E9-8024. Confidential Information and Commission Records and Information

AGENCY:

Commodity Futures Trading Commission.

ACTION:

Final rule.

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, [phone], Division of Market Oversight, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581. Electronic mail: [e-mail].

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.

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.

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 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.

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.

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]

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.

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 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.

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

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

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.

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.

(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 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 § 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 § 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 § 40.3(a)(7) or § 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

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).

9. 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.

* * * * *

10. 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.

* * * * *

PART 145—COMMISSION RECORDS AND INFORMATION

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.

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

§ 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.

Footnotes

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.

4.  73 FR 44939 (Aug. 1, 2008).

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).

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

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

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.

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