs (regulations 23.202(a) and (b) and 23.203(b)(2)).\11\
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    \10\ Commenters included: Agribusiness Council of Indiana; 
American Cotton Shippers Association (``ACSA''); Amcot; American 
Feed Industry Association (``AFIA''); American Gas Association; 
American Petroleum Institute; Barclays Capital (``Barclays''); Mr. 
Chris Barnard; Commodity Markets Council (``CMC''); Compliant Phones 
(``Compliant''); Electric Power Supply Association (``EPSA''); 
Electric Utility Trade Associations (National Rural Electric 
Cooperative Association, American Public Power Association, Large 
Public Power Council, and Edison Electric Institute) (``ETA''); 
Encana; Falmouth Farm Supply; The Fertilizer Institute; Futures 
Industry Association(``FIA''); Grain and Feed Association of 
Illinois; Kansas City Board of Trade (``KCBT''); CME Group 
(``CME''); Henderson & Lyman; IntercontinentalExchange, Inc. 
(``ICE''); Land O'Lakes, Inc.; Minneapolis Grain Exchange 
(``MGEX''); Minnesota Grain and Feed Association; National Grain and 
Feed Association (``NGFA''); National Introducing Brokers 
Association (``NIBA''); National Council of Farmer Cooperatives 
(``NCFC''); National Futures Association (``NFA''); Natural Gas 
Supply Association; Ohio Agribusiness Association; Oklahoma Grain 
and Feed Association; Rocky Mountain Agribusiness Association 
(``RMAA''); South Dakota Grain & Feed Association; and Working Group 
of Commercial Energy Firms (``Commercial Energy Working Group''). 
Comments are available in the comment file on www.cftc.gov. In the 
Final Adaptation Rule, the Commission addressed those comments 
unrelated to the proposed changes to regulation 1.35(a) concerning 
records of oral and written communications. See Final Adaptation 
Rule, 77 FR 66288.
    \11\  See Swap Dealer and Major Swap Participant Recordkeeping, 
Reporting, and Duties Rules; Futures Commission Merchant and 
Introducing Broker Conflicts of Interest Rules; and Chief Compliance 
Officer Rules for Swap Dealers, Major Swap Participants, and Futures 
Commission Merchants, 77 FR 20128 (Apr. 3, 2012) (``SD and MSP 
Recordkeeping Final Rule'') (adopting for SDs and MSPs reporting and 
recordkeeping standards now found in 17 CFR 23.201-23.203).
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II. Oral Communications and Other Recordkeeping Changes in the 
Proposal; Comments Received

    Under the Proposal, FCMs, IBs, RFEDs, and DCM and SEF members \12\ 
would be required to record 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 or cash commodity, whether 
communicated by telephone, voicemail, facsimile, instant messaging, 
chat rooms, electronic mail, mobile device, or other digital or 
electronic media. Comments to these proposed amendments to regulation 
1.35(a) primarily focused on: oral recordkeeping generally; the portion 
of the proposed provisions that would have required all DCM and SEF 
members, including commercial end-users and non-intermediaries, to keep 
records of their cash commodity transactions; and the proposed 
requirement that each record be maintained in a separately identifiable 
electronic file identifiable by transaction and counterparty 
(``tagging'').
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    \12\ A ``member'' is an individual, association, partnership, 
corporation, or trust--(i) owning or holding membership in, or 
admitted to membership representation on, a registered entity; or 
(ii) having trading privileges on a registered entity. See Final 
Adaptation Rule, 77 FR at 66316 (to be codified at 17 CFR 1.3(q)).
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A. Proposed Requirements To Record Oral Communications and Keep Them in 
Separate Electronic Files Identifiable by Transaction and Counterparty

1. Comments on Oral Recordkeeping Generally
    Commenters asserted that the proposed requirement for FCMs, IBs, 
RFEDs, and DCM and SEF members to record oral communications that lead 
to the execution of a commodity interest or cash commodity transaction 
was too costly, impossible to satisfy, overly broad, and/or 
unnecessary. ACSA, AFIA, Amcot, EPSA, ICE, and Land O'Lakes commented 
that these proposed amendments were broad and ambiguous.\13\ AFIA, CME, 
EPSA, MGEX, and the Commercial Energy Working Group argued that the 
phrases ``concerning quotes, solicitations, bids'' and ``lead to the 
execution of'' were vague and could encompass a great number of 
communications. Amcot asserted that the overbreadth of the proposed 
amendment would be burdensome for agricultural DCM members given that 
there are a variety of settings, including grower meetings and on-site 
visits, where a DCM member could have a discussion with an agricultural 
producer that leads to a cash commodity or commodity interest 
transaction. Land O'Lakes was unsure whether face-to-face conversations 
would have to be recorded under the proposed requirement. ICE inquired 
as to whether a general conversation about markets would be subject to 
the proposed recording requirement if a transaction occurred later in 
the day. AFIA stated that the risk of an incorrect interpretation would 
fall on local grain producers.
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    \13\ FIA made a similar argument regarding the application of 
the amendment to FCMs.
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    Regarding application of the proposed requirement to telephone 
conversations, Land O'Lakes and MGEX each argued that a DCM member 
might not know in advance of a telephone call whether that call would 
lead to a transaction. MGEX believed that this fact would require a DCM 
member to record all conversations, which they argued would be 
impossible. Land O'Lakes asserted that complying with the proposed 
requirement could involve massive amounts of recording, thereby 
deterring open communication between a DCM member and one of its 
agricultural producers. The Commercial Energy Working Group commented 
that proposed regulation 1.35(a) was too broad in that it could require 
DCM members to record communications of attorneys and other ``middle 
office'' personnel, and not just the communications of traders who are 
directly involved in executing a transaction. CMC argued that the 
Commission has substantially underestimated the considerable costs and 
limited benefits associated with the recordkeeping requirements for DCM 
and SEF members. CME does not believe firms can comply with the 
proposed oral recordkeeping requirements with respect to mobile 
telephones because, they stated, mobile telephone recording technology 
is not well developed in the United States.
    Regarding whether an oral communications recordkeeping requirement 
is necessary, NCFC stated that the proposed requirement to record oral 
communications is not necessary to achieve the Commission's stated goal 
of protecting customers from abusive sales practices. CMC asserted that 
current regulation 1.35(a)'s requirement to maintain written records of 
commodity interest and cash commodity transactions suffices to prevent 
market abuses. Amcot stated that the Commission failed to demonstrate 
the inadequacy of its existing regulations. Henderson & Lyman, NFA, and 
NIBA stated that the oral recordkeeping requirement is unnecessary 
because NFA already requires certain FCMs and IBs with a history of 
sales practice abuses to record calls made by their associated persons. 
Henderson & Lyman stated that the NFA rule and NFA's related guidance 
concerning communications are sufficient and cost-effective.
    NIBA commented that all IBs, or at the very least small IBs, should 
be exempt from the proposed amendments to regulation 1.35(a) because 
the burden on such small entities would be too great. Henderson & Lyman 
similarly commented that the proposed regulation would favor large IBs 
over small IBs. Neither NIBA nor Henderson & Lyman, however, offered a 
definition of ``small IB'' or provided any quantitative or qualitative 
thresholds. Henderson & Lyman stated that it is unnecessary to have an 
oral recording requirement for IBs because most IBs solicit customers 
electronically rather than over the telephone. Henderson & Lyman also 
stated that the focus on IBs was misplaced since misleading 
communications come from marketing firms rather than from IBs. NIBA 
further stated that the proposed amendment would be ineffective in 
compelling IBs to record their calls since those who refuse to do so 
will find a way to circumvent the regulation.
    Falmouth Farm Supply had several concerns with the proposed

[[Page 75526]]

amendment, asserting that a grain business-DCM member recording its 
telephone conversations with a farmer-supplier would amount to an 
invasion of privacy and that grain producers do not need the 
Commission's protection. CMC and ICE stated that it would be redundant 
for a DCM or SEF member to comply with proposed regulation 1.35(a) 
because the DCM or SEF member will have to engage an FCM clearing agent 
for each transaction, and the FCM would have to comply with the 
regulation.
2. Comments on the Proposed ``Tagging'' Requirement
    CME, Barclays, Henderson & Lyman, NGFA, and NIBA stated that it 
would be burdensome to comply with the proposed requirement to maintain 
records as separate electronic files identifiable by counterparty and 
transaction.\14\ FIA commented that the ``separate electronic file 
requirement'' is open-ended and, on its face, impossible to 
achieve.\15\ CME stated that potentially relevant conversations could 
span several days and that it would be difficult to link conversations 
to transactions. Therefore, CME commented, FCMs and IBs should only be 
required to record and identify conversations immediately preceding an 
order. FIA stated that a customer may decide to enter an order with an 
FCM at any time, even if that was not the original purpose of the call. 
According to FIA, this aspect of the futures business means that an FCM 
would have to record all of its telephone calls to comply with proposed 
regulation 1.35(a) and this would be difficult if not impossible. 
Moreover, FIA stated that compliance would be impossible because one 
could argue that any conversation pertains to a particular transaction. 
Like CME, Barclays stated that the tagging requirement is vague, 
potentially requiring an FCM to tag every communication that could ever 
lead to a transaction. Barclays stated that it would be particularly 
challenging to tag a telephone call when the firm is telephoned by a 
counterparty; when parties discuss a transaction that the firm did not 
originally anticipate; or when multiple transactions are discussed 
during a particular call. According to Barclays, there is no technology 
to automatically tag communications, so the firm would have to manually 
tag over 2.4 billion electronic communications it sends and receives 
every year. Barclays also stated that it is not aware of any 
commercially available technology that would allow entities to tag 
their telephone recordings by transactions and counterparty. Other 
commenters expressed similar concern regarding the reliability and 
availability of technological solutions for the proposed tagging 
requirement. The Commercial Energy Working Group stated that, in lieu 
of an accurate and commercially available software solution, manual 
identification and retrieval of oral records would require as many as 
three to five analysts and one to two additional technical support 
personnel to support transactions for a small or modest-sized end-user 
commodity business and that the total cost to a commodity business is 
likely to be in excess of $1 million annually.
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    \14\ NGFA's letter was supported by the other Grain and Feed 
Associations, the Agribusiness Associations, Land O' Lakes, and 
NCFC.
    \15\ ACSA generally supported FIA's comment letter.
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    According to Barclays, an FCM should be permitted to maintain 
records in any manner so long as it is able to respond to Commission 
inquiries in a timely and comprehensive fashion. The Commercial Energy 
Working Group commented that a firm should only have to identify 
communications as pertaining to a particular transaction if the 
Commission requests that information. Moreover, the Commercial Energy 
Working Group stated that it is unlikely that the Commission will 
request such information, so DCM members should not have a general 
obligation to tag conversations.\16\ The Commercial Energy Working 
Group urged the Commission to allow market participants to make their 
records searchable by transaction at the time the Commission requests 
the records rather than require that all records be maintained on a 
transaction-by-transaction basis in real-time.
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    \16\ API generally supported the Commercial Energy Working 
Group's comment letter.
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    MGEX sought clarification as to whether the requirement in proposed 
regulation 1.35(a) to maintain ``each transaction record in a separate 
electronic file identifiable by transaction and counterparty'' requires 
a file to be kept for each counterparty and for each transaction or 
whether it suffices to keep one transaction file that is indexed by 
counterparty and transaction. MGEX also stated that it would be 
duplicative for a firm to keep records of both written and oral 
communications if they contained substantially the same content.
3. Commenters' Suggested Revisions to the Oral Communications 
Requirement
    Commenters made suggestions about how the Commission should revise 
the Proposal to limit the burden. NGFA suggested that if the Commission 
adopts the proposed oral recordkeeping requirement, it should give FCMs 
and IBs a generous compliance timetable and flexible implementation 
options, particularly for smaller firms. CME, FIA, and MGEX asserted 
that firms should only be required ``reasonably'' to comply with oral 
recordkeeping requirements. MGEX suggested that a DCM member should 
only be required reasonably to link a conversation to an executed 
transaction. Barclays highlighted that the United Kingdom Financial 
Services Authority (``FSA'') adopted a reasonableness standard for 
compliance with its mobile telephone conversation recording 
requirement.\17\ CME stated that a reasonableness standard is necessary 
because of limited technology, particularly a lack of reliable search 
mechanisms. According to CME, one way a firm should be able to comply 
would be by having a policy prohibiting the use of mobile telephones to 
solicit or accept orders. CME commented that the Commission fails to 
provide evidence that the Proposal would be less effective with such a 
``reasonableness'' standard than without it. CME stated that only firm-
provided landline and mobile telephones should be covered by the rule 
as that would make the proposal consistent with foreign regulatory 
regimes. ETA stated that the Commission fails to justify aligning its 
recordkeeping requirements with those of other countries. CMC commented 
that the Proposal's reference to the fact that 80% of large U.K. 
financial services firms were already recording their traders' 
telephone calls prior to the FSA's enactment of its voice recordkeeping 
requirement is irrelevant to the burden that the Proposal would impose 
on agricultural enterprises who are DCM members trading for their own 
accounts and not on behalf of customers. FIA sought confirmation that 
an FCM, IB, or other DCM or SEF member can satisfy the recordkeeping 
requirements under regulation 1.35(a) by relying on record retention 
performed by a DCM or SEF.
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    \17\ In November 2011, the FSA rule requiring taping of mobile 
telephones became effective. Under the rule, a firm is required, 
``to take reasonable steps to record relevant conversations, and 
keep a copy of relevant electronic communications, made with, sent 
from or received on equipment: (1) Provided by the firm to an 
employee or contractor; or (2) the use of which by an employee or 
contractor has been sanctioned or permitted by the firm.'' See 
Financial Services Authority, Conduct of Business Sourcebook, 
Section 11.8 Recording telephone conversations and electronic 
communications (June 2012, Release 126, 11.8.2).

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[[Page 75527]]

    NFA recognized that audio recordings have been very useful to the 
Commission in enforcement proceedings and stated that only those firms 
that choose to record calls should have to maintain their recordings. 
Acknowledging that some FCMs currently record their telephone calls, 
FIA commented that, to the extent they do, recording is limited to 
dedicated order desks and only required to be stored for no more than a 
few days or weeks. FIA and MGEX asserted that the technology available 
to comply with the Proposal was ``uncertain at best'' and, therefore, 
the Proposal should be considered further in the context of available 
technology and then re-proposed in a separate release.
    EPSA suggested that a separate rulemaking should be published to 
address changes to regulation 1.35(a) to give affected parties 
reasonable notice. Amcot, Henderson & Lyman, and ICE asserted that the 
Commission has not considered existing state and federal wiretapping 
law and privacy laws in proposing these new requirements.

B. Proposed Requirement for All Members of a DCM or SEF To Record Oral 
and Written Communications Leading to the Execution of Cash Commodity 
Transactions

    Three DCMs joined various agricultural and energy sector trade 
organizations in opposing the Commission's proposed requirement to keep 
oral communications, and existing requirement to keep written 
communications, regarding cash market transactions on members of a DCM 
or SEF who are non-financial entities and commercial end-users, and who 
do not have customers.\18\ These commenters pointed out that including 
a DCM member's cash transactions would require compliance by hundreds, 
if not thousands, of agricultural and energy firms, including many who 
do not have customers and do not themselves enter into futures or 
swaps.\19\ EPSA and the Commercial Energy Working Group stated that 
many of the affected entities in the energy sector would be small 
entities that likely are unaware of the Proposal. Commenters asserted 
that the requirement amounted to unauthorized regulation of the cash 
market, which they asserted has always been carved out of the 
Commission's jurisdiction.\20\ Commenters also stated that the Dodd-
Frank Act did not intend for the Commission to subject cash commodity 
transactions to new recordkeeping requirements.\21\
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    \18\ Commenters included ACSA, the Agribusiness Associations, 
Amcot, CMC, Falmouth Farm Supply, the Grain and Feed Associations, 
Land O'Lakes, NCFC, AGA, API, EPSA, ETA, the Commercial Energy 
Working Group, ICE, KCBT, TFI, and MGEX.
    \19\ In related commentary, the Commercial Energy Working Group 
asked the Commission to clarify that the definition of ``member'' in 
the final rule covers only those people holding equity interests in 
a DCM that permit such holder to submit orders directly on the DCM's 
floor (or an electronic equivalent).
    \20\ Commenters included Agribusiness Council of Indiana; 
Agribusiness Association of Ohio; EPSA; Grain and Feed Association 
of Illinois; KCBT; Land `O Lakes; Minnesota Grain and Feed 
Association; NCFC; NGFA; Oklahoma Grain and Feed Association; RMAA; 
and the Commercial Energy Working Group.
    \21\ Commenters included Amcot; CME; EPSA; FIA; and NCFC.
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    The Grain and Feed Association of Illinois, the Oklahoma Grain and 
Feed Association, NCFC, and NGFA opposed the proposed revisions on the 
grounds that the employees of a grain elevator that is a DCM member 
would have to record calls and preserve emails with farmer producers 
from whom they buy grain for cash and, thus, hundreds of employees of 
grain storage and processing facilities would be significantly 
burdened. As a result, these commenters stated, a grain elevator that 
is a DCM member would be disadvantaged as compared to a grain elevator 
that is not a DCM member as the non-member would not be burdened by the 
compliance costs associated with proposed regulation 1.35(a). KCBT 
asserted that this creates a discriminatory regulatory structure. 
According to ICE, this outcome would deter firms from hedging 
commercial risk on a DCM or SEF, thereby defeating the Dodd-Frank Act's 
transparency objectives. NGFA and its affiliates argued that burdening 
facilities owned by companies that are DCM members with the new rules 
would create a bifurcation of the cash grain marketplace into 
facilities required to comply with new recordkeeping requirements and 
facilities owned and operated by companies who are not DCM members and, 
therefore, not required to comply. KCBT stated that their rules (and 
the rules of other DCMs) require that operators of registered delivery 
warehouses be members, further stating that the regulatory 
disincentives created by the application of proposed regulation 1.35(a) 
to all DCM member cash transactions could affect not only DCM 
expertise, but deliverable supplies and convergence. According to KCBT, 
should DCM commercial members operating delivery warehouses decide to 
withdraw from membership because of proposed regulation 1.35(a), 
deliverable supplies would be negatively impacted and there would be 
fewer deliverable supplies to foster convergence at delivery.
    Amcot stated that neither it nor its members should be subject to 
the proposed amendments because they do not transact with the public. 
Similarly, the Commercial Energy Working Group commented that end-users 
(i.e., DCM or SEF members trading for themselves) should not have to 
comply with proposed regulation 1.35(a) because they do not trade for 
customers and, therefore, pose minimal systemic risk. EPSA stated that 
regulation 1.35(a) was never intended to burden end-users.
    Several commenters objected to the Commission's regulation of 
records of cash commodity transactions. KCBT stated that it did not 
believe the Commission ever intended for regulation 1.35(a) to apply to 
cash and cash forward transactions outside of those directly relating 
to a regulated futures or swaps transaction. KCBT further stated that 
it has always interpreted regulation 1.35(a) to cover only those 
transactions for which a DCM member is acting as an agent for a 
customer. Thus, according to KCBT, the only DCM members (who were not 
otherwise FCMs or IBs) who would be required to comply would be floor 
brokers (``FBs''); DCM members who trade for themselves would not be 
covered. KCBT stated that it has also understood the ``related cash 
transactions'' referenced by regulation 1.35(a) to refer only to those 
transactions involving an exchange of a futures transaction for a 
physical commodity.
    The Commercial Energy Working Group asserted that, under the 
proposed amendments to regulation 1.35(a), many of the entities that 
transact on ICE, for example, would now be required to maintain records 
pursuant to Commission rules without consideration of whether the 
market users handle customer orders, which would be a departure from 
the past for members of contract markets that are not FCMs, IBs, or 
present on a trading floor. As a general matter, FIA argued that these 
proposed amendments to regulation 1.35(a) are not necessary to 
implement the Dodd-Frank Act and, therefore, they run counter to the 
guiding principles set out in President Obama's January 2011 Executive 
Order 13563, Improving Rulemaking and Regulatory Review.
    ACSA, CMC, FIA, Henderson & Lyman, ICE, NFA, and NIBA stated that 
the proposed amendments were inconsistent with the Commission's 
proposed recordkeeping requirements for SDs and MSPs because they would 
require FCMs, RFEDs, IBs, and members

[[Page 75528]]

of a DCM or SEF to record voice communications regardless of any other 
recordkeeping requirement that captures the same information.

C. Relationship Between Regulations 1.31 and 1.35(a)

    Amcot stated that it would be burdensome for its farmer-owned 
cotton marketing cooperative members to retain recordings of telephone 
calls for five years as the Commission proposed. CME commented that 
conversations should only be retained for six months after the 
execution of a transaction. FIA commented that the Commission failed to 
provide a justification for requiring that a swap record be maintained 
for the life of the swap plus five years. In contrast to other 
commenters, Mr. Chris Barnard asserted that all records should be kept 
indefinitely and scanned after two years, arguing that there is no 
technological or practical reason to limit the record retention period. 
Mr. Barnard specifically commented that records of voice communications 
also should be kept indefinitely. To support the asserted usefulness of 
such records, Mr. Barnard cited a 2009 IOSCO report stating that 
telephone records could benefit enforcement investigations.\22\
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    \22\ http://www.iosco.org/news/pdf/IOSCONEWS137.pdf.
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III. Final Rules

    The markets subject to the jurisdiction of the Commission have 
undergone a significant transformation over the last few decades, and 
particularly in the last few years. Technological advances have 
contributed to a tremendous growth in trading volume as well as the 
number and type of market participants, including significant numbers 
of retail customers that invest in the commodity markets through a 
variety of means. Markets are also more interconnected than ever 
before, with order flow distributed across multiple trading centers. 
These changes require the Commission to adapt, and these final rules 
are part of that adaptation.
    The overarching purpose of the Commission's final rules is to 
promote market integrity and protect customers. Requiring the recording 
and retention of oral communications will serve as a disincentive for 
covered entities to make fraudulent or misleading communications to 
their customers over the telephone and could serve as a meaningful 
deterrent against violations such as trading ahead of customer orders 
by providing a record of the time that a customer's telephone order is 
received. When the perspectives of the commenters are combined with the 
Commission's own experiences regulating the markets subject to its 
jurisdiction, a common theme emerges: The collection of and access to 
searchable records, both oral and written, are indispensable tools the 
Commission needs to ensure market integrity and protect customers. 
Currently, many of the market participants that will be subject to the 
final rules have such records by way of their business needs or other 
regulatory requirements. Some commenters have urged the Commission to 
rely on currently available information and not require more. While 
existing information aids the Commission in discharging its regulatory 
responsibility, the Commission believes current recordkeeping, 
particularly in the area of oral recordkeeping, is limited, to varying 
degrees, in availability, scope and effectiveness.
    The final rules will significantly advance the Commission's efforts 
to detect and deter abusive, disruptive, fraudulent and manipulative 
acts and practices that seriously harm market integrity and customers. 
In addition, the information that will be required as a result of this 
rulemaking will benefit the Commission in its market analysis efforts, 
such as investigating and preparing market reconstructions and 
understanding causes of unusual market activity. Further, the 
requirement that records be kept current and readily available 
facilitates the timely pursuit of potential violations, which can be 
important in seeking to freeze and recover any profits received from 
illegal activity.
    Notwithstanding the important policy and practical reasons for the 
final rules, the Commission shares many of the commenters' concerns 
regarding costs and the availability of relevant technology. Therefore, 
as discussed below, the Commission is adopting alternatives to the 
Proposal where doing so would achieve the Commission's objectives and 
the benefits of promoting market integrity and protecting customers 
albeit at lower cost. The Commission is also significantly extending 
the amount of time entities have to come into compliance with the final 
rule requiring the recording of oral communications. In so doing, the 
entities subject to this rulemaking are afforded the same amount of 
time as SDs and MSPs to come into compliance with analogous 
requirements in regulations 23.202(a)(1) and (b)(1).
    Regarding oral communications, in response to commenters' concerns 
that the scope of the new requirement was too broad, the new 
requirement to record oral communications will be limited to those oral 
communications that lead to a transaction in a commodity interest. As 
proposed, the oral communications recordkeeping requirement would have 
applied to commodity interest and cash commodity transactions. In 
response to comments asserting that the cost of implementing and 
maintaining an oral communication recording system would be overly 
burdensome for small entities and the commercial end-user, non-
intermediary members of a DCM or SEF, the Commission has determined to 
exclude from the new requirement to record oral communications: Small 
IBs\23\; the oral communications of an FB who is a member of a DCM or 
SEF that do not lead to the purchase or sale for any person other than 
the FB of any commodity for future delivery, security futures product, 
swap, or commodity option authorized under section 4c of the Act; and 
certain members of a DCM or SEF, including floor traders (``FTs''),\24\ 
commodity pool operators

[[Page 75529]]

(``CPOs''), SDs, MSPs,\25\ and members that are not registered or 
required to be registered with the Commission in any capacity. As 
proposed, the oral communications recording requirement would have 
applied to FCMs, RFEDs, all IBs and all members of a DCM or SEF. These 
exclusions are based on the Commission's experience that such entities 
are either unlikely to or prohibited from having a customer interface 
or an effect on market integrity. For example, while a Small IB takes 
customer orders, they generally do not execute those orders, meaning 
that they lack a direct market interface that could affect market 
integrity. Further, as defined herein, a Small IB is unlikely to 
generate the volume of market activity that the Commission would expect 
could affect the integrity of the markets. Conversely, where an FT 
could affect market integrity, they are prohibited from accepting 
customer funds and are therefore excluded by the limiting principle of 
customer protection.
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    \23\ Final regulation 1.35(a) excludes from the oral 
communications recordkeeping requirement any IB that has generated, 
over the preceding three years, $5 million or less in aggregate 
gross revenues from its activities as an IB (``Small IB''). All 
other IBs with aggregate gross revenue exceeding $5 million will be 
referred to as ``non-Small IBs.'' The Commission has previously 
determined this to be an appropriate definition of a small IB. In 
connection with regulation 1.71 (Conflicts of Interest Policies and 
Procedures by Futures Commission Merchants and Introducing Brokers), 
the Commission provided a separate regulatory standard for small 
IBs, based on this definition, to lessen the compliance burden 
imposed by the conflicts of interest requirements on such firms. See 
SD and MSP Recordkeeping Final Rule, 77 FR at 20148. In that rule, 
the Commission found that ``Section 4d(c) of the Act mandates the 
establishment of `appropriate informational partitions' within FCMs 
and IBs, and all such firms are bound by that statutory 
requirement,'' and. It concluded that ``the size of an IB plays a 
significant role in determining the appropriateness of such 
partitions.'' Id. at 70149. Applying this new standard for IBs to 
the instant final rulemaking, the Commission estimates that with 
respect to IBs, limiting the scope of final regulation 1.35(a) to 
IBs that are not small excludes more than 95% of IBs from the 
regulation 1.35 oral communications recordkeeping requirement 
adopted in this release. Thus, at present, the Commission expects 
that no more than approximately 75 IBs will be subject to the final 
oral recordkeeping requirements of regulation 1.35.
    \24\ The Commission notes that certain FTs, although excluded 
from the oral communications requirement in regulation 1.35(a), will 
be required to record their oral communications concerning swap 
transactions and their related cash and forward transactions, 
pursuant to regulation 23.202(a)(1) and (b)(1). Pursuant to 
regulation 23.200(i), a related cash or forward transaction means a 
purchase or sale for immediate or deferred physical shipment or 
delivery of an asset related to a swap where the swap and the 
related cash or forward transaction are used to hedge, mitigate the 
risk of, or offset one another. See SD and MSP Recordkeeping Final 
Rule, 77 FR at 20202. The recently finalized definition of SD 
(regulation 1.3(ggg)(iv)(H)) requires certain FTs who deal in swaps 
to comply with regulation 23.202, as well as certain other 
regulations in part 23, notwithstanding the fact that such FTs are 
not required to register as SDs. See 17 CFR 1.3(ggg)(iv)(H), as 
finalized by the Commission in Further Definition of ``Swap 
Dealer,'' ``Security-Based Swap Dealer,'' ``Major Swap 
Participant,'' ``Major Security-Based Swap Participant'' and 
``Eligible Contract Participant,'' 77 FR 30596 (May 23, 2012).
    \25\ As noted above, SDs and MSPs are subject to the oral 
communications recording requirement in Part 23. See SD and MSP 
Recordkeeping Final Rule, 77 FR at 20148 (to be codified at 17 CFR 
23.202(a)(1) and (b)(1)). SDs and MSPs that are also registered in a 
capacity covered by the oral communications recording requirement in 
regulation 1.35(a) would be subject to the recording requirements in 
both rules.
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    While seeking to mitigate the costs of compliance for smaller 
entities without compromising the Commission's objectives, the 
Commission is not exempting Small IBs and other excluded participants 
from the requirement to keep written records of covered information, 
for example, given or received by telephone. For example, if a Small IB 
receives a customer's order over the telephone, then the Small IB would 
not be required to record the telephone call under the new provision in 
regulation 1.35(a), but the Small IB would be required to keep a 
written record of the order under both the existing requirement in 
regulation 1.35(a) to keep and maintain records of ``all orders 
(filled, unfilled, or cancelled)'' and the new requirement in 
regulation 1.35(a) to keep records of ``instructions'' to place orders. 
Therefore, although this rulemaking's definition of Small IB will 
exclude most IBs from the requirement to record oral communications, 
the Commission believes it can continue to promote market integrity and 
protect customers because the same IBs will continue to be required to 
keep written records under regulation 1.35(a). In addition, because 
many of an IB's oral communications leading to a commodity interest 
transaction are conducted with FCMs, those oral communications would be 
recorded by the FCM.
    The Commission has also considered whether FBs should be treated 
similarly to IBs in drawing a distinction between large and small 
entities.\26\ The Commission does not believe any similar distinction 
is warranted. As Congress recognized by creating separate categories of 
registrants, FBs and IBs perform different functions. While both 
receive orders, an FB executes orders,\27\ and an IB transmits orders 
for execution.\28\ Because FBs execute orders and can direct the manner 
of the same without an intermediary, they can have a significant impact 
on the integrity of the market.\29\ When an IB solicits or receives 
order information from a customer through an oral communication, it 
then will often communicate that information either to an FCM or FB. 
Under the regulation as adopted, the FCM or FB would have to record the 
oral communication with the IB. By contrast, an FB may have covered 
communications with a customer who is not itself subject to a recording 
requirement. The need for recording oral communications with FBs has 
been independently recognized by several DCMs.\30\ DCM rules requiring 
FBs to record oral communications do not make distinctions based on an 
FB's size.
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    \26\ Regarding FBs, KCBT stated that, ``it has always understood 
1.35(a) to apply to members of DCMs * * * in order to capture and 
monitor the activities of DCM members * * * dealing with customers 
as agent for such transactions, namely registered FBs.''
    \27\ An FB generally is defined in section 1a(22)(A) of the CEA, 
7 U.S.C. 1a(22)(A), as: Any person--(--(i) who, in or surrounding 
any pit, ring, post, or other place provided by a contract market 
for the meeting of persons similarly engaged, shall purchase or sell 
for any other person--(I) any commodity for future delivery, 
security futures product, or swap; or (II) any commodity option 
authorized under section 4c of the CEA; or (ii) who is registered 
with the Commission as an FB.
    \28\ An IB generally is defined in section 1a(31)(A) of the CEA, 
7 U.S.C. 1a(31)(A), as: Any person (except an individual who elects 
to be and is registered as an associated person of a futures 
commission merchant) (i) who--(I) is engaged in soliciting or in 
accepting orders for--(aa) the purchase or sale of any commodity for 
future delivery, security futures product, or swap; (bb) any 
agreement, contract, or transaction described in section 
2(c)(2)(C)(i) or section 2(c)(2)(D)(i); (cc) any commodity option 
authorized under section 4c; or (dd) any leverage transaction 
authorized under section 19; and (II) does not accept any money, 
securities, or property (or extend credit in lieu thereof) to 
margin, guarantee, or secure any trades or contracts that result or 
may result therefrom; or (ii) who is registered with the Commission 
as an IB. See 7 U.S.C. 1a(31)(B).
    \29\ See, e.g., In re DiPlacido, [2007-2009 Transfer Binder] 
Comm. Fut. L. Rep. (CCH) ] 30,970 at 62,484 (CFTC Nov. 5, 2008), 
summary affirmance, 364 Fed. Appx. 657 (2d Cir. 2009), cert. denied, 
130 S.Ct. 1883 (2010) (records of FB's oral communications with 
customer admitted as evidence in case concerning manipulation of 
price of NYMEX electricity futures contracts).
    \30\ For instance, CME Rule 536.G, Telephone Recordings, states:
    Unless specifically exempted by the Market Regulation Department 
or designated Exchange staff, all headset communications must be 
voice recorded by the member or member firm authorized to use the 
headset and all such recordings must be maintained for a minimum of 
10 business days following the day on which the recording is made. 
Members and member firms are permitted to utilize their own 
recording devices, provided that the devices meet reasonable 
standards with respect to quality and reliability. Alternatively, 
members and member firms may utilize an Exchange administered voice 
recording system for a fee.
    CME Rulebook, Chapter 5 Trading Qualifications and Practices, 
Rule 536 Recordkeeping Requirements for Pit, Globex, and Negotiated 
Trades.
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    To address commenter concerns that the proposed rule would capture 
the oral communications of certain members of DCMs who currently are 
registered as FBs, but are solely trading for their own accounts, i.e., 
acting as FTs.,\31\ the Commission has determined to limit an FB's 
obligation to record its oral communications under regulation 1.35(a) 
to those oral communications that lead to the purchase or sale for any 
person other than the FB of any commodity for future delivery, security 
futures product, swap, or commodity option authorized under section 4c 
of the CEA. In this way, a registered FB operating as an FT (i.e., not 
handling customer orders) will be treated the same as an FT under the 
final rules.\32\
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    \31\ An FT generally is defined in section 1a(23)(A) of the CEA, 
7 U.S.C. 1a(23)(A), as: Any person--(i) who, in or surrounding any 
pit, ring, post, or other place provided by a contract market for 
the meeting of persons similarly engaged, purchases or sells solely 
for such person's own account--(I) any commodity for future 
delivery, security futures product, or swap; or (II) any commodity 
option authorized under section 4c of the CEA; or (ii) who is 
registered with the Commission as an FT.
    \32\ See 17 CFR 3.4(a).
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    In determining the applicability of the final rules to another 
group of market participants that are DCM members, commodity trading 
advisors (``CTAs''), the Commission has considered measures to again 
tailor the oral communications recordkeeping requirements for CTAs to 
mitigate the costs of compliance while achieving the twin objectives of 
promoting market integrity and protecting customers. The Commission has 
reduced the impact on CTAs by: Limiting the oral communications 
recordkeeping requirement to commodity interest transactions (i.e., not 
adopting the

[[Page 75530]]

proposal to include cash commodity transactions); reducing the record 
retention period for all records of oral communications from 5 years to 
1 year; permitting covered persons to contract with other Commission 
registrants to retain the required records (provided that the records 
retained by the contractor registrant are the same records, thus 
allowing covered persons to avoid retaining the same records as other 
Commission registrants); and removing the tagging requirement.\33\
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    \33\ The Commission considered drawing a revenues-based 
threshold for CTAs. However, given that CTAs do not have a capital 
requirement it is not possible for the Commission to readily 
determine the sizes of all registered CTAs and, therefore, the 
Commission would not be able measure the impact that such a 
threshold would have on CTAs. The Commission also considered, as an 
alternative, limiting the types of oral communications that a CTA 
must record in a similar manner to the way in which it has limited 
the types of oral communications that an FB must record to brokering 
communications. However, the Commission has determined that such a 
limitation is a not a reasonable alternative to having all CTAs who 
are members of a DCM or SEF record all oral communications that lead 
to the execution of a commodity interest transaction. Indeed, the 
limitation for FBs is appropriate for FBs, and not for other 
registration categories, given the current regulatory regime for FBs 
and FTs discussed above.
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    The Commission understands that currently available technology for 
recording oral communications may not be immediately accessible or may 
involve a material cost outlay for an affected entity. However, the 
Commission also anticipates that as the availability of this technology 
increases over time, the costs to use such technology will decline 
accordingly. Accordingly, to further conform regulation 1.35(a) with 
the final recordkeeping rule for SDs and MSPs,\34\ and in response to 
commenter request for a flexible compliance timetable, the Commission 
is adopting a [November 28, 2013] compliance date and regulation 
1.35(a)(4)(i) pursuant to which the Commission may, in its discretion, 
establish an alternative compliance schedule for the requirement to 
record oral communications under regulation 1.35(a)(1). Under new 
regulation 1.35(a)(4)(i), compliance with the requirement to record 
oral communications must be found to be technologically or economically 
impracticable for an affected entity that seeks, in good faith, to 
comply with the requirement. Pursuant to new regulation 
1.35(a)(4)(iii), the Commission delegates to the Director of the 
Division of Swap Dealer and Intermediary Oversight the authority to 
exercise the Commission's discretion under regulation 1.35(a)(4)(i). 
The purpose of new regulation 1.35(a)(4) is to facilitate the ability 
of the Commission to provide a technologically practicable compliance 
schedule for an affected entity that seeks to comply in good faith with 
the oral communications recordkeeping requirements of regulation 
1.35(a)(1). In order to obtain relief under new regulation 1.35(a)(4), 
an affected entity must submit a request to the Commission. An affected 
entity submitting a request for relief must specify the basis in fact 
supporting its claim that compliance with the oral communications 
recordkeeping requirement under regulation 1.35(a)(1) would be 
technologically or economically impracticable. Such a request may 
include a recitation of the specific costs and technical obstacles 
particular to the entity seeking relief and the efforts the entity 
intends to make in order to ensure compliance according to an 
alternative compliance schedule. Relief granted under regulation 
1.35(a)(4) shall not cause an affected entity to be out of compliance 
or deemed in violation of any recordkeeping requirements. Such requests 
for an alternative compliance schedule shall be acted upon within 30 
days from the time such a request is received. If not acted upon within 
the 30-day period, such request will be deemed approved.
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    \34\ See 17 CFR 23.206, as adopted by the Commission in SD and 
MSP Recordkeeping Final Rule.
---------------------------------------------------------------------------

    Regarding comments that the proposed amendments to regulation 
1.35(a) were inconsistent with the Commission's proposed recordkeeping 
requirements for SDs and MSPs because they would require FCMs, RFEDs, 
IBs, and members of a DCM or SEF to record voice communications 
regardless of any other recordkeeping requirement that captures the 
same information, the Commission addressed these comments in the final 
recordkeeping rules for SDs and MSPs, clarifying that, to the extent 
pre-execution trade information does not include information 
communicated by telephone, an SD or MSP is under no obligation to 
create recordings of its telephone conversations. If, however, any of 
this pre-execution trade information is communicated by telephone, the 
SD or MSP must record such communications.\35\ This clarification is 
consistent with the requirements under the revision to regulation 1.35 
requiring that all oral communications be recorded regardless of 
whether an audit trail can be established with other types of records. 
In response to commenter inquiry about whether face-to-face 
communications would have to be recorded under the final rule, the 
Commission does not intend for the final rule to require the recording 
of face-to-face conversations that do not occur over electronic, 
digital or other media.
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    \35\ See SD and MSP Recordkeeping Final Rule, 77 FR at 20130.
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2. Written Communications
    Regarding written communications, the Commission has decided to 
adopt the proposed amendment to regulation 1.35(a) to clarify that the 
existing requirement to keep written records applies to electronic 
written communications such as emails and instant messages, as 
proposed. The Commission considered comments asserting that: The 
requirement to keep ``electronic communications'' should not extend to 
members of a DCM or SEF that do not handle customer orders; regulation 
1.35(a) has never required DCM members to keep records of their 
electronic communications relating to their cash commodity 
transactions; and storing records of electronic communications would be 
overly burdensome for these members. In response, the Commission notes 
that the record retention requirements of existing regulation 1.35, as 
confirmed by the Commission's Division of Market Oversight in 2009, 
include all electronic forms of communication (emails, instant 
messages, and any other form of communication created or transmitted 
electronically).\36\ Thus, contrary to commenter assertions, the 
recordkeeping obligations of regulation 1.35 currently require that all 
DCM members keep electronic

[[Page 75531]]

communications. Therefore, the relevant portion of the proposed new 
language (now being adopted by the Commission) ``all * * * written 
communications * * * whether communicated by * * * instant messaging, 
chat rooms, electronic email, mobile device, or other digital or 
electronic media'' does not impose any new requirements on DCM members. 
Instead, the new language clarifies the existing requirement for DCM 
members to maintain electronic communications by enumerating the forms 
of communications that the Commission intends to be covered by the 
rule. In addition, as explained above, the final language relating to 
written communications is consistent with the final recordkeeping rule 
for SDs and MSPs.\37\
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    \36\ See U.S. Commodity Futures Trading Commission, Division of 
Market Oversight, Advisory for Futures Commission Merchants, 
Introducing Brokers, and Members of a Contract Market over 
Compliance with Recordkeeping Requirements, Feb. 5, 2009, (http://www.cftc.gov/ucm/groups/public/@industryoversight/documents/file/recordkeepingdmoadvisory0209.pdf) (footnotes omitted):
    The Division of Market Oversight (``Division'') has become aware 
that there is an industry misunderstanding of the record retention 
requirements of Regulations 1.35 and 1.31 as it relates to 
electronically conveyed records. The Division is issuing this 
Advisory to address any industry misunderstanding of the 
Commission's recordkeeping requirements applicable to futures 
commission merchants (``FCMs''), introducing brokers (``IBs''), and 
members of a designated contract market (``members''). With the 
increased reliance in the futures industry on electronic media and 
the use of personal electronic devices and communications technology 
to facilitate the execution of transactions for both open outcry and 
electronic trading, the Division is issuing this Advisory to correct 
any misunderstandings and to make certain that the individuals and 
entities subject to the Commission's recordkeeping requirements 
maintain all electronic forms of communications, including email, 
instant messages, and any other form of communication created or 
transmitted electronically for all trading.
    \37\ See SD and MSP Recordkeeping Final Rule, 77 FR at 20202-03 
(17 CFR 23.202(a)(1) and (b)(1)).
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    The Commission also has decided to change the proposed language in 
regulation 1.35(a) which would have required an entity to keep records 
of ``all transactions related to its business of dealing in commodity 
interests and cash commodities'' to ``all transactions related to its 
business of dealing in commodity interests \38\ and related cash and 
forward transactions.'' This is different than existing regulation 
1.35, which states ``commodity futures, retail forex transactions, 
commodity options and cash commodities (including currencies).'' \39\ 
The final rule defines ``related cash or forward transaction'' as a 
purchase or sale for immediate or deferred physical shipment or 
delivery of an asset related to a commodity interest where the 
commodity interest transaction and the related cash or forward 
transaction are used to hedge, mitigate the risk of, or offset one 
another.\40\ Because a forward is a type of cash transaction already 
covered by existing regulation 1.35, amending regulation 1.35 to apply 
to related forward transactions does not constitute an expansion of the 
scope of existing regulation 1.35.\41\
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    \38\ ``Commodity interest'' includes commodity futures, retail 
forex, commodity options, and swaps. See Final Adaptation Rule, 77 
FR at 66319 (to be codified at 17 CFR 1.3(yy)).
    \39\ 17 CFR 1.35(a). Regulation 1.35(a) has included 
transactions in ``cash commodities'' since as early as 1964:
    Each futures commission merchant and each member of a contract 
market shall keep full, complete, and systematic records, together 
with all pertinent data and memoranda, of all transactions relating 
to his business of dealing in commodity futures and cash commodities 
* * *
    17 CFR 1.35(a) (1964).
    \40\ This definition of ``related cash or forward transaction'' 
mirrors the definition of the same term as it applies to swap 
transactions for purposes of certain of an SD's or MSP's 
recordkeeping obligations under Part 23 of the Commission's 
regulations. See SD and MSP Recordkeeping Final Rule, 77 FR at 
20202.
    \41\ The Commission's glossary includes this definition of 
``forward contract'':
    A cash transaction common in many industries, including 
commodity merchandising, in which a commercial buyer and seller 
agree upon delivery of a specified quality and quantity of goods at 
a specified future date. Terms may be more ``personalized'' than is 
the case with standardized futures contracts (i.e., delivery time 
and amount are as determined between seller and buyer). A price may 
be agreed upon in advance, or there may be agreement that the price 
will be determined at the time of delivery.
    See CFTC Glossary, A Guide to the Language of the Futures 
Industry, at http://www.cftc.gov/ConsumerProtection/EducationCenter/CFTCGlossary/glossary_f.html.
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    To reflect these changes, the Commission also is changing the 
proposed revision to the title of regulation 1.35 from ``Records of 
Commodity Interest and Cash Commodity Transactions'' to ``Records of 
Commodity Interest and Related Cash or Forward Transactions.''
    In response to comments that the requirement to keep transaction 
records in separate files identifiable by transaction and counterparty 
is overbroad, overly burdensome, costly, and/or impossible to achieve, 
the Commission is modifying the Proposal to remove the requirement that 
each transaction be maintained as a separate electronic file. Instead, 
the final rule will require that such records be kept in a form and 
manner identifiable and searchable by transaction. This should be less 
burdensome than the Proposal because it will allow those required to 
comply to maintain searchable databases of the required records without 
the added cost and time needed to compile the required records into 
individual electronic files. It also is consistent with the final 
recordkeeping rule for SDs and MSPs under regulation 23.202.\42\ As the 
Commission noted in the final release for that rulemaking, regulation 
23.202 does not require the raw data to be tagged with transaction and 
counterparty identifiers so long as the recordkeeper can readily access 
and identify records pertaining to a transaction or counterparty by 
running a search of the raw data.\43\ Covered entities will be able to 
comply with this obligation by using any of a number of different 
solutions available, including commercially available products capable 
of conducting speech analytics on recordings from both landlines and 
mobile calls.
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    \42\ See SD and MSP Recordkeeping Final Rule, 77 FR at 20130.
    \43\ Id.
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    FIA requested guidance on whether an FCM, IB, or other DCM or SEF 
member can satisfy the recordkeeping requirements under regulation 
1.35(a) by relying on record retention performed by a DCM or SEF,\44\ 
and other commenters similarly requested guidance on whether a covered 
participant can rely on another Commission registrant's records to 
satisfy its recordkeeping obligations. While complying with the final 
rule is the responsibility of the covered participant and the covered 
participant will be liable for failure to comply, depending on the type 
of record and arrangements made for access, covered persons may 
reasonably rely on a DCM, SEF or other Commission registrant to 
maintain certain records on their behalf. For example, a member of a 
DCM or SEF can rely on electronic order routing or order execution 
systems of FCMs, DCMs, or SEFs to record the audit trail information it 
enters into the system in accordance with Commission requirements, if 
the covered person arranges to get access to such records in order to 
satisfy requirements under the regulation. Reliance on another person, 
however, will not relieve a covered person of responsibility for 
compliance with the regulation. Reliance on a third party is only 
appropriate where the records maintained by the third party duplicate 
the information required to be kept by the regulation. For example, if 
an FCM records its telephone calls with a covered IB, the IB need not 
separately record the same calls if the IB and FCM agree that the FCM 
will maintain the record and provide access to the IB. By contrast, if 
a covered IB receives a customer order by telephone and then calls it 
into the FCM, the covered IB must record its telephone call with the 
customer, while the FCM records the call between the IB and FCM. For 
other types of records, like instant messages and emails, it is 
unlikely that covered persons will be able to rely on recordkeeping by 
a third party because the third party recipient will not have a 
complete record of the distribution of the message by the sender.
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    \44\ FIA stated:
    We interpret the Commission's statement to mean that, to the 
extent a DCM or SEF records the relevant conversations of orders 
transmitted for execution by telephone, a Commission registrant that 
transmits such orders may rely on the DCM or SEF and is not required 
to record such conversations and maintain such records separately.
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    The Commission has considered commenter requests to adopt best 
efforts approach to compliance, and require only the recording of 
conversations on firm-provided mobile telephones, not personal devices. 
The Commission declines these requests and reiterates that any 
conversation the content of

[[Page 75532]]

which is described under the regulation must be recorded, regardless of 
whether it occurs on a firm-provided or personal phone.\45\ It would be 
contrary to the objectives of ensuring market integrity and customer 
protection to allow circumvention of the rule simply by communicating 
on a personal device lacking recording capability. To be clear, covered 
persons must ensure that covered communications do not occur on 
personal phones that lack recording capability. And while the 
Commission is not adopting any explicit safe harbors, as a matter of 
course, the Commission considers good faith compliance with policies 
and procedures reasonably designed to comply with the oral 
communications recording rule as a mitigating factor when exercising 
its discretion in enforcement actions for violation of the rule.
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    \45\ Significant technological advancements in recent years, 
particularly with respect to the cost of capturing and retaining 
copies of electronic material, including telephone communications, 
have made the prospect of establishing recordkeeping requirements 
for digital and electronic communications more economically feasible 
and systemically prudent. Evidence of these trends was examined in 
March 2008 by the FSA, which studied the issue of mandating the 
recording and retention of voice conversations and electronic 
communications. The FSA issued a Policy Statement detailing its 
findings and ultimately implemented rules relating to the recording 
and retention of such communications, including a recent 
determination that all financial service firms will be required to 
record any relevant communication by employees on their work cell 
phones. Similar rules that mandate recording of certain voice and/or 
telephone conversations have been promulgated by the Hong Kong 
Securities and Futures Commission and by the Autorit[eacute] des 
March[eacute]s Financiers in France and have been recommended by the 
International Organization of Securities Commissions (IOSCO). FSA, 
``Policy Statement: Telephone Recording: recording of voice 
conversations and electronic communications'' (March 2008).
---------------------------------------------------------------------------

    Regarding comments about the existing NFA requirement that NFA 
member firms with more than a certain percentage of disciplined 
associated persons must record all conversations that they have with 
existing and potential customers for two years, the Commission believes 
that the NFA rule has been effective at protecting the markets and the 
public. However, as discussed throughout, the Commission does not view 
its final recording requirement solely as a customer protection rule. 
The amendments adopted by this release are also a means to protect the 
integrity of the markets by aiding the Commission in detecting and 
deterring market abuse, including manipulation and false reporting.\46\
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    \46\ Recorded telephone conversations have been used in a number 
of the Commission's enforcement cases as evidence of market abuse. 
See, e.g., DiPlacido v. CFTC, 364 Fed.Appx. 657 (2d Cir. 2009); In 
re Barclays PLC, CFTC Docket No. 12-25 (June 27, 2012); CFTC v. 
Optiver US LLC, 2012 WL 1632613 (S.D.N.Y. Apr. 19, 2012).
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    The Commission disagrees with commenters who stated that compliance 
with the new recording requirement would be illegal in certain 
jurisdictions.\47\ Federal law does not prohibit a person from 
recording a telephone call where the person recording the call is a 
party to the call or one of the parties to the call has given prior 
consent to being recorded.\48\ While state laws differ regarding the 
ability to record customer telephone conversations, the difference 
exists in the type of consent required to be given before recording can 
occur. For example, some states require the consent of one party to the 
call and others require the consent of all parties to the call.\49\ 
Consent can be explicit or implied. A customer will have provided 
consent if, after being notified that the call is being recorded, he or 
she continues with the call.\50\ Therefore, a covered participant will 
in all circumstances be able to comply with this final recording rule 
without violating any other state or federal laws by informing the 
other parties to the call that the call is being recorded.\51\
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    \47\ Commenters included Henderson & Lyman; Amcot; and ICE.
    \48\ See 18 U.S.C. 2511(2)(d) (Interception and disclosure of 
wire, oral, or electronic communications prohibited) (``It shall not 
be unlawful under this chapter for a person not acting under color 
of law to intercept a wire, oral, or electronic communication where 
such person is a party to the communication or where one of the 
parties to the communication has given prior consent to such 
interception unless such communication is intercepted for the 
purpose of committing any criminal or tortious act in violation of 
the Constitution or laws of the United States or of any State.'')
    \49\ For example, under New York state law, only one of the 
parties to the conversation must consent. See NY CLS Penal Sec.  
250.00. Under California and Illinois state laws, all parties to the 
conversation must consent to the recording. See Cal. Pen. Code Sec.  
632; 720 ILCS 5/14-1.
    \50\ See, e.g., Griggs-Ryan v. Smith, 904 F.2d 112,118 (1st Cir. 
1990) (call recipient, previously warned that all incoming calls 
were being recorded, impliedly consented to interception); Kearney 
v. Salomon Smith Barney, Inc., 45 Cal.Rptr.3d 730, 749 (Cal. 2006) 
(business that adequately advises all parties to a telephone call, 
at the outset of the conversation, of its intent to record the call 
would not violate the statute prohibiting the recording of telephone 
conversations without the consent of all parties).
    \51\ Moreover, if a state law were to conflict with the 
recording requirement in regulation 1.35(a), such a law would be 
preempted by regulation 1.35(a).
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    Commenters also focused on the relationship between the proposed 
changes to regulation 1.35(a) and the existing record retention 
obligations of regulation 1.31 (Books and records; keeping and 
inspection). Under regulation 1.31, all books and records required to 
be kept under the Act or by the Commission's regulations must be kept 
for five years from the date thereof and be readily accessible during 
the first two years of the five-year period. Given the proposed 
amendment to regulation 1.35(a) to include a requirement to record all 
oral communications leading to the execution of a commodity interest or 
cash commodity transaction and that all such recordings be retained 
pursuant to regulation 1.31, records of oral communications kept 
pursuant to proposed regulation 1.35(a) would have had to be kept for 
five years.\52\ Concerning the relationship between regulations 1.31 
and 1.35(a), the Commission has determined to adopt a retention period 
of one year for all records of oral communications that lead to the 
execution of a transaction in a commodity interest. This modification 
responds to comments stating that the proposed retention period of five 
years for records of oral communications was too long. This also is 
consistent with the final provision for SD and MSP oral communications 
under new regulation 23.203(b)(2).\53\ In addition, the Commission 
believes that the one-year retention period for records of oral 
communications will enable it to adequately execute its enforcement 
responsibilities under the Act and these regulations, while minimizing 
the storage costs imposed on affected entities.
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    \52\ See 17 CFR 1.31
    \53\ See SD and MSP Recordkeeping Final Rule, 77 FR at 20204 
(Apr. 3, 2012) (``Provided, however, that records of oral 
communications communicated by telephone, voicemail, mobile device, 
or other digital or electronic media pursuant to Sec.  23.202(a)(1) 
and (b)(1) shall be kept for a period of one year.'').
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    In specific response to Amcot's concern that the five-year 
retention period for oral communications would have been too burdensome 
to its farming cooperative members, the Commission notes that, due to 
the adopted revisions to regulation 1.35(a), discussed above, the 
requirement to record oral communications likely will not apply to a 
significant portion, if any, of Amcot's members.\54\ With respect to 
Encana's request for clarification concerning the applicability of 
regulation 1.31 to

[[Page 75533]]

commercial end-users, regulation 1.31 applies to all records required 
to be kept by the Act or the Commission's regulations, such as records 
required to be kept under regulations 1.35, 18.05 and 23.202. 
Therefore, Encana's request is better addressed in particular response 
to those other recordkeeping requirements than in a discussion of how 
those records should be kept. In response to CME's comment that 
although the Commission suggests that the retention period for swaps 
applies only to SDs and MSPs, as addressed in proposed regulation 
23.203(b), the proposed amendment to regulation 1.31 is ambiguous in 
that it could be read to apply to all entities, the Commission 
clarifies that the final provision in regulation 1.31 regarding the 
retention period for records of swap transactions is triggered by the 
type of record and not the entity that is required to keep the record. 
Therefore, although regulation 23.203(b) only applies to SDs and MSPs 
with regard to their swap transactions, the final corresponding 
provision in regulation 1.31 applies to anyone who is required by the 
Act or by Commission regulations to keep records of swap or related 
cash or forward transactions.
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    \54\ The obligation to record oral communications under final 
regulation 1.35(a)(1) will not apply to (i) oral communications that 
lead solely to the execution of a related cash or forward 
transaction; (ii) oral communications by an FB that do not lead to 
the purchase or sale for any other person of any commodity for 
future delivery, security futures product, swap, or commodity option 
authorized under section 4c of the Commodity Exchange Act; (iii) an 
IB that has generated over the preceding three years $5 million or 
less in aggregate gross revenues from its activities as an IB; (iv) 
an FT; (v) a CPO; (vi) an SD; (vii) an MSP; or (viii) a DCM or SEF 
member that is not registered or required to be registered with the 
Commission in any capacity.
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IV. Administrative Compliance

A. Paperwork Reduction Act

    Regulation 1.35(a) is being amended to provide that certain 
Commission registrants be required to record and keep records of their 
oral communications that lead to the execution of a commodity interest 
transaction and their written communications that lead to the execution 
of a commodity interest or related cash or forward transaction, similar 
to the requirement that SDs and MSPs keep records of their oral and 
written communications that lead to the execution of swaps and related 
cash or forward transactions. Only the oral communications 
recordkeeping amendments impose new information recordkeeping 
requirements. These new requirements constitute a collection of 
information within the meaning of the Paperwork Reduction Act of 1995 
(``PRA'').\55\ Under the PRA, an agency may not conduct or sponsor, and 
a person is not required to respond to, a collection of information 
unless it has been approved by the Office of Management and Budget 
(``OMB'') and displays a currently valid control number.\56\ This 
rulemaking contains new collections of information, which amend the 
existing collection of information set forth in the ``Adaptation of 
Regulations to Incorporate Swaps'' final rule,\57\ OMB Control Number 
3038-0090, to add a new oral communication recordkeeping requirement 
that was not made part of the earlier Final Adaptation Rule. The 
Commission has submitted the Proposal containing the oral communication 
recordkeeping requirements that have been separately addressed in this 
release,\58\ this final rule release, and supporting documentation to 
OMB for review in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. 
Responses to these information collections will be mandatory.
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    \55\ 44 U.S.C. 3501 et seq.
    \56\ Id.
    \57\ On November 2, 2012, the Commission published in the 
Federal Register the Final Adaptation Rule. The Final Adaptation 
Rule promulgated the vast majority of the amendments that the 
Proposal had introduced. However, in the Final Adaptation Rule, the 
Commission stated that it would address in a separate release 
certain of the proposed changes to regulation 1.35 (i.e., the oral 
communication recordkeeping requirements).
    \58\ See 76 FR 33066, June 7, 2011.
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    With respect to all of the Commission's collections, the Commission 
will protect proprietary information according to the Freedom of 
Information Act and 17 CFR part 145, ``Commission Records and 
Information.'' In addition, section 8(a)(1) of the Act strictly 
prohibits the Commission, unless specifically authorized by the Act, 
from making public ``data and information that would separately 
disclose the business transactions or market positions of any person 
and trade secrets or names of customers.'' The Commission also is 
required to protect certain information contained in a government 
system of records according to the Privacy Act of 1974, 5 U.S.C. 552a.
1. Information To Be Provided by Reporting Entities/Persons
a. Amendments to Regulation 1.35 (Records of Commodity Interest and 
Related Cash or Forward Transactions)
i. Obligation To Develop and Maintain Recordkeeping Policies and 
Controls
    The final amendments to regulation 1.35(a) that require 
recordkeeping related to oral communications will require that each 
FCM, non-Small IB, RFED, and DCM or SEF member that is registered or 
required to be registered with the Commission in any capacity, except 
if registered as an FT, CPO, SD, or MSP, retain all oral communications 
provided or received concerning quotes, solicitations, bids, offers, 
instructions, trading, and prices, that lead to the execution of a 
commodity interest transaction, whether communicated by telephone, 
voicemail, facsimile, instant messaging, chat rooms, electronic mail, 
mobile device or other digital or electronic media. The final 
amendments to regulation 1.35(a) will also apply to FBs who are members 
of a DCM or SEF. However, FBs will only be required to record oral 
communications that lead to the purchase or sale for any person other 
than the FB of any commodity for future delivery, security futures 
product, swap, or commodity option authorized under section 4c of the 
Act.
    In the Proposal, the Commission anticipated that the aforementioned 
registrants may incur certain one-time start-up costs in connection 
with establishing a system to record oral communications. The 
Commission estimated that the cost of procuring systems to record these 
oral communications would be $55,000 for an average large entity that 
does not already have such systems in place, and estimated procurement 
costs of $10,000 for each small firm that does not already have such 
systems in place. Following publication of the Proposal, the Commission 
researched these costs further. As discussed below in the Cost-Benefit 
Considerations, the Commission now estimates that the cost for 
establishing a system to record oral communications on mobile phones 
using a cloud-based solution would be $90 per phone line and that the 
cost for establishing a system to record oral communications on a 
landline using a cloud-based solution would be $50 per phone line. The 
Commission estimates further that a small entity required to comply 
will have 10 phone lines and that a large entity required to comply 
will have 1,000 phone lines. Thus, to figure out the initial cost of 
establishing a system for recording oral communications, an entity will 
have to multiply the number of phone lines by the cost per line ($50 
per landline and $90 per mobile phone). The Commission estimates each 
entity to have 50% landlines and 50% mobile phone lines. Therefore, the 
initial cost for a small firm (10 phone lines) to establish a system 
for recording oral communications would be (5 x $50) + (5 x $90) or 
$700, and the initial cost for a large firm (1,000 phone lines) would 
be (500 x $50) + (500 x $90) or $70,000. For purposes of the PRA, the 
Commission has chosen to use an average initial cost of $35,000.
    Also in the Proposal, the Commission estimated the burden hours 
associated with these start-up costs to be 135 hours for any entity 
that does not already have a system in place. According to research 
referenced in the previous paragraph, the Commission now estimates that 
an entity will not have to spend any time

[[Page 75534]]

setting up a cloud-based solution for recording oral communications on 
a mobile phone or landline because the entity will merely have to 
contract for services from an outside vendor. However, an entity will 
spend an estimated range of 1 to 10 hours arranging the services of an 
outside vendor. If the entity chooses to negotiate the vendor's 
contract, the burden hours will be towards the higher end of the range.
    The Commission also estimated in the Proposal that one employee 
from each affected entity would have to devote one hour per trading day 
to ensure the operation of the system to record oral communications. 
Pursuant to the research referred to above, the Commission estimates 
that employees of those entities who will be required to record oral 
communications will not have to spend any time each day to ensure the 
operation of the system because the Commission expects that outside 
vendors would maintain the system.
ii. Comments Received
    As indicated earlier in this rule, in the Final Adaptation Rule, 
the Commission stated that it would address in a separate release 
certain of the proposed changes to regulation 1.35 and related 
amendments to regulation 1.31.\59\ In response to the amendments to 
regulation 1.35(a) in the Proposal, the Commission received 35 comment 
letters from a variety of institutions, including DCMs, agricultural 
trade associations, and agricultural cooperatives.\60\ The Commission 
has determined to adopt the Proposal's amendments to regulation 
1.35(a), with certain modifications, discussed above, in order to 
address the comments the Commission received. In addition, as part of 
this final rulemaking, the Commission is making certain related 
modifications to the record retention periods set forth in regulation 
1.31. The final rules provide for a retention period of one year for 
all records of oral communications that lead to the execution of a 
transaction in a commodity interest. This modification responds to 
comments stating that the proposed retention period of five years for 
records of oral communications was too long. This also is consistent 
with the final provision for SD and MSP oral communications under new 
regulation 23.203(b)(2).\61\ Moreover, in light of comments stating, 
among other things, that it would be overly burdensome for Small IBs 
and DCM members that do not have customers to comply with the oral 
communications recordkeeping requirement, the Commission decided to 
exclude these market participants from the oral recordkeeping 
amendments to regulation 1.35(a).
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    \59\ See supra section I.B.
    \60\ Comments are available in the comment file on www.cftc.gov.
    \61\ See SD and MSP Recordkeeping Final Rule, 77 FR at 20204 
(``Provided, however, that records of oral communications 
communicated by telephone, voicemail, mobile device, or other 
digital or electronic media pursuant to Sec.  23.202(a)(1) and 
(b)(1) shall be kept for a period of one year.'').
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B. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') requires that agencies 
consider whether the rules they propose will have a significant 
economic impact on a substantial number of small entities \62\ and, if 
so, provide a regulatory flexibility analysis respecting the 
impact.\63\ The Commission is adopting a substantive rule change to 
regulation 1.35(a). This substantive change would affect FCMs, certain 
IBs,\64\ RFEDs, and any member of a DCM or SEF who is registered or 
required to be registered with the Commission in any capacity other 
than as an FT, CPO, SD, or MSP by requiring them to keep records of all 
oral communications leading to the execution of a commodity interest 
transaction.
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    \62\ The Small Business Administration (SBA) identifies (by 
North American Industry Classification System codes) a small 
business size standard of $7 million or less in annual receipts for 
Subsector 523--Securities, Commodity Contracts, and Other Financial 
Investments and Related Activities. 13 CFR Ch. 1, Sec.  121.201.
    \63\ 5 U.S.C. 601 et seq.
    \64\ See note 2323, supra, for discussion of definition of Small 
IB.
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1. FCMs and RFEDs
    The Commission has previously determined that registered FCMs and 
RFEDs are not small entities for purposes of the RFA.\65\ Accordingly, 
the Chairman, on behalf of the Commission, hereby certifies pursuant to 
5 U.S.C. 605(b) that the final rules will not have a significant 
economic impact on a substantial number of small entities with respect 
to these entities.
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    \65\ See Policy Statement and Establishment of Definitions of 
``Small Entities'' for Purposes of the Regulatory Flexibility Act, 
47 FR 18618, 18619 (Apr. 30, 1982) (DCMs, FCMs, and large traders) 
(``RFA Small Entities Definitions''); Opting Out of Segregation, 66 
FR 20740, 20743 (Apr. 25, 2001) (ECPs); Regulation of Off-Exchange 
Retail Foreign Exchange Transactions and Intermediaries, 75 FR 
55410, 55416 (Sept. 19, 2010) (RFEDs) (``Retail Forex Final 
Rules''); and Position Limits for Futures and Swaps; Final Rule and 
Interim Final Rule, 76 FR 71626, 71680 (Nov. 18, 2011) (SEFs).
---------------------------------------------------------------------------

2. IBs
    Regulation 1.35(a) may have a significant economic impact on IBs 
with annual receipts between $5 million and $7 million. The Commission 
provided an initial regulatory flexibility analysis in its proposed 
rulemaking for all IBs, regardless of their size, as the proposed 
rulemaking did not exclude any IBs from the application of the 
requirement to keep records of all oral communications.\66\
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    \66\ See the Proposal, 76 FR at 33079. To the extent that small 
IBs were affected by the proposed rules, the Commission conducted an 
initial regulatory flexibility analysis. These final rules exclude 
Small IBs, as defined above. The final rules have therefore 
significantly reduced the number of IBs affected by regulation 
1.35(a). However, to the extent that certain small IBs, for purposes 
of RFA, may be affected by these rules, the Commission is conducting 
a final regulatory flexibility analysis.
---------------------------------------------------------------------------

    As discussed above, this final rule will involve substantive 
changes to regulation 1.35(a), by requiring, among others, non-Small 
IBs to record all oral communications that lead to the execution of a 
commodity interest transaction. As indicated above, the Commission 
provided an initial regulatory flexibility analysis for IBs in the 
Proposal, as required by 5 U.S.C. 603, because the oral recordkeeping 
requirement under regulation 1.35(a), as proposed, may have had a 
significant economic impact on a significant number of small IBs.\67\
---------------------------------------------------------------------------

    \67\ See the Proposal, 76 FR at 33079-80.
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    The Commission has never previously determined that IBs, as a 
registrant category, are not ``small entities'' for the purposes of the 
RFA. Instead, historically, the Commission has evaluated within the 
context of a particular regulatory proposal whether all or some 
affected IBs would be considered to be small entities and, if they are 
considered small entities, the economic impact on them of the 
particular regulation. Accordingly, the Commission offers, pursuant to 
5 U.S.C. 604, the following final regulatory flexibility analysis.
a. A Statement of the Need for, and Objectives of, the Rule
    The primary objective of final regulation 1.35(a) is to increase 
market integrity by requiring IBs with greater than $5 million in total 
aggregate gross revenues over the preceding three years to keep records 
of all oral communications leading to the execution of a commodity 
interest transaction. This rule is necessary for several reasons. 
First, it will protect the integrity of the market as a whole by aiding 
the Commission in detecting and deterring market abuse, including 
manipulation and false reporting. Additionally, it will make 
enforcement investigations more efficient by preserving critical 
evidence that otherwise may be lost to memory lapses

[[Page 75535]]

and inconsistent recollections. This, in turn, is expected to increase 
the success of enforcement actions, which will benefit customers, 
regulated entities, and the markets as a whole.\68\ Moreover, it also 
will protect customers from abusive sales practices, protect 
registrants from the risks associated with transactional disputes, and 
allow registrants to follow-up more effectively on customer complaints 
of abuses by their associated persons. Finally, final regulation 
1.35(a) provides regulatory parity of futures and swaps markets because 
the requirements of final regulation 1.35(a) are consistent with 
recently finalized regulations requiring SDs and MSPs to keep records 
of all oral communications leading to the execution of a swap 
transaction or a related cash or forward transaction.\69\
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    \68\ In promulgating its own telephone recording rule, the 
Financial Services Authority issued guidance stating the following 
benefits: ``(i) Recorded communication may increase the probability 
of successful enforcement; (ii) this reduces the expected value to 
be gained from committing market abuse; and (iii) this, in 
principle, leads to increased market confidence and greater price 
efficiency.'' See Financial Services Authority, ``Policy Statement: 
Telephone Recording: Recording of voice conversations and electronic 
communications'' (Mar. 2008).
    \69\ See SD and MSP Recordkeeping Final Rule, 77 FR at 20203-04 
(to be codified at 17 CFR 23.202(a)(1) and (b)(1)).
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b. A Statement of the Significant Issues Raised by the Public Comments 
in Response to the Initial Regulatory Flexibility Analysis, a Statement 
of the Assessment of the Agency of Such Issues, and a Statement of Any 
Changes Made in the Proposed Rule as a Result of Such Comments
i. Significant Issues Raised by the Public Comments in Response to the 
Initial Regulatory Flexibility Analysis
    Comments on the proposed amendments to regulation 1.35(a) primarily 
focused on the implications of the proposed oral recordkeeping and 
tagging requirements and, in particular, on the portion of the Proposal 
requiring all DCM and SEF members, including commercial end-users and 
non-intermediaries, to keep records of their cash commodity 
transactions. One theme of the comments was that the proposed oral 
communications recordkeeping and tagging requirements were overly 
burdensome.\70\ Commenters were also concerned that the proposed 
separate electronic file requirement was open-ended, seemingly 
impossible to achieve,\71\ and overly burdensome. Commenters also 
explained that it could be difficult to link conversations occurring 
over several days,\72\ and could require the recording of all 
conversations \73\ because a call might begin unrelated to a covered 
transaction but eventually lead to a covered transaction. Commenters 
sought a reasonableness standard regarding oral recordkeeping and a 
limitation to exclude oral communications on mobile telephones and 
argued that the new oral communications recordkeeping requirement would 
be illegal in certain jurisdictions. Commenters also requested that the 
proposal to record and store oral communications should be reviewed in 
the context of available technology.
---------------------------------------------------------------------------

    \70\ See, e.g., comments from Amcot (overbreadthover breadth 
would be burdensome for agricultural DCM members) and NIBA (at the 
very least, small IBs should be exempt from the proposed amendments 
to 1.35(a) because the burden on such small entities would be too 
great).
    \71\ See comment from FIA.
    \72\ See comment from CME.
    \73\ See id.
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ii. Agency Assessment of Significant Issues Raised by the Public 
Comments in Response to the Initial Regulatory Flexibility Analysis
    The Commission carefully considered the comments, determined that a 
number of concerns and requested alternatives had merit and, as a 
result, made a number of adjustments in response. In response to 
commenters' concerns that the proposed amendments were overly 
burdensome to non-intermediaries' cash agricultural and energy 
transactions, the Commission has limited not only the oral 
recordkeeping requirements of regulation 1.35(a) to commodity interest 
transactions, but also the existing written recordkeeping requirements 
therein to commodity interest and related cash and forward 
transactions.
    Some commenters expressed concerns that the proposed revisions to 
regulation 1.35(a) would be unduly burdensome for small entities and 
DCM and SEF members who are commercial end-users and non-
intermediaries. In response, the Commission has excluded Small IBs 
(those IBs with less than $5 million in total aggregate gross revenues 
over the preceding three years) from the application of the rules and 
certain DCM and SEF members from the scope of the new requirement to 
record oral communications, namely FTs, CPOs, SDs, and MSPs that would 
have been obligated to comply by virtue of their status as a DCM or SEF 
member.
    Commenters also expressed the view that the requirement to keep 
transaction records in separate files identifiable by transaction and 
counterparty is overbroad, overly burdensome, costly, and/or impossible 
to achieve. In response, the Commission has removed the requirement 
that each transaction be maintained as a separate electronic file. In 
response to a request that covered persons be able to rely on another 
Commission registrant's records to satisfy their recordkeeping 
obligations, the Commission provided for such reliance in the final 
rules, to be applicable only when the records being kept are identical.
    The Commission declined to amend the Proposal in response to 
certain comments. Although commenters sought a reasonableness standard 
regarding oral recordkeeping and a limitation to exclude oral 
communications on mobile telephones, the Commission determined to 
retain the provisions of the Proposal that any covered communication 
must be recorded, whether it occurs on a firm-provided or personal 
device.\74\
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    \74\ As discussed in more detail above, significant 
technological advancements in recent years, particularly with 
respect to the cost of capturing and retaining copies of electronic 
material, including telephone communications, have made the prospect 
of establishing recordkeeping requirements for digital and 
electronic communications more economically feasible and 
systemically prudent.
---------------------------------------------------------------------------

    The Commission also has determined not to amend the Proposal in 
response to commenters stating that compliance with the new oral 
communications recordkeeping requirement would be illegal in certain 
jurisdictions. It is not a violation of federal law to record a 
telephone call where the person recording the call is a party to the 
call or one of the parties to the call has given prior consent to being 
recorded.\75\ While state laws differ regarding the ability to record 
customer telephone conversations, the difference is in the type of 
consent to recording required. Therefore, the most a covered 
participant will have to do to comply with the final oral 
communications recording rule without violating any other state or 
federal laws is to obtain the prior consent of the other parties to the 
call to record the conversation. The Commission also notes that DCM 
rules currently require all floor personnel who wear headsets to record 
their conversations, so there is only an incremental burden to the 
entities already subject to those rules, such as FBs.
---------------------------------------------------------------------------

    \75\ See 18 U.S.C. 2511(2)(d).
---------------------------------------------------------------------------

iii. Changes Made in the Proposed Rule as a Result of Such Comments
     In response to comments, the Commission incorporated the 
following modifications to the Proposal into final regulation 1.35(a): 
Reduced the scope of the obligation to record oral

[[Page 75536]]

communications as proposed by limiting it to commodity interest 
transactions; reduced the retention period for records of oral 
communications leading to a commodity interest transaction from five 
years to one; reduced the scope of persons required to record oral 
communications from FCMs, RFEDs, IBs and all members of a DCM or SEF to 
FCMs, RFEDs, IBs with total aggregate gross revenues of at least $5 
million over the preceding three years, and any member of a DCM or SEF 
registered or required to be registered with the Commission in any 
capacity, other than FTs, CPOs, SDs, and MSPs (although SDs and MSPs 
are required to comply with regulations 23.202(a)(1) and (b)(1) which 
require recordkeeping of certain oral communications, among other 
requirements); eliminated the tagging requirement; and allowed for 
covered persons to rely on the records of another Commission 
registrant, where appropriate (since reliance will not be appropriate 
in all circumstances as discussed in section III above) in complying 
with their recording obligations, while confirming that the covered 
person will be liable for any violation of the regulation.
iv. Response to ETA Comment Letter
    Among other things, the Proposal stated that, except for the 
proposed revision to regulation 1.35(a) requiring IBs to maintain 
records of voice communications, the Proposal would not have a 
significant economic effect on a substantial number of small entities. 
The Proposal included a Regulatory Flexibility Analysis with respect to 
the proposed requirement that IBs maintain such records. That analysis 
concluded with the determination to treat equally all Commission 
registrants transacting on behalf of customers with respect to keeping 
records of oral communications.
    The ETA commented that the Proposal failed to reflect that the vast 
majority of the ETA's constituents, electrical utilities that the ETA 
believes would be affected by the Proposal, are ``small entities'' and, 
therefore, that an analysis under the RFA was required. The ETA's 
comment letter did not specify which proposed provisions in the instant 
rulemaking would affect its members or into which affected entity 
category or categories its members could fall. Notably, the RFA does 
not obligate the Commission to analyze the indirect effects on persons 
not subject to the rule itself. As the Commission understands, those 
electrical utilities that may be small entities will not be FCMs, 
RFEDs, IBs with annual receipts of over $5 million, or members of a DCM 
or SEF transacting business with customers. Rather, they most likely 
will be end-users of the transactions conducted, the recorded rather 
than the recorders. As such, there will be no direct, significant 
economic impact on these electric utilities. Rather, the impact will be 
imposed on the entities through which they may effect transactions.
c. A Description of and an Estimate of the Number of Small Entities to 
Which the Rule Will Apply or an Explanation of Why No Such Estimate Is 
Available
    An IB generally \76\ is defined in CEA section 1a(31)(A) as 
follows:
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    \76\ CEA section 1a(31)(B), 7 U.S.C. 1a(31)(B), grants the 
Commission the authority to further define the term IB.

    Any person (except an individual who elects to be and is 
registered as an associated person of a futures commission 
merchant)--
    (i) Who--
    (I) Is engaged in soliciting or in accepting orders for--
    (aa) The purchase or sale of any commodity for future delivery, 
security futures product, or swap;
    (bb) Any agreement, contract, or transaction described in 
section 2(c)(2)(C)(i) or section 2(c)(2)(D)(i);
    (cc) Any commodity option authorized under section 4c; or
    (dd) Any leverage transaction authorized under section 19; and
    (II) Does not accept any money, securities, or property (or 
extend credit in lieu thereof) to margin, guarantee, or secure any 
trades or contracts that result or may result therefrom; or
    (ii) Who is registered with the Commission as an introducing 
broker.\77\
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    \77\ 7 U.S.C. 1a(31)(A).

    As the Commission stated in the initial Regulatory Flexibility 
Analysis, there are an estimated 1,500 IBs registered with the 
Commission at any given time. As of June 30, 2012, there were 1,431 
registered IBs.\78\ The Commission stated in the Proposal's Regulatory 
Flexibility Analysis that a large percentage of registered IBs are 
``guaranteed'' IBs,\79\ many of which may be small entities.\80\ 
However, the Commission estimates that limiting, with respect to IBs, 
the scope of final regulation 1.35(a) to non-Small IBs excludes more 
than 95% of registered IBs from regulation 1.35's oral communications 
recordkeeping requirement. Thus, the Commission expects that no more 
than approximately 75 registered IBs will be subject to the final oral 
recordkeeping requirements of regulation 1.35(a) at any one time.
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    \78\ Source: NFA.
    \79\ A guaranteed IB (``GIB'') is an IB that ``does not have to 
maintain a partic[ul]ar level of net capital but, instead, is 
guaranteed by a particular FCM/RFED and is generally required to 
introduce all its business to that FCM/RFED.'' Independent IBs 
``must maintain adjusted net capital of at least $45,000 but may 
introduce business to any registered FCM/RFED.'' NFA, What is the 
difference between an independent IB and a guaranteed IB?, available 
at http://www.nfa.futures.org/nfa-faqs/registration_faqs/requirements-for-FCM-IB-applicants/what-is-difference-between-IIB-and-GIB.html last visited Sept. 28, 2012.
    \80\ According to the NFA, as of June 30, 2012, there were 832 
registered GIBs.
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d. A Description of the Projected Reporting, Recordkeeping, and Other 
Compliance Requirements of the Rule, Including an Estimate of the 
Classes of Small Entities Which Will Be Subject to the Requirement and 
the Type of Professional Skills Necessary for Preparation of the Report 
or Record
    Regulation 1.35(a), as amended, will require, among others, non-
Small IBs to record all oral communications that lead to the execution 
of a commodity interest transaction.\81\ The regulation is primarily a 
recordkeeping requirement, which will obligate covered IBs that do not 
already do so to record their oral communications \82\ or the oral 
communications of their traders and sales forces. The final rules 
provide for a retention period of one year for all records of oral 
communications that lead to the execution of a transaction in a 
commodity interest. This modification responds to comments stating that 
the proposed retention period of five years for records of oral 
communications was too long. This also is consistent with the final 
provision for SD and MSP oral communications under new regulation 
23.203(b)(2).
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    \81\ The Proposal had required recording of oral communications 
that lead to the execution of a commodity interest and cash 
commodity transaction. See the Proposal, 77 FR at 33091.
    \82\ Covered market participants will be allowed to arrange with 
third parties, including DCMs, SEFs, and FCMs, to have access to the 
DCMs', SEFs', or other Commission registrants' records and, to the 
extent the records are duplicative of what would be required ofby 
the covered entity under the rule, may rely on such records to 
satisfy their own recordkeeping obligations. The Commission 
notesNote, however, that this does not relieve the covered 
participant from liability for compliance failures.

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[[Page 75537]]

e. A Description of the Steps the Agency Has Taken To Minimize the 
Significant Economic Impact on Small Entities Consistent With the 
Stated Objectives of Applicable Statutes, Including a Statement of the 
Factual, Policy, and Legal Reasons for Selecting the Alternative 
Adopted in the Final Rule and Why Each One of the Other Significant 
Alternatives to the Rule Considered by the Agency Which Affect the 
Impact on Small Entities Was Rejected
    In connection with adopting the final rules, the Commission 
considered, as alternatives, establishing different compliance or 
reporting requirements that take into account the resources available 
to smaller entities, exempting smaller entities from coverage of the 
disclosure requirements, and clarifying, consolidating, or simplifying 
disclosure for small entities. In response to comments that the 
proposed oral communications recordkeeping requirement would be overly 
burdensome for small IBs, the Commission dramatically scaled back the 
scope of regulation 1.35(a) as it applies to oral recordkeeping by IBs, 
reducing by well more than half the number of IBs expected to be 
subject to the requirement. The Commission further reduced the impact 
on IBs by limiting the oral communications recordkeeping requirement to 
commodity interest transactions from the proposed commodity interest 
and cash commodity transactions.
    Although commenters sought a reasonableness standard regarding oral 
recordkeeping and a limitation to exclude oral communications on mobile 
telephones, the Commission has retained the provisions of the Proposal 
that any covered communication must be recorded, whether it occurs on a 
firm-provided or personal device.\83\ The Commission is, however, 
ameliorating the impact thereof by stating that it will consider good 
faith compliance with policies and procedures reasonably designed to 
comply with the oral communications recording requirement as a 
mitigating factor when exercising its discretion for violations of the 
requirement.
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    \83\ As discussed in more detail above, significant 
technological advancements in recent years, particularly with 
respect to the cost of capturing and retaining copies of electronic 
material, including telephone communications, have made the prospect 
of establishing recordkeeping requirements for digital and 
electronic communications more economically feasible and 
systemically prudent.
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C. Consideration of Costs and Benefits

    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 
the following 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. The Commission considers the costs and 
benefits resulting from its discretionary determinations with respect 
to the section 15(a) factors.
1. Background
    The markets subject to the jurisdiction of the Commission have 
undergone a significant transformation over the last few decades, and 
particularly in the last few years. Technological advances have 
contributed to a tremendous growth in trading volume in swaps as well 
as other derivatives, including futures, as well as the number and type 
of market participants. Among other notable changes, today's derivative 
markets include significant numbers of retail customers that invest in 
the commodity markets through a variety of means. Markets are also more 
interconnected than ever before, with order flow distributed across 
multiple trading centers. With this interconnectivity comes not only 
positive efficiencies, but also the potential for cross-market 
manipulation that can be difficult to detect and prove without ready 
access to information evincing the intent of those engaged in market 
activity. In addition, the Commission notes that requiring the 
recording and retention of oral communications will serve as a 
disincentive for covered entities to make fraudulent or misleading 
communications to their customers over the telephone and could serve as 
a meaningful deterrent against violations such as trading ahead of 
customer orders by providing a record of the time that a customer's 
telephone order is received.
    In July 2010, Congress passed the Dodd-Frank Act which, among other 
things, establishes a comprehensive regime for the regulation of swaps. 
The Dodd-Frank Act brings swaps under the Commission's jurisdiction and 
obligates the Commission to adopt new regulations related to 
registration and regulation of SDs and MSPs, trade execution and 
clearing requirements, and swap data recordkeeping and real time 
reporting. In section 731 of the Dodd-Frank Act, Congress added CEA 
section 4s to require the registration and regulation of SDs and MSPs 
by the Commission, including the establishment of requirements for SDs 
and MSPs to keep records of swap transactions.\84\
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    \84\ 76 FR 33066.
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    In response to Congress' act of requiring that SDs and MSPs keep 
daily trading records of their swaps, including records of 
communications made by telephone,\85\ and to be consistent with the 
oral communications recordkeeping requirement for SDs and MSPs in 
connection with their swap and related cash and forward 
transactions,\86\ the Commission is exercising its discretion to amend 
its regulations to require FCMs, RFEDs, non-Small IBs (i.e., IBs that 
have generated more than $5 million in aggregate gross revenues over 
the preceding three years) \87\ and members of a DCM or SEF who are 
registered or required to register with the Commission in any capacity 
other than FTs, CPOs, SDs, and MSPs to record all oral communications 
that lead to the execution of a transaction in a commodity interest. 
FBs that are members of a DCM or SEF are required to record all oral 
communications that lead to the purchase or sale for any person other 
than the FB of any commodity for future delivery, security futures 
product, swap, or commodity option authorized under section 4c of the 
Act. In this way, the Commission is affording the other markets subject 
to its jurisdiction the same market integrity and customer protections 
that Congress afforded the swaps markets in the Dodd-Frank Act. The 
Commission recognizes that these benefits are not without cost, and has 
carefully considered both benefits and costs in light of the 
considerations provided in CEA section 15(a) and, where appropriate, 
adopted alternatives to the Proposal that would achieve similar 
benefits as proposed, but at a lower cost.
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    \85\ See 7 U.S.C. 6s(g)(1).
    \86\ See SD and MSP Recordkeeping Final Rule, 77 FR at 20203-04 
(Regulation 23.202(a)(1) and (b)(1)).
    \87\ See note 2323, supra, for discussion of definition of Small 
IB.
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2. Summary of the Final Rule
    Prior to this amendment, regulation 1.35(a) specified which parties 
are required to keep written records related to commodity futures, 
commodity options, and cash commodities, and what information they are 
required to record. The requirements of regulation 1.35(a) applied to 
FCMs, RFEDs, IBs, and DCM members.

[[Page 75538]]

    As discussed above, the Commission is adopting a provision 
requiring certain entities to record all oral communications leading to 
the execution of a transaction in a commodity interest. Unlike existing 
regulation 1.35(a), this new provision will apply to FCMs, RFEDs, non-
Small IBs, and DCM and SEF members that are registered or required to 
be registered with the Commission in any capacity other than as an FT, 
CPO, SD or MSP.
    As described above, the Commission considered adopting an exclusion 
for certain FBs similar to the exclusion for Small IBs, but determined 
to not adopt such an exclusion, in part, because FBs are parties to 
oral communications relating to the means or methods by which a trade 
will be executed. However, the Commission did determine to limit the 
application of the rule to FBs so that an FB will only be required to 
record their oral communications that lead to the purchase or sale for 
any person other than the FB of any commodity for future delivery, 
security futures product, swap, or commodity option authorized under 
section 4c of the CEA. This provision of the final rule addressed 
commenter concerns that the Proposal inappropriately captured the oral 
communications of certain members of DCMs who currently are registered 
as FBs, but are solely trading for their own accounts, i.e., acting as 
FTs. In addition, in response to comments regarding implementation 
challenges associated with oral recordkeeping requirements for SDs and 
MSPs, the Commission is extending the implementation deadline to 
provide these entities with approximately one year to comply following 
the publication of the final rule.\88\ This change provides entities 
subject to regulation 1.35(a) with the same amount of implementation 
time as was made available to SDs and MSPs.\89\ The Commission believes 
that an extended period for implementation is warranted in order to 
ensure that entities subject to this rule have adequate time to address 
the implementation challenges noted by SIFMA, as discussed below.
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    \88\ See letter from SIFMA dated August 10, 2012, Re: Request 
for No-Action Relief: Recordkeeping Requirements under the Internal 
Business Conduct Rules. Available at: [XXXX].
    \89\ See Letter from the Division of Swap Dealer and 
Intermediary Oversight of the CFTC to SIFMA, dated Oct. 29, 2012, 
CFTC Letter No. 12-29. Available at: http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/12-29.pdf.
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3. Benefits
    By this action, the Commission improves its ability to ensure the 
integrity of all the markets subject to its jurisdiction and that 
customers are similarly protected, whether they be engaged in a swap 
with an SD, or a futures transaction with an FCM.
    As stated above, the markets subject to the jurisdiction of the 
Commission have undergone a significant transformation over the last 
few decades, and particularly in the last few years. Technological 
advances have contributed to a tremendous growth in trading volume as 
well as the number and type of market participants, including 
significant numbers of retail customers that invest in the commodity 
markets through a variety of means. Markets are also more 
interconnected than ever before, with order flow distributed across 
multiple trading centers. This interconnectivity yields important 
benefits but also presents increased risk, including the potential for 
cross-market manipulation where an action in one market is purposefully 
orchestrated to yield a desired outcome in another market. Therefore, 
to ensure that the integrity of the markets and customers are similarly 
protected across all markets subject to the Commission's jurisdiction, 
the Commission must have similar access to information regardless of 
whether the market participant is registered, for example, as an SD or 
an FCM.
     As the Commission explained when adopting similar 
transactional level recordkeeping requirements for SDs and MSPs, the 
Commission believes these recordkeeping requirements will protect 
market participants and promote the integrity of the markets by 
ensuring the existence of an audit trail that includes relevant oral 
communications. A strong audit trail, among other things: Provides a 
basis for efficiently resolving transactional disputes; acts as a 
disincentive to engage in unduly risky, injurious, or illegal conduct 
in that the conduct will be traceable; and in the event such conduct 
does occur, provides a mechanism for policing such conduct, both 
internally as part of a firm's compliance efforts and externally by 
regulators enforcing applicable laws and regulations.

With respect to the latter-noted benefit--enforcing applicable laws and 
regulations--oral records have proven to be no less, and in some cases 
perhaps more, valuable than written records alone.\90\
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    \90\ See note 4646, supra.
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    By requiring records of all communications leading to a transaction 
in a commodity interest, the public benefits and the financial 
integrity of the markets is protected because additional documentation 
enhances the Commission's ability to detect and enforce rule 
violations, including manipulation and fraud. In particular, records of 
oral communications related to such transactions provide a record of 
the facts and circumstances that give rise to a violation that can be 
used in enforcement proceedings to redress the same. Effective 
enforcement of the Commission's regulations, particularly those 
prohibiting fraud and manipulation, protects market participants and 
the public and promotes the integrity of the markets subject to the 
Commission's jurisdiction.
    Notwithstanding the important, practical benefits of the final 
rules, the Commission has considered commenters' concerns regarding 
costs and product availability.
4. Costs
    The public comments related to changes to regulation 1.35(a) can be 
broken down into roughly four general categories: Concerns about the 
costs of compliance to firms,\91\ concerns about the feasibility of 
complying with the requirements of the regulation,\92\ concerns about 
market participants choosing to exit the market or of a market 
bifurcation,\93\ and privacy concerns.\94\
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    \91\ See, e.g., FIA; NFA; ICE, Inc.; Hunton and Williams, LLP; 
National Grain and Feed Association, Land O' Lakes; Minneapolis 
Grain Exchange, Inc.; CME Group; Commodity Markets Council; 
Barclay's Capital; Amcot; Grain and Feed Association of Illinois; 
Agribusiness Council of Indiana; Minnesota Grain and Feed 
Association; Agribusiness Association of Iowa; American Petroleum 
Institute; Ohio AgriBusiness Association; American Feed Industry 
Association; South Dakota Grain and Feed Association; Natural Gas 
Supply Association; Commodity Markets Council; Natural Gas Supply 
Association; the Fertilizer Institute; Kansas City Board of Trade; 
Oklahoma Grain and Feed Association; Electric Power Supply 
Association; Henderson & Lyman; Rocky Mountain Agribusiness 
Association; American Cotton Shippers Association.
    \92\ See, e.g., Land O'Lakes; Minneapolis Grain Exchange, Inc.; 
CME Group; Commodity Markets Council.
    \93\ See, e.g., National Grain and Feed Association; Grain and 
Feed Association of Illinois; Agribusiness Council of Indiana; 
Minnesota Grain and Feed Association; Agribusiness Association of 
Iowa; Ohio AgriBusiness Association; American Feed Industry 
Association; Kansas City Board of Trade.
    \94\ See, e.g., Virginia Nobbe; American Feed Industry 
Association; Henderson and Lyman.
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    Commenters cited a broad range of compliance costs associated with 
setting up and maintaining systems to record and tag oral 
communications. One commenter that is a recording technology provider 
stated that it would cost in the range of $50/month to record a 
landline phone or $90/month to record a mobile phone with minimal

[[Page 75539]]

fixed setup costs. They also stated that market participants may be 
able to negotiate more favorable rates if they are able to sign longer 
contracts, or if they have a large number of phones and/or landlines 
that need to be recorded. While other commenters did not provide per 
line estimates, they did provide aggregate cost estimates that are 
significantly higher than those cited above.\95\
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    \95\ For example, FIA cited expenditures on the part of several 
of its members of between $300,000-$600,000 to upgrade and maintain 
their landline phones in order to record conversations and estimated 
expenditures of anywhere from $160,000 to $2.5 million to record 
conversations on mobile phones depending on firm size. Further, FIA 
cited a fee of $500,000 to purchase licenses for ``word spotting'' 
software to search and retrieve these oral records. The Commercial 
Energy Working Group stated that this compliance with the amended 
regulation 1.35 could cause costs to firms to ``increase 
exponentially'' (they cited an ``unidentified investment bank'' in 
the UK that spent $4.2 million each year to monitor its Blackberry 
phones in response to a similar Financial Services Authority 
mandate).
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    The Commission has considered that the requirement to record and 
maintain records of oral communications that lead to the execution of 
commodity interest transactions will create additional costs for market 
participants subject to the requirements. Those costs include set-up 
costs to implement voice recording technology on both landlines and 
mobile phones, recurring costs (such as a monthly fee per user or per 
phone line to record), and the costs incurred by data storage. 
Commenters estimate that for participants using a so-called ``cloud-
based solution,'' the monthly fees would be approximately $90/month/
phone for mobile phones, and approximately $50/month/line for 
landlines. The setup costs, in each case, are estimated to be roughly 
one month's subscription fees or less.\96\ Commenters estimate that 
data storage costs are likely to be approximately $13/month/line.\97\
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    \96\ Compliant Phones.
    \97\ Id.
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    According to commenters, internal recording solutions (i.e., ``non-
cloud-based solutions'') typically entail more significant 
implementation costs, though those costs are likely to vary widely 
based on existing technology, and particularly on any existing 
recording capabilities, that an entity already has. The Commission does 
not have adequate data to estimate the number of entities that already 
have recording capabilities, or the extent to which such capabilities 
are deployed in parts of the organization that would be impacted by the 
oral recordkeeping requirements in regulation 1.35.
    SIFMA, in response to the final oral recordkeeping requirements for 
SDs and MSPs, noted implementation challenges related to recording 
calls made on both landlines and cell phones, recording calls outside 
the U.S., and the ability to search and retrieve records of calls, and 
requested additional time to address those challenges.\98\
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    \98\ See SD and MSP Recordkeeping Final Rule, 77 FR 20128. Based 
on SIFMA's representations, the Commission determined that relief 
from certain oral recordkeeping requirements for SDs and MSPs is 
warranted to address the issues presented, and granted no-action 
relief to SDs and MSPs until March 31, 2013.
    Among other things, SIFMA stated that implementing systems to 
record landline conversations will require upgrades to data 
retention infrastructure, testing that must occur on nights and 
weekends, and overcoming difficulties obtaining products and 
services. Further, they stated that mobile phone recording 
technology has ``not achieved the levels of stability, performance 
and scalability that would be considered for commercial grade 
products.'' They stated that shipping delays, testing and 
troubleshooting challenges due to different time zones, legal 
requirements, and ``an apparent lack of recording capabilities'' in 
certain countries and uncertainty about what transactions may be 
subject to the requirements would delay efforts to implement 
solutions in foreign offices. And last, they asserted that 
limitations related to caller identification technology and 
associated metadata would prevent SDs and MSPs from rapidly 
implementing solutions that would enable them to search and retrieve 
calls related to specific counterparties or transactions.
---------------------------------------------------------------------------

    The Commission, mindful of the fact that the entities subject to 
this rule will likely face some of the same implementation challenges, 
is providing the same amount of time for entities subject to regulation 
1.35(a) to comply as was afforded to SDs and MSPs to comply with 
regulations 23.202(a)(1) and (b)(1). In addition, 1.35(a)(4)(i) permits 
entities seeking to comply in good faith with the oral communications 
recordkeeping requirements of regulation 1.35(a)(1) to submit a request 
for relief if compliance is technologically or economically 
impracticable for an affected entity prior to the compliance deadline. 
The Commission anticipates that the additional time for implementation 
will benefit entities subject to this rule by providing more time to 
address the challenges noted by SIFMA. Moreover, it will create 
opportunities for entities that are subject to this rule to benefit 
from solutions developed by vendors serving SDs and MSPs.
    The Proposal included an additional requirement that transaction 
records be kept in separate electronic files identifiable by 
transaction and counterparty.\99\ In response to comments, the 
Commission is not adopting that requirement, such that firms are not 
required to keep records in separate electronic files. Instead, firms 
are only required to identify and retrieve relevant records upon 
Commission request. Therefore, the cost associated with ``tagging'' of 
oral communication records has been eliminated. Relevant entities, 
however, will need to be able to search and select records related to a 
particular transaction or counterparty when the Commission requests 
them. The Commission expects that this may be done in one of two ways. 
Market participants may use an electronic means of scanning records by 
key word or they may identify key words and concepts in records 
manually by listening to the recordings. In either case, participants 
must be able to identify and retrieve records if they are required to 
do so by the Commission.
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    \99\ With respect to the proposed requirement that entities 
proactively identify which communications relate to specific 
traders, trades, and counterparties and then ``tag'' them as such, 
comments expressed concerns regarding the reliability of 
technological solutions. For instance, the FIA writes, ``We 
understand that two software providers, NICE Actimize and Nexidia, 
offer so-called `word spotting' programs'' but that they believe 
that these programs ``are not foolproof and may identify less than 
50 percent of potentially relevant conversations.'' The Commercial 
Energy Working Group stated that in lieu of an accurate software 
solution, manual identification and retrieval of oral records would 
require ``as many as 3-5 analysts and 1-2 additional technical 
support personnel to support transactions'' for ``a small or modest-
sized end-user commodity business'' and that ``the total cost to a 
commodity business is likely to be in excess of $1 million 
annually.''
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    If, when recordings are requested by the Commission, an entity 
chooses to assign or hire personnel to listen to recordings and 
identify those being requested, the costs will vary significantly 
depending on the number and length of oral communications that must be 
reviewed. These variables will, in turn, be influenced by a host of 
other factors, including: the number of transactions or counterparties 
for which relevant recordings must be identified; the length of time 
across which specified traders were active or specified trades were 
likely discussed, or the specified counterparties were in contact with 
the entity from whom the recordings are requested; the number of oral 
communications that specified traders or counterparties made during the 
period that may be in question; and the average length of each call. 
The Commission estimates that in such cases, an entity might dedicate 
personnel to spend as little as 50 hours reviewing recordings, or as 
much as 5,000 hours reviewing recordings. The average wage for a 
compliance specialist is $155.96 per hour and therefore the cost for 
manual review, if an entity chooses that option when the

[[Page 75540]]

Commission requests records, could range from $7,800 to $780,000.\100\
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    \100\ The average wage for a compliance specialist is $155.96 
[($58,303 per year)/(2,000 hours per year) * 5.35 = $155.96]. For 
the purposes of the Cost Benefit Considerations section, the 
Commission has used wage estimates that are taken from the SIFMA 
``Report on Management and Professional Earnings in the Securities 
Industry 2011'' because industry participants are likely to be more 
familiar with them. Hourly costs are calculated assuming 2,000 hours 
per year and a multiplier of 5.35 to account for overhead and 
bonuses. All totals calculated on the basis of cost estimates are 
rounded to two significant digits.
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    Alternatively, the Commission is aware that vendors that provide 
recording services are also capable of providing speech analytic search 
capabilities for a set fee. For example, one vendor estimated this cost 
at $40 to $80 per user per month.\101\ According to commenters, other 
entities may choose to acquire speech analytics services that can be 
housed internally rather than on the vendor's servers. Another vendor 
stated that the costs would depend on the number of hours sent through 
the speech analytics device and that initial deployment costs would 
likely range from $160,000 to $1,500,000 for the largest organizations 
with ongoing annual fees that are approximately 18% of the initial cost 
($29,000--$270,000 per year). Alternatively, small entities can 
implement a desktop solution with the same analytics capabilities. The 
initial license costs approximately $25,000 per user and 18% ongoing 
maintenance fees ($4,500 per year per user).\102\ Another vendor 
estimated that setup costs, including relevant licenses, would range 
from $450,000 for a small entity to $4,000,000 for a large entity, and 
that annual maintenance costs would range from $80,000 to 
$800,000.\103\ These numbers assume that entities do not yet have 
speech analytics services being used in other parts of the company's 
operations that could be expanded to include the oral records required 
under this rule. However, the Commission understands that some of the 
largest financial entities may already be customers of companies that 
provide speech analytics services. As a consequence, the costs for 
those entities may be less than if they were implementing speech 
analytics services de novo.
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    \101\ See Compliant Phones communication.
    \102\ See Nexidia communication.
    \103\ See NICE communication.
---------------------------------------------------------------------------

    In response to the Proposal, some commenters expressed concern that 
the imposition of more stringent recordkeeping requirements on DCM 
members could prompt a bifurcation in the markets for certain services 
because of the compliance cost advantage that market participants who 
are not DCM members enjoy.\104\ They suggested that entities that are 
DCM members might stop offering services that make them subject to the 
regulation 1.35 requirements.\105\
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    \104\ Several commenters submitted a form letter addressing this 
point. Entities submitting this letter, with minor modifications in 
some cases, include: National Grain and Feed Association, Grain and 
Feed Association of Illinois, Agribusiness Council of Indiana, 
Minnesota Grain and Feed Association, Agribusiness Association of 
Iowa, Ohio AgriBusiness Association, South Dakota Grain and Feed 
Association, Kansas City Board of Trade, and Oklahoma Grain and Feed 
Association.
    \105\ For instance, the Kansas City Board of Trade writes that 
the operators of delivery warehouses are often required to be DCM 
members and that the added expense of compliance with regulation 
1.35 could cause firms to withdraw from the business of providing 
warehousing services, thereby decreasing market competitiveness.
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    In the Proposal, the Commission proposed to include FCMs, RFEDs, 
IBs, and all DCM and SEF members under the oral recordkeeping 
requirement and also proposed that such recordkeeping requirements 
would apply to all transactions in commodity interests and cash 
commodities. However, in the final rule, the Commission amended 
regulation 1.35(a) such that Small IBs and members of DCMs and SEFs who 
are not otherwise registered or required to be registered with the 
Commission in any capacity, as well as those members registered as FTs, 
CPOs, SDs, and MSPs, are not subject to the oral communication 
recordkeeping requirements under regulation 1.35(a). The limiting 
principle for the determination of which classes of registrants must 
comply with the final rule are, as discussed further above, 
transactions by entities that could affect both market integrity and 
customer protection.
    Finally, some commenters expressed concern that if employees of a 
regulated entity use personal phones (either landline or mobile) for 
business purposes, calls on those lines must be recorded. Commenters 
stated privacy concerns with the same. However, simple solutions to 
protect employee privacy do exist. For example, depending on the 
policies of the firm, it is possible for certain phone numbers to be 
excluded from recording.\106\ Alternatively, the company could 
institute a policy that employees are not to conduct personal business 
on recorded lines.
---------------------------------------------------------------------------

    \106\ See Compliant Phones communication.
---------------------------------------------------------------------------

    In addition, amendments in this final rule will require SEF members 
to comply with regulation 1.35, and it is likely that some of those 
members will not have been subject to regulation 1.35(a) previously. In 
addition to the costs related to oral communications recordkeeping, 
mentioned above, the Commission estimates that SEF members that are 
newly subject to regulation 1.35(a) will spend additional time each day 
compiling and maintaining transaction records. The Commission estimates 
that the cost of that additional time is $236,000 to $393,000 per 
entity per year.\107\
---------------------------------------------------------------------------

    \107\ This is estimated to take 6-10 hours per day (assuming 252 
days per year) of the time of an office services supervisor. The 
average wage for an office services supervisor is $155.96 [($58,303 
per year)/(2,000 hours per year) * 5.35 = $155.96]. $155.95*6*252 = 
235,812.31. $155.95*10*252 = 393,020.52.
---------------------------------------------------------------------------

    Also, the amendments in this final rule will require FCMs, RFEDs, 
IBs, and members of DCMs to comply with the regulation 1.35(a) 
recordkeeping requirements for any swap transactions into which they 
enter. The Commission estimates that such entities will spend an 
additional 0.5 hours per swap capturing and maintaining the records 
required under regulation 1.35(a), and therefore estimates that the 
per-swap cost will be $83.00.\108\
---------------------------------------------------------------------------

    \108\ This estimates 0.5 hours of time from an office services 
supervisor. The average salary for an office services supervisor is 
$165.25/hour [($61,776 per year)/(2,000 hours per year) * 5.35 = 
$165.25 per hour]. $165.25*0.5 = $82.63.
---------------------------------------------------------------------------

4. Consideration of Alternatives
    As compared to the Proposal, the Commission has limited the range 
of entities that are subject to the oral recordkeeping requirement, 
narrowing it to entities that could affect market integrity and 
customer protection by way of their function as intermediaries for 
other parties. The Commission also has limited the range of 
transactions that are subject to the requirement from commodity 
interest and cash commodity transactions to commodity interest 
transactions. Limiting the range of entities that must record and keep 
oral communications reduces the number of entities that must bear the 
costs of creating and maintaining records required by regulation 
1.35(a). In particular, by excluding from the new regulation 1.35(a) 
oral communications recordkeeping provisions Small IBs and DCM or SEF 
members that are registered as FTs or CPOs, or SDs or MSPs (as SDs and 
MSPs are covered by regulations 23.202(a)(1) and (b)(1)), or neither 
registered nor required to be registered with the Commission in any 
capacity, certain entities such as agricultural cooperatives, energy 
end-users and other smaller entities that may transact on DCMs and SEFs 
on their own behalf, but not on behalf of customers, avoid mandatory 
recordkeeping costs.

[[Page 75541]]

    As noted above, new regulation 1.35 will not require entities to 
keep records in separate electronic files. Instead, the amendments as 
adopted require only that subject entities be able to identify which 
records relate to specific parties or transactions when requested to do 
so by the Commission. Such requests are infrequent for any one market 
participant, and therefore the costs of complying with them will be far 
less than what would have been the case under the proposed rule.
    As described above, the Commission considered alternatives to 
compliance, including various safe harbors, but determined not to adopt 
them. For example, the Commission has considered, but declines to 
adopt, recommendations that it include a ``reasonableness'' standard 
because such a standard could result in market participants documenting 
policies and procedures but failing to vigorously monitor for 
compliance with the same. The Commission also declines to adopt this 
recommendation as inconsistent with the requirements applicable to SDs 
and MSPs under Part 23 of the Commission's regulations. Rather, the 
Commission determines that it would be more appropriate to consider 
good faith compliance with policies and procedures reasonably designed 
to comply with the oral communications recording rule as a mitigating 
factor when exercising its enforcement discretion with respect to 
violations of the rule.
5. Consideration of Section 15(a) Factors
(1) a. Protection of Market Participants and the Public
    The oral recordkeeping requirement in regulation 1.35(a) will 
protect market participants and the public by ensuring the existence of 
an audit trail that includes relevant oral communications. A strong 
audit trail, among other things, provides a basis for resolving 
transactional disputes; acts as a disincentive to engage in unduly 
risky, injurious or illegal conduct in that the conduct will be 
traceable; and in the event such conduct does occur, provides a 
mechanism for policing such conduct, both internally as part of a 
firm's compliance efforts and externally by regulators enforcing 
applicable laws and regulations.
(2) b. Efficiency, Competitiveness, and Financial Integrity of Futures 
Markets
    Requiring records of all oral communications leading to a 
transaction in a commodity interest promotes the efficiency, 
competitiveness and financial integrity of the markets by increasing 
the Commission's ability to detect and prosecute violations of the Act 
and the Commission's rules related to fraud, manipulation and other 
disruptive trade practices.
(3) c. Price Discovery
    Neither the Commission nor commenters have identified consequences 
for price discovery that are expected to result from this rule.
(4) d. Sound Risk Management Practices
    The Commission believes that proper recordkeeping--though likely to 
require initial investment in recordkeeping and other back office 
systems--is essential to risk management because it facilitates an 
entity's awareness of its transactions, positions, trading activity, 
internal operations, and any complaints made against it, among other 
things. Such awareness supports sound internal risk management policies 
and procedures ensuring that decision-makers within affected entities 
are fully informed about the entity's activities and can take steps to 
mitigate and address significant risks faced by the firm. When 
individual market participants engage in sound risk management 
practices the entire market benefits. Accordingly, the Commission 
believes that this final rule, notwithstanding the potential costs 
identified above, will promote the public interest in sound risk 
management.
(5) e. Other Public Interest Considerations
    The Commission has not identified any other public interest 
considerations that could be impacted by the oral communications 
recordkeeping rule under regulation 1.35(a).

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, under the authority of 7 
U.S.C. 1 et seq., the Commodity Futures Trading Commission hereby 
amends Chapter I of Title 17 of the Code of Federal Regulations 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, 2a, 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, as 
amended by Title VII of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376 (2010).


0
2. Amend Sec.  1.31 by revising paragraph (a)(1) to read as follows:


Sec.  1.31  Books and records; keeping and inspection.

    (a)(1) All books and records required to be kept by the Act or by 
these regulations 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; Provided, however, That records 
of any swap or related cash or forward transaction shall be kept until 
the termination, maturity, expiration, transfer, assignment, or 
novation date of the transaction and for a period of five years after 
such date. Records of oral communications kept pursuant to Sec. Sec.  
1.35(a) and 23.202(a)(1) and (b)(1) of this chapter shall be kept for a 
period of one year. All such books and records shall be open to 
inspection by any representative of the Commission, or the United 
States Department of Justice. For purposes of this section, native file 
format means an electronic file that exists in the format in which it 
was originally created.
* * * * *

0
3. Amend Sec.  1.35 by revising the section heading and paragraph (a) 
to read as follows:


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

    (a) Futures commission merchants, retail foreign exchange dealers, 
introducing brokers, and members of designated contract markets or swap 
execution facilities. (1) Each futures commission merchant, retail 
foreign exchange dealer, introducing broker, and member of a designated 
contract market or swap execution facility shall keep full, complete, 
and systematic records, which include all pertinent data and memoranda, 
of all transactions relating to its business of dealing in commodity 
interests and related cash or forward transactions. Included among such 
records shall be 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

[[Page 75542]]

interests and related cash or forward transactions. Among such records 
each member of a designated contract market or swap execution facility 
must retain and produce for inspection are 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, such documents are referred to 
as ``original source documents.'' Such records shall be kept in a form 
and manner identifiable and searchable by transaction. Also included 
among the records required to be kept by this paragraph are 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 
related cash or forward transactions, whether communicated by 
telephone, voicemail, facsimile, instant messaging, chat rooms, 
electronic mail, mobile device, or other digital or electronic media; 
provided, however, the requirement in this paragraph (a)(1) to record 
oral communications shall 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 designated contract market or swap execution 
facility that is not registered or required to be registered with the 
Commission in any capacity.
    (2) For purposes of paragraph (a)(1) 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.
    (3) 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.
    (4)(i) The Commission may in its discretion establish an 
alternative compliance schedule for the requirement to record oral 
communications under paragraph (a)(1) 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) 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)(4)(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)(4)(i) of this section.
    (iv) Relief granted under paragraph (a)(4)(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 17, 2012, by the 
Commission.
Sauntia S. Warfield,
Assistant Secretary of the Commission.

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

Appendices to Adaptation of Regulations To Incorporate Swaps--
Commission Voting Summary and Statements of Commissioners

Appendix 1--Commission Voting Summary

    On this matter, Chairman Gensler and Commissioners Sommers, 
Chilton, O'Malia and Wetjen voted in the affirmative; no 
Commissioner voted in the negative.

Appendix 2--Statement of Chairman Gary Gensler

    I support the final rule to amend 1.31 and 1.35(a) of the 
Commodity Futures Trading Commission's (CFTC) regulations to conform 
them to recordkeeping requirements for swap dealers and major swap 
participants. The rule enhances the Commission's enforcement program 
for the futures market to promote market integrity and protect 
customers.
    These conforming amendments integrate the CFTC's regulations 
with the Dodd-Frank Wall Street Reform and Consumer Protection Act 
(Dodd-Frank Act), which expanded the scope of the Commodity Exchange 
Act to include swaps.
    As proposed, the rule would have required members of a 
designated contract market (DCM) or swap execution facility (SEF) to 
record all oral communications that lead to the execution of a 
transaction in a cash commodity. The Commission received numerous 
comments about the effect of such a requirement on members of the 
agricultural community that trade in cash commodities and are not 
required to be registered with the Commission other than, in some 
cases, as floor traders.
    In consideration of comments, the Commission adopted 
modifications that preserve the rule's purpose without adversely 
affecting the agricultural community. Only those oral communications 
that lead to a transaction in a commodity interest (i.e. a commodity 
futures contract, commodity option contract, foreign exchange 
contract, or swap) will have to be recorded. Furthermore, only FCMs, 
certain introducing brokers (IBs), retail foreign exchange dealers 
(RFEDs), and those members of a DCM or SEF who are registered or 
required to be registered with the Commission (except for floor 
traders, commodity pool operators, swap dealers, major swap 
participants, and floor brokers who trade for themselves) will have 
to record oral communications.
    Market participants that must comply will be required to record 
communications relating to: Quotes, solicitations, bids, offers, 
instructions, trading, and prices that lead to the execution of a 
transaction in a commodity interest. Methods of communication that 
fall under the rule include telephone, voicemail, facsimile, instant 
messaging, electronic mail, mobile device, or other digital or 
electronic media. Thus, the rulemaking 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 will make enforcement investigations more efficient by 
preserving

[[Page 75543]]

critical evidence that otherwise may be lost to memory lapses and 
inconsistent recollections. 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 
customers, market participants and the markets. Moreover, it also 
will protect customers from abusive sales practices, lower the risk 
of transactional disputes and allow registrants to follow-up more 
effectively on customer complaints.

[FR Doc. 2012-30691 Filed 12-20-12; 8:45 am]
BILLING CODE 6351-01-P