[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