The trade group representing clearing agents and exchanges in the futures market says that the Commodity Futures Trading Commission has underestimated the costs of potentially requiring broker-dealers and clearing firms to record phone and electronic communications and store records.
The Futures Industry Association has recommended that the CFTC ask the regulator’s Technology Advisory Committee to analyze the effectiveness and “true” costs of existing recording technology. It also wants the CFTC to allow financial firms to rely on the records of trading platforms when complying with its recording and storage requirement.
Firms should not have to store all books and records in either paper or electronic form for five years, the group said .
In June, the CFTC proposed requiring clearing firms and broker-dealers to maintain records of “all oral and written communications” involving quotes, solicitations, bids, offers, instructions, trading and prices that lead to the execution of transactions whether by phone, fax, instance messaging or other electronic means.
The CFTC also recommended firms maintain all books and records on trading activities “in their original form” -- either paper or electronic -- for the first two years of the total of at least five years. The clock would start five years after a swap contract expired.
The FIA said that some of its member firms have estimated they will need to spend at least $600,000 to upgrade and maintain less than 10 land line telephones. Annual operating costs could amount to the same. When it comes to recording mobile telephone conversations, the tab could come to at least $1 million annually. That’s a far cry from the $55,000 the CFTC estimated it would cost am “average large firm” to buy the necessary recording equipment.
“The nature and scope of the obligations that would be imposed on Commission registrants and non-registrant members of designated contract markets and swap execution facilities under the proposed amendment is unclear and, in one case, simply impossible to meet,” wrote the FIA in a letter to the CFTC on August 8. “We urge the Commission to confirm that Commission registrants and non-registrant members of designated contract markets and swap execution facilities may rely on DCMs and SEF’s and not be required to record conversations and maintain books separately.”
The FIA is concerned that the CFTC could require the recording of all telephone calls including calls made on mobile telephone, involving sales or trading personnel even if the call doesn’t lead to an order being executed. Even more worrisome to the trade group is the CFTC’s proposal that financial firms maintain the records of each transaction as a separate electronic file identifiable by transaction and counterparty.
“The Commission’s estimate does not include the costs of maintaining each transaction record as a separate electronic file,” wrote the FIA, adding that the technology to do so may not even exist. The trade group cited two software providers – NICE Actimize and Nexidia which offer “word-spotting” programs to facilitate the search for conversations—as charging $500,000 in licensing fees alone.
If the CFTC goes ahead with its recommendation to require the recording of telephone conversations, said the FIA, it should adopt the “principles-based” approach favored by the U.K’s regulator as the standard for determining the liability of a financial firm. The FSA requires financial firms to take “reasonable steps” to record relevant telephone conversations sent or received on equipment provided or sanctioned by the firm and to prevent an employee from using his or her own telephone.
