CCRO Best Practices and CFTC Enforcement Activity Highlight the Importance of Maintaining Required Records
May 22, 2003
On February 27, 2003, the Committee of Chief Risk Officers (CCRO) issued its "Best Practices for Energy Price Indices" (Best Practices). The Best Practices are designed to increase the accuracy of energy commodity (e.g., electricity, natural gas, crude oil) transaction data reported to firms such as Platt’s and Gas Daily that aggregate and publish such data, while providing confidentiality safeguards to the reporting firms. In the Best Practices, the CCRO advises data providers and index publishers to maintain records and to "review and consider all applicable state and federal recordkeeping requirements when developing or updating a retention policy." In particular, recordkeepers should take Commodity Futures Trading Commission (CFTC) requirements into account as they implement the Best Practices or their own internal policies and procedures.
Many energy companies are also members of futures exchanges, such as NYMEX. One CFTC rule is broadly written to require each futures exchange member (Member) to keep "full, complete, and systematic records, together with all pertinent data and memoranda, of all transactions relating to its business of dealing in commodity futures, commodity options and cash commodities." Although the rule is written broadly, it is not clear that the CFTC has the authority to require energy traders to maintain records of cash market commodity transactions unless those records are related to a futures contract position. Arguably, the CEA only authorizes the CFTC to require Members to maintain records of cash transactions that bear some reasonable relationship to their futures and futures option positions. Market participants should carefully consider how the CFTC views the scope of its recordkeeping regulations when developing their internal recordkeeping policies and procedures.
Members also must maintain and produce copies of any communication they publish or generally circulate concerning market information or conditions that affect or tend to affect the price of any commodity and the true source of or authority for the information contained in the communication. For example, if your company sends transaction data to reporting services, you must maintain copies of that data and all records from which you extracted the data, including electronic risk management systems, confirmations and trade blotters. Other required records include: all orders (filled, unfilled and cancelled), journals, ledgers, purchase and sale statements. Also included are documents on which trade information originally is recorded.
Energy market participants may be subject to additional recordkeeping requirements, depending on the nature and scope of their business. For example, exchanges of futures for physicals or swaps, block trades and other types of noncompetitive trades (including, but not limited to, transfer or office trades), must be specifically identified, and all orders, records and communications related to such transactions must be specifically marked.
Holding or controlling more than a specified number of futures or options on futures contracts (that is, having a "reportable position") also triggers certain CFTC recordkeeping requirements. Every trader who holds or controls a reportable futures or option position in a commodity must keep books and records showing: all details concerning all positions and transactions in futures contracts on the commodity on all futures exchanges, all positions and transactions in options on futures on the commodity, all positions and transactions in the cash commodity, its products and byproducts, and commercial activities in the underlying commodity that the trader hedges using the reportable positions. Upon receipt of a request from the CFTC, those holding reportable positions must furnish the CFTC any pertinent information concerning such positions, transactions or activities.
CFTC rules mandate that all required records be retained for five years. Such records must be maintained in an easily accessible place for the first two of those five years. In addition, those using either micrographic or electronic storage media must develop and maintain operational procedures and controls over these records and satisfy other requirements to ensure the availability and integrity of those records for the required retention period. Electronic storage media users must also retain a third-party technical consultant prior to using such media to provide the CFTC with the requested records if the entity required to keep the records cannot or will not provide them to the CFTC. Each electronic storage media user or its technical consultant must also represent to the CFTC prior to the initial use of the system that the storage system meets CFTC requirements for using electronic storage media.
If your company is subject to, but not in compliance with the requirements described above, it may be violating CFTC rules and the Commodity Exchange Act. The penalties for such violations can be severe and include administrative, civil and even criminal sanctions (for willful violations). In December 2002, for example, Dynegy Marketing & Trade paid a $5 million civil monetary penalty to settle a CFTC enforcement action for, among other things, failing to maintain records of information Dynegy provided to gas price index publishers. In a similar action in March 2003, El Paso Merchant Energy settled CFTC charges of reporting false market data, attempted manipulation and failing to produce required records. Under the settlement order, El Paso Merchant Energy agreed to pay a $20 million civil monetary penalty. In light of the potentially serious consequences of CFTC recordkeeping violations, your company’s policies and procedures must address applicable CFTC recordkeeping requirements.
If you would like assistance in determining whether CFTC recordkeeping requirements apply to your company and, if so, ensuring that your company’s policies and procedures adequately address those requirements, please contact your regular McDermott, Will & Emery lawyer or one of the authors of this article for more information on Best Practices.
