Futures Audit Trails Requirements: A Compliance Minefield?

US futures exchange rules require participants with direct access to the exchange’s trading systems to maintain an “electronic audit trail” of all order messages submitted to the exchange.  The technical specifications associated with this audit trail requirement are highly prescriptive.   Compliance with the requirement – which exchange market regulation divisions monitor with vigilance, typically by way of annual examinations – requires close cooperation among Compliance, Operations and IT personnel within firms that trade through direct access.  Audit trails must be complete and accurate and account for every electronic communication a firm’s systems send to or receive from the exchange.  (Even what might seem de minimis omissions and errors can and do result in fines.)  Audit trail records must be maintained for a minimum of five years.

Recently ICE Futures US filed notice with the CFTC of amendments to its audit trail rule (ICE Futures US Rule 4.19).  The rule as amended will expand the list of FIX Tags required to be maintained by clearing members of ICE Clear US, as well as by customers with “direct access” to the exchange (access that bypasses the credit or risk control infrastructure of the customer’s guaranteeing clearing member).  The amendments also make clear that the exchange has “express authority to enforce the accurate population of” its audit trail requirements, and provide that a clearing member “must take appropriate action if it has actual or constructive knowledge” that a customer it has authorized for direct access has failed to accurately input or maintain audit trail requirements. 

For the most part, the audit trail requirements of ICE Futures US are aligned with those in force under the CME’s rules (set forth in Rule 536.B of the four CME Rulebooks).  (Notably, however, where the CME rule requires order entry, order modification, and exchange response receipt times to be maintained at least to the millisecond, the ICE Futures US rule requires “not less than one hundredth of a second.”)

Clearing members should note that audit trail rules require them to produce, on request, both their own audit trail records and those of any customer whose direct access they have guaranteed.  (The CME rules permit clearing members guaranteeing direct access to a CME “equity member” to require that equity member to maintain its own audit trail.)  Because certain elements of a guaranteed customer’s audit trail record will not be in the custody of the guaranteeing clearing member, clearing members providing such guarantees should arrange with their direct access customers periodically to download complete and accurate audit trail records from those customers.  Clearing members should consider memorializing these obligations in a supplement to their clearing agreements with such customers.   

The ICE Futures US rule amendments will be effective on January 2, 2023 (or sooner, as advised by the exchange).  The text of the ICE Futures US submission to the CFTC is here.   The CME’s Market Regulation Advisory Notice on its audit trail rule is here.