Supporting Statement - Rules 3a68-2 and 3a68-4(c) (2)

SUPPORTING STATEMENT
for the Paperwork Reduction Act New Information Collection Submission for
Rule 3a68-2 (Interpretation of Swaps, Security-Based Swaps, and Mixed Swaps) and
Rule 3a68-4(c) (Process for Determining Regulatory Treatment for Mixed Swaps)
A.
1.

Justification

Information Collection Necessity

Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act
(“Dodd-Frank Act”) adds to the Commodity Exchange Act (“CEA”) and the Securities
Exchange Act of 1934 (“Exchange Act”) definitions of the terms “swap,” “security-based
swap,” and “mixed swap.” 1

Section 712(d)(1) of the Dodd-Frank Act provides that the Commodity Futures
Trading Commission (“CFTC”) and the Securities and Exchange Commission (“SEC”)
(together with the CFTC, the “Commissions”), in consultation with the Board of Governors
of the Federal Reserve System, shall jointly further define the terms “swap,” “security-based
swap,” “swap dealer,” “security-based swap dealer,” “major swap participant,” “major
security-based swap participant,” “eligible contract participant,” and “security-based swap
agreement.”
Under the comprehensive framework for regulating swaps and security-based
swaps established in Title VII of the Dodd-Frank Act, the CFTC is given regulatory authority
over swaps, the SEC is given regulatory authority over security-based swaps, and the
Commissions shall jointly prescribe such regulations regarding mixed swaps as may be
necessary to carry out the purposes of Title VII of the Dodd-Frank Act.

On July 10, 2012, the Commissions jointly adopted rules and interpretative
guidance to further define the terms “swap,” “security-based swap,” and “security-based
swap agreement,” regarding “mixed swaps,” and governing books and records with respect
to “security-based swap agreements.” 2 Section 712(d)(4) of the Dodd-Frank Act provides
that any interpretation of, or guidance by, either the CFTC or SEC regarding a provision of
Title VII of the Dodd-Frank Act shall be effective only if issued jointly by the Commissions
(after consultation with the Board) on issues where Title VII of the Dodd-Frank Act
requires the CFTC and SEC to issue joint regulations to implement the provision. The
Commissions believe that any interpretation or guidance regarding whether a Title VII of
the Dodd-Frank Act instrument is a swap, a security-based swap, or both (i.e., a mixed
swap), must be issued jointly pursuant to this requirement.
There are instruments (or classes of instruments) that are difficult to categorize
definitively as swaps or security-based swaps. Further, because mixed swaps are both
swaps and security-based swaps, identifying a mixed swap is not always straightforward.
1

Citations to provisions of the CEA and the Exchange Act, 15 U.S.C. 78a et seq., in this document
refer to the numbering of those provisions after the effective date of Title VII.

2

See Further Definition of “Swap,” “Security-Based Swap,” and “Security-Based Swap
Agreement”; Mixed Swaps; Security-Based Swap Agreement Recordkeeping, 77 FR 48207
(August 13, 2012) (“Adopting Release”).

In addition, because mixed swaps are both security-based swaps and swaps, absent a joint
rule or order by the Commissions permitting an alternative regulatory approach, persons
who desire or intend to list, trade, or clear a mixed swap (or class thereof) would be
required to comply with all the statutory provisions in the CEA and the Exchange Act
(including all the rules and regulations thereunder) that were added or amended by Title
VII of the Dodd-Frank Act with respect to swaps or security-based swaps. Such dual
regulation may not be appropriate in every instance and may result in potentially
conflicting or duplicative regulatory requirements. Consequently, the SEC adopted Rule
3a68-2, which creates a process for interested persons to request a joint interpretation by
the Commissions regarding whether a particular instrument (or class of instruments) is a
swap, a security-based swap, or both (i.e., a mixed swap), as well as Rule 3a68-4(c), which
establishes a process for persons to request that the Commissions issue a joint order
permitting such persons (and any other person or persons that subsequently lists, trades,
or clears that class of mixed swap) to comply, as to parallel provisions 3 only, with specified
parallel provisions of either the CEA or the Exchange Act, and related rules and regulations
(collectively “specified parallel provisions”), instead of being required to comply with
parallel provisions of both the CEA and the Exchange Act.

Under Rule 3a68-2, a person provides to the Commissions a copy of all material
information regarding the terms of, and a statement of the economic characteristics and
purpose of, each relevant agreement, contract, or transaction (or class thereof), along with
that person’s determination as to whether each such agreement, contract, or transaction
(or class thereof) should be characterized as a swap, security-based swap, or both (i.e., a
mixed swap). The Commissions also may request the submitting person to provide
additional information.

Under Rule 3a68-4(c), a person provides to the Commissions a copy of all material
information regarding the terms of, and the economic characteristics and purpose of, the
specified (or specified class of) mixed swap. In addition, a person provides the specified
parallel provisions, and the reasons the person believes such specified parallel provisions
would be appropriate for relevant mixed swap (or class thereof), and an analysis of: i) the
nature and purposes of the parallel provisions that are the subject of the request; ii) the
comparability of such parallel provision; and iii) the extent of any conflicts or differences
between such parallel provisions. The Commissions also may request the submitting
person to provide additional information.
2.

Information Collection Purpose and Use

The SEC uses the information collected pursuant to Rule 3a68-2 to evaluate an
agreement, contract, or transaction (or class thereof) in order to provide joint
interpretations or joint notices of proposed rulemaking with the CFTC regarding whether
these agreements, contracts, or transactions (or classes thereof) are swaps, security-based
swaps, or both (i.e., mixed swaps) as defined in the Dodd-Frank Act.
3

For purposes of Rule 3a68-4(c) under the Exchange Act, “parallel provisions” means comparable
provisions of the CEA and the Exchange Act that were added or amended by Title VII of the
Dodd-Frank Act with respect to security-based swaps and swaps, and the rules and regulations
thereunder.

2

The SEC uses the information collected pursuant to Rule 3a68-4(c) to evaluate a
specified, or a specified class of, mixed swaps in order to provide joint orders or joint
notices of proposed rulemaking with the CFTC regarding the regulation of that particular
mixed swap or class of mixed swap.

The information provided to the SEC pursuant to Rules 3a68-2 and 3a68-4(c) also
allows the SEC to monitor the development of new OTC derivatives products in the
marketplace and determine whether additional rulemaking or interpretive guidance is
necessary or appropriate.
3.

Consideration Given to Information Technology

4.

Duplication

5.

Effect on Small Entities

Rules 3a68-2 and 3a68-4(c) allows persons to submit requests to the Commissions
for joint interpretations regarding whether a particular agreement, contract, or transaction
(or class thereof) is a swap, security-based swap, or both (i.e., a mixed swap), and for joint
orders permitting alternative regulatory treatment for particular mixed swaps. We
understand from our staff’s discussions with industry participants that information
technology is commonly used to assist in the creation and maintenance of documentation
as part of their ordinary course business and risk management practices, including
documentation required by the rules for a request submitted pursuant to Rules 3a68-2 and
3a68-4(c); however, the rule does not mandate how an entity must gather or maintain the
documentation required for a submission under Rules 3a68-2 and 3a68-4(c).
The rule does not duplicate existing regulatory requirements. Moreover, we
understand from our staff’s discussions with industry participants that the persons likely to
submit a request under Rules 3a68-2 and 3a68-4(c) may currently create and maintain, as
part of their ordinary course business and risk management practices, some of the
documentation that is required by Rules 3a68-2 and 3a68-4(c). 4
For purposes of SEC rulemaking in connection with the Regulatory Flexibility Act, a
small entity includes (i) when used with reference to an “issuer” or a “person,” other than
an investment company, an “issuer” or “person” that, on the last day of its most recent fiscal
year, had total assets of $5 million or less, 5 or (ii) a broker-dealer with total capital (net
worth plus subordinated liabilities) of less than $500,000 on the date in the prior fiscal year
as of which its audited financial statements were prepared pursuant to Rule 17a-5(d) under
4

The information required to be submitted to request an interpretation under Rule 3a68-2 is
information about the nature of the instrument and the person’s own determination, and reasons,
regarding the instrument’s status as a swap, security-based swap, or mixed swap. The information
required to be submitted to request alternative regulatory treatment under Rule 3a68-4(c) is
information about the nature of the mixed swap and the person’s own determination, and reasons,
regarding the proposed alternative regulatory treatment of the instrument. In the absence of a
request pursuant to Rule 3a68-2 or 3a68-4(c), such persons would need to maintain certain
information about such instruments, as well as make their own determination regarding the status
of and regulatory regime applicable to the instrument, as a part of their ordinary business practices.

5

See 17 CFR 240.0-10(a).

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the Exchange Act, 6 or, if not required to file such statements, a broker-dealer with total
capital (net worth plus subordinated liabilities) of less than $500,000 on the last day of the
preceding fiscal year (or in the time that it has been in business, if shorter); and is not
affiliated with any person (other than a natural person) that is not a small business or small
organization. 7 Under the standards adopted by the Small Business Administration, small
entities in the finance and insurance industry include the following: (i) for entities engaged
in credit intermediation and related activities, entities with $175 million or less in assets; 8
(ii) for entities engaged in non-depository credit intermediation and certain other
activities, entities with $7 million or less in annual receipts; 9 (iii) for entities engaged in
financial investments and related activities, entities with $7 million or less in annual
receipts; 10 (iv) for insurance carriers and entities engaged in related activities, entities with
$7 million or less in annual receipts; 11 and (v) for funds, trusts, and other financial vehicles,
entities with $7 million or less in annual receipts. 12

Based on the SEC’s existing information about the swap markets, we believe that the
swap markets, while broad in scope, are largely dominated by entities such as those that
are covered by the “swap dealer,” “security-based swap dealer,” “major swap participant,”
and “major security-based swap participant” definitions. 13 The SEC believes that such
entities exceed the thresholds defining “small entities” set out above. Moreover, although it
is possible that other persons may engage in swap, security-based swap, and mixed swap
transactions, we do not believe that any of these entities are “small entities” as defined in
Rule 0-10 under the Exchange Act. 14 Feedback from industry participants about the swap
markets indicates that only persons or entities with assets significantly in excess of $5
million (or with annual receipts significantly in excess of $7 million) participate in the swap
markets.

To the extent that a small number of transactions did have a counterparty that was
defined as a “small entity” under SEC Rule 0-10, the SEC believes it is unlikely that the
information collections under Rules 3a68-2 and 3a68-4(c) would have a significant
economic impact on that entity. Rules 3a68-2 and 3a68-4(c) simply provide a process for
6

See 17 CFR 240.17a-5(d).

7

See 17 CFR 240.0-10(c).

8

See 13 CFR 121.201 (Subsector 522).

9

See id.

10

See id. at Subsector 523.

11

See id. at Subsector 524.

12

See id. at Subsector 525.

13

See, e.g., CEA section 1a(49), 7 U.S.C. 1a(49) (defining “swap dealer”); section 3(a)(71)(A) of the
Exchange Act, 15 U.S.C. 78c(a)(71)(A) (defining “security-based swap dealer”); CEA section
1a(33), 7 U.S.C. 1a(33) (defining “major swap participant”); section 3(a)(67)(A) of the Exchange
Act, 15 U.S.C. 78c(a)(67)(A) (defining “major security-based swap participant”). See Further
Definition of “Swap Dealer,” “Security-Based Swap Dealer,” “Major Swap Participant,” “Major
Security-Based Swap Participant” and “Eligible Contract Participant,” 77 FR 30596 (May 23,
2012) (“Entity Definitions Release”). Such entities also would include commercial entities that
may use swaps to hedge or mitigate commercial risk.

14

See 17 CFR 240.0-10(a).

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such persons, if they desire, to request interpretations of whether agreements, contracts,
and transactions are swaps, security-based swaps, or mixed swaps or to request alternative
regulatory treatment for mixed swaps.
6.

Consequences of Not Conducting Collection

The collection of information in Rule 3a68-2 is designed to provide the
Commissions with sufficient information regarding the instrument at issue so that the
Commissions can appropriately evaluate whether it is a swap, a security-based swap, or
both (i.e., a mixed swap). We believe that, without the information in Rule 3a68-2, the SEC
may not have sufficient information about instruments for which market participants are
unsure of the characterization and thus may not be able to issue an interpretation of
whether an instrument is a swap, security-based swap, or mixed swap. We further believe
that, as a result, there is a possibility that market participants who engage in agreements,
contracts, or transactions about which the status as a swap, security-based swap, or mixed
swap is uncertain would face greater regulatory uncertainty regarding the status of such
instruments.

The collection of information in Rule 3a68-4(c) is designed to provide the
Commissions with sufficient information regarding the mixed swap at issue so that the
Commissions can appropriately evaluate whether alternative regulatory treatment for the
mixed swap is warranted. We believe that, without the information in 3a68-4(c), the SEC
may not have sufficient information about such mixed swaps to permit alternative
regulatory treatment. We further believe that, as a result, there is a possibility that market
participants who engage in mixed swaps that might otherwise be appropriate for
alternative regulatory treatment would face greater regulatory burdens regarding such
instruments.
7.

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

8.

Consultations Outside the Agency

9.

Payment or Gift

There are no special circumstances. These collections are consistent with the
guidelines in 5 CFR 1320.5(d)(2), except potentially with respect to the confidentiality of
information. There is no requirement that the collections of information in Rules 3a68-2
and 3a68-4(c) be provided to the SEC or a third party on a regular, ordinary course basis.
However, such information may be considered proprietary financial information regarding
an entity’s swap, security-based swap, or mixed swap transactions, and thus confidentiality
concerns may arise where the SEC has obtained information pursuant to Rule 3a68-2 or
3a68-4(c). In a situation where the SEC has obtained such information, the SEC would
consider requests for confidential treatment of such information on a case-by-case basis.
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.
There are no payments or gifts to respondents in the information collection.
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10.

Confidentiality

11.

Sensitive Questions

12.

Information Collection Burden

There is no requirement that the collections of information in Rules 3a68-2 and
3a68-4(c) be provided to the SEC or a third party on a regular, ordinary course basis. No
assurances of confidentiality are provided in the rules. In a situation where the SEC has
obtained the information, the SEC would consider requests for confidential treatment on a
case-by-case basis.
No questions of a sensitive nature are asked. The information collection does not
collect any Personally Identifiable Information (PII).
Rule 3a68-2

The SEC expects 25 requests pursuant to Rule 3a68-2 per year. The SEC estimates
the total paperwork burden associated with preparing and submitting each request would
be 20 hours to retrieve, review, and submit the information associated with the submission.
This 20 hour burden is divided between the SEC and the CFTC, with 10 hours per response
regarding reporting to the SEC and 10 hours of response regarding third party disclosure to
the CFTC. 15 The SEC estimates this would result in an aggregate annual burden of 500
hours (25 requests x 20 hours/request).
Rule 3a68-4(c)

The SEC expects ten requests pursuant to Rule 3a68-4(c) per year. The SEC
estimates that nine of these requests will have also been made in a request for a joint
interpretation pursuant to Rule 3a68-2, and one will not have been. The SEC estimates the
total burden for the one request for which the joint interpretation pursuant to 3a68-2 was
not requested would be 30 hours, and the total burden associated with the other nine
requests would be 20 hours per request because some of the information required to be
submitted pursuant to Rule 3a68-4(c) would have already been submitted pursuant to Rule
3a68-2. The burden in both cases is evenly divided between the SEC and the CFTC.
13.

Costs to Respondents

Rule 3a68-2

The SEC estimates that the total annual costs resulting from a submission under
Rule 3a68-2 would be approximately $12,000 for the services of outside attorneys to
retrieve, review, and submit the information associated with the submission. This cost is
divided between the SEC and the CFTC, with $6,000 per response regarding reporting to the
SEC and $6,000 per response regarding third party disclosure to the CFTC. Assuming 25
requests each year, as discussed above, the SEC estimates that this would result in
15

The burdens imposed by the CFTC are included in this collection of information.

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aggregate costs each year of $300,000 for the services of outside professionals (e.g.,
attorneys) (25 requests x 30 hours/request x $400 in hourly legal fees).
Rule 3a68-4(c)

The SEC estimates that the total costs resulting from a submission under Rule
3a68-4(c) would be approximately $20,000 for the services of outside attorneys to retrieve,
review, and submit the information associated with the submission of the one request for
which a request for a joint interpretation pursuant to Rule 3a68-2 was not previously made
(1 request x 50 hours/request x $400). For the nine requests for which a request for a joint
interpretation pursuant to Rule 3a68-2 was previously made, the SEC estimates the total
costs associated with preparing and submitting a party’s request pursuant to Rule 3a684(c) would be $6,000 less per request because, as discussed above, some of the information
required to be submitted pursuant to Rule 3a68-4(c) already would have been submitted
pursuant to Rule 3a68-2. The SEC estimates this would result in an aggregate cost each
year of $126,000 for the services of outside attorneys (9 requests x 35 hours/request x
$400).
14.

Costs to Federal Government

15.

Changes in Burden

16.

Information Collection Planned for Statistical Purposes

17.

Approval to Omit OMB Expiration Date

18.

Exceptions to Certification for Paperwork Reduction Act Submissions

There are no estimated operation costs to the federal government associated with
this rule.
The Costs to Respondents changed from that previously submitted based upon an
amortization of the number of requests the SEC expects to receive over three years,
eliminating the differentiation between the numbers of requests the SEC expects to receive
during the first versus the subsequent two years. In the Paperwork Reduction Act
supporting statement previously submitted, the SEC estimated receiving 50 requests for a
joint interpretation pursuant to Rule 3a68-2 in the first year and 10 requests in the ensuing
years, totaling 70 requests for three years. The SEC now estimates receiving 25 requests for
a joint interpretation pursuant to Rule 3a68-2 each year, totaling 75 requests for three
years. In the Paperwork Reduction Act supporting statement previously submitted, the SEC
estimated receiving 20 requests for a joint order pursuant to Rule 3a68-4(c) in the first
year and 5 requests in the ensuing years, totaling 30 requests for three years. The SEC now
estimates receiving 10 requests for a joint order pursuant to Rule 3a68-4(c) each year,
totaling 30 requests for three years.
Not applicable. The information collection is not used for statistical purposes.
The Commission is not seeking approval to omit the expiration date.
This collection complies with the requirements in 5 CFR 1320.9.
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B.

Collection of Information Employing Statistical Methods
This collection does not involve statistical methods.

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