2017-11014

produced, and maintained set forth in other Commission regulations.

DATES: The effective date for this final rule is August 28, 2017.

FOR FURTHER INFORMATION CONTACT: Eileen T. Flaherty, Director, (202)

418-5326, [email protected]; Frank Fisanich, Chief Counsel, (202) 418-

5949, [email protected]; Andrew Chapin, Associate Chief Counsel, (202)

418-5465, [email protected]; Katherine Driscoll, Associate Chief

Counsel, (202) 418-5544, [email protected]; C. Barry McCarty, Special

Counsel, (202) 418-6627, [email protected]; or Jacob Chachkin, Special

Counsel, (202) 418-5496, [email protected], Division of Swap Dealer

and Intermediary Oversight, Commodity Futures Trading Commission, 1155

21st Street NW., Washington, DC 20581.

In response to petitions for rulemaking from various industry

groups requesting amendments to Sec. 1.31, the Commission published in

the Federal Register on January 19, 2017 a proposal (``Proposal'') to

amend the recordkeeping obligations applicable to all persons required

to keep records pursuant to the Act and Commission regulations

promulgated thereunder (referred to in the Proposal as ``records

entities'').\1\ Regulation 1.31 sets forth the form and manner in which

all regulatory records must be kept by records entities. Regulation

1.31 does not specify the types of regulatory records that must be

kept, rather it specifies the form and manner in which regulatory

records required by other Commission regulations are maintained and

produced to the Commission. The proposed amendments to Sec. 1.31, and

related technical amendments to Sec. Sec. 1.35 and 23.203, would

modernize and make technology neutral the form and manner in which

regulatory records must be kept, as well as rationalize the current

rule text for ease of understanding. Under the proposed amendments,

records entities would have greater flexibility regarding the retention

and production of all regulatory records

under a less-prescriptive, principles-based approach.

\1\ Recordkeeping, 82 FR 6356 (Jan. 19, 2017).

Among other proposed changes requested in the petitions for

rulemaking, the Commission proposed to eliminate the requirement for a

records entity to: (1) Keep electronic regulatory records in their

native file format (i.e., in the format in which it was originally

created); (2) retain any electronic record in a non-rewritable, non-

erasable format (i.e., the ``write once, read many'' or ``WORM''

requirement); and (3) engage a third-party technical consultant and for

the consultant to file certain representations with the Commission

regarding access to the records entity's electronic regulatory records.

These proposed changes would be universal to all records entities,

including intermediaries registered or required to be registered with

the Commission; registered entities such as designated contract

markets, swap execution facilities, and derivatives clearing

organizations; and any other persons required to produce certain

regulatory records as set forth in other Commission regulations.

II. Summary of Comments

The Commission received sixteen comment letters on the Proposal

from a wide range of records entities, including registrants,

registered entities and other persons subject to the Commission's

recordkeeping obligations set forth in Sec. 1.31.\2\ All commenters

generally supported the Commission's efforts to modernize and make

technology neutral the existing recordkeeping obligations. One

commenter requested that the Commission limit changes to Sec. 1.31 to

the elimination of the native file format, WORM, and third-party

technical consultant requirements, and withdraw the remainder of the

proposal.\3\ As outlined below, several commenters also suggested

modifications to the proposed rule text, including the requirement for

records entities to establish, maintain, and implement written policies

and procedures reasonably designed to ensure that the records entity

complies with its recordkeeping obligations. For reasons provided

below, the Commission has accepted certain of these recommendations in

the amendments being adopted today, but has declined to accept certain

other recommendations, including recommendations beyond the scope of

\2\ Comment letters were submitted by the following entities:

The Securities Industry and Financial Markets Association

(``SIFMA''); CME Group Inc. (``CME''); NASDAQ Futures, Inc.

(``NASDAQ''); the National Futures Association (``NFA''); SunTrust

Bank; the Futures Industry Association (``FIA''); the Edison

Electric Institute and National Rural Electric Cooperative (``EEI &

NREC''); the Investment Company Institute (``ICI''); Managed Funds

Association, Investment Adviser Association, Alternative Investment

Management Association, and SIFMA Asset Management Group

(``Associations''; the Minneapolis Grain Exchange (``MGEX''); The

U.S., Inc. (``ICE''); the Commercial Energy Working Group (``Working

Group''); the International Swaps and Derivatives Association, Inc.

(``ISDA''); the Federal Home Loan Banks (``FHLBanks''); and the

International Energy Credit Association (``IECA''). All comment

letters are available on the Commission's Web site at https://comments.cftc.gov/PublicComments/CommentList.aspx?id=1774.

\3\ See CME comment letter.

The Commission has considered the comments it received in response

to the Proposal and is adopting the rule amendments as proposed, with

the following exceptions: (1) Revising the definition of ``regulatory

records'' in Sec. 1.31(a); (2) deleting proposed Sec. 1.31(b)

regarding the requirement for a records entity to establish, maintain,

and implement written policies and procedures designed to ensure

compliance with all obligations under Sec. 1.31; (3) amending Sec.

1.31(c) to limit the retention period for pre- trade communications

required by Sec. 23.202(a)(1) and Sec. 23.202(b)(1)-(3) to five years

from the date the communication was created; (4) deleting from Sec.

1.31(d)(2)(i) the requirement that a records entity retain systems that

maintain the ``chain of custody elements'' of any electronic regulatory

record; and (5) re-lettering Sec. 1.31(c)-(f) to account for the

deletion of proposed Sec. 1.31(b). Specific provisions of the final

rules are addressed below.

A. Regulation 1.31(a): Definitions

The Commission proposed to define in Sec. 1.31(a) the terms

``electronic regulatory records,'' ``records entity,'' and ``regulatory

records'' as used elsewhere in the section.

The Commission received several comments regarding the proposed

definition of ``records entity'' to be any person required by the Act

or Commission regulations to keep regulatory records. A few commenters

requested that the Commission exclude from the definition of ``records

entity'' those persons that are neither registrants nor registered

entities.\4\ One commenter \5\ further suggested that compliance with

the proposed changes would impose greater costs on records entities

that are neither registrants nor registered entities.\6\ In light of

these comments, the Commission notes that the final rule as adopted by

this release does not impose any new recordkeeping requirements on any

records entity, including those that are neither registrants nor

registered entities, such as commercial end-users. Rather, the final

rule merely modernizes and makes technology neutral the form and manner

in which regulatory records must be kept. Further, the final rule is

clear that it does not override other methods of maintaining records

that may be specified elsewhere in the Act or other Commission

regulations.\7\ Thus, commercial end-users that are records entities,

for example, may continue to maintain records in accordance with their

current practices if such are permitted by the Act, Commission

regulations, or existing relief or guidance.\8\ Further, as stated

above, the final rule removes several obligations regarding the form

and manner in which regulatory records must be kept that should lessen

the compliance costs associated with the recordkeeping requirements set

forth in Sec. 1.31. Given the foregoing, the Commission has determined

not to exclude any persons required to keep regulatory records from the

definition of ``records entity.''

\4\ E.g., ISDA, ICI, and Associations comment letters.

\5\ See ISDA comment letter.

\6\ E.g., Sec. 1.35(a) (Unregistered members of a DCM or SEF

required to retain records of commodity interests and related cash

or forward transactions) and Sec. Sec. 32.2, 32.3, 45.2, and 45.6

(Non-Swap Dealer/Major Swap Participants (``Non-SD/MSPs'') are

subject to trade option requirements including recordkeeping).

\7\ See text of final rule, Sec. 1.31(b), (c), and (d), each

stating, ``[u]nless specified elsewhere in the Act or Commission

\8\ E.g., Revised recordkeeping requirements for trade option

counterparties that are Non-SD/MSPs, Trade Options, 81 FR 14966,

14970 (Mar. 21, 2016); and Relief for Unregistered Members from

retaining text messages and maintaining required records in a

particular form and manner, Records of Commodity Interest and

Related Cash or Forward Transactions, 80 FR 80247, 80250-51 (Dec.

Regarding the definition of ``regulatory records,'' the Commission

specifically requested comment whether the term ``metadata''--or data

about data--should be defined. The Commission recognized in the

Proposal that the term metadata may be generally understood by

practitioners notwithstanding a lack of universal agreement on an exact

definition. A majority of commenters on the issue agreed that metadata

need not be defined at this time as that would be inconsistent with the

Commission's stated goal to provide for less-prescriptive recordkeeping

obligations.\9\ Further, one commenter asserted that including metadata

definition of a ``regulatory record'' would greatly increase the amount

and associated costs of data to be stored and potentially subject to

production requests.\10\ Another commenter stated that records entities

would be required to pursue, develop, and purchase additional

technological solutions to ensure compliance if metadata were

\9\ E.g., FIA and ICE comment letters.

\10\ See CME comment letter.

\11\ See Associations comment letter.

The Commission notes that it and other federal agencies, including

the Securities and Exchange Commission (``SEC''), have been requesting

metadata in conjunction with information requests to industry for more

than five years through standardized data delivery standards.\12\ The

Commission believes that the Sec. 1.31(a) definition of ``regulatory

record,'' i.e., all data produced and stored electronically describing

how and when such books and records were created, formatted, or

modified, is sufficient to support its statutory inspection and

investigative functions. Thus, the Commission has determined that there

is no need to define metadata at this time.

\12\ The Commission publishes the CFTC Data Delivery Standards

on its Web site at: http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/file/enfdatadeliverystandards052716.pdf. The Commission notes that other

federal agencies, such as the SEC (https://www.sec.gov/divisions/enforce/datadeliverystandards.pdf), the Department of Justice

the Department of Treasury Office of Foreign Asset Control (https://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Documents/ofac_data_delivery.pdf) have similar data delivery

The Commission further noted in the Proposal that the proposed

definition of ``regulatory records'' would more clearly state the

existing requirement for each records entity to maintain a regulatory

record and any subsequent versions of such record. Multiple commenters

questioned whether the revised language was, in fact, imposing a new

requirement to maintain versions of a regulatory record before it

becomes in fact a regulatory record (i.e., drafts of an agreement

created during a negotiation but prior to execution).\13\ To clarify

that the Commission did not intend to require versions of a regulatory

record prior to its becoming a regulatory record, the Commission is

modifying the definition of ``regulatory records'' to indicate that the

term means all books and records required to be kept by the Act or

Commission regulations, including any record of any correction or other

amendment to such books and records, provided that, with respect to

such books and records stored electronically, regulatory records shall

also include: (i) Any data necessary to access, search, or display any

such books and records; and (ii) all data produced and stored

electronically describing how and when such books and records were

created, formatted, or modified. The Commission believes the definition

as revised makes clear that a records entity only has the obligation to

maintain data about a regulatory record after it is created and not

about the record before it becomes a regulatory record.

\13\ E.g., Associations, CME, and ICE comment letters.

As noted in the Proposal this is the existing standard in Sec.

1.31. Under existing Sec. 1.31(b)(1)(ii)(A) electronic records are

required to be preserved exclusively in a non-rewritable, non-erasable

format. This provision was designed to ensure the ``trustworthiness of

documents that may be relied upon by the Commission in conducting

investigations and entered into evidence in administrative and judicial

proceedings.'' \14\ It therefore follows that each version of an

electronic record and all subsequent versions would have to be

maintained under the existing rule. This requirement provides for a

comprehensive audit trail, which the Commission believes is vital to

both the supervision and enforcement of the Act and Commission

\14\ See 58 FR at 27460.

Finally, another commenter also asserted that retaining all

versions of a regulatory record is redundant and creates additional

opportunities for data theft or loss.\15\ The commenter did not provide

any detail regarding how maintaining subsequent versions of a

regulatory record, which is an existing requirement under Sec. 1.31,

raises new concerns about data theft or loss. Thus, the Commission is

unable to address any such concern at this time.

\15\ See CME comment letter.

B. Regulation 1.31(b): Regulatory Records Policies and Procedures

The Commission proposed to amend Sec. 1.31(b) to require each

records entity to establish, maintain, and implement written policies

and procedures reasonably designed to ensure that the records entity

complies with its obligations under Regulation 1.31. As proposed, the

written policies and procedures would provide for, without limitation,

appropriate training of officers and personnel of the records entity

regarding their responsibility for ensuring compliance with the

obligations of the records entity under Sec. 1.31, and regular

monitoring of such compliance.

Without an explanation of the differences, several commenters

disagreed with the Commission that the proposed requirement for written

policies and procedures is consistent with the existing Sec.

1.31(b)(3) requirement for anyone using electronic storage media to

develop and maintain written operational procedures and controls (i.e.,

an ``audit system'') designed to provide accountability over both the

initial entry of required records and the entry of each change made to

any original or duplicate record.\16\ Again without providing any

explanation of the differences between the existing ``audit system''

requirement and the proposed requirement for written policies and

procedures or any specific cost estimates, commenters also argued that

the application of the proposed written policies and procedures

requirement would create new regulatory obligations for records

entities which are neither registrants nor registered entities, some of

whom are commercial end-users.\17\ As a result, commenters argued that

this additional requirement could deter certain market participants

from trading swaps and other derivatives products in order to avoid

having to comply with burdensome recordkeeping requirements.\18\ A few

commenters argued that the specific reference to training is not

consistent with the Commission's emphasis on a less-prescriptive,

principles-based recordkeeping requirement.\19\ Other commenters

requested that the Commission provide a phase-in period for

establishing, maintaining and implementing written policies and

\16\ E.g., ISDA comment letter.

\17\ E.g., IECA comment letter.

\18\ See ISDA comment letter.

\19\ E.g., Associations comment letter.

\20\ See MGEX and Working Group comment letters.

Having considered these comments, the Commission has determined not

to adopt the written policies and procedures requirement for records

entities set forth in proposed Sec. 1.31(b). The final rule, as

adopted, sets forth the form and manner in which regulatory records

must be kept, the retention period for various types of regulatory

records, and the standards for production of regulatory records to the

Commission. Given these clearly defined obligations, the Commission

agrees with commenters that the requirement for written policies and

procedures is unnecessary. As the Commission noted in the Proposal, the

obligation to satisfy the requirements

regarding Sec. 1.31 is one that a records entity ignores at its peril.

It is ultimately the duty and responsibility of records entities to

ensure accurate and reliable records. The Commission also notes that

registrants are subject to a duty to diligently supervise all

activities relating to its business as a Commission registrant,

pursuant to Sec. 166.3. The Commission does not consider the

withdrawal of a requirement for written policies and procedures to

create an explicit or implicit defense against recordkeeping violations

or failure to supervise violations.

C. Regulation 1.31(b): Duration of Retention

The Commission proposed to amend Sec. 1.31(c)(re-lettered as Sec.

1.31(b) in the final rule) to re-state and clarify the existing

retention period requirements for categories of regulatory records set

forth in existing Sec. 1.31(a), including the requirement that certain

records associated with a swap be retained for the duration of the swap

plus five years. The Commission also proposed to distinguish between

electronic regulatory records and those records exclusively created and

maintained on paper by requiring a records entity to keep electronic

regulatory records readily accessible for the duration of the required

record keeping period, and not just for the first two years. The

Commission noted that this standard is consistent with the SEC's

standard for certain intermediaries.\21\ For ease of understanding, the

Commission also proposed to amend Sec. Sec. 1.35(a) and 23.203(b)(1)

and (2) to make technical changes regarding regulatory records related

to oral communications and swaps-related information maintained by

swaps dealers and major swap participants, respectively. The Commission

received several comments regarding various aspects of proposed Sec.

\21\ SEC Rule 17a-4(f).

Two commenters \22\ requested that the Commission reduce the

retention standard for electronic pre-execution communications required

by Sec. 23.202 in relation to a swap to five years from the date of

creation of the regulatory record rather than the current standard of

the duration of the swap plus five years.\23\ The commenters stated

that the longer retention period ``places an unnecessary retention

burden on firms, which exceeds most statutes of limitations or utility

with respect to underlying transactions.'' \24\ Another commenter

stated that increasing retention periods for the storage of sensitive

information in electronic form could put records entities, and their

third-party service providers, at greater risk in the event of a data

\22\ See SIFMA and ISDA comment letters.

\23\ See Sec. 23.202(a)(1).

\24\ See SIFMA comment letter.

\25\ See Associations comment letter.

The Commission recognizes the increased burden and risk of a longer

retention period as pointed out by commenters, and, having considered

such increased burden and risk in light of the nature of the affected

regulatory records, has determined to require retention of electronic

communications specified in Sec. 23.202(a)(1) and Sec. 23.202(b)(1)-

(3) only for a period of five years from the date of creation of the

required record. The Commission notes that these are records of pre-

execution communications and, as such, are likely to be useful for

regulatory oversight purposes for a shorter length of time than records

regarding execution of transactions or records of events that effect

transactions following execution.

For the avoidance of doubt, the Commission is not changing the

retention period for execution trade information under Sec.

23.202(a)(2), post-execution trade information under Sec.

23.202(a)(3), the ledgers required under Sec. 23.202(a)(4), or the

daily trading records for related cash and forward transactions in

Sec. 23.202(b)(4)-(7). However, as previously stated, the Commission

will continue to monitor changes in information technology and consider

whether the recordkeeping regulation should be adjusted to reflect

Certain commenters requested clarification whether the requirements

as adopted apply to existing records.\26\ The Commission confirms that

the requirements adopted by this release do apply to existing records.

However, the Commission notes that existing recordkeeping methods

remain valid for compliance with the new rule, and that for many

records entities, applying the new regime will reduce regulatory

burdens. For example, many records entities will be permitted to

maintain existing electronic records in a manner other than in their

native file format and will no longer be required to retain a third-

party technical consultant with authority to access a records entity's

existing electronic records.\27\

\26\ See FIA and Working Group comment letters.

\27\ The amendments adopted herein however would not excuse non-

compliance with existing Sec. 1.31 prior to the effective date of

D. Regulation 1.31(c): Form and Manner of Retention

The Commission proposed to adopt Sec. 1.31(d) (re-lettered as

Sec. 1.31(c) in final rule) to describe recordkeeping requirements

regarding the form and manner in which regulatory records are retained

by records entities. Consistent with the Commission's emphasis on a

less-prescriptive, principles-based approach, proposed Sec. 1.31(d)(1)

would rephrase the existing requirements in the form of a general

standard for each records entity to retain all regulatory records in a

form and manner necessary to ensure the records' and recordkeeping

systems' authenticity and reliability. The Commission proposed to adopt

Sec. 1.31(d)(2) to set forth additional controls for records entities

retaining electronic regulatory records. The Commission emphasized in

the Proposal that the proposed regulatory text does not create new

requirements, but rather updates the existing requirements so that they

are set out in a way that appropriately reflects technological

advancements and changes to recordkeeping methods since the prior

amendments of Sec. 1.31 in 1999.

Various commenters proposed technical amendments to proposed Sec.

1.31(d)(2). Multiple commenters \28\ requested that the Commission

delete the ``chain of custody'' provision in proposed Sec.

1.31(d)(2)(i) because it is a legal evidentiary standard which does not

translate clearly to the technological requirements for recordkeeping.

Another commenter similarly noted that the ``chain of custody''

requirement is redundant and unnecessarily prescriptive given that

records entities are required under proposed Regulation 1.31(d)(1) to

keep regulatory records in a form and manner that ensures the

authenticity and reliability of such records.\29\ Moreover, one of the

commenters noted that the proposed definition of ``regulatory records''

in proposed Sec. 1.31(a) already includes a chain of custody

requirement based on the following language: ``data that describes how,

when, and, if relevant, by whom such electronically stored information

was collected, created, accessed, modified, or formatted.'' \30\ The

Commission has considered the comment that the term ``chain of

custody'' may cause confusion given that it currently exists as a legal

evidentiary standard and, given that the Commission is also persuaded

that the concept is adequately covered under the

definition of ``regulatory records'' it has determined to delete the

``chain of custody elements'' from the electronic regulatory records

systems requirement in amended Sec. 1.31(c)(2)(i). The Commission

notes, however, that the deletion of the term ``chain of custody'' does

not change the practical requirement that records entities maintain a

comprehensive audit trail for all electronic regulatory records.

\28\ See SIFMA, ISDA, and Associations comment letters.

\29\ See Working Group comment letter.

\30\ See SIFMA comment letter.

One commenter also requested that the Commission amend proposed

Sec. 1.31(d)(2)(ii) to incorporate existing business continuity

planning regulations in lieu of the proposed language: ``in the event

of an emergency or other disruption of the records entity's electronic

record retention systems[.]'' \31\ The Commission is not making this

requested change because records entities are not prohibited by the

rule from incorporating their obligations to maintain availability of

regulatory records into their existing business continuity planning.

The Commission does not believe that the general standard in new Sec.

1.31(c)(2)(ii) creates an obligation that would conflict with a records

entity's existing business continuity procedures.

The same commenter also requested that the Commission amend the

proposed records inventory requirement in new Sec. 1.31(c)(2)(iii) to

not require system descriptions and information necessary for accessing

or producing electronic regulatory records because introducing concepts

related to access and production of records in this section is

potentially confusing.\32\ For clarity, the Commission notes that data

necessary to access and produce electronic regulatory records is itself

a regulatory record under the definition thereof in Sec. 1.31(a).

Thus, the requirement in new Sec. 1.31(c)(2)(iii) is simply a

requirement that a records entity keep an up-to-date inventory of the

systems where such data is maintained.

Another commenter requested that the Commission delete from

proposed Sec. 1.31(d)(2)(i) the language ``and to monitor compliance

with the Act and Commission regulations in this Chapter'' because such

an ``obligation to comply would not normally be embodied in a

recordkeeping system.'' \33\ The Commission understands this comment to

mean that the commenter reads proposed Sec. 1.31(d)(2)(1) (re-lettered

as Sec. 1.31(c)(2)(1) in the final rule) as a stand-alone obligation

to ``monitor compliance with the Act. . . .'' To clarify, the

Commission notes that the requirement is to establish systems that

maintain the security, signature, and data regarding electronic

regulatory records to ensure that the records entity can monitor

compliance with the Act. Thus the requirement is not a stand-alone

obligation to ``monitor compliance with the Act and Commission

\33\ See Associations comment letter.

Another commenter objected to the proposed amendments that would

impose the requirements of proposed Sec. 1.31(d) (re-lettered as Sec.

1.31(c) in the final rule) on commercial end-users that happen to be

records entities, including the requirements that ``each records entity

maintaining electronic regulatory records shall establish appropriate

systems and controls that ensure the authenticity and reliability of

electronic regulatory records[.]'' \34\ The commenter stated that

commercial end-users should not be subject to the obligation to

establish ``systems and controls . . . that ensure the authenticity of

the information . . . and . . . monitor compliance with the Act and

Commission regulations in this chapter[]'' because the expense and

burden of that obligation goes beyond the recordkeeping methods allowed

in other Commission regulations allowing commercial end-users to retain

and maintain their records in the ordinary or normal course of

business.\35\ Moreover, the commenter stated that the creation of an

``up-to-date inventory'' appears to impose an entirely new regulatory

recordkeeping expense that will require a commercial end-user to

produce an inventory of its electronic records, and keep that inventory

up to date, with respect to the ``electronic records'' that a

commercial end-user is allowed in other Commission regulations to

retain and maintain in the ordinary or normal course of business.\36\

\34\ See IECA comment letter.

\35\ See e.g., Sec. 20.6(c) regarding large trader reporting

for physical commodity swaps.

\36\ See e.g., Sec. Sec. 32.2, 32.3, 45.2, and 45.6 regarding

trade option requirements for Non-SD/MSPs.

The Commission declines to revise the rule in response to this

comment because, as noted previously, Sec. 1.31(d) (re-lettered as

Sec. 1.31(c) in the final rule) does not impose any new recordkeeping

requirements on any records entity, including those that are commercial

end-users. Rather, the final rule merely modernizes and makes

technology neutral the form and manner in which regulatory records must

be kept. Further, the final rule is clear that it does not override

other methods of maintaining records that may be specified elsewhere in

the Act or other Commission regulations. Thus, commercial end-users

that are records entities, for example, may continue to maintain

records in accordance with their current practices if such are

permitted by the Act, Commission regulations, or existing relief or

guidance. Finally, as described above, the final rule removes several

obligations regarding the form and manner in which regulatory records

must be kept that should lessen the compliance costs associated with

the recordkeeping requirements set forth in Sec. 1.31 generally.

In response to a specific question in the Proposal as to whether

the Commission should routinely publish guidelines regarding the

technical standards for electronic regulatory records, one commenter

argued that publication of such standards likely would result in

increased cost and devotion of technical resources to ensure compliance

with any changing standards.\37\ The commenter specifically requested

that the Commission avoid publishing guidelines for technical standards

of regulatory records and simply monitor records entities to ensure

that regulatory records are retained in a ``form and manner necessary

to ensure the records' and recordkeeping systems' authenticity and

reliability.'' Given that only one commenter responded to the request

for comment, and responded negatively, the Commission is persuaded that

publishing guidelines regarding the technical standards for electronic

regulatory records would not be helpful at this time.

\37\ See MGEX comment letter.

Regarding the form and manner of retention of electronic regulatory

records, one commenter requested confirmation that the specific means

of electronic storage that the commenter employs is an acceptable means

for storing electronic regulatory records.\38\ As noted throughout this

adopting release the Commission believes that the amendments to Sec.

1.31 are intended to be technology neutral and therefore the Commission

is not requiring or endorsing any type of record retention system or

\38\ See DTCC comment letter.

With respect to the effective date of these regulations, a few

commenters requested a three- or six-month phase-in period for

compliance.\39\ Although the Commission has noted throughout this

adopting release that it believes that the amendments adopted today are

creating any new compliance obligations for any records entities, it is

nevertheless persuaded that a three-month phase-in for compliance is a

reasonable request. Thus, the Commission has determined that the

effective date for the proposed amendments will be 90 days from the

date of publication.

\39\ See MGEX and Working Group comment letters.

E. Regulation 1.31(d): Inspection and Production of Regulatory Records

The Commission proposed to adopt new Sec. 1.31(e) (re-lettered as

Sec. 1.31(d) in the final rule) to re-state and clarify the right of

inspection of the Commission and the United States Department of

Justice in existing Sec. 1.31(a)(1). One commenter requested that the

Commission engage in a dialogue with industry to address challenges

presented by the production requirements of Sec. 1.31, including the

scope of what is subject to a production request and who may make such

a request.\40\ In particular, the commenter stated that Sec. 1.31

should recognize the long standing protections of attorney-client

privilege and expressly exclude such information from the rule's

\40\ See CME comment letter.

The Commission believes that the proposed amendment to Sec.

1.31(e) does not alter the existing right of inspection regarding

regulatory records and notes that attorney-client protections are

addressed elsewhere in federal and state law.\41\

\41\ See Wigmore on Evidence: Evidence in Trials at Common Law--

Wigmore, Rule 502. Attorney- Client Privilege and Work Product

(online version updated 4/2017), for a comprehensive list of

attorney-client protections under federal and state law. Further, in

1999, the Commission addressed the waiver of privilege issue as

follows: ``As is currently the case with all Commission required

records, recordkeepers may not deny authorized Commission

representatives access to any individual storage medium that

includes Commission-required records or delay production while the

individual storage medium is reviewed for the presence of privileged

material. The final rule merely eliminates the regulatory inference

that the commingling of Commission-required records with non-

Commission-required records necessarily amounts to a waiver of any

privilege otherwise covering the latter category of records.'' See

Recordkeeping, 64 FR 28735, 28740, note 40 (May 27, 1999).

F. Comments Beyond the Scope of the Proposed Rulemaking

Although the Commission stated that the Proposal was limited to

amendments to Sec. 1.31 and related technical amendments, the

Commission received several comments regarding matters outside the

scope of the Proposal, as discussed below.

The petitioners for rulemaking restated their request from their

original petition that the Commission adopt amendments to Part 4 of the

Commission's regulations regarding certain recordkeeping requirements

applicable to commodity pool operators and commodity trading

advisors.\42\ The Proposal did not address any such amendments and thus

such amendments are outside of the scope of this rulemaking.

\42\ See Associations and ICI comment letters.

Another commenter \43\ acknowledged that the Regulation AT

rulemaking \44\ addresses source code issues outside the scope of the

Proposal, but nonetheless requested the Commission provide additional

guidance regarding any requests for source code information by the

Commission subject to Sec. 1.31. In response to this request, the

Commission reiterates that production of source code is outside the

scope of this rulemaking.

\43\ See FIA comment letter.

\44\ See Regulation Automated Trading, 81 FR 85334 (Nov. 25,

Finally, another commenter \45\ recommended that the SEC amend SEC

Rule 17a-4 regarding the recordkeeping obligations of broker-dealers,

some of whom are also registered as futures commission merchants with

the Commission. The Commission does not have jurisdiction with respect

to SEC regulations and thus such recommendation is outside of the scope

of this rulemaking.

\45\ See SIFMA comment letter.

IV. Related Matters

A. Regulatory Flexibility Act

The Regulatory Flexibility Act (``RFA'') \46\ requires Federal

agencies, in promulgating regulations, to consider whether the rules

they propose will have a significant economic impact on a substantial

number of small entities and, if so, to provide a regulatory

flexibility analysis regarding the economic impact on those entities.

In the Proposal, the Commission certified that the Proposal would not

have a significant economic impact on a substantial number of small

entities. The Commission received no comments with respect to the RFA.

\46\ 5 U.S.C. 601 et seq.

As discussed above, because the final rule relates to most

recordkeeping obligations under the Act and the Commission's

regulations, it may affect the full spectrum of Commission registrants,

all persons required to register but not registered with the

Commission, and certain persons that are neither registered nor

required to register with the Commission. The Commission has previously

determined that certain registrants are not small entities for purposes

of the RFA and, therefore, the requirements of the RFA do not apply to

those entities.\47\ For other registrants, however, the Commission has

found it appropriate to consider whether such registrants should be

deemed small entities for purposes of the RFA on a case-by-case basis,

in the context of the particular Commission regulation at issue.\48\ As

certain persons affected by the final rule, including Commission

registrants, may be small entities for purposes of the RFA, the

Commission considered whether this rulemaking would have a significant

economic impact on any such persons.

\47\ See, e.g., Policy Statement and Establishment of

Definitions of ``Small Entities'' for Purposes of the Regulatory

Flexibility Act, 47 FR 18618 (Apr. 30, 1982) (futures commission

merchants and commodity pool operators); Leverage Transactions, 54

FR 41068 (Oct. 5, 1989) (leverage transaction merchants); Regulation

of Off-Exchange Retail Foreign Exchange Transactions and

Intermediaries, 75 FR 55410, 55416 (Sept. 10, 2010) (retail foreign

exchange dealers); and Registration of Swap Dealers and Major Swap

Participants, 77 FR 2613, 2620 (Jan. 19, 2012) (swap dealers and

major swap participants).

\48\ See 47 FR at 18620 (commodity trading advisors and floor

brokers); Registration of Floor Traders; Mandatory Ethics Training

for Registrants; Suspension of Registrants Charged With Felonies, 58

FR 19575, 19588 (Apr. 15, 1993) (floor traders); and Introducing

Brokers and Associated Persons of Introducing Brokers, Commodity

Trading Advisors and Commodity Pool Operators; Registration and

Other Regulatory Requirements, 48 FR 35248, 35276 (Aug. 3, 1983)

As discussed in the Proposal, the final rule generally updates and

simplifies existing Commission regulation 1.31 with new provisions that

maintain the ability of the Commission to examine and inspect

regulatory records. It accomplishes this by deleting outdated terms and

revising provisions to reflect advances in information technology,

allowing records entities to benefit from evolving technological

developments while maintaining necessary safeguards to ensure the

reliability of the recordkeeping process. It also reduces the retention

period for certain regulatory records related to swaps and related cash

and forward transactions, as discussed above.

The Commission believed that the Proposal would impose only limited

additional costs on small entities related to the requirement that they

establish written recordkeeping policies and procedures. However, for

the reasons discussed above, the Commission has been persuaded to not

require such written recordkeeping policies and procedures.

As a result, the final rule is not expected to impose any new

burdens on market participants. The Commission

does not, therefore, expect small entities to incur any additional

costs as a result of the final rule. In addition, the Commission does

not expect the economic value of the benefit to small entities of the

final rule to be significant. Consequently, the Commission finds that

no significant economic impact on small entities will result from the

Accordingly, for the reasons stated above, the Commission believes

that the final rule will not have a significant economic impact on a

substantial number of small entities. Therefore, the Acting Chairman,

on behalf of the Commission, hereby certifies, pursuant to 5 U.S.C.

605(b), that the final rule being published today by this Federal

Register release will not have a significant economic impact on a

substantial number of small entities.

B. Paperwork Reduction Act

The Paperwork Reduction Act of 1995 (``PRA'') \49\ imposes certain

requirements on Federal agencies (including the Commission) in

connection with their conducting or sponsoring any collection of

information as defined by the PRA. The final rule does not impose any

new recordkeeping or information collection requirements, or other

collections of information that require approval of the Office of

Management and Budget (``OMB'') under the PRA.

\49\ 44 U.S.C. 3501 et seq.

As discussed above, the Proposal would have replaced the existing

audit system requirements in Commission regulation 1.31 with a

requirement that records entities establish written recordkeeping

policies and procedures. Such changes would have resulted in revisions

to ``Adaptation of Regulations to Incorporate Swaps-Records of

Transactions, OMB control number 3038-0090''. Because the Commission

has been persuaded not to require such written recordkeeping policies

and procedures, the Commission will not be modifying this OMB control

number to reflect the addition of the proposed recordkeeping policies

and procedures requirement. As discussed in the Proposal, however, the

Commission will submit to OMB revisions to OMB control number 3038-0090

to reflect the final rule's removal of the audit system requirements in

current Commission regulation 1.31.

2. Information Collection Comments

In the Proposal, the Commission invited the public and other

Federal agencies to comment on any aspect of the information collection

requirements discussed therein, including that the only collection of

information within the meaning of the PRA added or modified by the

Proposal would be in respect of the proposed, but not adopted,

requirement that records entities establish recordkeeping policies and

procedures. The Commission did not receive any such comments.

C. Cost-Benefit Considerations

Section 15(a) of the Act \50\ requires the Commission to consider

the costs and benefits of its actions before issuing a regulation under

the Act. 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: (i) Protection of market participants and the

public; (ii) efficiency, competitiveness and financial integrity of

futures markets; (iii) price discovery; (iv) sound risk management

practices; and (v) other public interest considerations. The Commission

considers the costs and benefits resulting from its discretionary

determinations with respect to the Section 15(a) considerations.

As discussed above in relation to the RFA, the Proposal generally

updates and simplifies existing Commission regulation 1.31 by deleting

outdated terms and revising provisions to reflect advances in

information technology while safeguarding the reliability of the

recordkeeping process. The Commission believes that the final rule does

not impose any additional costs on records entities.

The Commission is committed to reviewing its regulations to ensure

they keep pace with technological developments and industry trends, and

reduce regulatory burden. The Commission believes that the final rule

will allow records entities to benefit from evolving technology while

maintaining necessary safeguards to ensure the reliability of the

recordkeeping process. By deleting outdated terms and revising

provisions to reflect advances in information technology, the final

rule will allow records entities to utilize a wider range of currently

available technology than previously allowed and remove or modify

requirements that the Commission believes are now obsolete (e.g.,

removing the requirements to have an audit system, to maintain

electronic records in limited specified formats, and to retain a

Technical Consultant, and reducing the retention period for certain

regulatory records of swaps and related cash or forward transactions),

allowing records entities to reduce their costs. In addition, the

Commission believes that the flexibility provided by the final rule

will, without further Commission rulemaking, allow records entities to

adopt new technologies as such technologies evolve, allowing such

persons to reduce future costs.

Moreover, the Commission expects that the added flexibility

provided by the final rule will encourage records entities to utilize

electronic storage rather than maintain paper regulatory records. The

Commission expects that this conversion will benefit the Commission,

the Department of Justice, and the commodity interest industry,

generally, by making the universe of regulatory records more accessible

3. Section 15(a) Factors

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. CEA Section 15(a) further

specifies that the costs and benefits shall be evaluated in light of

five broad areas of market and public concern: (i) Protection of market

participants and the public; (ii) efficiency, competitiveness, and

financial integrity of futures markets; (iii) price discovery; (iv)

sound risk management practices; and (v) other public interest

i. Protection of Market Participants and the Public

Because the final rule does not alter any existing requirements

regarding the type of regulatory records to be produced and maintained,

but, rather, modernizes and makes technology neutral the form and

manner in which certain regulatory records must be kept the Commission

believes that the final rule will continue to protect the public by

maintaining necessary safeguards to ensure the reliability of the

recordkeeping process while allowing records entities to benefit from

ii. Efficiency, Competitiveness, and Financial Integrity of Markets

As discussed above, the final rule, by providing additional

flexibility to records entities to electronically store their

regulatory records, may increase resource allocation efficiency by

improving the way in which such records are maintained. Apart from

the Commission anticipates minimal change to the efficiency,

competitiveness, and financial integrity of the markets, because this

rulemaking only affects recordkeeping and not how these markets

iii. Price Discovery

The Commission believes that the final rule may increase confidence

and participation in the markets by lowering costs for records entities

and by encouraging the electronic storage of regulatory records,

allowing such records to be more easily accessed and searched.

Nevertheless, the Commission does not anticipate a significant increase

in liquidity or a significant improvement in price discovery as a

result of the final rule.

iv. Sound Risk Management Practices

The Commission does not believe that the final rule will have any

significant impact on sound financial risk management practices because

this rulemaking only affects recordkeeping and not how market

participants conduct financial risk management. The Commission believes

that the final rule may result in minor improvements to operational

risk management because, as noted above, it will provide additional

flexibility to records entities to electronically store their

v. Other Public Interest Considerations

The Commission has not identified any additional public interest

4. Comments on Cost-Benefit Considerations

The Commission invited public comment on its cost-benefit

considerations in the Proposal, including the Section 15(a) factors

described above. Commenters were invited to submit with their comment

letters any data or other information that they had that quantified or

qualified the costs and benefits of the Proposal. The Commission

received a number of comments on the Proposal as described above;

however, none of the persons who commented on the Proposal submitted

any data or other information that quantified or qualified the costs

and benefits of the Proposal. Nevertheless, in response to certain

comments on the Proposal, and to reduce the costs of the final rule on

records entities, the Commission has been persuaded not to require in

the final rule the written recordkeeping policies and procedures that

had been proposed in Sec. 1.31(b) because the alternative suggested by

commenters achieves all the recordkeeping objectives of the Commission.

List of Subjects

Commodity futures, Reporting and recordkeeping requirements.

Authority delegations (Government agencies), Commodity futures,

Reporting and recordkeeping requirements.

For the reasons set forth in the preamble, the Commodity Futures

Trading Commission amends 17 CFR chapter I as follows:

PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

1. The authority citation for part 1 continues to read as follows:

Authority: 7 U.S.C. 1a, 2, 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

2. Revise Sec. 1.31 to read as follows:

Sec. 1.31 Regulatory records; retention and production.

(a) Definitions. For purposes of this section:

Electronic regulatory records means all regulatory records other

than regulatory records exclusively created and maintained by a records

entity on paper.

Records entity means any person required by the Act or Commission

regulations in this chapter to keep regulatory records.

Regulatory records means all books and records required to be kept

by the Act or Commission regulations in this chapter, including any

record of any correction or other amendment to such books and records,

provided that, with respect to such books and records stored

electronically, regulatory records shall also include:

(i) Any data necessary to access, search, or display any such books

and records; and

(ii) All data produced and stored electronically describing how and

when such books and records were created, formatted, or modified.

(b) Duration of retention. Unless specified elsewhere in the Act or

Commission regulations in this chapter:

(1) A records entity shall keep regulatory records of any swap or

related cash or forward transaction (as defined in Sec. 23.200(i) of

this chapter), other than regulatory records required by Sec.

23.202(a)(1) and (b)(1)-(3) of this chapter, from the date the

regulatory record was created until the termination, maturity,

expiration, transfer, assignment, or novation date of the transaction

and for a period of not less than five years after such date.

(2) A records entity that is required to retain oral

communications, shall keep regulatory records of oral communications

for a period of not less than one year from the date of such

(3) A records entity shall keep each regulatory record other than

the records described in paragraphs (b)(1) or (b)(2) of this section

for a period of not less than five years from the date on which the

record was created.

(4) A records entity shall keep regulatory records exclusively

created and maintained on paper readily accessible for no less than two

years. A records entity shall keep electronic regulatory records

readily accessible for the duration of the required record keeping

(c) Form and manner of retention. Unless specified elsewhere in the

Act or Commission regulations in this chapter, all regulatory records

must be created and retained by a records entity in accordance with the

(1) Generally. Each records entity shall retain regulatory records

in a form and manner that ensures the authenticity and reliability of

such regulatory records in accordance with the Act and Commission

regulations in this chapter.

(2) Electronic regulatory records. Each records entity maintaining

electronic regulatory records shall establish appropriate systems and

controls that ensure the authenticity and reliability of electronic

regulatory records, including, without limitation:

(i) Systems that maintain the security, signature, and data as

necessary to ensure the authenticity of the information contained in

electronic regulatory records and to monitor compliance with the Act

and Commission regulations in this chapter;

(ii) Systems that ensure the records entity is able to produce

electronic regulatory records in accordance with this section, and

ensure the availability of such regulatory records in the event of an

emergency or other disruption of the records entity's electronic record

retention systems; and

(iii) The creation and maintenance of an up-to-date inventory that

identifies and describes each system that maintains information

necessary for accessing or producing electronic regulatory records.

(d) Inspection and production of regulatory records. Unless

specified elsewhere in the Act or Commission regulations in this

chapter, a records entity, at its own expense, must produce or make

accessible for inspection all regulatory records in accordance with the

(1) Inspection. All regulatory records shall be open to inspection

by any representative of the Commission or the United States Department

(2) Production of paper regulatory records. A records entity must

produce regulatory records exclusively created and maintained on paper

promptly upon request of a Commission representative.

(3) Production of electronic regulatory records. (i) A request from

a Commission representative for electronic regulatory records will

specify a reasonable form and medium in which a records entity must

produce such regulatory records.

(ii) A records entity must produce such regulatory records in the

form and medium requested promptly, upon request, unless otherwise

directed by the Commission representative.

(4) Production of original regulatory records. A records entity may

provide an original regulatory record for reproduction, which a

Commission representative may temporarily remove from such entity's

premises for this purpose. Upon request of the records entity, the

Commission representative shall issue a receipt for any original

regulatory record received. At the request of a Commission

representative, a records entity shall, upon the return thereof, issue

a receipt for the original regulatory record returned by such

3. In Sec. 1.35, revise paragraph (a)(5) to read as follows:

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

(5) Form and manner. All records required to be kept pursuant to

paragraphs (a)(1), (a)(2), (a)(3), and (a)(4) of this section, other

than pre-trade communications, shall be kept in a form and manner that

allows for the identification of a particular transaction.

PART 23--SWAP DEALERS AND MAJOR SWAP PARTICIPANTS

4. The authority citation for part 23 continues to read as follows:

Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6b-1, 6c, 6p, 6r, 6s, 6t,

9, 9a, 12, 12a, 13b, 13c, 16a, 18, 19, 21.

Section 23.160 also issued under 7 U.S.C. 2(i); Sec. 721(b),

Pub. L. 111-203, 124 Stat. 1641 (2010).

5. In Sec. 23.203, amend paragraph (b) as follows:

a. Revise paragraph (b)(1); and

b. Remove and reserve paragraph (b)(2).

The revisions to read as follows:

Sec. 23.203 Records; retention and inspection.

(b) Record retention. (1) The records required to be maintained by

this chapter shall be maintained in accordance with the provisions of

Sec. 1.31 of this chapter, except as provided in paragraph (b)(3) of

this section. All such records shall be open to inspection by any

representative of the Commission, the United States Department of

Justice, or any applicable prudential regulator. Records relating to

swaps defined in section 1a(47)(A)(v) shall be open to inspection by

any representative of the Commission, the United States Department of

Justice, the Securities and Exchange Commission, or any applicable

Issued in Washington, DC, on May 23, 2017, by the Commission.

Christopher J. Kirkpatrick,

Secretary of the Commission.

Note: The following appendix will not appear in the Code of

Appendix to Recordkeeping--Commission Voting Summary

On this matter, Acting Chairman Giancarlo and Commissioner Bowen

voted in the affirmative. No Commissioner voted in the negative.

[FR Doc. 2017-11014 Filed 5-26-17; 8:45 am]

BILLING CODE 6351-01-P

Last Updated: May 30, 2017