Swap Transaction Recordkeeping: Information Hoarding


The Dodd-Frank Wall Street Reform and Consumer Protection Act has many new or updated rules and regulations for organizations in the financial markets. One in particular is Title Seven, which gives the Commodity Futures Trading Commission (“CFTC”) the authority to set rules for swap dealers and major swap participants regarding the records they are required to retain in connection with swap transactions and the method and duration of retention. With this authority the CFTC came up with regulations establishing and governing the duties of swap dealers and major swap participants.

These rules are so detailed and apply to so many different types of records that they will be difficult to understand, and many institutions may be lost for the first few years of the rules’ application, leading to extravagant costs.

The requirements of recordkeeping pertaining to swaps are frighteningly broad. They include any and all communications relating to the transaction until its termination. This requires recording and retaining everything from the very first conversation that one would have with a swap dealer in regards to such a transaction, and continues until the very last conversation that is had between the two parties, encompassing everything in between even remotely related to the swap transaction. Furthermore, these requirements apply not just to emails and instant messaging, but also to phone calls. This would require employees of swap dealers to have recording devices attached to their work telephones, and probably to their personal mobile phones as well.

The rule also addresses the method of retention. All records must be kept “readily accessible” (a term left undefined) for the life of the swap and for an additional two years. The last three years of the period records need not be kept “readily accessible.” Somewhat less stringently, the Commission only requires voice records to be kept for one year after the life of the swap.

The first and obvious thing to point out is that all of the rules are much more complex than this. The CFTC’s rule, along with comments it received and addressed, totals in the hundreds of pages, which not only must be read, but also must be understood, as the slightest mistake may cost these institutions millions, and worse, their reputations.

This can get even more complex when only one of the counterparties is a CFTC registered swap dealer, but even when both counterparties are swap dealers, deciding which has to report to the CFTC, or if both must do so, is not always a clear decision.

The Commission believes this regulation will help protect the swap market from those looking to exploit it. Yet while market corruption is a terrible problem, it is unclear whether the CFTC regulations will achieve their intended beneficial impact. The procedures and rules mandated by the CFTC would produce terabytes of record data for each swap-dealer annually, and combing this data for relevant information would prove very difficult and cumbersome. Further, the recordkeeping data would not be useful as a tool to prevent misconduct, but rather, as an investigatory tool should there be a future need. Indeed, this could be why the commission wants all transactional records searchable by counterparty and transaction. Given that the regulation lacks any sort of preventative measure beyond deterrence, the benefits of such policies do not seem to justify the onerous costs to swap dealers and market participants.

For swap dealers without an existing surveillance infrastructure, it is estimated that simply installing devices to record all phone calls, emails, and instant messages will cost millions of dollars. Additionally, there is the cost of storing the data in the appropriate format:  Developing a system that neatly sorts the information by transaction and counterparty would only add to the immense cost. The process of archiving voice records could also prove costly, as transcribing and creating searchable phone call files is not easy. Finally, the vast amounts of data produced by this record-keeping would have a hefty storage cost attached to it.

The efforts of the Commission are undeniably laudable. Things like this need to be done to reform Wall Street in the wake of the Great Recession; and yes, unfortunately someone has to bear the cost so the entire market doesn’t collapse due to the misaction of a few, again. And the information does have to be stored in a way that allows the Commission to find things easily; otherwise, what would be the point? As always, though, the problems are in the details. All conversations, ever?  It just seems very extreme, especially in light of the fact that the extremism does not appear get one much further than if this were scaled back a little.

The same goal can be reached if we allow the banks to record all that is needed to reconstruct the transaction. That is the ultimate goal of the Commission, yet it goes out of its way to demand more than necessary.


About Author

Comments are closed.

Fordham Journal of Corporate & Financial Law