2010-6813

FR Doc 2010-6813[Federal Register: March 30, 2010 (Volume 75, Number 60)]

[Proposed Rules]

[Page 15635-15639]

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

[DOCID:fr30mr10-23]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 38 and 140

RIN 3038--AC68

Delegations of Authority To Disclose Confidential Information

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rule.

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SUMMARY: The Commodity Futures Trading Commission (``CFTC'' or

``Commission'') is proposing to amend its regulations governing

delegations of authority to disclose confidential information to permit

CFTC staff to provide confidential information to ``registered

entities,'' including exempt commercial markets offering significant

price discovery contracts, and to require that registered entities

update their lists of confidential data recipients on an annual basis.

The Commission's proposal would also clarify that confidential

information provided by the Commission to registered entities may only

be used for market surveillance, audit, investigative or rule

enforcement purposes and would remove the requirement that disclosures

of confidential information to foreign government agencies and foreign

futures authorities require the concurrence of the Commission's

Division of Enforcement. Finally, the proposal would make certain other

technical and conforming amendments to the Commission's rules.

DATES: Comments must be received by April 29, 2010.

ADDRESSES: Comments should be submitted to David Stawick, Secretary,

Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st

Street, NW., Washington, DC 20581. Comments also may be sent by

facsimile to (202) 418-5521, or by e-mail to

confidentialinforules@cftc.gov. Reference should be made to

``Delegations of Authority to Disclose Confidential Information.''

Comments may also be submitted through the Federal eRulemaking Portal

at http://www.regulations.gov. All comments must be in English.

FOR FURTHER INFORMATION CONTACT: Donald Heitman, Senior Special

Counsel, Division of Market Oversight, Commodity Futures Trading

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

DC 20581. Telephone: (202) 418-5041. E-mail: dheitman@cftc.gov.

SUPPLEMENTARY INFORMATION:

I. Background

A. The Commodity Exchange Act's Confidentiality Provisions

Section 8(a) of the Commodity Exchange Act (``CEA'' or ``Act'')

prohibits the Commission from disclosing information that would

separately disclose the business transactions or market positions of

any person or trade secrets or names of customers.\1\ Despite this

general prohibition, the CEA recognizes the need to share confidential

information with registered entities and certain other self-regulatory

bodies under specified circumstances. Section 8a(6) of the Act

therefore authorizes the Commission to communicate to the proper

officials of ``registered entities'' \2\ and other self-regulatory

bodies \3\ the full facts regarding a particular transaction or market

operation, ``which in the judgment of the Commission disrupts or tends

to disrupt any market or is otherwise harmful or against the best

interests of producers, consumers, or investors, or which is necessary

or appropriate to effectuate the purposes of [the] Act.'' Disclosure

under this provision is subject to the caveat that information

furnished by the Commission may not be disclosed by the receiving

registered entity, registered futures association or self-regulatory

organization except in a self-regulatory action or proceeding.

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\1\ 7 U.S.C. 12(a).

\2\ Section 1a(29) of the Act defines the term registered entity

to mean: ``(A) a board of trade designated as a contract market

under section 5; (B) a derivatives transaction execution facility

registered under section 5a; (C) a derivatives clearing organization

registered under section 5b; (D) a board of trade designated as a

contract market under section 5f; and (E) with respect to a contract

that the Commission determines is a significant price discovery

contract, any electronic trading facility on which the contract is

executed or traded.''

\3\ In addition to ``registered entities,'' the Commission is

authorized to share confidential information with registered futures

associations (see section 17 of the Act, 7 U.S.C. 21) and self-

regulatory organizations as defined in section 3(a)(26) of the

Securities Exchange Act of 1934. 7 U.S.C. 12a(6).

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Commission regulation 140.72 implements these statutory provisions,

delegates to specified senior staff the authority to make disclosures

to ``a contract market, registered futures association or self-

regulatory organization,'' and establishes the standards and protocols

governing such disclosures. However, regulation 140.72 has never been

amended to replace the reference to ``contract market'' with a

reference to the more inclusive defined term, ``registered entity,''

which includes not only designated contract markets, but several other

types of entities as well (see note 2 above). The term, ``registered

entity,'' was added to the Act by the Commodity Futures Modernization

Act of 2000 (``CFMA'').\4\ The registered entity definition was

subsequently expanded by the CFTC Reauthorization Act of 2008 (``2008

Reauthorization Act''),\5\ which incorporated electronic trading

facilities trading significant price discovery contracts into the

registered entity definition as section 1a(29)(E).

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\4\ Public Law 106-554, 114 Stat. 2763 (2000).

\5\ Incorporated as Title XIII of the Food, Conservation and

Energy Act of 2008, Public Law 110-246, 122 Stat. 1624 (June 18,

2008).

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The CEA also recognizes the need to share confidential information

with other Federal or state regulatory authorities, acting within the

scope of their jurisdiction, as well as foreign futures authorities,

and in section 8(e) authorizes the Commission to make such disclosures

on request, provided the Commission is satisfied that the information

will not be disclosed except in connection with an action or proceeding

brought under the laws governing the receiving authority, to which that

receiving authority is a party. Commission regulation 140.73 implements

the provisions of CEA section 8(e), delegates to specified senior staff

the authority to make disclosures and establishes the standards and

protocols governing disclosure to a requesting regulator.

As discussed below, the principal amendments to regulation 140.72

are being proposed: (1) To conform the Commission's rule to the CEA, as

amended by the CFMA and the 2008 Reauthorization Act, by applying the

regulation to ``registered entities;'' (2) to require that registered

entities update their lists of confidential data recipients on an

annual basis and notify the Commission within 10 business days of any

changes to the list; and (3) to clarify that confidential information

provided by the Commission to registered entities

[[Page 15636]]

may only be used for market surveillance, audit, investigative or rule

enforcement responsibilities of the registered entity. The Commission

additionally is proposing technical amendments to both regulations

140.72 and 140.73.

B. Part 38 of the Commission's Regulations

As noted above, by its terms, regulation 140.72 includes procedural

requirements for DCMs that relate to the receipt and use of information

furnished by the CFTC.\6\ As a result of the passage of the CFMA, the

Commission adopted regulations that exempted DCMs from all Commission

regulations that were not specifically reserved in regulation 38.2.

Regulation 140.72 was not specifically reserved in regulation 38.2. The

Commission, however, believes that regulation 140.72 (both in its

current form and as proposed to be amended herein) contains procedural

safeguards that are intended to protect furnished information from

improper use and disclosure. In that regard, the Commission attaches

particular importance to the requirement that registered entities

(including DCMs) must formally identify the officials within the

organization who are specifically authorized to receive information

from Commission staff and update that contact information annually. The

Commission therefore proposes to add regulation 140.72 to the list of

regulations reserved in regulation 38.2.

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\6\ The amendments proposed herein would not alter those

requirements since the amendments would replace the term, ``contract

market,'' with the term, ``registered entity,'' which by definition

includes contract markets.

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II. Discussion

A. Amendments Necessitated by the CFMA and the CFTC Reauthorization Act

of 2008

The 2008 Reauthorization Act directs the CFTC to extend its

regulatory oversight to the trading of significant price discovery

contracts (``SPDCs'') on exempt commercial markets (``ECMs'') and,

among other statutory amendments, adds ECMs with SPDCs to the

definition of ``registered entity'' in section 1(a)(29) of the CEA.\7\

Accordingly, with respect to a contract that the Commission determines

is a SPDC, the ECM on which it is traded or executed becomes a

registered entity subject to all the provisions of the CEA applicable

to registered entities--including section 8a(6) of the Act. Consistent

with this statutory change, the proposed amendments to regulation

140.72 would make its provisions applicable to ``registered entities''

and would permit staff to disclose confidential information to ECMs

insofar as the disclosures relate to the ECM's SPDCs.

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\7\ As noted above, the 2008 Reauthorization Act added the

following provision to section 1(a)(29)'s definition of registered

entity: ``(E) with respect to a contract that the Commission

determines is a significant price discovery contract, any electronic

trading facility on which the contract is executed or traded.'' 7

U.S.C. 1(a)(29)(E).

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Regulation 140.72(b) provides that disclosures shall only be made

to a contract market, registered futures association or self-regulatory

organization official who is named in a list filed with the Commission

by the chief executive officer of the entity. By amending paragraph (b)

to refer to ``registered entities'' (instead of ``contract markets'')

the proposed amendments would apply the disclosure rules to all such

registered entities, including, among others, derivatives clearing

organizations (``DCOs'') and ECMs with respect to their SPDCs. Thus,

for example, all registered entities would be required to provide to

the Commission a list of officials within their organization authorized

to receive disclosures of confidential information. The proposed rules

would also require that the lists of officials authorized to receive

disclosures must be updated annually. Finally, the proposed amendments

would clarify that the chief executive officer of the registered entity

must notify the Commission within ten business days of any additions or

deletions to the list.

B. Amendments Regarding the Use of Confidential Information

Recently, questions have arisen regarding the potential use of

confidential information provided by the Commission to DCMs. In

particular, DCM officials have inquired as to whether they might be

allowed to use that information to assess the current composition of a

given market with an eye to developing additional types of contracts.

Consistent with the Section 8a(6), these proposed rules clarify that

confidential information provided by the Commission to registered

entities (including DCMs) can only be used for their market

surveillance, audit, investigative or rule enforcement

responsibilities, which do not include business development purposes.

The Commission solicits comments regarding whether similar restrictions

should be applied to confidential information generated internally by a

registered entity.\8\ In addition, registered entities should review

their procedures for the handling of confidential information from the

Commission to ensure that persons handling such information are

properly ``walled off'' from the rest of the organization.

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\8\ For example, Part 17 of the Commission's regulations

requires that clearing members, FCMs, and foreign brokers file daily

large trader reports with the Commission. The Kansas City Board of

Trade (KCBT) and the Minneapolis Grain Exchange (MGX) rely on

receiving daily transmissions of large trader reports from the

Commission for monitoring speculative position limits and reportable

positions. The remaining DCMs have adopted their own large trader

reporting rules and independently collect large trader reports.

Under this proposed rule, KCBT and MGX would be prohibited from

using the confidential large trader reports they receive from the

Commission for anything other than market surveillance, audit,

investigative or rule enforcement purposes. DCMs that independently

collect large trader reports would not be subject to the same

prohibitions because they do not receive the data from the

Commission.

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C. Technical and Conforming Amendments

Regulations 140.72(a) and 140.73(a) currently list, by title, a

large number of senior staff members to whom the Commission delegates

authority to disclose confidential information to the various

regulatory and self-regulatory authorities listed in those respective

regulations. Many of these titles have been rendered obsolete by

subsequent CFTC organizational changes. In order to simplify the

regulations and minimize the need for further regulatory amendments to

conform to future organizational changes, the proposed regulations

would delegate the authority to disclose confidential information to

the heads of the major Commission Divisions or Offices involved and

give those individuals the authority to sub-delegate that authority to

such other employees of their respective Divisions or Offices as they

may designate from time to time.

As noted above, regulation 140.73 delegates to specified senior

staff the authority to disclose confidential information to United

States, state and foreign government agencies and to foreign futures

authorities. Regulation 140.73(b) currently requires that disclosures

made pursuant to this section must be made with the concurrence of the

Director of the Division of Enforcement or his or her designee. For

efficiency, the Commission proposes to delete paragraph (b) of

regulation 140.73.

The CFMA added a number of new definitions to section 1a of the

CEA. As a result, the definition of ``foreign futures authority,''

formerly found in section 1a(10) of the CEA, has been renumbered as

section 1(a)(18). The Commission proposes a conforming amendment to

regulation 140.73(a)(3),

[[Page 15637]]

which is applicable to foreign futures authorities, to correctly

identify the definitional section.

III. Related Matters

A. Cost Benefit Analysis

Section 15(a) of the CEA requires the Commission to consider the

costs and benefits of its actions before issuing new regulations under

the Act. Section 15(a) does not require the Commission to quantify the

costs and benefits of new regulations or to determine whether the

benefits of adopted regulations outweigh their costs. Rather, section

15(a) requires the Commission to consider the costs and benefits of the

subject regulations in light of five broad areas of market and public

concern: (1) Protection of market participants and the public; (2)

efficiency, competitiveness, and financial integrity of the market for

listed derivatives; (3) price discovery; (4) sound risk management

practices; and (5) other public interest considerations. The Commission

may, in its discretion, give greater weight to any one of the five

enumerated areas of concern and may, in its discretion, determine that,

not withstanding its costs, a particular regulation is necessary or

appropriate to protect the public interest.

As relevant here, the proposed amendments would extend the

information-sharing provisions of regulation 140.72 to registered

entities, including DCOs and exempt commercial markets with respect to

their SPDCs, among others. The authority and benefits of the provisions

regarding disclosure of confidential information derive from a

determination that the transaction or market operation to be disclosed

disrupts or tends to disrupt any market; or is otherwise harmful or

against the best interests of producers, consumers, or investors; or

that disclosure is necessary or appropriate to effectuate the purposes

of the CEA. The other proposed amendments would clarify, consistent

with the language of Section 8a(6) and regulation 140.72(d), that

registered entities could only use the information for their market

surveillance, audit, investigative or rule enforcement responsibilities

and would enhance the reliability of the disclosure system by requiring

registered entities to update their lists of confidential data

recipients on an annual basis and to notify the Commission of any

changes to such lists in a timely fashion. The costs associated with

these proposed amendments are minimal. Extending the regulations'

confidential disclosure requirements to registered entities, including

ECMs with SPDCs, while clarifying the confidentiality protections and

improving the reliability of the disclosure system, enhances the

Commission's ability to prevent market disruptions and protect the

interests of producers, consumers and the public.

B. Regulatory Flexibility Act

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

requires that agencies, in proposing rules, consider the impact of

those rules on small entities. These amendments would extend CFTC

staff's ability to share relevant information with additional

registered entities, including ECMs with SPDCs, would further protect

the confidentiality of disclosed information by requiring that

registered entities could only use the information for their market

surveillance, audit, investigative or rule enforcement responsibilities

and would enhance the reliability of the disclosure system by requiring

registered entities to update their lists of confidential data

recipients on an annual basis. The proposed rules otherwise would make

technical and conforming changes to rules 140.72 and 140.73. The

Commission has previously determined that DCMs, derivatives transaction

execution facilities (``DTEFs''), ECMs (with or without SPDCs) and DCOs

are not small entities for purposes of the RFA.\9\ Similarly, the

Commission believes that the other type of registered entity listed in

section 1a(29) of the Act, a board of trade designated as a contract

market under section 5f,\10\ is likewise not a small entity for

purposes of the RFA. Accordingly, the Commission does not expect that

these amendments will have a significant impact on a substantial number

of small entities. For this reason, and pursuant to section 3(a) of the

RFA, 5 U.S.C. 605(b), the Chairman, on behalf of the Commission, hereby

certifies that these regulations will not have a significant economic

impact on a substantial number of small entities. Nevertheless, the

Commission solicits public comments as to whether a DTEF, a DCM

designated under section 5f of the Act or an ECM with a SPDC should be

considered a small entity for purposes of the RFA.

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\9\ See: 47 FR 18618 at 18619 (April 30, 1982) with respect to

DCMs; 66 FR 42255 at 42268 (August 10, 2001) with respect to DTEFs

and ECMs; and 66 FR 45604 at 45609 (August 29, 2001) with respect to

DCOs.

\10\ Section 5f deals with ``Designation of Securities Exchanges

and Associations as Contract Markets.''

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C. Paperwork Reduction Act

The Paperwork Reduction Act of 1980 (``PRA''), 44 U.S.C. 3501 et

seq., imposes certain requirements on Federal agencies, including the

Commission, in connection with conducting or sponsoring any collection

of information as defined by the PRA. Rules 140.72 and 140.73 are not

associated with an information collection as defined by the PRA.

Accordingly, the Commission certifies that, for purposes of the PRA,

these proposed amendments would not impose any new reporting or

recordkeeping requirements.

List of Subjects

17 CFR Part 38

Block transactions, Commodity futures, Contract markets,

Transactions off the centralized market, Reporting and recordkeeping

requirements.

17 CFR Part 140

Authority delegations (Government agencies), Organization and

functions (Government agencies).

Accordingly, the Commission proposes to amend 17 CFR parts 38 and

140 as follows:

PART 38--DESIGNATED CONTRACT MARKETS

1. The authority citation for part 38 is revised to read as

follows:

Authority: 7 U.S.C. 2, 5, 6, 6c, 7, and 12a, as amended by the

Commodity Futures Modernization Act of 2000, Appendix E of Pub. L.

106-554, 114 Stat. 2763 (2000).

2. Section 38.2 is revised to read as follows:

Sec. 38.2 Exemption.

Agreements, contracts, or transactions traded on a designated

contract market under Section 5 of the Act, the contract market and the

contract market's operator are exempt from all Commission regulations

for such activity, except for the requirements of this Part 38 and

Sec. Sec. 1.3, 1.12(e), 1.31, 1.37(c)-(d), 1.38, 1.52, 1.59(d), 1.60,

1.63(c), 1.67, 33.10, Part 9, Parts 15 through 21, Part 40, Part 41,

Sec. 140.72 and Part 190 of this chapter, including any related

definitions and cross-referenced sections.

PART 140--ORGANIZATION, FUNCTIONS AND PROCEDURES OF THE COMMISSION

3. The authority citation for part 140 conitnues to read as

follows:

Authority: 7 U.S.C. 2 and 12a.

4. Section 140.72 is revised to read as follows:

[[Page 15638]]

Sec. 140.72 Delegation of authority to disclose confidential

information to a registered entity, registered futures association or

self-regulatory organization.

(a) Pursuant to the authority granted under sections 2(a)(12),

8a(5) and 8a(6) of the Act, the Commission hereby delegates, until such

time as the Commission orders otherwise, to the Director of the

Division of Market Oversight, the Director of the Division of Clearing

and Intermediary Oversight, the Director of the Division of

Enforcement, the General Counsel, the Chief Economist and the Director

of the Office of International Affairs, and to such other employees of

their respective Divisions and Offices as they may designate from time

to time, the authority to disclose to an official of any registered

entity (as defined in section 1a(29) of the Act), registered futures

association, or self-regulatory organization as defined in section

3(a)(26) of the Securities Exchange Act of 1934, any information

necessary or appropriate to effectuate the purposes of the Act,

including, but not limited to, the full facts concerning any

transaction or market operation, including the names of the parties

thereto. This authority to disclose shall be based on a determination

that the transaction or market operation disrupts or tends to disrupt

any market or is otherwise harmful or against the best interests of

producers, consumers, or investors or that disclosure is necessary or

appropriate to effectuate the purposes of the Act. The authority to

make such a determination is also delegated by the Commission to the

Commission employees identified in this section. A Commission employee

delegated authority under this section may exercise that authority on

his or her own initiative or in response to a request by an official of

a registered entity, registered futures association or self-regulatory

organization.

(b) Disclosure under this section shall only be made to a

registered entity, registered futures association or self-regulatory

organization official who is named in a list filed with the Commission

by the chief executive officer of the registered entity, registered

futures association or self-regulatory organization, which sets forth

the official's name, business address and telephone number. The chief

executive officer shall provide the Commission with an updated list

annually, during the first month of the calendar year, and shall

thereafter notify the Commission within 10 business days of any

deletions or additions to the list of officials authorized to receive

disclosures under this section. The original list, each annual update,

and any supplemental list required by his paragraph shall be filed with

the Secretary of the Commission, and a copy thereof shall also be filed

with the Regional Administrator for the region in which the registered

entity is located or in which the registered futures association or

self-regulatory organization has its principal office.

(c) Notwithstanding the provisions of paragraph (a) of this

section, in any case in which a Commission employee delegated authority

under this section believes it appropriate, he or she may submit to the

Commission for its consideration the question of whether disclosure of

information should be made. Nothing in this section shall prevent the

Commission from exercising the authority delegated in paragraph (a) of

this section.

(d) For purposes of this section, the term ``official'' shall mean

any officer or member of the staff, management or a committee of a

registered entity, registered futures association or self-regulatory

organization who is specifically charged with market surveillance,

audit, investigative or rule enforcement responsibilities, or their

duly authorized representative or agent, who is named on the list filed

pursuant to paragraph (b) of this section or any supplement thereto.

(e) For the purposes of this section, the term ``self-regulatory

organization'' shall mean the same as that defined in section 3(a)(26)

of the Securities Exchange Act of 1934.

(f) Any registered entity, registered futures association or self-

regulatory organization receiving information from the Commission under

these provisions may use such information only for its market

surveillance, audit, investigative or rule enforcement responsibilities

and shall not disclose such information, except that disclosure may be

made in any self-regulatory action or proceeding.

5. Section 140.73 is revised to read as follows:

Sec. 140.73 Delegation of authority to disclose information to United

States, State, and foreign government agencies and foreign futures

authorities.

(a) Pursuant to sections 2(a)(12), 8a(5) and 8(e) of the Act, the

Commission hereby delegates, until such time as the Commission orders

otherwise, to the General Counsel, the Director of the Division of

Enforcement, the Director of the Division of Market Oversight, the

Director of the Division of Clearing and Intermediary Oversight, the

Chief Economist and the Director of the Office of International

Affairs, and to such other employees of their respective Divisions and

Offices as they may designate from time to time, the authority to

furnish information in the possession of the Commission obtained in

connection with the administration of the Act, upon written request,

to:

(1) Any department or agency of the United States, including for

this purpose an independent regulatory agency, acting within the scope

of its jurisdiction;

(2) Any department or agency of any State or any political

subdivision thereof, acting within the scope of its jurisdiction; or

(3) Any foreign futures authority, as that term is defined in

section 1a(18) of the Act, or any department or agency of any foreign

government or political subdivision thereof, acting within the scope of

its jurisdiction, provided that the Commission official making the

disclosure is satisfied that the information will not be disclosed

except in connection with an adjudicatory action or proceeding brought

under the laws of such foreign government or political subdivision to

which such foreign government or political subdivision or any

department or agency thereof, or foreign futures authority is a party.

(b) In furnishing information under this delegation pursuant to

paragraphs (a)(1) and (2) of this section, the Commission official

making the disclosure shall remind the department or agency involved

that section 8(e) of the Act prohibits the disclosure by such

department or agency of information that would separately disclose the

business transactions or market positions of any person and trade

secrets or names of customers except in an action or proceeding under

the laws of the United States, the State, or a political subdivision

thereof to which the department or the agency of either the state or

political subdivision, the Commission, or the United States is a party.

(c) This delegation shall not affect any other delegation that the

Commission has made or may make, which authorizes any other officer or

employee of the Commission to furnish information to governmental

bodies on the Commission's behalf.

(d) Notwithstanding the provisions of paragraph (a) of this

section, in any case in which any employee delegated authority therein

believes it appropriate, the matter may be submitted to the Commission

for its consideration. Nothing in this section shall prohibit the

Commission from exercising the authority delegated in paragraph (a) of

this section.

[[Page 15639]]

Issued in Washington, DC, on March 22, 2010, by the Commission.

David A. Stawick,

Secretary of the Commission.

[FR Doc. 2010-6813 Filed 3-29-10; 8:45 am]

BILLING CODE 6351-01-P

Last Updated: March 30, 2010