NFA comments on CFTC swap incorporation rule-making

The NFA has released a comment letter to the CFTC offering its opinion on two provisions found in the CFTC proposed rule to incorporate swaps into existing agency regulations. The Association’s comments apply to expanded record-keeping requirements found in the proposed rule.

The first comment applies to CFTC Regulation 1.35(a). As it currently stands, FCMs, RFEDs, IBs, and DCM members must keep certain records so that they can be produced for inspection. The proposed amendment to 1.35(a) expands the records to be kept to cover “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 commodity futures. This includes communications via telephone, voicemail, fax, instant message, chats, email, cell phone, or any other digital communication device.

The NFA finds two problems with this proposition. One, the Commission states that its intent is to harmonize these requirements with those placed upon swap dealers and major swap participants. However, current regulation only requires swap dealers and major swap participants to keep records made in the normal course of business. The proposal goes far beyond this requirement.

Second, the NFA points out that the CFTC has underestimated the amount this would cost affected firms. The Commission’s cost-benefit analysis only takes into account the cost of the phone system itself, and neglects to investigate the aggregate cost to the industry of keeping those recordings for five years. The NFA speculates that implementing such a rule for all 1700 FCMs, IBs, and RFEDs would be significant. Dodd-Frank rules issued by the SEC have been struck down recently for similarly inadequate cost-benefit analyses.

The second part of the letter addresses CFTC Regulation 1.31(a). The Commission is proposing to amend existing regulation to state that all records must be kept in their original state (for paper records) or in their native file format (for electronic records). The NFA asks for clarification that micrographic or electronic storage media would not need to be maintained in a separate paper original. It also questions the necessity of maintaining native file formats.

Read more about this NFA comment letter.
Creative Commons License photo credit: @boetter

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