Recordkeeping and Surveillance Obligations
Financial firms trading derivatives must maintain comprehensive records of trading activity and conduct surveillance to detect manipulative, abusive, or unauthorized trading. Recordkeeping requirements specify what must be retained and for how long, while surveillance programs monitor for suspicious patterns and regulatory violations.
Definition and Key Concepts
Recordkeeping Requirements
| Regulator | Primary Rule | Scope |
|---|
| SEC | Rule 17a-4 | Broker-dealers |
| CFTC | Regulation 1.31 | FCMs, swap dealers |
| FINRA | Rule 4511 | FINRA members |
| NFA | Compliance Rule 2-10 | NFA members |
Record Categories
| Category | Examples |
|---|
| Order records | Order tickets, time stamps, modifications |
| Trade records | Execution reports, allocations, confirmations |
| Account records | Customer agreements, statements, correspondence |
| Position records | Daily positions, margin, P&L |
| Communications | Emails, chats, voice recordings |
Retention Periods
| Record Type | SEC/FINRA | CFTC |
|---|
| Trade blotters | 6 years | 5 years |
| Order tickets | 6 years | 5 years |
| Customer records | 6 years | 5 years |
| Communications | 3-6 years | 5 years |
| Position records | 6 years | 5 years |
How It Works in Practice
Required Trade Records
Order record requirements:
| Field | Description |
|---|
| Order ID | Unique identifier |
| Timestamp | Receipt and execution time |
| Account | Customer or firm account |
| Product | Security/contract details |
| Side | Buy or sell |
| Quantity | Ordered and executed |
| Price | Limit price and execution price |
| Order type | Market, limit, stop |
| Time in force | Day, GTC, IOC |
| Execution venue | Exchange, ATS, OTC |
Trade record requirements:
| Field | Description |
|---|
| Trade ID | Unique identifier |
| Execution timestamp | Precise time |
| Counterparty | Executing broker or counterparty |
| Capacity | Principal or agent |
| Commission | Fees charged |
| Settlement details | Date, instructions |
Electronic Recordkeeping
WORM (Write Once, Read Many) requirements:
| Requirement | Description |
|---|
| Non-rewriteable | Cannot alter or delete |
| Indexed | Searchable and retrievable |
| Accessible | Immediate access for examination |
| Verified | Integrity checks |
| Backed up | Redundant storage |
Storage standards:
| Standard | Requirement |
|---|
| Format | Industry-standard, readable |
| Location | Secure, fire-protected |
| Backup | Geographic redundancy |
| Testing | Annual restoration test |
| Audit trail | All access logged |
Surveillance Obligations
Areas of surveillance:
| Area | Focus |
|---|
| Market manipulation | Spoofing, layering, wash trades |
| Insider trading | Material non-public information |
| Front-running | Trading ahead of customer orders |
| Position limits | Exceeding regulatory limits |
| Marking the close | Manipulation at settlement |
| Best execution | Fair pricing for customers |
Surveillance methods:
| Method | Application |
|---|
| Pattern detection | Algorithmic analysis of trading patterns |
| Threshold alerts | Triggers based on volume, P&L, etc. |
| Exception reports | Unusual activity flagging |
| Correlation analysis | Cross-market pattern detection |
| Communication review | Keyword and pattern searches |
Worked Example
Trade Recordkeeping Process
Scenario:
Options trader executes order for customer account.
Order entry (9:30:15 AM):
| Field | Value |
|---|
| Order ID | ORD-2025-0117-00001 |
| Account | CUST-12345 |
| Product | SPY Feb 480 Call |
| Side | Buy to open |
| Quantity | 100 contracts |
| Order type | Limit |
| Price | $5.50 |
| Time in force | Day |
| Received | 2025-01-17 09:30:15.123 |
| Rep ID | REP-789 |
Execution (9:30:18 AM):
| Field | Value |
|---|
| Trade ID | TRD-2025-0117-00001 |
| Execution time | 2025-01-17 09:30:18.456 |
| Quantity filled | 100 contracts |
| Price | $5.48 |
| Venue | CBOE |
| Capacity | Agent |
| Commission | $65.00 |
| Counterparty | Market maker ABC |
Confirmation generated:
| Field | Value |
|---|
| Trade date | January 17, 2025 |
| Settlement date | January 21, 2025 |
| Net amount | $54,865.00 |
| Status | Pending settlement |
Records retained:
| Record | Retention | Location |
|---|
| Order ticket | 6 years | Trade archive |
| Execution report | 6 years | Trade archive |
| Confirmation | 6 years | Customer records |
| Voice recording | 3 years | Communication archive |
| Audit trail | 6 years | System logs |
Surveillance Alert
Alert generated:
| Field | Value |
|---|
| Alert ID | SURV-2025-0117-042 |
| Type | Unusual trading pattern |
| Account | PROP-567 |
| Trigger | 300% of average daily volume |
| Product | AAPL options |
| Date | January 17, 2025 |
Investigation steps:
| Step | Action | Finding |
|---|
| 1 | Review trading activity | Large position built |
| 2 | Check for news | Earnings announcement scheduled |
| 3 | Review communications | No red flags |
| 4 | Interview trader | Explained strategy rationale |
| 5 | Document conclusion | Legitimate hedging activity |
Documentation:
| Document | Content |
|---|
| Alert record | Original alert details |
| Investigation notes | Steps taken, findings |
| Conclusion | No violation, rationale |
| Approval | Supervisor sign-off |
| Retention | 5 years |
Risks, Limitations, and Tradeoffs
Recordkeeping Risks
| Risk | Description | Consequence |
|---|
| Missing records | Incomplete retention | Regulatory finding |
| Altered records | Improper modification | Obstruction allegation |
| Access failure | Cannot produce on demand | Examination failure |
| Format obsolescence | Cannot read old formats | Retention violation |
Surveillance Risks
| Risk | Description | Consequence |
|---|
| False positives | Too many alerts | Alert fatigue |
| False negatives | Missed violations | Regulatory liability |
| Delayed detection | Pattern found too late | Harm occurred |
| Inadequate coverage | Gaps in monitoring | Examination finding |
Common Pitfalls
| Pitfall | Description | Prevention |
|---|
| Off-system communication | Personal devices | Clear policies, monitoring |
| Incomplete audit trail | Gaps in records | System validation |
| Delayed archiving | Records not preserved | Automated capture |
| Poor indexing | Cannot find records | Metadata standards |
| Siloed systems | Fragmented records | Integrated archive |
Penalties
| Violation | Typical Penalty |
|---|
| Recordkeeping failure | $10,000 - $500,000 |
| Surveillance deficiency | $50,000 - $1,000,000 |
| Failure to produce | $10,000 per day |
| Alteration/destruction | Criminal referral |
Regulatory Examination Focus
Common Examination Requests
| Request | Response Time |
|---|
| Trade blotter for period | Same day |
| Specific order/trade records | Same day |
| Customer communications | 1-3 days |
| Surveillance alerts and resolution | 1-3 days |
| Policies and procedures | Immediate |
Examination Preparation
| Activity | Frequency |
|---|
| Mock examination | Annual |
| Record retrieval test | Quarterly |
| Surveillance system review | Semi-annual |
| Policy update | As needed |
Checklist and Next Steps
Daily operations checklist:
Weekly review checklist:
Monthly compliance checklist:
Annual assessment checklist:
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