CFTC

Overview CFTC record keeping CFTC trade and communications surveillance

CFTC - Regulating US Derivatives Markets

The mission of the CFTC is to promote the integrity, resilience, and vibrancy of the US derivatives markets through sound regulation. In order to do this effectively, the CFTC regulates a number of different organizations related to these markets, including:

Swap Data Repositories (“SWRs”),
Derivative Clearing Organizations (“DCOs”),
Designated Contract Markets (“DCMs”), and
Swap Execution Facilities (“SEFs”)

CFTC Oversight Responsibilities

The CFTC is an independent federal agency that oversees the United States derivatives markets, including futures contracts, options, and swaps, as well as over-the-counter (“OTC”) markets. While the rules that the CFTC have oversight of were part of the Commodity Exchange Act (“CEA”) passed in 1936, the Commission itself was established in 1974 by the passage of the Commodity Futures Trading Commission Act.

Organizations regulated by the CFTC

Swap Data Repositories (“SDRs”)

As an output of the Dodd-Frank Act, the CFTC is responsible for regulating swap data repositories, which were created in order to provide a central facility for swap data reporting and record keeping.

Derivative Clearing Organizations (“DCOs”)

A DCO is an entity that enables each party of an agreement, contract, or transaction to substitute (either through novation or otherwise) the credit of the DCO for the credit of the parties. It also arranges or provides (on a multilateral basis) for the settlement of obligations. Additionally, it provides clearing services or arrangements that mutualize or transfer credit risk among participants.

Designated Contract Markets (“DCMs”)

DCMs are exchanges that may list for trading futures or option contracts based on all types of commodities and that may allow access to their facilities by all types of traders, including retail customers. CFTC staff perform regular reviews of each DCM's ongoing compliance with the required core principles, called Rule Enforcement Reviews.

Swap Execution Facilities (“SEFs”)

An SEF is an electronic platform provided by a corporate entity that allows participants to buy and sell swaps in a regulated and transparent manner. Within the CFTC, the Department of Enforcement is responsible for detecting, investigating, and prosecuting violations of the CEA as well as CFTC regulations.

Overview of CFTC record keeping rules

All CFTC regulations fall under Title 17 of the Code of Federal Regulations (“CFR”). There are several sections under Title 17 that contain regulations specifically related to record keeping.

Rule 17 CFR §1.31

Rule 17 CFR §1.31 addresses the form by which institutions must retain and produce CFTC required records. Originally written in 1994, the regulation underwent several revisions in 2017, which included no longer requiring records be held in their native format and eliminating the write-once, read-many (“WORM”) requirement. Learn more >

Rules 17 CFR §45

Rules 17 CFR §45 and §46 (swap data record keeping and reporting requirements), and §49 (swap data repositories) are all rules which lay out further record keeping relations, specific to the swap market and swap organizations (e.g., swap execution facilities and swap data repositories). Learn more >

What challenges do financial firms face with regard to CFTC record keeping?

There are a number of broad challenges related to record keeping, regardless of the regulatory agency rules.

CFTC Record keeping challenge 1: Identifying which records need to be retained

Firms must identify which records they need to produce and retain. Building this inventory of records starts with an institution understanding exactly which products, asset classes, and instruments the business trades in, and which rules and records apply. In many cases, institutions are finding that they are either not storing required records appropriately or are not creating the records in the first place.

CFTC Record keeping challenge 2: Keeping up with new rules

In addition, new record keeping rules require institutions to review the impact on their firm and assess whether improvements in technology are required to meet minimum standards for CFTC record keeping. This can be costly in terms of both time and money.

CFTC Record keeping challenge 3: Growing data volumes

Firms involved in futures are required to produce a large number of records, including database records, voice recordings and other complex record types. In addition to the sheer number of record types, many of the records are assembled from data stored in multiple information systems, external sources, and markets. The ability to collate and store a large volume of records across different systems and markets is proving to be a significant challenge for the market participants.

CFTC Record keeping challenge 4: Archiving and monitoring employee communications

Financial institutions have faced increasing challenges surrounding the monitoring and record keeping of employee communications due to the increased use of digital communication channels. The Covid pandemic and a shift towards flexible working have increased those challenges since tracking and capturing communications that occur outside of the office is more challenging.

Recent CFTC Record Keeping Enforcements

There have been a number of enforcement actions taken by the CFTC for compliance failures. Two large violations that have occurred more recently include:

August 2023 – SEC and CFTC fine 13 firms a combined $549M for record keeping failures. Learn more >

August 2023 – Tier-one bank fined by CFTC for second time in a year for record keeping failures. Learn more >

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CFTC trade and communications surveillance

Section 6(c) to the Commodities Exchange Act

Under the Dodd-Frank Act, Congress gave the CFTC new and greater enforcement authority for futures, swaps and spot commodity markets similar to Section 10 of the Securities and Exchange Act of 1934. Congress added Section 6(c) to the Commodity Exchange Act which prohibits manipulative or deceptive devices or contrivances.

CFTC Rule 180.1

The CFTC then issued Final Rule 180.1, which gives the CFTC authority to enforce Section 6(c) and broadly prohibits manipulative and deceptive devices and contrivances, employed intentionally or recklessly, regardless of whether the conduct in question was intended to create or did create an artificial price.

CFTC Rule 17

Additionally, under Rule 17 CFR § 38.156, firms must maintain an automated trade surveillance system which can detect and investigate potential trade practice violations. The system must process daily orders within 24 hours end of the trading day. This system must also be able to detect specific trade patterns and anomalies.

CFTC surveillance enforcement actions

The CFTC have used their newly expanded powers of enforcing market manipulations to great lengths. A recent example of action they have taken includes:

December 2023 - CFTC orders commodities firm to pay $91M for fraudulent scheme to misappropriate Material Non-Public Information (MNPI). Learn more >

What challenges do firms face in regard to CFTC trade and communications surveillance?

There are many challenges firm’s face related to trade and communications surveillance. Below sets out a few examples, however as many firms operate in different manners, additional challenges may present themselves, which will also need to be accounted for.

CFTC trade and communications surveillance challenge 1:
Broad definition of market manipulation

One of the biggest challenges the industry faces with respect to trade and communications surveillance is the broad nature of the rules themselves. The way in which the rules are written and with no prescribed way in which surveillance should be conducted, leaves the CFTC with significant leeway to find violations of market manipulation rules.

CFTC trade and communications surveillance challenge 2:
Use of new communications

Widespread use of new communications channels, in many cases digital methods such as encrypted apps, makes surveillance even more difficult for the firms. This is because communications on new channels either need to be captured or made prohibited through a corporate policy. But when a platform is banned, firms need to be able to identify intent among employees to, for example, start talking on this unmonitored channel to ensure policies are being adhered to. Yet most surveillance technology is not up to date with modern ways of communicating.

CFTC trade and communications surveillance challenge 3:
Determining actual wrongdoing

A firm’s ability to distinguish between clear signals of wrongdoing and simply ‘noise’ within the trading environment makes it even more challenging for firms to comply with CFTC market manipulation rules. Many trade surveillance systems find it difficult to distinguish between false results (or "false positives") and instances that actually warrant an investigation. Additionally, there needs to be evidence of intent, which further complicates matters for firms.

CFTC trade and communications surveillance challenge 4:
Disparate systems

Surveillance doesn't have to be done holistically. In fact, many firms today still use different systems for different types of data or even asset classes. For example, many firms carry out their communications and trade surveillance separately, through different platforms. However, trades don’t happen in isolation and this data is deeply interconnected. Disparate data not only impacts the time it takes for firms to respond to potential instances of misconduct or market manipulation but also prevents them from getting an integrated view of their trading operations.

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