E7-14103. Confidential Information and Commission Records and Information

AGENCY:

Commodity Futures Trading Commission.

ACTION:

Notice of proposed rulemaking.

SUMMARY:

The Commodity Futures Trading Commission is proposing to amend the procedures for confidential treatment requests by derivatives transaction execution facilities (DTEF), derivatives clearing organizations (DCO), or designated contract markets (DCM) for products and rules submitted via certification procedures or for Commission review and approval. The proposed rules will provide the exclusive means of requesting confidential treatment for product and rule submissions filed under Parts 40 and 41 of the Commission's regulations. Specifically, DCMs, DTEFs, and DCOs will be required to follow the customary procedures of requesting confidential treatment of information submitted to the Commission except: The submitter also will be required to file a detailed written justification simultaneously with the request for confidential treatment; and the submitter will be required to segregate the material deemed confidential in an appendix to the submission. Additionally, Commission staff may make an initial determination to grant or deny confidential treatment to such material before receiving a request under the Freedom of Information Act (FOIA). The Commission is proposing these amendments to expedite the confidential treatment review process and consequently allow the Commission to provide the public with more immediate access to non-confidential information.

DATES:

Submit comments on or before August 20, 2007.

ADDRESSES:

You may submit comments by any of the following methods:

• Federal eRulemaking Portal: http://www.regulations.gov.
• Mail/Hand Deliver: Eileen A. Donovan, Acting Secretary of the Commission, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581.
• E-mail: [e-mail].

FOR FURTHER INFORMATION CONTACT:

Riva Adriance, Deputy Director for Market Review, [phone]; or David Steinberg, Attorney Advisor, [phone], Division of Market Oversight, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581. Electronic mail: [e-mail] or [e-mail]. This document is also available at http://www.regulations.gov.

SUPPLEMENTARY INFORMATION:

I. Background

A. Overview

During the past two years, the Commission has observed an increase in the number of registered entity filings submitted under Parts 40 and 41 of the Commission's regulations that are accompanied by a request for confidential treatment.^[1] Most of these requests for confidential treatment have been submitted to the Commission in connection with market maker incentive plans.^[2] Under current regulation 145.9(d)(10), when the Commission receives a request for confidential treatment for material submitted to the Commission, no determination with respect to any request for confidential treatment will be made until the Commission receives a FOIA request for the subject material. After receipt of the FOIA request, Commission Regulation 145.9(e)(1) generally requires the Assistant Secretary of the Commission to notify the submitter that the Commission received a FOIA request for material subject to the request for confidential treatment.^[3] In most cases, the Assistant Secretary also requests that the submitter file a detailed written justification of the confidential treatment request within ten business days.^[4]

As a result, both the requirement that a FOIA request must be received to trigger the confidentiality review and the need for submission of a detailed written justification delays the Commission's ability to make a timely confidentiality determination as to whether any information should be made public. Furthermore, in some cases, the Commission never receives a FOIA request for the subject material, which prevents the Commission from moving forward with the confidential treatment review process. While the Commission recognizes limited circumstances where a registered entity filing a submission under Parts 40 and 41 may be entitled to confidential treatment, the Commission has a history of generally making certified rules and products and other rule submissions public and, furthermore, for DCMs, Designation Criterion 7 and Core Principle 7 often require such publication.^[5]

B. Freedom of Information Act

The Freedom of Information Act, 5 U.S.C. 552, provides generally that the public has a right of access to federal agency records except to the extent such records, or portions of them, are protected from disclosure by one (or more) of nine exemptions. A submitter requesting confidential treatment must request in writing that the Commission afford confidential treatment under FOIA for any information submitted to the Commission while specifying the grounds on which confidential treatment is being requested.^[6] A registered entity typically asserts that the information submitted to the Commission should be exempt from disclosure pursuant to FOIA exemption (b)(4), 5 U.S.C. 552 (b)(4), because the release of such information will cause competitive harm to the submitter.^[7] Commission Regulation 145.9 sets forth the procedures that a submitter of information to the Commission must follow in order to obtain confidential treatment for such information. That same provision, however, also permits the Commission to specify “alternative procedures” for “a particular study, report, investigation, or other matter.” ^[8] Consistent with that authority, the Commission is proposing to specify alternative procedures for processing requests for confidential treatment of registered entity filings submitted under Parts 40 and 41 of the Commission's regulations.

II. Proposed Amendments

A. Procedures for Requesting Confidential Treatment Under Parts 40 and 41

The Commission is proposing to add paragraph (c) to Commission Regulation 40.8 to list the procedures that a registered entity must follow when filing a request for confidential treatment. Section 40.8(c) would provide the exclusive method of requesting confidential treatment for information required to be filed under Parts 40 and 41. In addition, the proposal would add new regulations 40.2(a)(3)(iv), 40.6(a)(3)(vi), 41.23(a)(7), and 41.24(a)(6) and amend regulations 40.3(a)(7) and 40.5(a)(8) to direct the registered entity requesting confidential treatment to follow the new procedures specified in Commission Regulation 40.8(c). Proposed regulation 40.8(c) would further require the registered entity to follow the procedures in Commission Regulation 145.9 except that: (1) A detailed written justification of the confidential treatment request must be filed simultaneously with the submission; and (2) the material deemed confidential must be filed in an appendix to the request. Finally, the proposed rules would allow Commission staff to make an initial determination to grant or deny confidential treatment before receiving a FOIA request for the subject material.

The requirement that a registered entity follow the procedures in proposed new regulation 40.8(c) would address the absence of guidance in the Commission's regulations for a registered entity when filing a “reasonable justification” along with the request for confidential treatment for submissions filed under Parts 40 and 41. The proposed rules would remove the reasonable justification requirement from Commission Regulations 40.3(a)(7) and 40.5(a)(8) and direct the submitter to follow the procedures of regulation 40.8(c) with the filing of the detailed written justification.^[9] Additionally, the requirement that the registered entity simultaneously file the detailed written justification with the request for confidential treatment would eliminate the ten-business-day period permitted under regulation 145.9(e)(1) for the submitter to file the detailed written justification after receiving notice that a FOIA request has been received by the Commission. With these changes, the Commission would be able to conduct a thorough analysis of the detailed written justification without delay and weigh, in a more deliberate manner, the potential harm in releasing any portion of the submission against allowing the public to have more timely access to the non-confidential information.

The proposed rules would not affect the ability of the submitter to object to the denial of a confidential treatment request. Thus, the submitter would still be able to file an appeal of any adverse determination with the Commission's Office of the General Counsel.^[10] The Commission also notes that a determination that any part of the request for confidential treatment should be granted may be reconsidered if a FOIA request is received by the Commission for the subject material.

The proposed rule requiring material deemed confidential to be placed in an appendix to the submission would enable the Commission to make the non-confidential information available to the public as soon as it receives the submission. The Commission has observed that registered entities requesting confidential treatment sometimes ask for confidentiality for the entire submission. When this happens, the Commission is unable to make any part of the submission immediately available to the public, even when it is clear that information contained in the filing is not confidential and, furthermore, for DCMs, such publication may be required under Designation Criterion 7 and Core Principle 7.^[11]

For example, during the past year, Commission staff has contacted certain registered entities that requested confidential treatment for submissions containing market maker incentive plans and requested that they amend their original submissions by placing the confidential information in an appendix. This has enabled the Commission to make the underlying submissions containing the non-confidential information available to the public. The registered entities have been receptive to these requests. Based upon this experience, the Commission does not believe its proposed amendments would place an undue burden on registered entities requesting confidential treatment. Registered entities are consequently on notice that requests for confidential treatment may only cover the appendix to the submission while the underlying submission would be made immediately available to the public.

B. Public Availability of Terms and Conditions of Products and Mechanisms for Executing Transactions on or Through the Facilities of the Contract Market

The terms and conditions of contracts must be made available to market authorities, market participants, and the public by the DCM under Section 5(d)(7) of the Act.^[12] Regulations 40.3(a)(7) and 40.5(a)(8) currently provide that a product's terms and conditions, as contained in contents of a filing of a submission to the Commission, are publicly available at the time of their submission. The Commission believes the requirement that a product's terms and conditions be publicly available at the time of submission also applies to submissions containing terms and conditions that are filed under regulations 40.2, 40.6, 41.23, and 41.24. In an effort to create a more logical placement in the Commission's regulations for the public availability of a product's terms and conditions, the Commission proposes to relocate this provision to new paragraph 40.8(d) under the Availability of Public Information section of Part 40. This would ensure that registered entities are fully aware, and the public would be on notice that this information is available.

The mechanisms for executing transactions on or through the facilities of the contract market must also be made available to market authorities, market participants, and the public by the DCM under Section 5(d)(7) of the Act. The Commission proposes adding language to new paragraph 40.8(d) to make clear to registered entities that this information is public and to inform the public that this information is also available. The Commission notes that mechanisms for executing transactions on or through the facilities of the contract market generally include such information as trading algorithms and information from an exchange's rulebook that pertain to trading. Moreover, the Commission notes that requests for confidential treatment covering the mechanisms for executing transactions on or through the facilities of the contract market and a product's terms and conditions will not be processed.

III. 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 the regulation outweigh its costs. Rather, section 15(a) simply requires the Commission to “consider the costs and benefits” of its action.

Section 15(a) of the Act 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 or to accomplish any of the purposes of the Act.

The Commission is considering the costs and benefits of these proposed regulations in light of the specified provisions of section 15(a) of the Act:

1. Protection of market participants and the public. The proposed amendments should have no effect on the Commission's ability to protect market participants and the public.

2. Efficiency and competition. The proposed amendments are expected to benefit efficiency by making the non-confidential information from registered entity submissions available to the public in a more timely manner. The Commission anticipates that the costs of compliance with the confidential treatment procedures will be minimal. The proposed amendments should have no effect, from the standpoint of imposing costs or creating benefits, on competition in the futures and options markets.

3. Financial integrity of futures markets and price discovery. The amendments should have no effect, from the standpoint of imposing costs or creating benefits, on the financial integrity or price discovery function of the futures and options markets.

4. Sound risk management practices. The amendments being proposed herein should have no effect on the risk management practices of the futures and options industry.

5. Other public considerations. No additional public considerations could be determined.

After considering these factors, the Commission has determined to propose the rules and rule amendments set forth below. The Commission invites public comment on its application of the cost-benefit provision. Commenters also are invited to submit any data that they may have quantifying the costs and benefits of the proposal with their comment letters.

IV. 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 has previously determined that the foregoing entities are not small entities for purposes of the RFA.^[13] 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.

B. Paperwork Reduction Act of 1995

This proposed rulemaking contains information collection requirements. As required by the Paperwork Reduction Act (PRA) of 1995 (44 U.S.C. 3504(h)), the Commission has submitted a copy of this section to the Office of Management and Budget (OMB) for its review.

Collection of Information: Rules Relating to Part 40, Provisions Common to DCMs, DTEFs, and DCOs, OMB Control Number 3038-0022.

The expected effect of the proposed amended regulations will be to increase the burden previously approved by OMB for this collection of information by 16 hours as it will result in the filing of approximately five additional pages when a registered entity files a detailed written justification and confidential appendix under Commission Regulations 40.2, 40.3, 40.4, 40.5, and 40.6.

The estimated burden was calculated as follows:

Estimated number of respondents: 12.

Annual responses by each respondent: .30.

Total annual responses: 4.

Estimated average hours per response: 4.

Annual reporting burden: 16.

Collection of Information: Rules Relating to Part 41, Security Futures Products, OMB Control Number 3038-0059.

The expected effect of the proposed amended regulations will be to increase the burden previously approved by OMB for this collection of information by 3.6 hours as it will result in the filing of approximately five additional pages when a registered entity files a detailed written justification and confidential appendix under Commission Regulations 41.23 and 41.24.

Estimated number of respondents: 3.

Annual responses by each respondent: .30.

Total annual responses: .90.

Estimated average hours per response: 4.

Annual reporting burden: 3.6.

Organizations and individuals desiring to submit comments on the information collection requirements should direct them to the Office of Information and Regulatory Affairs, Office of Management and Budget, Room 10202, New Executive Office Building, 725 17th Street, NW., Washington, DC 20503; Attention: Desk Officer for the Commodity Futures Trading Commission.

In compliance with the PRA, the Commission, through these proposed regulations, solicits comments to: (1) Evaluate whether the proposed collection of information is necessary for the proper performance of the functions of the Commission, including whether the information will have a practical use; (2) evaluate the accuracy of the Commission's estimate of the burden of the proposed collection of information, including the validity of the methodology and assumptions used; (3) enhance the quality, usefulness, and clarity of the information to be collected; and (4) minimize the burden of collecting information on those who are to respond, including through the use of appropriate automated electronic, mechanical, or other technological collection techniques or other forms of information technology, e.g., permitting electronic submission responses.

OMB is required to make a decision concerning the collection of information contained in these proposed regulations between 30 and 60 days after publication of this document in the Federal Register. Therefore, a comment to OMB is best assured of having its full effect if OMB receives it within 30 days of publication. This does not affect the deadline for the public to comment to the Commission on the proposed regulations. Copies of the information collection submission to OMB are available from the CFTC Clearance Officer, 1155 21st Street, NW., Washington DC 20581, [phone].

List of Subjects

17 CFR Part 40

• Commodity futures
• Contract markets
• Designation application
• Reporting and recordkeeping requirements

17 CFR Part 41

• Security futures

For the reasons stated in the preamble, the Commission proposes to amend 17 CFR parts 40 and 41 as follows:

PART 40—PROVISIONS COMMON TO CONTRACT MARKETS, DERIVATIVES TRANSACTION EXECUTION FACILITIES AND DERIVATIVES CLEARING ORGANIZATIONS

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 Pub. L. 106-554, 114 Stat. 2763A-365.

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

§ 40.2

Listing products for trading by certification.

(a) * * *

(3) * * *

(v) A request for confidential treatment as permitted under the procedures of § 40.8.

* * * * *

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

§ 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 § 40.8.

* * * * *

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

§ 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 § 40.8.

* * * * *

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

§ 40.6

Self-certification of rules by designated contract markets and registered derivatives clearing organizations.

(a) * * *

(3) * * *

(vi) A request for confidential treatment as permitted under the procedures of § 40.8.

* * * * *

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

§ 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 procedures in § 145.9 of this chapter shall apply with the following exceptions:

(1) A detailed written justification of the confidential treatment request must be filed simultaneously with the request for confidential treatment;

(2) The material deemed confidential must be segregated in an appendix to the submission; and

(3) Commission staff may make an initial determination with respect to the request for confidential treatment before receiving a request under the Freedom of Information Act for the material for which confidential treatment is being sought.

(d) A registered entity's filing regarding a product's terms and conditions and the mechanisms for executing transactions on or through the facilities of the contract market will be made publicly available at the time of submission and requests for confidential treatment covering this information will be denied.

PART 41—SECURITY FUTURES PRODUCTS

7. 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).

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

§ 41.23

Listing of security futures products for trading.

(a) * * *

(7) Includes a request for confidential treatment as permitted under the procedures of § 40.8.

* * * * *

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

§ 41.24

Rule amendments to security futures products.

(a) * * *

(6) Includes a request for confidential treatment as permitted under the procedures of § 40.8.

* * * * *

Issued in Washington, DC, on July 17, 2007 by the Commission.

Eileen A. Donovan,

Acting Secretary of the Commission.

Footnotes

1.  A registered entity is defined under Section 1a(29) of the Commodity Exchange Act (Act) as a DCM under Section 5 of the Act (including Section 5f), a DTEF registered under Section 5a of the Act, and a DCO registered under Section 5b of the Act. (Section 5f of the Act, along with Part 41 of the Commission's regulations, establishes requirements for national securities exchanges, national securities associations and alternative trading systems registered with the Securities and Exchange Commission to notice register with the Commission in order to list security futures products (i.e., futures on a single equity security and futures on narrow-based security indexes)).

2.  Market maker incentive plans are created by a registered entity to increase volume of trading and liquidity, typically for new product launches or in markets that for other reasons have low trading volume. In general, registered entities have requested confidential treatment for the name of the market maker(s), the compensation provided by the registered entity to the market maker(s), trade priorities (i.e., percentage of the order flow), and the bid/ask spread level.

3.  Commission Regulation 145.9(e)(1) provides that if the Assistant Secretary or his or her designee determines that a FOIA request seeks material for which confidential treatment has been requested pursuant to regulation 145.9, the Assistant Secretary or his or her designee shall require the submitter to file a detailed written justification of the confidential treatment request within ten business days (unless under regulation 145.9(d)(7) an extension of time has been granted) of that determination unless, pursuant to an earlier FOIA request, a prior determination to release or withhold the material has been made, the submitter has already provided sufficient information to grant the request for confidential treatment, or the material is otherwise in the public domain.

4.  Commission Regulation 145.9(d)(7).

5.  The Commission has been publishing rule submissions on the Commission's website since August of 2003. Prior to this date, Commission staff had consistently determined that submissions filed pursuant to Section 5a(a)(12) of the Act were public, and, pursuant to Appendix A(b)(3) or Part 145, rule filings submitted under Section 5a(a)(12) were made available in the Commission's reading room. Section 5a(a)(12) was removed from the Act with the passage of the Commodity Futures Modernization Act of 2000 (CFMA). As a result, the Commission amended Appendix A (b)(3) to Part 145. Current Appendix A (b)(3) to Part 145 requires the Office of the Secretariat to make registered entity filings relating to rules as defined in Commission Regulation 40.1 available to the public unless the filing is covered by a request for confidential treatment. See 69 FR 67503-67508 (November 18, 2004). The Commission believes the submissions now filed under Sections 5c(c)(1) and 5c(c)(2) of the Act should, except in limited circumstances, continue to be made publicly available as they generally do not cause any competitive harm to the registered entity.

6.  Commission Regulation 145.9(d)(1).

7.  Exemption (b)(4) of FOIA protects trade secrets and commercial or financial information obtained from a person that is privileged or confidential. See also Commission Regulation 145.9(d)(ii). Commission Regulation 145.9(d) provides other grounds for non-disclosure of information, including information that: (1) Is specifically exempted by a statute that either requires that the matters be withheld from the public so as to leave no discretion on the issue or establishes particular criteria for withholding or refers to particular types of matters to be withheld; (2) would constitute a clearly unwarranted invasion of the submitter's personal privacy; (3) would reveal investigatory records compiled for law enforcement purposes whose disclosure would constitute an unwarranted invasion of the personal privacy of the submitter; and (4) would reveal investigatory records for law enforcement purposes when disclosure would interfere with enforcement proceedings or disclose investigative techniques and procedures, provided that the claim may be made only by a designated contract market or registered futures association with regard to its own investigatory records.

8.  Commission Regulation 145.9(b).

9.  67 FR 62873-62880 (October 9, 2002). Amendments to rules 40.3 and 40.5 (which require the registered entity to identify with particularity information in the submission that will be subject to a request for confidential treatment and support the request for confidential treatment with reasonable justification) were made to conform with language in Commission Regulations 37.5(b)(5) and 38.3(a)(5) (which pertain to applicants for DTEF registration and contract market designation, respectively) that required the submitter to include a reasonable justification in support of the request for confidential treatment. However, Commission Regulations 37.5(b)(5) and 38.3(a)(5) were amended by eliminating the reasonable justification requirement. Instead, these regulations now require the applicant to follow the procedures in Commission Regulation 145.9 when requesting confidential treatment. See 69 FR 67811-67817 (November 22, 2004).

10.  Commission Regulation 145.9(g).

11.  The Commission notes that provisions under these Parts may not apply to all registered entities. For example, Section 40.2 applies to all registered entities while 40.3 applies only to DCMs and DTEFs and not DCOs.

12.  67 FR 62874-75 (Oct. 9, 2002). Product terms and conditions that are made publicly available at the time of their submission to the Commission enable the Commission to obtain the views of market participants and others to ascertain whether the proposed product would be readily susceptible to manipulation, or otherwise violate the Act. Commission staff routinely conduct trade interviews when reviewing novel instruments to ascertain the relative susceptibility of a product to being manipulated. To be meaningful, these interviews require the release of the proposed instrument's terms and conditions. Generally, the Commission intends to continue its long-standing practice of requesting public comment on the terms and conditions of new products under review for Commission approval by publication of notices in the Federal Register. In instances where notice in the Federal Register is impracticable or otherwise unnecessary, notice of a submission for voluntary approval and of the public availability of the proposed product's terms and conditions will be through the Commission's internet Web site (http://www.cftc.gov).

The terms and conditions of products eligible for trading by self-certification will be available from the Commission, at the time that the exchange legally could commence trading—the beginning of the business day following certification to the Commission.

13.  47 FR 18618, 18619 (April 30, 1982) discussing contract markets; 66 FR 42256, 42268 (August 10, 2001) discussing exempt boards of trade, exempt commercial markets and derivatives transaction execution facilities; 66FR 45605, 45609 (August 29, 2001) discussing derivatives clearing organizations.