I. The Form of Books and Records

CFTC Rule 1.31, which currently includes archaic terms such as “micrographic media,” and directs market participants to retain electronic records on floppy disks and microfiche, has long been due for an update. Accordingly, the CFTC has amended the Rule to make it “technologically neutral” and therefore more likely to stand the test of time. Amended Rule 1.31 defines the body of books and records required to be kept by the Commodity Exchange Act (“CEA”) and the CFTC’s regulations as “regulatory records,” a subset of which are defined as “electronic regulatory records.” Market participants must retain all data necessary to access, search, or display electronic books and records, and all data produced and stored electronically describing how and when such books and records were created, formatted, or modified (i.e., metadata). The CFTC decided not to include a specific definition of metadata, stating that including specifics would be contrary to the goal of technology neutrality, and found instead that requiring the description of how and when such books and records were created, formatted, or modified would be sufficient to support its statutory inspection and investigative purposes. Persons need only maintain such data about a regulatory record after the record is created. The term “electronic regulatory records” refers to all such records that are not created and maintained on paper.

II. The Manner of Creating and Maintaining Books and Records

Amended Rule 1.31 specifies that regulatory records must be created and retained in a form and manner that ensures authenticity and reliability in accordance with the CEA and CFTC’s regulations. Market participants must keep an inventory of their electronic records, and establish systems and controls to ensure the authenticity and reliability of such records, which must include systems that maintain the security, signature, and data necessary to ensure that the records are authentic. Moreover, they must be able to produce such records in the event of an emergency or systems outage. However, these are not new requirements, but rather helpful guidance for market participants maintaining electronic books and records.

As originally proposed, Amended Rule 1.31 would have required market participants to establish, maintain, and implement written policies and procedures reasonably designed to ensure compliance with its recordkeeping obligations under Rule 1.31. However, the finalized version of Amended Rule 1.31 does away with this requirement, in response to commenters’ concerns that such a requirement is inconsistent with a principles-based approach to regulating recordkeeping.

The CFTC approved a modification to CFTC Rule 23.203(b), which specifies the retention time period for electronic pre-execution communications in relation to a swap. The modification reduces the time period from the life of the swap plus five years, to five years from the date of creation of the regulatory record.

III. Inspection of Books and Records

Amended Rule 1.31 restates and clarifies the CFTC’s and Department of Justice’s (“DOJ”) right to inspect books and records required to be kept and maintained in accordance with Rule 1.31. The requirement that market participants produce records to the CFTC and DOJ upon request remains unchanged, but Amended Rule 1.31 clarifies that electronic records must be produced promptly in a reasonable form and medium.

Additionally, Amended Rule 1.31 removes the requirement that recordkeepers engage a third-party technical consultant, and that the technical consultant file certain representations with the CFTC regarding access to the recordkeeper’s electronic regulatory records.

1. The rulemaking is available at cftc.gov/idc/groups/public/@newsroom/documents/file/federalregister052317.pdf.

Client Alert 2017-150