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Compliance and Control

CFTC Streamlines Swaps Record Keeping

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June 09, 2017

CFTC makes less burdensome record keeping requirements for treasury’s derivatives.

Gov regsCorporates engaged in the derivatives market, and especially those that are frequent participants, should take stock of recently amended record-keeping requirements, which should be easier to comply with and provide an opportunity for treasury to ensure its systems are capturing and retaining the information correctly.

The new requirements apply to derivative instruments including future contracts and swaps, and they go into effect Aug. 28.

Paul Architzel, a partner at law firm WilmerHale and co-head of the firm’s futures and derivatives group, said that CFTC Rule 1.31 has required derivative users to maintain records about transactions in a highly prescriptive manner, at times problematic for infrequent market participants. The amended rules will be easier to comply with, and should prompt corporates to revisit how treasury, or whichever department engages in derivatives, records the transactions.

“Now it would make sense to be aware of the Commission’s recordkeeping requirements,” Mr. Architzel said. “They’re less prescriptive so they’re easier to comply with, and companies may want to revisit how they record those transactions and whether their record keeping systems apply.”

Most corporates are relatively infrequent users of the derivatives markets, although energy, food and other heavy users of commodities tend to approach the market regularly. If treasury is responsible for executing the transactions, then treasury executives must ensure that their treasury management systems are up to the task under the amended rule, which hadn’t been significantly changed since 1999. The agency added in 2012 the requirement to keep electronic files in their “native format,” without clearly defining term, according to WilmerHale. It proposed the current rule in January of this year, recognizing that the rule needed to align better with contemporary electronic information systems.

In an example, Mr. Architzel noted that food producers may pursue exchange-of-futures-for-physicals transactions, in which a futures contract on a commodity such as flour is exchanged for the actual physical good.

“The company would need to keep the records related to its cash flour transaction, if that’s underlying the futures contract,” Mr. Architzel said, adding that irregularities may prompt the CFTC to review the cash-market leg of the transactions, and in doing so it may look at whether the company’s records comply.

Most notably in terms of changes, WilmerHale says, is the elimination of the requirements that records entities store regulatory records in their native file format and retain a third-party technical consultant. Other changes include requiring pre-execution regulatory records to be stored for five years rather than the life of the instrument plus five years, although post-execution records must still be stored for the longer period. Oral communications must be maintained for five years from the date on which the record was created.

The CFTC “abandoned its formerly prescriptive approach,” WilmerHale says, and is now “technology neutral,” adopting a broad and flexible standard for record retention so that all regulatory records are retained in a way that ensures their authenticity and reliability. That means establishing proper systems and controls to maintain the “security, signature and data” necessary to ensure the records’ authenticity, and to produce the electronic records in accordance with the rule.

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