On May 22, 2014, the CFTC staff provided no-action relief to members of swap execution facilities (“SEF”s) and designated contract markets (“DCM”s) who are not registered or required to be registered with the CFTC in any capacity (“Covered Members”) from certain recordkeeping requirements relating to text messages and to record storage format.1 According to CFTC Acting Chairman Mark Wetjen, the relief comes in an effort to promote trading on SEFs and DCMs by reducing “unworkable and costly recording requirements” on end-users.2
Acting Chairman Wetjen concurrently announced two other actions, stating that these collective actions are an effort to reduce the “negative, unintended consequences” that market regulations may have on commercial end-users. The two other actions are (i) a proposed rule amendment to adjust the de minimis threshold for determining if an entity that enters into swaps with utility special entities must register as a swap dealer,3 and (ii) a roundtable and reopening of the comment period on the proposed rules on position limits and aggregation of the position limits, specifically in relation to hedging of physical commodities by commercial market participants.4
The three CFTC actions are summarized below.
Relief From Recording Text Messages and Record Searchability Requirements
The no-action letter grants limited relief to Covered Members from certain recordkeeping requirements under Regulation 1.35(a).5 As amended, Regulation 1.35(a) requires certain entities to 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… in a form and manner identifiable and searchable by transaction, [including] 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.6
The CFTC’s relief is in response to a letter written to the CFTC by the Commodity Markets Council (“CMC”) in December 2013 (“CMC December 2013 Letter”) and public comments made during and after a roundtable in April 2014. The CMC expressed that while text messages, instant messaging and other electronic communications have replaced telephone conversations as the primary mode of communication for Covered Members, Covered Members have not found a technology solution for searching, retaining and archiving the communications in a way that is not cost-prohibitive.7 End-users additionally expressed to the CFTC that this challenge exists particularly with respect to text messages. Moreover, the Federal Home Loan Banks asserted that they are concerned about their ability to meet the searchability requirement of Regulation 1.35(a) with respect to cash or forward transactions related to, or executed in connection with, their swap transactions.8
As a result, the CFTC staff has granted limited relief to Covered Members from keeping digital or electronic written communications, specifically with respect to text messages. Covered Members will still be required to keep all other written records, including other types of electronic and digital media, such as emails and instant messages.9 Further relief is granted to Covered Members from keeping written records of all transactions relating to their business of dealing in commodity interests and related cash or forward transactions in a form and manner identifiable and searchable by transaction.
The relief is described as time-limited, and will apply until the effective date of any CFTC action in response to the CMC December 2013 Letter, which may include a rulemaking, an order, or a decision to take no further action.10
Position Limit Comment Period Extension
In a concurrent action, the CFTC staff announced that a public roundtable will be held on June 19, 2014 to consider certain issues regarding position limits for physical commodity derivatives. The CFTC is re-opening the comment period for the proposed rules on speculative position limits and related aggregation.11 The comment period on these proposed amendments will reopen on June 12, 2014 and end on July 3, 2014.12
The current Part 150 position limits regime applies to futures and option contracts in nine enumerated agricultural commodities,123while the proposed rule aims to establish speculative position limits for 28 exempt and agricultural commodity futures and option contracts and physical commodity swaps that are economically equivalent to such contracts.14 In addition, the proposed rule on aggregation changes the rules regarding which accounts and positions must be aggregated for the purpose of determining compliance with the position limit levels.15
Comments should be limited to the issues of hedges of a physical commodity by a commercial enterprise, including:
The third concurrently announced action proposes to amend current regulations to permit an entity, when trying to determine whether it must register as a swap dealer, to exclude utility operations-related swaps with utility special entities when calculating whether it has exceeded the de minimis threshold specific to “special entities.”16 The CFTC is seeking comments on the proposal; the comment period will close 30 days after the proposal is published in the Federal Register.
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Please feel free to reach out to your regular contacts at the firm if you have any questions about the matters addressed in this alert. In addition, you are welcome to contact any of the above members of the firm’s Derivatives Practice.
Authored By: Daniel N. Budofsky, Akshay N. Belani, Lihua Chen, Joshua Sterling, and Olga Kamensky
Contacts
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
1 CFTC Letter No. 14-72 (May 22, 2014).
2 CFTC Press Release, “Acting Chairman Mark Wetjen Announces Three Actions to Protect Liquidity for Certain End-Users, Further Consider Certain Hedging Practices, and Promote Trading on SEFs and DCMs,” PR6936-14 (May 22, 2014) (available at http://www.cftc.gov/PressRoom/PressReleases/pr6936-14).
3 CFTC Proposed Rule, “Exclusion of Utility Operations-Related Swaps with Utility Special Entities from De Minimis Threshold for Swaps with Special Entities,” 17 C.F.R. Part 1.
4 CFTC Proposed Rule and Extension of Comment Period, “Position Limits for Derivatives and Aggregation of Positions,” 17 C.F.R. Parts 1, 15, 17, 19, 32, 37, 38, 140 and 150.
5 See 17 C.F.R. § 1.35(a). Regulation 1.35(a), which details the requirements for records of commodity interest and related cash or forward transactions to be kept by futures commission merchants, retail foreign exchange dealers, introducing brokers, and members of DCMs or SEFs, was amended in December 2012 for better integration with the new statutory framework for swaps created by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L. 111–203, 124 Stat. 1376 (2010)), as well as for conformity with the recordkeeping regime for swap dealers and major swap participants (17 C.F.R. § 23.202).
6 Id. However, the oral recordkeeping requirements do not apply to certain persons, including floor traders, commodity pool operators, swap dealers, major swap participants and Covered Members. Initially, affected entities were required to be compliant with the recordkeeping requirements above by December 21, 2013, but several rounds of no-action relief have delayed the compliance dates for certain entities to May 1, 2014 (see CFTC Letter No. 13-77 (Dec. 20, 2013)), and, in some cases, December 31, 2014 for oral recordkeeping requirements (see CFTC Letter No. 14-60 (April 25, 2014)). Additional information about Regulation 1.35(a) and the relevant no-action relief is available here and here.
7 CFTC Letter No. 14-72, p. 3.
8 Id. (citing Letter on behalf of the Federal Home Loan Banks to the CFTC, “Re: Comments on CFTC Rule 1.35 in Response to the CFTC’s Roundtable to Discuss Dodd-Frank End-User Issues,” 5-6 (Apr. 17, 2014) (available at http://comments.cftc.gov/PublicComments/ViewComment.aspx?id=59823&SearchText=)).
9 Id.
10 Id.
11 CFTC Proposed Rule and Extension of Comment Period, “Position Limits for Derivatives and Aggregation of Positions,” 17 C.F.R. Parts 1, 15, 17, 19, 32, 37, 38, 140 and 150.
12 Id.
13 See 17 C.F.R. § 150.2.
14 See Position Limits for Derivatives, 78 Fed. Reg. 75680 (Dec. 12, 2013).
15 See Aggregation of Positions, 78 Fed. Reg. 68946 (Nov. 15, 2013).
16 See CFTC Proposed Rule, “Exclusion of Utility Operations-Related Swaps with Utility Special Entities from De Minimis Threshold for Swaps with Special Entities,” 17 C.F.R. Part 1. “Commodity Exchange Act Section 4s(h)(2)(C) and Regulation 23.401(c) define the term ‘special entity’ to include: a Federal agency; a State, State agency, city, county, municipality, or other political subdivision of a State; any employee benefit plan as defined under the Employee Retirement Income Security Act of 1974 (ERISA); any government plan as defined under ERISA; and any endowment. Regulation 23.401(c) adds ‘any instrumentality, department, or a corporation of or established by a State or subdivision of a State’ to the definition.”