After high-risk behavior triggered the U.S. financial crisis in 2008, Congress passed the Dodd-Frank Wall Street
Reform and Consumer Protection Act that created regulatory compliance processes to enforce transparency and accountability in the finance industry. One provision under Dodd-Frank Act regulations makes it easier to monitor the largely unregulated swaps marketplace. Traditionally, swaps tended to be conducted informally during telephone conversations, making it difficult for regulators to monitor the marketplace. In 2012, the Commodity Futures Trading Commission (CFTC) approved a rule requiring most registered futures brokers to record telephone calls in an effort to deter illicit activity. Brokers have until Dec. 21, 2013, to comply with the new Dodd-Frank call recording rule.
This FAQ is part of SearchCompliance's IT Compliance FAQ series.
Why is the federal government requiring most futures brokerage firms to start recording telephone calls and voicemail this year?
In December 2012, the CFTC voted to require most registered futures brokerage firms to record oral communications and maintain the records for one year. The deadline to comply is Dec. 21, 2013.
CFTC Chairman Gary Gensler said that the Dodd-Frank Act introduced comprehensive swaps marketplace regulation for the first time, including oversight of swap dealers and a clearinghouse requirement for standardized derivatives trading. The CFTC's oral communications recording requirement, he noted, should give the commission greater enforcement leverage. What's more, requiring brokers to record phone calls should deter them from making fraudulent or misleading communications to their customers and from trading ahead of customer orders.
By requiring firms to preserve conversations, the commission has greater evidence at its disposal during investigations of fraud and market manipulation. To that end, recorded conversations must be searchable and identifiable by transaction.
Swap dealers and major swap participants must also be registered with the CFTC. To reduce risk, dealers must comply with capital and margin requirements and adhere to business conduct standards. Some types of credit default swaps and interest rate swaps must be cleared by derivatives clearing organizations that are registered with the CFTC.
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Under what circumstances do futures brokerage firms have to comply with the Dodd-Frank telephone call recording rule?
Firms that trade in commodity interests, such as commodity futures contracts, commodity options, swaps and foreign exchange contracts, must record oral communications if they have more than $5 million in gross revenues. These firms include futures commission merchants, introducing brokers and retail foreign exchange dealers.
The CFTC specified that only conversations leading to the execution of futures or other commodity interests (excluding cash commodity transactions) have to be recorded. Quotes, bids, instructions, prices, solicitations, offers and other communications must be recorded if they result in a transaction execution. However, covered firms and participants will likely have to record all oral communications because they do not know in advance which conversations will lead to transactions.
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What is the cost of complying with the Dodd-Frank call recording rule?
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The CFTC estimates it costs $90 per mobile phone and $50 per landline to set up a cloud-based system to comply with the Dodd-Frank call recording requirement. The average initial cost for setting up a cloud-based system, according to the commission, would be $35,000, but in-house recording systems would likely be more expensive. The Futures Industry Association (FIA), for example, noted that its members have had to spend as much as $600,000 for the upgrade and upkeep of landline phones to record calls. The FIA told the commission that it can cost as much as $2.5 million to establish a system for recording mobile phone conversations. Storing the records brings ongoing additional costs as well.
Recognizing that small firms, in particular, may face economic or technological difficulties in complying with the call recording rule, the CFTC is accepting requests for alternative compliance schedules. Requests must include the costs and technical obstacles each firm has to meeting the Dec. 21, 2013, deadline, and a suggested alternative compliance schedule.
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How does the Dodd-Frank call recording rule apply to bring-your-own-device environments and state privacy laws?
The CFTC emphasized in its ruling that covered firms and participants must record all conversations that lead to an execution of futures or other commodity interests, regardless of the communications device used. The industry had asked that the commission offer safe harbor to firms with policies banning the use of personal devices for trades, but the request was denied. The commission did note that policies and procedures that aim to comply with the call recording rule would be favorably considered during enforcement actions.
The CFTC noted that the call recording rule does not violate any privacy laws if the other parties are informed of the recording. "However, as a practical matter," the commission warned, "all market participants should ensure that customers and counterparties have consented to the recording of all oral communications that may be subject to the Final Rules and should confirm the permissible methods of obtaining such consent under applicable state law."
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