Rule 15c3-4 Supporting Statement 2013

SUPPORTING STATEMENT
for the Paperwork Reduction Act Information Collection Submission for
“Rule 15c3-4”
A.

Justification
1.

Necessity of Information Collection

Rule 15c3-4 (17 CFR 240.15c3-4) under the Securities Exchange Act of 1934
(“Exchange Act”) requires broker-dealers that are registered with the U.S. Securities and
Exchange Commission (the “Commission”) as over-the-counter (“OTC”) derivatives dealers, or
that use Appendix E to Rule 15c3-1 (17 CFR 240.15c3-1e), 1 to establish, document, and maintain
an internal risk management control system. Paragraph (b) of Rule 17a-4 (17 CFR 240.17a-4(b))
requires that a broker-dealer’s documentation of its risk management control systems and
periodic reviews thereof must be preserved for a period of not less than three years, the first two
years in an easily accessible place. In addition, an OTC derivatives dealer or ANC firm is
expected to be able to provide the Commission staff with a copy of its documented risk
management control procedures when it registers with the Commission as an OTC derivatives
dealer or ANC firm and it is expected to be able to provide examiners with a copy of such
procedures when it is subsequently examined.
Rule 15c3-4 further sets forth the basic elements governing the establishment, execution,
and review of an OTC derivatives dealer’s or an ANC firm’s risk management control system.
These elements are designed to ensure the integrity of an OTC derivatives dealer’s or an ANC
firm’s risk measurement, monitoring, and management process, to clarify accountability at the
appropriate organizational level, and to define the permitted scope of the dealer’s activity and
level of risk.
Rule 15c3-4 is designed to ensure the integrity of the risk measurement, monitoring, and
management process, and to clarify accountability, at the appropriate organizational level, for
defining the permitted scope of activity and level of risk. All financial market participants are
exposed to various types of risk, whether they conduct business in the standardized securities
markets or the OTC derivatives market. Because of these and other risks, an OTC derivatives
dealer or ANC firm must comply with, among other things, Rule 15c3-4, which makes it
necessary for such broker-dealer to implement a risk management control system.
An OTC derivatives dealer or ANC firm also is required under Rule 15c3-4 to consider a
number of issues impacting its business environment when creating its risk management control
system. For example, an OTC derivatives dealer or ANC firm must consider, among other
things, the sophistication and experience of relevant trading, risk management, and internal audit
personnel and the firm’s management philosophy, when designing and implementing its internal
control system’s guidelines, policies, and procedures. This ensures that the control system that is
1

The requirements of Rule 15c3-4 to adopt an internal risk management system also apply
to certain broker-dealers that compute specific net capital charges under Appendix E to
Rule 15c3-1 (which are collectively referred to as “ANC firms”). See Exchange Act
Release No. 49380 (Jun. 8, 2004).

implemented adequately addresses the risks posed by the business being conducted and the
environment in which it is being conducted. In addition, this enables the firm to implement
specific policies and procedures that are unique to its circumstances.
The Commission is statutorily authorized to promulgate Rule 15c3-4 under Section
15(c)(3) of the Exchange Act (15 U.S.C. §§78o and 78q). This section authorizes the
Commission to adopt rules and regulations regarding the financial responsibility of
broker-dealers that the Commission deems necessary or appropriate in the public interest or for
the protection of investors. Further statutory authority is found in Section 23(a) of the Exchange
Act (15 U.S.C. §78w).
2.

Purpose and Use of the Information Collection

Rule 15c3-4 is an integral part of the Commission’s financial responsibility program for
OTC derivatives dealers and ANC firms. The information collected under Rule 15c3-4 is
essential to the regulation and oversight of OTC derivatives dealers and ANC firms, and their
financial responsibility. More specifically, requiring these firms to document the planning,
implementation, and periodic review of their risk management controls ensures that all pertinent
issues are considered and that the risk management controls are implemented properly and that
they continue to adequately address the risks faced by OTC derivatives dealers and ANC firms.
A strong risk management control system is necessary for firms to manage the complex
risks arising from the business of an OTC derivatives dealer or an ANC firm. The
implementation of risk management controls within financial intermediaries promotes their
stability, and consequently, the stability of the entire financial system by reducing the risk of
significant losses on the part of market participants. This, in turn, reduces the risk that massive
defaults could undermine the market as a whole. Specifically, internal risk management controls
provide two important functions: (1) to protect against firm-specific risks such as operational,
market, credit, legal, and liquidity risks; and (2) to protect the financial industry from systemic
risk.
3.

Consideration Given to Information Technology

There are four OTC derivatives dealers currently subject to Rule 15c3-4 and it is
anticipated that four additional firms will register as OTC derivatives dealers over the next three
years. Each of these firms utilizes or is anticipated to utilize automated systems for preparing
and reporting information about their internal risk management control systems. Thus, improved
technology would not reduce the burden. 2
2

This information collection does not cover the hour burden associated with ANC firms,
because the hour burden for ANC firms is included in the Paperwork Reduction Act
collection for Rule 15c3-1, which requires ANC firms to comply with specific provisions
of Rule 15c3-4 in Appendix E to Rule 15c3-1. See 17 CFR 240.15c3-1(a)(7)(iii), 17 CFR
240.15c3-1e(a)(1)(ii), and 17 CFR 240.15c3-1e(a)(1)(viii)(C).
2

4.

Duplication

We are not aware of duplication of this information, because OTC derivatives dealers are
not otherwise required to obtain and maintain the information required by Rule 15c3-4.
5.

Effect on Small Entities

Rule 15c3-4 does not and will not affect small entities because the definition of an OTC
derivatives dealer excludes small entities.
6.

Consequences of Not Conducting Collection

If the required activities were not conducted or were conducted less frequently (i.e., due
to a reduction in risk management procedures), the protection afforded to the public would be
diminished.
7.

Inconsistencies with Guidelines in 5 CFR 1320.5(d)(2)

There are no special circumstances. This collection is consistent with the guidelines in
5 CFR 1320.5(d)(2).
8.

Consultations Outside the Agency

The required Federal Register notice with a 60-day comment period soliciting comments
on this collection of information was published. No public comments were received.
9.

Payment or Gift

No payment or gift is provided to respondents.
10.

Confidentiality

The information collected by the Commission from OTC derivatives dealers in
accordance with Rule 15c3-4 is kept confidential to the extent permitted by the Freedom of
Information Act (5 U.S.C. § 552 et seq.). To the extent that the information in this collection is
provided to the Commission in connection with an application by an OTC derivatives dealer, the
assurance of confidentiality is provided in accordance with the applicable rules. 3
11.

Sensitive Questions

Not applicable. No information of a sensitive nature is required.

3

Exchange Act Release No. 40594 (Oct. 23, 1998).
3

12.

Burden of Information Collection

At present, four OTC derivatives dealers are registered with the Commission. The
Commission anticipates that four additional entities will become OTC derivatives dealers during
the next three years (including one entity that has submitted a pending application to become an
OTC derivatives dealer).
Based upon discussions with affected and potentially affected industry participants, the
Commission estimates that, on average, a firm initially will take approximately 2,000 hours to
establish and document its risk management control system. Further, we estimate that, on
average, an OTC derivatives dealer will take approximately 200 hours each year to maintain its
risk management control system.
Thus, under Rule 15c3-4, the estimated annualized burden would be 800 hours for the
four OTC derivatives dealers currently registered with the Commission to maintain their risk
management control systems, 4 2,666 hours for the four new OTC derivatives dealers to establish
and document their risk management control systems, 5 and 400 hours for the four new OTC
derivatives dealers to maintain their risk management control systems. 6
13.

Cost to Respondents

The Commission believes that there would be no additional reporting costs associated
with the proposed rule, other than the costs described in Item 12 above.
14.

Costs to Federal Government

It is estimated that reviews of existing and anticipated OTC derivatives dealers’ risk
management control systems, which will be performed by Commission staff, will take
approximately 576 hours, 7 costing the Commission approximately $33,264 8 based on the number
of reviews that are likely to be performed and our computation of the value of staff time devoted
to these reviews and the related overhead, valued at 25% of the value of staff time. 9

4

(200 hours x 4 firms) = 800.

5

(2000 hours x 1.333 firms) = 2,666.

6

(200 hours x 4 firms) / 2 = 400 {the number is divided by two to show an average, since it
is assumed that the four new OTC derivatives dealers will register in even intervals over
the three years}.

7

((4 firms x 96 hours) + ((4 firms x 96 hours) / 2)) = 576 hours.

8

(.75 x (576 hours x $77 per hour)) = $33,264.

9

This estimate was computed according to the guidelines set forth in U.S. General
Services Administration, Guide to Estimating Reporting Costs (1973).
4

15.

Changes in Burden

The Commission estimates that a total of eight entities will be registered as OTC
derivatives dealers at the end of the next three years, consisting of the four current OTC
derivatives dealers and four anticipated registrants (in contrast with the prior estimate of five
OTC derivatives dealers, consisting of four current OTC derivatives dealers and one anticipated
registrant).
16.

Information Collection Planned for Statistical Purposes

Not applicable. The information collection is not used for statistical purposes.
17.

Approval to Omit OMB Expiration Date

The Commission is not seeking approval to omit the expiration date.
18.

Exceptions to Certification

This collection complies with the requirements in 5 CFR 1320.9.
B.

COLLECTIONS OF INFORMATION EMPLOYING STATISTICAL METHODS
This collection does not employ statistical methods.

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