The U.S. Commodity Futures Trading Commission, facing resistance from agricultural and energy firms, is struggling to reach consensus on when traders must keep audio records that could be used in enforcement cases.
The rule, proposed in June 2011 and awaiting final approval, would require recording by members of derivatives exchange and swap-execution facilities. The records could help the CFTC’s enforcement unit determine traders’ intent when later probing claims of market manipulation and false reporting.
“Nothing can be more useful to a prosecutor than to be able to be a fly on the wall while the transaction is happening,” Steve Crimmins, a K&L Gates LLP law partner and former Securities and Exchange Commission deputy chief litigation counsel, said in a telephone interview.
The CFTC used recordings of telephone calls in the probe that led to its $200 million settlement with Barclays Plc (BARC) over claims that the bank helped manipulate interest rates.
The agency proposal met resistance starting last year from industry groups representing small and large trading firms and exchanges including Archer-Daniels-Midland Co. (ADM:US), Cargill Inc., Macquarie Bank Ltd. and the Kansas City Board of Trade. The rule would affect all exchange members and the swap-execution facilities created by the Dodd-Frank Act to boost transparency.
Groups including the Commodity Markets Council and National Grain and Feed Association have held five meetings with CFTC staff members on the issue in the last month. The groups say the proposed rule would unnecessarily capture commercial end-users that trade derivatives to hedge risk.
CFTC members are working to reach consensus on a final version, according to an agency official who sought anonymity because the rulemaking process isn’t public. Commissioners and staff members are debating whether small and large traders should face the same requirements, the person said.
“From my perspective, there is no need for a country grain elevator, cooperative or small firm to be included in this requirement,” Bart Chilton, a Democratic commissioner, said today. “The large guys who do billions in trading are another matter. They should record such conversations that can have an impact on prices consumers pay.”
Under the proposal, firms would be required to keep records of all oral communications that lead to the execution of trades. Firms would need to keep the records for five years and have them readily accessible for the first two years.
“The reason the CFTC is pushing this back is that it is contentious and may have serious impacts on industry that were not thought through,” Commodity Markets Council President Sanjeev Joshipura said in a telephone interview. “Members both small and large have strong concerns about the technological feasibility of the oral record-keeping requirements and the cost burdens associated with such requirements.”
The cost of compliance serves to “penalize exchange membership,” which could then drive liquidity away from the exchanges, he said.
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