Proposed § 23.203(b)(2) required SDs and MSPs to retain records of any swap or related cash or forward transaction until the termination or maturity of the transaction and for a period of five years after such date. The Commission notes that proposed revisions to Commission regulation § 1.31 require retention of swap transaction records for a period of five years following the termination, expiration, or maturity of a swap,83 and that § 23.203 is consistent with retention requirements under the final swap data reporting rule.84 However, to mitigate costs in response to commenters’ concerns85 regarding retention of pre-execution trade information, the Commission is revising the rule to reduce the voice recording retention period to one year. The Commission considered a six-month retention period for voice recordings, as recommended by ISDA & SIFMA, but determined that for swaps, particularly long tenor swaps, a longer period is necessary
83 See Adaptation of Commission Regulations to Accommodate Swaps, 76 FR 33066, 33088 (June 7, 2011).
84 See Swap Data Recordkeeping and Reporting Requirements, 77 FR 2136, 2212 (Jan. 13, 2012).
85 See MFA (stating that the vast majority of its members do not keep records of transactions for five years and compliance with rule as proposed would be burdensome and costly); The Working Group (long-term electronic storage of significant amounts of pre-execution communication will prove costly over five-year period); ISDA (supporting a voice recording obligation aligned to the six-month minimum required by the UK Financial Services Authority); SIFMA (same). Chris Barnard, conversely, recommended that records should be required to be kept indefinitely rather than the general five years under the proposal. Mr.
Barnard argued that documents can be scanned after five years, so there is no practical reason for limiting the retention period and the information would be useful for future analytical purposes.
in order to give trade discrepancies an opportunity to surface. In addition, the
Commission believes that a one-year retention period is necessary to make the audit trail most useful for the Commission’s enforcement purposes. The Commission believes the benefit of available voice recordings to clear up latent trade discrepancies and aide in enforcement actions justifies the incremental cost of an additional six-month retention period.
Costs
Sections 4s(f) and (g) of the CEA require SDs and MSPs to adopt and implement certain reporting and recordkeeping requirements. The costs and benefits that necessarily result from these basic statutory requirements are considered to be the “baseline” against which the costs and benefits of the Commission’s final rules are compared or measured.
The “baseline” level of costs includes the costs that result from the following activities required by the statute:
Keeping books and records of all activities related to the business of the SD or MSP in such form and manner and for such period as may be prescribed by the Commission;
Maintaining daily trading records of swaps and related cash or forward transactions and recorded communications, including electronic mail, instant messages, and recordings of telephone calls, and including such information as the Commission shall require;
Maintaining daily trading records for each counterparty in a manner and form that is identifiable with each swap;
Maintaining a complete audit trail for conducting comprehensive and accurate trade reconstructions.
Compliance with the statutory baseline alone would result in costs for SDs and MSPs. For example, the requirement to maintain recorded communications would include the cost of a telephonic recording system. Similarly, compliance with the statutory provisions would require data storage and retrieval systems.
Congress mandated that the Commission adopt rules to implement each of the statutory provisions. With regard to its implementation decisions, the Commission has determined the following to be costs to SDs and MSPs to comply with the final
regulations regarding recordkeeping obligations under Part 23:
Compiling transaction, position, and business records;
Compiling records of data reported to an SDR;
Compiling records of real-time reporting data;
Compiling daily trading records for swaps of pre-trade information, including all oral and written communications concerning quotes, solicitations, bids, offers, instructions, trading, and prices that lead to the execution of a swap, however communicated; execution trade information, including the name of the counterparty, the terms of each swap, the date and time of execution; and post-execution trade information;
Compiling daily trading records for related cash and forward transactions of pre-trade information, including all oral and written communications concerning quotes, solicitations, bids, offers, instructions, trading, and prices that lead to the execution of a related cash or forward transaction,
however communicated; execution trade information, including the name of the counterparty, the terms of each swap, the date and time of
execution; and post-execution trade information;
Data storage, in physical and/or digital format, in most cases for the term of a swap plus five years;
Telephonic recording system (to record voice calls related to transactions);
and
Software and/or hardware updates to existing systems to capture and maintain the required records and to convert to Coordinated Universal Time.
With regard to the reporting requirements, the Commission has determined that compliance with the requirements relating to reporting swap data to an SDR and the real-time public reporting of swap transaction data will constitute compliance with such reporting requirements in section 4s(f). The reporting rules set forth in this release consist of cross-references to the reporting requirements in the rules relating to the
reporting of swaps to an SDR and the real-time public reporting of swap transaction data.
Accordingly, the Commission has considered the costs and benefits of reporting swap data to an SDR and real-time public reporting in those final rulemakings; therefore, those costs and benefits are not addressed in this rulemaking.86
As discussed, in adhering to its mandate from Congress, where possible the Commission also has attempted to alleviate the burdens on affected entities. In this
86 See Swap Data Recordkeeping and Reporting Requirements, 77 FR 2136 (Jan. 13, 2012); and Real-Time Public Reporting of Swap Transaction Data, 77 FR 1182 (Jan. 9, 2012).
regard, the Commission sought to minimize recordkeeping costs by eliminating the requirement that daily trading records of swaps and related cash and forward transactions be maintained as a separate electronic file.
Based on the available data, the Commission has been unable to reliably quantify the cost of compliance with the recordkeeping rules.87 Although the rules were adapted from existing recordkeeping regulations from a variety of sources including the
Commission’s regulations and those of the SEC, such regulations have evolved over time and reliable quantitative data is generally not available regarding the costs of compliance with such requirements. A 1998 adopting release for the SEC’s rules for OTC
derivatives dealers (including recordkeeping rules) cited commenters estimates in a range from $75,000 to $500,000 per year. Although dated, these SEC estimates provide a measure from which to very roughly attempt to gauge compliance costs.88 Moreover, because financial entities that will likely be required to register as SDs are currently subject to prudential regulation or other form of regulatory oversight, the Commission believes they will already have some form of recordkeeping policies and procedures in place.
In contrast, the Commission anticipates that entities that are not subject to
prudential regulation may incur greater costs to develop the infrastructure to comply with these recordkeeping requirements. In this respect, one commenter presented a report prepared by National Economic Research Associates, Inc. (NERA) stating that (1)
87 To better inform this assessment, the Commission has conducted a review of applicable academic literature, but found no research reports or studies that are directly relevant to its considerations of costs and benefits of these final rules.
88 See OTC Derivatives Dealers, 63 FR 59362, 59391 (Nov. 3, 1998).
compliance by certain entities with the proposed requirement that SDs and MSPs retain instant messages and tie them to transaction identifiers would entail average initial retention costs of $464,000 and average incremental ongoing annual costs of $228,000;
(2) that the retention of phone calls would entail an average initial investment of
$649,000 with additional annual costs of $382,000; and (3) that the requirement to time stamp transactions and use unique identifiers for transactions would entail average initial setup costs of $2,800,000 and average annual costs of $302,000.89 The Commission notes that the required use of unique identifiers is the subject of another rulemaking not adopted in this release.
Certain of the costs associated with these recordkeeping rules result from
collections of information subject to the Paperwork Reduction Act. Costs attributable to collections of information subject to the PRA are discussed further in section V.B.1.
below. The Commission has also considered these costs, which it incorporates by reference herein, in its section 15(a) analysis.
Benefits
The Commission believes these recordkeeping requirements will contribute to important, though unquantifiable, benefits intended by the Dodd-Frank Act. More specifically, complete, rigorous transactional recordkeeping promotes both external and internal risk management by providing an audit trail of past transactions. A strong audit trail, in turn generates a number of benefits, including the following:
89 NERA, Cost-Benefit Analysis of the CFTC’s Proposed Swap Dealer Definition Prepared for the Working Group of Commercial Energy Firms, December 20, 2011. In this late-filed comment supplement, NERA concludes that cost-benefit considerations compel excluding entities “engaged in production, physical distribution or marketing of natural gas, power, or oil that also engage in active trading of energy derivatives”—termed “nonfinancial energy companies” in the report—from regulation as SDs, including these recordkeeping and reporting rules.
It facilitates a firm’s ability to recognize and manage its risk, thereby enhancing the risk management of the market as a whole.
It acts as a disincentive to engage in unduly risky or injurious conduct in that the conduct will be traceable.
In the event such conduct does occur, it provides a mechanism for policing such conduct, both internally as part of a firm’s compliance efforts and externally by regulators.
It provides a basis for efficiently resolving transactional disputes.
And, it supports SDR reporting in that it provides a backstop to confirm the accuracy of reported information.
Section 15(a) Determination