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e9-8024

  • FR Doc E9-8024[Federal Register: April 15, 2009 (Volume 74, Number 71)]

    [Rules and Regulations]

    [Page 17392-17395]

    From the Federal Register Online via GPO Access [wais.access.gpo.gov]

    [DOCID:fr15ap09-11]

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    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Parts 40, 41, and 145

    RIN 3038-AC44

    Confidential Information and Commission Records and Information

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Final rule.

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    SUMMARY: The Commodity Futures Trading Commission is adopting final

    rules to specify the exclusive procedures under which designated

    contract markets (DCMs), derivatives clearing organizations (DCOs) and

    derivatives transaction execution facilities (DTEFs) (collectively,

    ``regulated entities'') may request confidential treatment for products

    and rules submitted via certification procedures or for Commission

    review and approval under parts 40 and 41 of the Commission's

    regulations. The amendments also revise the Commission's part 145

    regulations under the Freedom of Information Act by providing that the

    confidential treatment procedures specified in section 145.9 do not

    apply to information filed by regulated entities pursuant to parts 40

    and 41.

    DATES: May 15, 2009.

    FOR FURTHER INFORMATION CONTACT: Susan Nathan, Senior Special Counsel,

    (202) 418-5133, Division of Market Oversight, Commodity Futures Trading

    Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington,

    DC 20581. Electronic mail: snathan@cftc.gov.

    SUPPLEMENTARY INFORMATION:

    I. Background

    A. Procedural History

    On July 20, 2007, the Commission requested comment from the public

    regarding its proposal to establish in part 40 of its regulations the

    exclusive procedure to be followed by regulated entities when

    requesting confidential treatment for information they are required to

    submit under parts 40 and 41 of the Commission's regulations,\1\ and to

    clarify the standards under which requests for confidential treatment

    will be considered.\2\ Three commenters responded to this proposal: the

    CME Group (``CME''), CBOE Futures Exchange (``CFE'') and the New York

    Mercantile Exchange (``NYMEX'').\3\ While CFE generally supported the

    proposal, CME and NYMEX questioned the merits of the proposed

    amendments and the adequacy of the Commission's explanation for

    proposing the changes.

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    \1\ Part 40 of the Commission's regulations, 17 CFR part 40,

    specifies the standards and procedures to be followed by regulated

    entities for listing products for trading by certification to the

    Commission; voluntary submission of new products for Commission

    review and approval; amendments to terms or conditions of enumerated

    agricultural contracts; voluntary submission of rules for Commission

    review and approval; and self certification of rules by DCMs and

    DCOs. Part 41, 17 CFR part 41, contains the standards and procedures

    for filing required information with respect to security futures

    products.

    \2\ 72 FR 39764.

    \3\ In August 2008, subsequent to the Commission's Notice of

    Proposed Rulemaking in this matter, CME and NYMEX completed a

    merger. As a result, NYMEX is currently a wholly-owned indirect

    subsidiary of CME Group, Inc.

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    In light of the CME and NYMEX comments, the Commission re-proposed

    the rule amendments in order to (1) Clarify the procedure for seeking

    review of an adverse determination; (2) amend Commission regulation

    145.9 to make clear that that process for requesting confidential

    treatment under the Commission's Freedom of Information Act regulations

    does not apply to submissions filed pursuant to parts 40 and 41; and

    (3) address more fully the reasons for proposing the amendments. The

    Federal Register release announcing the re-proposal fully addressed the

    substantive issues raised by the commenters and invited additional

    public comment on one issue raised by NYMEX: whether the Commission

    should honor requests for confidential treatment of algorithms or

    similar trading tools that are mechanisms for executing

    transactions.\4\ CME submitted comments on this matter.

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    \4\ 73 FR 44939 (Aug. 1, 2008).

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    B. Confidential Treatment of Trading Mechanisms

    1. Comments: Confidential Treatment of Information Made Public by

    Statute or Rule

    The Commodity Exchange Act (``CEA'') and regulations promulgated

    thereunder require that substantial portions of the material filed

    pursuant to Parts 40 and 41 be made publicly available by the

    submitters. Section

    [[Page 17393]]

    5(d)(7) of the CEA--DCM Core Principle 7--requires that the terms and

    conditions of contracts and the ``mechanisms for executing transactions

    on or through'' a DCM be made available by the DCM to market

    authorities, market participants and the public.\5\ Similarly, DTEF

    Core Principle 5 requires that boards of trade publicly disclose

    specified information, and Core Principle L requires that DCOs make

    available to market participants information concerning the rules and

    operating systems of clearing and settlement systems. Moreover,

    Commission regulations 40.3(a)(7) and 40.5(a)(8) specify that a

    product's terms and conditions become publicly available at the time of

    submission to the Commission.

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    \5\ The CEA does not define the phrase ``mechanisms for

    executing transactions,'' but the Commission noted in its proposal

    and re-proposal that this generally includes such information as

    trading algorithms, market maker programs, and information from an

    exchange's rule book that pertains to or impacts trading. 72 FR

    39764 (Jul. 20, 2007); 73 FR 44941 n.17 (Aug. 1, 2008).

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    The commenters' concerns focused on the Commission's proposal to

    amend part 40 by adding new paragraph (d) to regulation 40.8 to clarify

    that staff will not consider requests for confidential treatment of

    information that is considered publicly available pursuant to section

    5(d)(7) of the CEA or regulations 40.3(a)(7) or 40.5(a)(8). In response

    to CME's concern that DCMs have legitimate commercial and competitive

    interests in maintaining the confidentiality of information about the

    contractual obligations of, and incentives offered to, their market

    makers, the Commission distinguished between the two types of

    information. The Commission noted that both market maker and incentive

    programs are considered ``rules'' under Commission regulations and thus

    are presumptively public. Compensation structures are properly made

    public because they may affect the quality of price quotations provided

    by market makers as well as liquidity in the market; because this

    material is routinely available, no exchange is at a competitive

    disadvantage. On the other hand, the Commission acknowledged that

    access to particular information related to incentive programs could

    give an unfair advantage to potential counterparties of market makers

    or to other markets. Incentive programs may, therefore, include

    information for which confidential treatment is appropriate. Commission

    staff has, for example, withheld information relating to participant

    names, bid-ask spreads and minimum size requirements because access to

    this information could unfairly advantage potential counterparties of

    market makers and provide other market makers with a competitive edge

    when setting up their own market maker programs. Thus, while incentive

    programs are presumptively public, these programs may include

    commercially valuable information which is entitled to protection. For

    this reason, the Commission believes it would be inappropriate to

    summarily deny confidential treatment to all information submitted in

    connection with incentive programs.

    In its comment letter, NYMEX urged that the same reasoning should

    apply to confidential treatment for trading mechanisms, which it stated

    could include ``an algorithm or other similar proprietary trading

    tool'' for which a registered entity might seek patent or trademark

    protection.\6\ Although trading mechanisms are required to be made

    publicly available pursuant to section 7(d)(8) of the CEA, and the

    Commission is unaware of any circumstance in which trading mechanisms

    warrant protection from public disclosure, the Commission in an

    abundance of caution invited further public comment with respect to

    whether specific types of trading tools should be considered for

    confidential treatment.

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    \6\ Letter from NYMEX dated Aug. 23, 2007, at 3.

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    2. CME's September 15, 2008 Comment Letter.

    In response to this invitation, CME submitted additional comments

    urging the Commission to (1) conclude that summary denial of

    confidential treatment to ``mechanisms for executing transactions,

    including trading algorithms or similar proprietary trading tools''

    could cause competitive harm to the submitter, and is, therefore,

    inappropriate and (2) refrain from utilizing a rulemaking to determine

    blanket confidential treatment for specific types of trading tools.

    Rather, CME proposed that the Commission make confidentiality

    determinations on a case-by-case basis at the time of the initial

    request for confidential treatment.\7\

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    \7\ Letter from CME Group dated September 15, 2008, at 3.

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    The Commission has carefully considered these comments and agrees

    that, to the extent that NYMEX's and CME's comments refer to specific

    hardware, software or ``code'' underlying a trading tool or algorithm,

    such hardware, software, or code may qualify for confidential

    treatment. The Commission does not consider such information to be part

    of the ``trading mechanism;'' it thus is not presumptively public and

    is accordingly outside the scope of this rulemaking.

    The Commission wishes to emphasize that the purpose of the proposed

    amendments is to improve its ability to provide the public with

    immediate access to material filed under Parts 40 and 41 that does not

    warrant confidential treatment, i.e., that must be made publicly

    available by statute or rule. CME's suggestion of a case-by-case

    determination would preserve the status quo that the proposed

    amendments were intended to correct.

    Accordingly, the proposed amendments are being adopted in the final

    rules.

    II. Related Matters

    A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601 et seq.

    (2000), requires federal agencies, in proposing regulations, to

    consider the impact of those regulations on small entities. The

    regulations proposed herein would affect derivatives transaction

    execution facilities, designated contract markets, and derivatives

    clearing organizations. The Commission previously has determined that

    the foregoing entities are not small entities for purposes of the

    RFA.\8\ Accordingly, the Acting Chairman, on behalf of the Commission,

    hereby certifies pursuant to 5 U.S.C. 605(b) that the proposed

    regulations will not have a significant economic impact on a

    substantial number of small entities.

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    \8\ 47 FR 18618, 18619 (April 30, 1992) discussing contract

    markets; 66 FR 42256, 42268 (August 10, 2001), discussing exempt

    boards of trade, exempt commercial markets and derivatives

    transaction execution facilities; 66 FR 45605, 45609 (August 29,

    2001), discussing derivatives clearing organizations.

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    B. Paperwork Reduction Act

    As required by the Paperwork Reduction Act of 1995, 44 U.S.C.

    3504(h), the Commission submitted a copy of the proposed rule

    amendments to the Office of Management and Budget for its review. The

    Commission did not receive any public comments relative to its analysis

    of paperwork burdens associated with this rulemaking.

    C. Cost-Benefit Analysis

    Section 15(a) of the Act, as amended by section 119 of the CFMA,

    requires the Commission to consider the costs and benefits of its

    action before issuing a new regulation under the Act. By its terms,

    section 15(a) as amended does not require the Commission to quantify

    the costs and benefits of a new regulation or to determine whether the

    benefits of a regulation outweigh its

    [[Page 17394]]

    costs. Rather, section 15(a) simply requires the Commission to

    ``consider the costs and benefits'' of its action.

    Section 15(a) further specifies that costs and benefits shall be

    evaluated in light of five broad areas of market and public concern:

    Protection of market participants and the public; efficiency,

    competitiveness, and financial integrity of futures markets; price

    discovery; sound risk management practices; and other public interest

    considerations. Accordingly, the Commission could, in its discretion,

    give greater weight to any one of the five enumerated areas and could,

    in its discretion, determine that, notwithstanding its costs, a

    particular regulation was necessary or appropriate to protect the

    public interest or to effectuate any of the provisions to accomplish

    any of the purposes of the Act.

    The Commission published its analysis of the costs and benefits

    when it proposed and reproposed the rule amendments that have now been

    adopted.\9\ It did not receive any public comments pertaining to the

    analysis.

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    \9\ 72 FR 39764 (July 20, 2007); 73 FR 44939 (August 1, 2008).

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    List of Subjects

    17 CFR Part 40

    Commodity futures, Contract markets, Designation application,

    Reporting and recordkeeping requirements.

    17 CFR Part 41

    Security futures.

    17 CFR Part 145

    Commission records and information.

    0

    For the reasons stated in the preamble, the Commission amends 17 CFR

    parts 40, 41 and 145 as follows:

    PART 40--PROVISIONS COMMON TO CONTRACT MARKETS, DERIVATIVES

    TRANSACTION EXECUTION FACILITIES AND DERIVATIVES CLEARING

    ORGANIZATIONS

    0

    1. The authority for part 40 continues to read as follows:

    Authority: 7 U.S.C. 1a, 2, 5, 6, 6c, 7, 7a, 8 and 12a, as

    amended by appendix E of Public Law 106-554, 114 Stat. 2763A-365.

    0

    2. Section 40.2 is amended by adding paragraph (a)(3)(v) to read as

    follows:

    Sec. 40.2 Listing products for trading by certification.

    (a) * * *

    (3) * * *

    (v) A request for confidential treatment as permitted under the

    procedures of 40.8

    * * * * *

    0

    3. Section 40.3 is amended by revising paragraph (a)(7) to read as

    follows:

    Sec. 40.3 Voluntary submission of new products for Commission review

    and approval.

    (a) * * *

    (7) Include a request for confidential treatment as permitted under

    the procedures of Sec. 40.8.

    * * * * *

    0

    4. Section 40.5 is amended by revising paragraph (a)(8) to read as

    follows:

    Sec. 40.5 Voluntary submission of rules for Commission review and

    approval.

    (a) * * *

    (8) Include a request for confidential treatment as permitted under

    the procedures of Sec. 40.8.

    * * * * *

    0

    5. Section 40.6 is amended by adding new paragraph (a)(3)(vi) to read

    as follows:

    Sec. 40.6 Self-certification of rules.

    (a) * * *

    (3) * * *

    (vi) A request for confidential treatment as permitted under the

    procedures of 40.8.

    * * * * *

    0

    6. Section 40.8 is amended by adding new paragraphs (c) and (d) to read

    as follows:

    Sec. 40.8 Availability of public information.

    * * * * *

    (c) A registered entity's filing of new products under the self-

    certification procedures, new products for Commission review and

    approval, new rules and rule amendments for Commission review and

    approval, and new rules and rule amendments submitted under the self-

    certification procedures will be treated as public information unless

    covered by a request for confidential treatment. If a registered entity

    files a request for confidential treatment, the following procedures

    will apply:

    (1) A detailed written justification of the confidential treatment

    request must be filed simultaneously with the request for confidential

    treatment. The form and content of the detailed written justification

    shall be governed by Sec. 145.9 of this chapter;

    (2) All material for which confidential treatment is requested must

    be segregated in an appendix to the submission;

    (3) The submission itself must indicate that material has been

    segregated and, as appropriate, redacted;

    (4) Commission staff may make an initial determination with respect

    to the request for confidential treatment without regard to whether a

    request for the information has been sought under the Freedom of

    Information Act;

    (5) A submitter of information under this Part may appeal an

    adverse decision by staff to the Commission's Office of General

    Counsel. The form and content of such appeal shall be governed by Sec.

    145.9(g) of this chapter;

    (6) The grant of any part of a request for confidential treatment

    under this section may be reconsidered if a subsequent request under

    the Freedom of Information Act is made for the information.

    (d) Commission staff will not consider requests for confidential

    treatment of information that is required to be made public under

    section 5(d)(7) of the Act of Commission regulations Sec. 40.3(a)(7)

    or Sec. 40.5(a)(8).

    7. Appendix D is amended by adding a new sentence to the end of the

    first paragraph of section 8, ``Other requirements,'' to read as

    follows:

    Appendix D to Part 40--Submission Cover Sheet and Instructions

    * * * * *

    (8) Other requirements-- * * * Checking the box marked

    ``confidential treatment requested'' on the Submission Cover Sheet

    does not obviate the submitter's responsibility to comply with all

    applicable requirements for requesting confidential treatment in

    rule 40.8(c) and, where appropriate, rule 145.9, and will not

    substitute for notice or full compliance with such requirements.

    * * * * *

    PART 41--SECURITY FUTURES PRODUCTS

    0

    8. The authority citation for part 41 continues to read as follows:

    Authority: Sections 206, 251 and 252, Pub. L. 106-554, 114 Stat.

    2763, 7 U.S.C. 1a, 2, 6f, 6j, 7a-2, 12a, 15 U.S.C. 78g(c)(2).

    0

    9. Section 41.23 is amended by adding new paragraph (a)(7) to read as

    follows:

    Sec. 41.23 Listing of security futures products for trading.

    (a) * * *

    (7) Includes a request for confidential treatment as permitted

    under the procedures of Sec. 40.8.

    * * * * *

    0

    10. Section 41.24 is amended by adding new paragraph (a)(6) to read as

    follows:

    Sec. 41.24 Rule amendments to security futures products.

    (a) * * *

    (6) Includes a request for confidential treatment as permitted

    under the procedures of Sec. 40.8.

    * * * * *

    [[Page 17395]]

    PART 145--COMMISSION RECORDS AND INFORMATION

    0

    11. The authority citation for part 145 continues to read as follows:

    Authority: Public Law 99-570, 100 Stat. 3207; Public Law 89-554,

    80 Stat. 383; Public Law 90-23, 81 Stat. 54; Public Law 98-502, 88

    Stat. 1561-1564 (5 U.S.C. 552); Sec. 101(a), Public Law 93-463, 88

    Stat. 1389 (5 U.S.C. 4a(j)), unless otherwise noted.

    0

    12. Section 145.9 is amended by revising paragraph (b) to read as

    follows:

    Sec. 145.9 Petition for confidential treatment of information

    submitted to the Commission.

    * * * * *

    (b) Scope. The provisions of this section shall apply only where

    the Commission has not specified that an alternative procedure be

    utilized in connection with a particular study, report, investigation,

    or other matter. See 40.8 for procedures to be utilized in connection

    with filing information required to be filed pursuant to 17 CFR parts

    40 and 41.

    * * * * *

    Issued in Washington, DC on April 3, 2009 by the Commission.

    David Stawick,

    Secretary of the Commission.

    [FR Doc. E9-8024 Filed 4-14-09; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: April 15, 2009



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