[Federal Register Volume 74, Number 71 (Wednesday, April 15, 2009)]
[Rules and Regulations]
[Pages 17392-17395]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-8024]


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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: [email protected].

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