The Big Data Problem the CFTC Can t Seem to Solve

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1 October 19, 2015 SIDLEY UPDATE The Big Data Problem the CFTC Can t Seem to Solve Introduction On September 28, 2015, the Division of Market Oversight (DMO) of the U.S. Commodity Futures Trading Commission (CFTC) issued a no-action letter (CFTC Letter 15-52) 1 extending the compliance dates for certain electronic reporting requirements under Parts 17, 18 and 20 of the CFTC s regulations in connection with the CFTC s recently adopted ownership and control rule (the OCR Final Rules). CFTC Letter represents a further delay in the full implementation of the OCR Final Rules, with the CFTC staff having already extended compliance dates on two previous occasions. CFTC Letter replaces the no-action relief provided in February 2015 (CFTC Letter 15-03) and extends the compliance dates under the OCR Final Rules to dates ranging from April 27, 2016 to February 13, CFTC Letter was issued to the Futures Industry Association (FIA) on behalf of FIA members that are subject to the OCR Final Rules. FIA also has submitted to the CFTC a petition for amendments to the OCR Final Rules. 2 FIA s petition calls on the CFTC to make changes to various forms, modify the definitions under the OCR Final Rules to provide additional clarify about the data that should be reported, and amend the reporting process to address challenges identified during implementation of the OCR Final Rules. As described in this Sidley Update, the CFTC continues to struggle to fully implement the OCR Final Rules, which involve the collection by the CFTC of massive amounts of new data designed to better identify participants in the futures and swaps markets. Every day, the CFTC receives millions of discrete pieces of data about the futures and over-the-counter derivatives markets. The amount of data received by the CFTC has increased greatly over the past few years, largely in response to new demands placed on the agency, and placed by the agency on itself, after enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) in The CFTC s Commissioners and staff have not been shy in saying the agency lacks the staffing, funding and technology to adequately analyze all this data that is relentlessly flowing into the CFTC s computer systems. Given the political situation in Washington, the CFTC s situation is unlikely to change any time soon. However, the CFTC s big data problem, as acute as it already may be, is getting even worse. The CFTC is in the process of implementing changes to its large trader reporting system that will greatly expand the data required to be reported electronically to the agency, both by increasing the complexity of the data already being reported and by increasing the number of parties required to report this data. This new ownership and control reporting 1 More information available here. 2 More information available here. Sidley Austin provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship. Attorney Advertising - For purposes of compliance with New York State Bar rules, our headquarters are Sidley Austin LLP, 787 Seventh Avenue, New York, NY 10019, ; One South Dearborn, Chicago, IL 60603, ; and 1501 K Street, N.W., Washington, D.C ,

2 Page 2 system poses a number of challenges for the CFTC, but it also poses challenges for market participants, as they must determine what needs to be reported, collect the necessary data, and put in place complex systems to ensure compliance with the new regime. Former CFTC Commissioner Scott O Malia once said that the use of big data and technology is critical to transform the CFTC into a 21st century regulator that can efficiently and cost-effectively surveil the derivatives markets. 3 However, he also said that the CFTC had a big data problem and that the CFTC must think big to solve that problem. 4 Assuming for the moment that the sort of big thinking Mr. O Malia had in mind is not likely to come cheap, it is hard to see how the CFTC will solve its big data problem any time soon. The problem will only be compounded when the ownership and control reporting system is fully implemented over the coming months and years, particularly given the very low volume thresholds that will make an account reportable to the CFTC, as discussed below. In November 2013, the CFTC finalized new ownership, control rules and changes to certain CFTC reporting forms designed to enhance the CFTC s ability to identify futures and swap market participants. 5 As described herein, full implementation of the OCR Final Rules has been delayed repeatedly and implementation is now scheduled to be complete by early 2017, barring further delays. The implementation of the OCR Final Rules, which build on the CFTC s existing large trader reporting system, may strain the technological resources of the CFTC and of futures and swaps market participants. The changes could also strain compliance departments that are already spread thin by a half-decade of regulatory change. It is not clear whether the CFTC is really ready for these challenges, but perhaps more importantly, market participants are also struggling to comply with the OCR Final Rules. Large Trader Reporting Background The CFTC was created as an independent federal government agency in 1974, but its predecessors in the U.S. Department of Agriculture date back to the 1920s. 6 The CFTC s mission is to foster open, transparent, competitive, and financially sound markets, to avoid systemic risk, and to protect the market users and their funds, consumers, and the public from fraud, manipulation, and abusive practices related to derivatives and other products that are subject to the Commodity Exchange Act [(CEA)]. 7 The Grain Futures Administration implemented the first large trader reporting system in Under that system, clearing members were required to report on a daily basis the market positions of each trader exceeding a specified size. The Grain Futures Administration used the information to prepare annual reports similar to today s Commitments of Traders reports. There was a period in 1927 during which the Secretary of Agriculture temporarily suspended 3 Keynote Address by Commissioner Scott D. O Malia, The Future of Financial Standards SWIFT Institute, SWIFT s Standards Forum, and the London School of Economics and Political Science, London, England; available here. 4 Id. 5 Commodity Futures Trading Commission, Ownership and Control Reports, Forms 102/102S, 40/40S, and 71; Final Rule, 78 Fed. Reg History of the CFTC; available here. (CFTC History). 7 Commodity Futures Trading Commission, Mission & Responsibilities; available here. 8 CFTC History.

3 Page 3 large trader reporting in response to complaints that the reporting requirements were keeping large speculative traders from entering the market, and thus were actually depressing grain prices. The suspension lasted from February 26, 1927 until November 1, The Grain Futures Administration later determined that the large trader reporting requirements had not discouraged large speculators from entering the grain futures markets. The reporting requirements were again suspended in response to complaints that they were depressing grain prices, this time at the height of the Great Depression in The system was reinstated by the middle of In 1936, the Commodity Exchange Act was enacted and the jurisdiction of the new Commodity Exchange Commission, which replaced the Grain Futures Commission, was greatly expanded to include a list of enumerated agricultural commodities beyond merely grains. The CEA granted the Commodity Exchange Commission the authority, for the first time, to establish speculative position limits, and the Commodity Exchange Commission promulgated the first such limits on grains in late 1938 and on cotton in mid In 1947, pursuant to a Congressional subpoena issued two days earlier, the CEA was amended to enable the Secretary of Agriculture to submit to Congress, and make public, the names, addresses, and market positions of large traders. 9 Shortly thereafter, the Secretary of Agriculture submitted and published 35,000 large trader reports. The modern structure of the large trader reporting system dates to 1961, when the Commodity Exchange Authority adopted Parts 15 through 21 of Title Those rules superseded old Sections 1.18 and 1.19 of Title 17. The 1961 amendments imposed reporting requirements on clearing members of contract markets (Part 16); FCMs and foreign brokers (Part 17); traders who hold or control open contracts that equal or exceed certain reportable levels (Part 18); merchants, processors and dealers in certain commodities who hold or control open contracts in such commodities that equal or exceed certain reportable levels (Part 19); and members of contract markets (Part 20). The 1961 amendments also adopted the Part 21 rules, which provided the regulator with authority to issue special calls for information from FCMs, foreign brokers, and members of contract markets. 11 The 1961 amendments established a series of large trader reporting forms Series 00 reports were to be filed by clearing members, 12 Series 01 reports were to be filed by FCMs and foreign brokers, 13 Series 03 reports were to be filed by traders, 14 and Series 04 reports were to be filed by merchants and dealers. 15 The Commodity Exchange Authority published the first Commitments of Traders report on June 13, 1962, replacing the annual reports that had previously been published. 16 The Commodity Exchange Authority had taken another step forward in the policy of providing the public with current and basic data on futures market operations by 9 Id. 10 Commodity Exchange Authority (Including Commodity Exchange Commission), Department of Agriculture, Supersedure of Certain Regulations; 26 Fed. Reg (April 7, 1961). Part 20 was originally part of the large trader reporting rules, but was subsequently repealed and replaced by the modern version of Part 20, which is a post-dodd Frank creation that is also part of the large trader reporting rules, as described below. 11 Id. at These reports consisted of grains (i.e., wheat, corn, oats, rye, barley, flaxseed, soybeans, grain sorghums) (200); cotton (300); butter (400); eggs (500); potatoes (600); millfeeds (700); wool and wool tops (800); lard and tallow (900); cottonseed oil and soybean oil (1000); and cottonseed meal and soybean meal (1100). 13 Same commodities as the Series 00 reports, but with 01 at the end instead of Same commodities as the Series 00 reports, but with 03 at the end instead of Same commodities as the Series 00 reports, but with 04 at the end instead of 00 and reports were only required for grains, cotton and eggs. 16 CFTC History.

4 Page 4 moving beyond an annual statistical recap and initiating the publication of monthly COT reports. 17 These first commitments of traders reports were compiled monthly and published on the 11th or 12th calendar day of the following month, covering 13 agricultural commodities. In 1968, the CEA was amended to add livestock and livestock products (for example, live cattle and pork bellies) to the list of regulated commodities. 18 The 1968 amendments also enhanced reporting requirements. The CEA was overhauled in 1974 with the enactment of the Commodity Futures Trading Commission Act of That law created the CFTC as an independent agency and granted the CFTC authority over all commodities (other than onions), not merely agricultural commodities. 20 There have been a number of technical changes to the CFTC s large trader reporting requirements since 1974, but let s fast-forward to the 2000s. The CFTC has historically had exclusive regulatory authority over transactions in contracts for the purchase and sale of commodities for future delivery (i.e., futures contracts). However, in the wake of the market crisis of 2008, Congress enacted Dodd-Frank and granted the CFTC regulatory authority over the much larger and more complex swaps markets. 21 The CFTC has taken a number of separate actions to obtain information about the swaps markets and generally to modernize the large trader reporting system, both for swaps and for futures. The large trader reporting system is intended to preserve the core economic functions of the futures and swaps markets, which includes providing opportunities for market participants to hedge risks and facilitate price discovery with respect to the commodities underlying futures and swaps. The system also allows the CFTC to identify possible instances of market manipulation, violations of position limits, and other wrongful activity so that various regulatory and self-regulatory bodies can intervene to put a stop to, prevent or punish the wrongful activity. The CFTC s Large Trader Reporting System The large trader reporting system is set forth in Parts 15 through 21 of the CFTC s regulations, which are codified in Title 17 of the Code of Federal Regulations. The large trader reporting system is separate and distinct from other reporting and recordkeeping rules promulgated by the CFTC, such as the CFTC s swap data reporting and recordkeeping rules and real-time swap reporting rules, which are codified in Parts 43, 45 and 46 of the CFTC s regulations. Those reporting and recordkeeping rules are also important tools for the CFTC in conducting market surveillance, but the requirements of those rules are entirely separate from the large trader reporting system. The large trader rules are structured to identify and require reporting of data about open contracts, including information necessary for the identification of persons who hold or control reportable positions in open contracts, as well as information necessary for the identification of special accounts Commodity Futures Trading Commission, Comprehensive Review of the Commitments of Traders Reporting Program, Request for Comments; 71 Fed. Reg (June 21, 2006). 18 CFTC History. 19 Pub. L (1974). 20 Onions have been excluded from the list of regulated commodities since the enactment of the Onion Futures Act in That exclusion remains in the Commodity Exchange Act to this day. CFTC History. 21 Pub. L (2010). 22 OCR Final Rules at

5 Page 5 Section of Title 17 of the Code of Federal Regulations forms the basis for the CFTC s large trader reporting system. 23 That section requires FCMs, clearing members and foreign brokers to submit to the CFTC daily reports for each special account they carry. 24 These special accounts are those commodity futures or options accounts in which there are reportable positions. 25 The CFTC uses the daily reports to among other things: Assess individual traders activities and potential market power; enforce speculative position limits; monitor for disruptions to market integrity; and calculate statistics that the Commission publishes to enhance market transparency (e.g., in the weekly Commitment of Traders reports and monthly Bank Participation Report). 26 For each account identified on a Section report, the reporting FCM, clearing member or foreign broker must separately identify the special account to the CFTC on Form 102 within three days of the account becoming reportable. FCMs, clearing members and foreign brokers are required to self-start i.e., report without being asked to report but they may also be required to file a Form 102 in response to a special call issued by the CFTC. It may be shocking, given that it is 2015 and we do almost nothing on paper any more, but the large trader reporting rules require the filing of a separate Form 102 for each special account, by paper. These paper filings are generally submitted via or fax, but they can also be submitted by regular mail. Each Form 102 is required to include the following information: A special account number; the name, address, and other identification information for the controller, owner (if also the controller), or originator (if an omnibus account) of the account; an indication whether trades and positions in the special account are usually associated with commercial activity of the account owner in a related cash commodity or activity; information regarding an FCM s relationship to the account; and name and address information for the party submitting the Form The reporting party is also required to provide its own legal entity identifier (LEI), as well as any LEIs of various other parties, including account owners, controllers and originators. The current large trader reporting rules also require, after a special call by the CFTC, each trader holding or controlling a reportable position to file with the CFTC a Statement of Reporting Trader (Form 40) in the manner directed in the special call. These forms are also submitted to the CFTC by , fax or regular mail. Form 40 provides the CFTC with basic identifying information about the reportable trader, including the following: Name and address; principal business and occupation; type of trader; registration status with the [CFTC]; name and address of other persons whose trading the trader controls; name, address, and phone number for each controller of the reporting trader s trading; name and location of other reporting firms through which the reporting trader has accounts; name and locations of persons guaranteeing the trading accounts of the reporting trader or persons having a 10 percent or greater financial interest in the reporting trader or its accounts; other identification information regarding accounts which the reporting trader guarantees or in which the reporting trader has a financial interest of 10 percent or more; and whether the reporting trader has certain 23 Part 16 of the CFTC rules also require reports from DCMs and SEFs. These reports are generally referred to as trade capture reports and they are filed electronically. They capture end-of-day positions for each clearing member, and there are no reporting thresholds every end-of-day position is reflected in the reports. While the Part 16 reports are sometimes left out of discussions of the CFTC s large trader reports, they are vital to the CFTC s market oversight function and are used by the CFTC to confirm the accuracy and completeness of reports filed by FCMs, clearing members, and foreign brokers under Part 17 of the CFTC s rules. 24 OCR Final Rules at Section reports are reported on CFTC Form 101 Positions of Special Accounts. 25 The reporting levels are set forth in a table in CFTC regulation For example, the reportable level for corn contracts is 250 contracts, and the reportable level for S&P 500 Index contracts is 1,000 contracts. Reportable levels generally range from 25 contracts to 3,000 contracts. 26 OCR Final Rules at Id.

6 Page 6 relationships with owners that are foreign governments. 28 Additional information is required depending on whether the reporting trader completing the Form 40 is a natural person or an entity. In 2011, the CFTC adopted rules expanding the large trader reporting system to cover physical commodity swaps and swaptions. Those rules are codified in Part 20 of the CFTC regulations. In addition to creating for the first time a position-based reporting regime for swaps, the 2011 rulemaking also required the reporting of counterparty consolidated accounts with reportable positions on newly created form 102S and the filing of Form 40S by swaps traders in response to special calls issued by the CFTC. 29 The information obtained by the CFTC through the large trader reporting system is intended to be confidential and is solely for use by the CFTC in fulfilling its market surveillance and oversight roles. 30 To ensure the privacy of the information provided to the CFTC, the CFTC assigns confidential reporting numbers to reporting firms and traders. In certain markets for which there are CFTC-set speculative position limits (as opposed to position limits set by the futures exchanges themselves), hedgers that hold positions in excess of those limits must file Series 04 Reports with the CFTC pursuant to Part 19 of the CFTC s regulations. These reports are required in the grain, soy complex, and cotton markets and must be filed monthly. Form 204 (Statement of Cash Positions in Grains) and Form 304 (Statement of Cash Positions in Cotton) show the traders positions in the cash markets and are used by the CFTC staff to determine whether a particular trader has sufficient cash market positions to justify having futures positions that are in excess of applicable position limits. Information from Form 304 is also used to publish a weekly Cotton-on-Call report as a service to the cotton industry. Furthermore, CFTC Rule requires traders holding reportable positions in certain futures and option markets to retain records detailing their derivative and cash positions and transactions. Records must include inventories, purchases and sales of the cash commodity represented by the futures market, and its products and byproducts. Traders must provide these records to the CFTC upon request. Part 19 and Rule were not substantially amended by the OCR Final Rules, but market participants should remain vigilant about these legacy requirements, as they have at times caught market participants particularly non-u.s. market participants by surprise. The Final Ownership and Control Reporting Rules In November 2013, the CFTC adopted the OCR Final Rules, which substantially expand the reporting rules and forms used in the large trader reporting system and requires for the first time all forms to be filed electronically. 31 The new OCR Final Rules accommodate more detailed ownership and control information regarding identified special accounts, and... identify underlying trading accounts. 32 The OCR Final Rules will substantially expand the data received by the CFTC every day about the futures and swaps markets and will impose new reporting obligations on parties already required to report under the existing large trader reporting system. They will also impose reporting obligations on many parties that did not previously have any such 28 Id. at Id. 30 See 7 U.S.C. 12 (prohibiting the CFTC from publicly disclosing any person s positions, transactions, or trade secrets, except under limited circumstances). 31 OCR Final Rules at OCR Final Rules at

7 Page 7 reporting obligations. Furthermore, for the first time, the OCR Final Rules require all forms to be submitted electronically. The OCR Final Rules created three new forms: New Form 102, New Form 71 and New Form New Form 102 is a multifunction form. The requirement to file the form is triggered by (a) a special account (Form 102A), (b) a volume threshold account (Form 102B), or (c) a consolidated account becoming reportable (Form 102S). The data to be reported on the From 102 depends on the reporting trigger. New Form 71 is collected by the CFTC via special call much in the same way the CFTC currently collects Form 40 and Form 40S, but Form 71 will be used to collect additional information about certain volume threshold accounts identified on Form 102B. New Form 71 is essentially designed to drill down through successive layers of omnibus accounts to identify the actual trading accounts comprising those omnibus accounts. New Form 40 and New Form 40S will be used in the same manner as current Forms 40 and 40S. Traders and market participants identified on New Form 102 and New Form 71 may be required to file New Form 40 or New Form 40S in response to a special call issued by the CFTC. 34 All of these forms will be required to be filed and updated electronically through either a web-based portal or through secure FTP transmission. 35 Reporting Forms Form 102A, which is an updated version of legacy Form 102, collects position-based information to identify futures accounts with reportable positions. Form 102A requires identifying information about the owners and controllers of the trading accounts underlying each special account. Clearing members, FCMs and foreign brokers will be required to report electronically on Form 102A, by 9:00 a.m. on the business day following a special account becoming reportable, beginning September 30, Form 102B, which is a new reporting form under the OCR Final Rules, requires transaction-based, not positionbased, reporting of trading accounts that exceed 50 contracts during a single trading day on a single reporting market (i.e., volume threshold accounts ). The 50 contract threshold is calculated across all purchases and sales and across all expiration months in a contract. An account could be flat at the end of the day and nevertheless be reported on the basis of intra-day trading activity. Reporting markets include both futures exchanges and swap execution facilities. Like the Form 102A, Form 102B requires identifying information about the owners and controllers of volume threshold accounts. Clearing members will be required to report electronically on Form 102B, by 9:00 a.m. on the business day following a volume threshold account becoming reportable, beginning on dates ranging from September 30, 2015 to February 13, Form 102S, which is an updated version of legacy Form 102S, requires position-based reporting about counterparty consolidated accounts with respect to physical commodity swaps and swaptions on 46 physical commodities. Swap dealers and clearing members will be required to report electronically on Form 102S, by 9:00 a.m. on the third business day following a counterparty consolidated account becoming reportable, beginning on September 30, OCR Final Rules at Id. 35 Id.

8 Page 8 Additional information about compliance dates for electronic filing of Forms 102A, 102B, and 102S is provided below. The CFTC Pushes Back Deadlines and Issues A FRIENDLY REMINDER CFTC Letter No On July 23, 2014, in response to a request submitted by FIA, DMO issued a no-action letter providing relief from compliance with certain requirements under the OCR Final Rules. 36 Under that letter, the staff provided relief from electronically reporting via New Form 102A and New Form 102S until February 11, 2015, relief from electronically reporting via New Form 102B until March 11, 2015 and relief from electronically reporting via New Forms 40 and 40S and New Form 71 until February 11, The relief was conditioned on reporting parties continuing to report via the legacy forms in accordance with the requirements that were in place before the CFTC adopted the OCR Final Rules. Compliance with applicable recordkeeping was not delayed. FIA had asserted that the industry needs sufficient time to build and test systems in keeping with industry standard technology risk management practices for purposes of complying with the electronic reporting requirements of the OCR Final Rule. FIA also indicated that in addition to the technical development necessitated by the OCR Final Rule, the industry needs more time to educate clients globally and collect the new data required for OCR reporting. 37 CFTC Letter No On February 10, 2015, DMO issued a no-action letter 38 further preserving the status quo until various dates ranging from September 30, 2015 to February 13, Pursuant to relief provided under Letter 15-03, compliance with the requirements to report via New Form 102A, New Form 102B (with respect to DCM volume threshold accounts but not SEF volume threshold accounts), and New Form 102S will not be required until September 30, Compliance with the requirements to file New Form 40, New Form 40S, and New Form 71 will not be required until February 11, 2016 and compliance with the requirement to file New Form 102B (with respect to SEF volume threshold accounts) will not be required until February 13, Until the applicable compliance date, legacy versions of Forms 102, 102S, 40 and 40S must be filed in compliance with the requirements of those forms that were in place before the CFTC adopted the OCR Final Rules. However, compliance with newly adopted OCR recordkeeping requirements was not deferred under Letter The compliance date for those recordkeeping rules has already passed. CFTC Letter No On March 23, 2015, the CFTC staff issued an advisory reminding reporting parties of their obligations to obtain information on a timely basis from customers and counterparties in order to allow them to comply with the OCR Final Rules, lest they face possible disciplinary action by their respective self-regulatory organizations or other measures. 39 In the words of the staff: Reporting Parties may deem it advisable to furnish this advisory 36 CFTC Letter No (July 23, 2014). 37 Id. 38 CFTC Letter No (February 10, 2015). 39 CFTC Advisory No (March 23, 2015).

9 Page 9 to their customers and counterparties as a tool to ensure that such customers and counterparties provide the timely cooperation needed for Reporting Parties to comply with the OCR Final Rule. This reminder should be taken seriously by market participants. The large trader reporting system, and now the OCR Final Rules, perform a central function in allowing the CFTC to fulfill its market surveillance role. The CFTC has brought several high-profile enforcement cases in this area over the past several years, and the penalties in those cases have been material ranging from $25,000 in civil monetary penalties to $700,000 in civil monetary penalties, in addition to other sanctions, and generally showing an upward trend. 40 The CFTC has been particularly harsh in punishing repeat offenders. Furthermore, the futures exchanges have their own rules requiring compliance with the large trader reporting rules, so a violation of the CFTC rules could lead to both CFTC sanctions and sanctions from one or more of the exchanges. The exchanges have been aggressive in pursuing enforcement cases for violation of their own rules and have sanctioned a number of firms for such violations. CFTC Letter No On September 28, 2015, DMO issued yet another no-action letter extending certain compliance dates into 2016 and 2017 and replacing CFTC Letter No Pursuant to this latest relief, compliance with the requirements to report via New Form 102A, New Form 102B (with respect to DCM volume threshold accounts but not SEF volume threshold accounts), and New Form 102S will not be required until April 27, Compliance with the requirements to file New Form 40, New Form 40S, and New Form 71 will not be required until September 28, 2016, and compliance with the requirement to file New Form 102B (with respect to SEF volume threshold accounts) will not be required until February 13, Until the applicable compliance date, legacy versions of Forms 102, 102S, 40 and 40S must be filed in compliance with the requirements of those forms that were in place before the CFTC adopted the OCR Final Rules. Moving Forward OCR Testing As the CFTC staff receives OCR data and prepares for mandatory electronic OCR reporting, the CFTC s Office of Data and Technology (ODT) has been testing the submission of Forms 102A, 102B and 102S through its Portal and Secure FTP process. The staff has indicated that reporting parties are expected to cooperate with ODT staff as requested to test and implement any information technology standards or systems associated with the OCR Final Rule as contemplated in that rulemaking. 41 During the testing period, reporting parties are expected to provide Production Grade test data and otherwise provide forms and filings as described on the OCR testing page on the CFTC s web site Most enforcement actions in this area include other violations, such as violations of applicable position limits, in addition to the violations of large trader reporting requirements. 41 CFTC Letter No Id.

10 Page 10 FIA Tech OCR Data Service FIA Technology Services has been working with entities required to report under the OCR Final Rules, as well as with the exchanges and other service providers, to develop a technological solution to compliance with the OCR Final Rules. FIA has developed a web-based reporting system called the FIA Tech OCR Data Service that allows reporting parties, including FCMs, clearing organizations, foreign brokers, and swap dealers to capture and store client data needed for regulatory reporting purposes and file ownership and control reports to the CFTC. 43 The system allows ownership and control information to be maintained by clients of reporting parties, and then incorporates that information automatically into reports filed by the reporting parties in accordance with the OCR Final Rules. The FIA Tech OCR Data Service can also be used to file New Forms 40, 40S and 71 upon instructions by the client account or omnibus account originator. Use of the FIA system is voluntary. However, providing the necessary ownership and control information in some manner is effectively mandatory, as clearing members, FCMs and foreign brokers may no longer be able to trade with a client that does not provide the necessary ownership and control information. There is no fee charged for a client that merely wishes to upload its ownership and control information through the FIA Tech OCR Data Service and give permission for that information to be provided to its clearing members, FCMs or foreign brokers. Other Issues with the OCR Final Rules The CFTC s large trader reporting rules are highly complex and have for many years created substantial compliance costs for market participants. With the implementation of the OCR Final Rules, the regime is set to become even more complicated. While the move toward electronic reporting should ultimately lead to the CFTC collecting more reliable data, the OCR Final Rules also raise a number of difficult interpretive and technical questions. To date, the CFTC staff has done a great deal to assist market participants in coming into compliance with the OCR Final Rules. The CFTC staff has prepared a technical guidance document in connection with the OCR Final Rules that provides detailed instructions on submitting data electronically to the CFTC. 44 The CFTC staff has also hosted bi-weekly conference calls with reporting parties regarding technical issues with implementation of the OCR Final Rules and the staff have been answering a number of questions from market participants via and phone calls. However, market participants should be cautious about over-reliance on these informal methods of seeking guidance from the staff. The CFTC has indicated that [i]n the event of any conflict between the requirements of the OCR Final Rule (including the questions and instructions on the reporting forms attached thereto) and (a) the technical guidance document, (b) any verbal communications by Commission staff regarding the technical guidance document or the OCR Final Rule or (c) responses from Commission staff to technical questions..., the OCR Final Rule controls. 45 Presumably, any guidance that conflicts with the staff s technical guidance document will eventually be reflected in a revised version of that document, but until such revisions are made, market participants will be relying on the informal guidance at their own risk. One area in which the CFTC may need to go back to the drawing board is in the reporting of volume threshold accounts. The reporting level for such accounts is extremely low only 50 contracts per trading day, aggregated 43 FIA, FIA Tech, OCR; available here. 44 See CFTC Technical Guidance Document for 17 CFR Parts 15, 17, 18, and 20 Ownership and Control Reports, Forms 102/102S, 40/40S, and 71; available here. 45 Ownership and Control Reporting (OCR); available here.

11 Page 11 across all purchases and sales, and across all contract months. Assuming that one role of reporting rules is to deter wrongdoing by persons who might otherwise be bad actors, but who will avoid the market entirely to avoid having their bad acts discovered by the regulator, the low threshold does not make sense. The setting of such a low threshold for volume threshold accounts means that virtually the entire market will be captured. While there may be something to be said for the CFTC having information about as broad a swath of the market as possible, that goal is not really achieved by the OCR Final Rules. If the goal is 100 percent visibility into the markets, why not make the threshold zero contracts? If the goal is deterrence, why not raise the threshold to ensure that only market participants that are really engaged in significant activity are captured? Furthermore, if the 50 contract threshold is simply a recognition that the CFTC lacks the resources to police very small and inactive accounts, shouldn t the threshold be even higher? If the CFTC really has a serious big data problem, that problem is certainly not helped by vastly increasing the amount of data pouring into the CFTC s servers every day. Given the resource shortages currently facing the CFTC, which are unlikely to be resolved in the near term, the CFTC must make difficult choices about what kinds of data and how much data it wishes to collect and analyze. There are costs associated with every incremental piece of data collected, and those costs are born both by the agency and by the markets. Hopefully, once the CFTC starts receiving the full set of data under the OCR Final Rules, it will be able to refine its reporting requirements to focus on the data that is most likely allow the CFTC to fulfill its surveillance role. To reflect back on the CFTC s roots as a regulator of the grain markets, the CFTC must determine how it will go about separating the wheat from the chaff. Massive amounts of new information will provide no real benefit if the CFTC does not have the ability to determine which information really matters. The CFTC must also work to harmonize its various reporting rules. The CFTC has at least two vast data collection regimes the large trader reporting system, which includes the OCR Final Rules, and the swap data reporting system. These systems overlap to a certain extent, but they also leave gaps. For example, a particular swap transaction may be reported by a swap dealer on Form 102S, with a follow up Form 40S filed by its counterparty. That same transaction may be reported to a swap data repository pursuant to the CFTC s Part 43 and 45 rules, leading to double reporting of the transaction. At the same time, a retail futures account that transacts fewer than 50 contracts per day would not be reported under the swap data reporting regime, and would remain below the reporting threshold to be a volume threshold account under the large trader reporting rules. It is not clear why either result is sensible or efficient. The CFTC should eliminate these overlaps and fill the gaps between these systems. While we are not aware of any specific concerns about the computer systems being used by the CFTC to collect information under the OCR Final Rules, recent lapses by Federal government agencies have opened the government to criticism of its aging technical infrastructure. The OCR Final Rules will require the reporting of sensitive commercial information about the ownership and control of derivatives positions and accounts. This information could be quite valuable to commercial competitors or even to foreign governments. Information security is another aspect of the CFTC s big data problem that will only be made worse by increasing the volume and sensitivity of information being collected.

12 Page 12 Conclusion The CFTC seems to have a big data problem too much information and too little ability to analyze that information. With full implementation of the OCR Final Rules, that problem may soon become even more acute. The rules are highly complex and technical. They seem to be tailor made for generating compliance failures. Furthermore, compliance departments are already spread thin and must cope with their own big data issues. Are you ready for compliance? Is the CFTC ready? We will find out soon enough. If you have any questions regarding this Sidley Update, please contact the Sidley lawyer with whom you usually work, or Nathan A. Howell Partner nhowell@sidley.com Sidley Investment Funds Practice Sidley has a premier, global practice in structuring and advising investment funds and advisers. We advise clients in the formation and operation of all types of alternative investment vehicles, including hedge funds, fund-of-funds, commodity pools, venture capital and private equity funds, private real estate funds and other public and private pooled investment vehicles. We also represent clients with respect to more traditional investment funds, such as closed-end and open-end registered investment companies (i.e., mutual funds) and exchange-traded funds (ETFs). Our advice covers the broad scope of legal and compliance issues that are faced by funds and their boards, as well as investment advisers to funds and other investment products and accounts, under the laws and regulations of the various jurisdictions in which they may operate. In particular, we advise our clients regarding complex federal and state laws and regulations governing securities, commodities, funds and advisers, including the Dodd-Frank Act, the Investment Company Act of 1940, the Investment Advisers Act of 1940, the Securities Act of 1933, the Securities Exchange Act of 1934, the Commodity Exchange Act, the USA PATRIOT Act and comparable laws in non-u.s. jurisdictions. Our practice group consists of approximately 120 lawyers in New York, Chicago, London, Hong Kong, Singapore, Shanghai, Tokyo, Los Angeles and San Francisco. Sidley Securities & Derivatives Enforcement and Regulatory Practice Sidley s Securities & Derivatives Enforcement and Regulatory group advises and defends clients in a wide range of securities- and derivatives-related matters. With more than 150 lawyers in 10 offices worldwide, we provide comprehensive regulatory, enforcement, and litigation solutions in matters involving the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the Financial Industry Regulatory Authority (FINRA), self-regulatory organizations (SROs), state attorneys general, and state securities regulators. Our team is distinctive in that it combines the strength of nationally recognized enforcement lawyers with the skills of equally prominent counseling lawyers. We work collaboratively to provide our clients with informed, efficient, and effective representation. To receive Sidley Updates, please subscribe at BEIJING BOSTON BRUSSELS CENTURY CITY CHICAGO DALLAS GENEVA HONG KONG HOUSTON LONDON LOS ANGELES NEW YORK PALO ALTO SAN FRANCISCO SHANGHAI SINGAPORE SYDNEY TOKYO WASHINGTON, D.C. Sidley Austin refers to Sidley Austin LLP and affiliated partnerships as explained at