SUPPORTING STATEMENT 18A-3 and 18A-10 (3235-0702) Final Rule v.3

SUPPORTING STATEMENT 18A-3 and 18A-10 (3235-0702) Final Rule v.3.pdf

Rule 18a-3 Non-cleared security-based swap margin requirements for security-based swap dealers and major security-based swap participants for which there is not a prudential regulator.

OMB: 3235-0702

⚠️ Notice: This form may be outdated. More recent filings and information on OMB 3235-0702 can be found here:

2022-07-19 - Extension without change of a currently approved collection

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SUPPORTING STATEMENT for the Paperwork Reduction Act Information Collection
Submission for Rule 18a-3 – Non-cleared security-based swap margin requirements for
security-based swap dealers and major security-based swap participants for which there is
not a prudential regulator.
3235-0702 1
This submission is being made pursuant to the Paperwork Reduction Act of 1995, 44
U.S.C. Section 3501 et seq.
A.

JUSTIFICATION
1.

Necessity of Information Collection

On June 21, 2019, in accordance with Section 764 of the Dodd-Frank Wall Street Reform
and Consumer Protection Act (the “Dodd-Frank Act”), 2 which added section 15F to the
Securities Exchange Act of 1934 (the “Exchange Act”), 3 the Securities and Exchange
Commission (the “Commission”) adopted Rule 18a-3 to established minimum margin
requirements for nonbank security-based swap dealers (“SBSDs”) and nonbank major securitybased swap participants (“MSBSPs”) for non-cleared security-based swaps. 4 The rule
establishes a new collection of information requirement with respect to nonbank SBSDs.
Specifically, under paragraph (e) of Rule 18a-3, as adopted, nonbank SBSDs will be
required to monitor the risk of each account and establish, maintain, and document procedures
and guidelines for monitoring the risk of accounts as part of its risk management control
system required under Rule 15c3-4. In addition, the rule requires nonbank SBSDs to review, in
accordance with written procedures and at reasonable periodic intervals, its non-cleared
security-based swap activities for consistency with such risk monitoring procedures and
guidelines. Nonbank SBSDs are also required to determine whether information and data
necessary to apply the risk monitoring procedures and guidelines are accessible on a timely
basis and whether information systems are available to adequately capture, monitor, analyze,
and report relevant data and information. Finally, the rule requires that the monitoring
procedures and guidelines must include, at a minimum, procedures and guidelines for:
•

Obtaining and reviewing account documentation and financial information necessary
for assessing the amount of current and potential future exposure to a given
counterparty permitted by the SBSD;

•

Determining, approving, and periodically reviewing credit limits for each
counterparty, and across all counterparties;

Note that, following the supporting statement for Rule 18a-3, as adopted, there is a supporting statement for
Rule 18a-10, as adopted. Rule 18a-10 was not a rule that was proposed in connection with the proposing
release of the rules described herein, but followed from comments received in connection with the rules. The
supporting statement for Rule 18a-10 shares the same OMB number as Rule 18a-3. For more information,
see Section 8 (Consultations Outside the Agency) in the supporting statement for Rule 18a-10, below.

See Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376
(2010).

See 15 U.S.C. 78o-10(e)(2)(B).

•

Monitoring credit risk exposure to the SBSD from non-cleared security-based swaps,
including the type, scope, and frequency of reporting to senior management;

•

Using stress tests to monitor potential future exposure to a single counterparty and
across all counterparties over a specified range of possible market movements over a
specified time period;

•

Managing the impact of credit exposure related to non-cleared security-based swaps
on the SBSD’s overall risk exposure;

•

Determining the need to collect collateral from a particular counterparty, including
whether that determination was based upon the creditworthiness of the counterparty
and/or the risk of the specific non-cleared security-based swap contracts with the
counterparty;

•

Monitoring the credit exposure resulting from concentrated positions with a single
counterparty and across all counterparties, and during periods of extreme volatility;
and

•

Maintaining sufficient equity in the account of each counterparty to protect against
the largest individual potential future exposure of a non-cleared security-based swap
carried in the account of the counterparty as measured by computing the largest
maximum possible loss that could result from the exposure.

In addition, the final rule provides that a nonbank SBSD seeking approval to use a model to
calculate initial margin will be subject to an application process consistent with Rule 15c3-1e and
paragraph (d) of Rule 18a-1, as applicable, governing the use of internal models to compute net
capital. The nonbank SBSD will need to submit sufficient information to allow the Commission to
make a determination regarding the performance of nonbank SBSD’s initial margin methodology.
2.

Purpose and Use of the Information Collection

Information collection under Rule 18a-3, as adopted is integral to the Commission’s
financial responsibility program for nonbank SBSDs. The program is designed to ensure that
nonbank SBSDs effectively manage counterparty risk by monitoring their financial exposures to
non-cleared security-based swap counterparties. These information collections will facilitate the
collection of adequate levels of margin assets by nonbank SBSDs so as to protect them against
counterparty default on both current and potential future exposures.
Under Rule 18a-3, as adopted, a nonbank SBSD is required to establish and implement risk
monitoring procedures with respect to counterparty accounts. The purpose of the rule is to limit
risks to individual firms and systemic risk arising from non-cleared security-based swaps. Firms’
records relating to the collection of collateral required by Rule 18a-3, as adopted, assist examiners
in evaluating whether SBSDs are in compliance with requirements in the rule.
3.

Consideration Given to Information Technology

The information collections will not require that respondents use any specific
information technology system either to prepare or submit information collections under Rule
18a-3.
4.

Duplication

This information collection does not duplicate any existing information collection.

Effect on Small Entities

The information collections required under Rule 18a-3 would not place burdens on small
entities. The nonbank SBSDs subject to the information collections under the rule are not expected
to be small entities.
6.
Consequences of Not Conducting Collection
If the required information collections are not conducted or are conducted less frequently,
the protection afforded to counterparties and the U.S. financial system 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 Commission requested comment on the collection of information requirements in the
proposing release in October 2012. 5 In addition, in 2018, the Commission reopened the comment
period and requested additional comment on the proposed rules and amendments (including
potential modifications to proposed rule language). 6 While the Commission did not receive
specific comments with respect to the proposed collection of information with respect to Rule
18a-3, as proposed to be adopted, the Commission received a number of comment letters in
response to the 2012 proposal. 7 In response to comments received regarding Rule 18a-3, as
proposed to be adopted, the Commission has modified the language in the final rule, as discussed
below. These comments and their impact on PRA estimates are discussed below.
9.

Payment or Gift

No payment or gift is provided to respondents.
10.

Confidentiality

The information collected by the Commission under Rule 18a-3, as adopted, is kept
confidential to the extent permitted by the Freedom of Information Act (5 U.S.C. § 552 et seq.).
11.

Sensitive Questions

No questions of a sensitive nature are asked. The information collection does not collect
5

See Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major SecurityBased Swap Participants and Capital Requirements for Broker-Dealers, Exchange Act Release No. 68071
(Oct. 18, 2012), 77 FR 70213, 70299 (Nov. 23, 2012).

See Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major SecurityBased Swap Participants and Capital Requirements for Broker-Dealers, Exchange Act Release No. 84409
(Oct. 11, 2018), 83 FR 53007 (Oct. 19, 2018) (“Capital, Margin, and Segregation Comment Reopening”).

Comments available at https://www.sec.gov/comments/s7-08-12/s70812.shtml.

any Personally Identifiable Information (“PII”). 8 At the same time, however, Commission staff
understands that there may be instances when certain information (including, but not limited to, a
person’s name, email, or phone number) could be provided by a respondent in response to one of
the collections of information. However, Commission staff does not envision any circumstances in
which a social security number would be provided pursuant to any of the collections of information.
As such, we believe that the treatment of any PII with the collection of information associated with
this rule is not likely to implicate the Federal Information Security Management Act of 2002 or the
Privacy Act of 1974.
12.

Burden of Information Collection

Counterparty Risk Monitoring Procedures (Rule 18a-3(e))
The Commission staff estimates that there would be 22 nonbank SBSDs 9 that would each
spend an average of 210 hours establishing and documenting their Rule 18a-3 counterparty risk
monitoring procedures, for a one-time industry-wide hour burden of 4,620 recordkeeping
hours. 10 The staff further estimates that each nonbank SBSD would spend an average of 60 hours
per year reviewing risks associated with its counterparties, for an annual industry-wide hours
burden of 1,320 recordkeeping hours. 11 Taken together, the annualized hour burden for the
total industry is 2,860 hours. 12
Initial Margin Model (Rule 18a-3(d))
Based on comments received, 13 the Commission modified the language in the final rule to
8

The term “Personally Identifiable Information” refers to information which can be used to distinguish or trace
an individual’s identity, such as their name, social security number, biometric records, etc. alone, or when
combined with other personal or identifying information which is linked or linkable to a specific individual,
such as date and place of birth, mother’s maiden name, etc.

While Rule 18a-3 contains requirements that apply to both nonbank SBSDs and MSBSPs, the particular
requirement that constitutes a collection of information relates only to subpart (e) of the rule, which requires
only nonbank SBSDs to establish and follow risk monitoring procedures in respect of individual securitybased swap customer agreements. Because this individual account requirement does not apply to MSBSPs,
they are not included as respondents in the calculation of the associated burden. Further, the number of
nonbank SBSDs subject to Rule 18a-3 has been reduced from 25, as proposed, to 22, to account for the 3
stand-alone SBSDs that the Commission estimates will elect the alternative compliance mechanism under
Rule 18a-10, as adopted. The adoption of Rule 18a-10 will enable stand-alone SBSDs to elect an alternative
compliance mechanism and comply with the relevant requirements of the Commodity Exchange Act and the
U.S. Commodity Futures Trading Commission’s (“CFTC”) rules in lieu of Rule 18a-3, as adopted.

22 nonbank SBSDs x 210 hours = 4,620 hours. These amounts are annualized over three years resulting in 70
(210 hours/3 years) hours per nonbank SBSD per year and an industry wide annual burden of 1,540
recordkeeping hours.

22 nonbank SBSDs x 60 hours = 1,320 hours.

1,540 hours + 1,320 hours = 2,860.

The Commission received comments to more closely align the final rules with the margin rules of the CFTC
and the prudential regulators. See, e.g., Center for Capital Markets Competitiveness, Chamber of Commerce
11/19/2018 Letter; Letter from Scott O’Malia, Chief Executive Officer, International Swaps and Derivatives
Association (Nov. 19, 2018). These modifications to more closely align the final rules included an option for
a stand-alone SBSD to use a model to calculate initial margin for equity security-based swaps subject to
certain conditions. The Commission believes permitting the model-based approach under these limited

provide that a nonbank SBSD may use a model to calculate initial margin, if the use of the model
has been approved by the Commission. The final rule provides that a nonbank SBSD seeking
approval to use a margin model will be subject to an application process and ongoing conditions
in Rule 15c3-1e and paragraph (d) of Rule 18a-1 governing the use of internal models to compute
net capital. A nonbank SBSD seeking approval to use a margin model will need to submit
sufficient information to allow the Commission to make a determination regarding the
performance of the nonbank SBSD’s margin methodology. Based on staff experience, the
Commission estimates it will take a nonbank SBSD approximately 50 hours to prepare and
submit an application to the Commission to seek authorization to use an internal model to
calculate initial margin. Based on observations regarding the implementation by market
participants of final swap margin rules adopted by other domestic regulators, the Commission
believes it is likely that all 22 nonbank SBSDs will seek Commission approval to use an internal
model to calculate initial margin resulting in a total industry-wide one-time hour burden of 1,100
hours. 14 The Commission also estimates that each nonbank SBSD will spend approximately 250
hours per year reviewing, updating, and backtesting their initial margin model, resulting in a total
industry-wide annual hour burden of 5,500 recordkeeping hours. 15 In total, the Commission
estimates an annualized hourly burden of 5,866.67 hours. 16
Summary of Hourly Burdens

Name of
Information
Collection

Rule 18a-3(e)
(Counterparty Risk
Monitoring
Procedures)
Rule 18a-3(d)
(Initial Margin
Model)

13.

Initial
Burden
per
Entity
per
Response

Type of
Burden

Number
of
Entities
Impacted

Annual
Responses
per Entity

Recordkeeping

210.00

Recordkeeping

50.00

Initial
Burden
Annualized
per Entity
per
Response

Ongoing
Burden
per Entity
per
Response

Annual
Burden
Per Entity
per
Response

Total
Annual
Burden
Per Entity

70.00

60.00

130.00

2,860.00

16.67

250.00

266.67

5,866.74

TOTAL HOURLY BURDEN FOR ALL RESPONDENTS

8,726.74

Total
Industry
Burden

Small
Business
Entities
Affected

Costs to Respondents

The 22 respondents subject to the collection of information may incur start-up costs in
circumstances strikes an appropriate balance in terms of addressing commenters’ concerns and maintaining
regulatory parity between the cash equity market and the equity security-based swap market. Permitting the
use of models for the purpose described above will further harmonize the Commission’s margin rule with the
rules of domestic and foreign regulators and, therefore, minimize potential competitive impacts of imposing
different requirements.
14

22 nonbank SBSDs x 50 hours = 1,100 hours. These amounts are annualized over three years resulting in
16.67 (50 hours/3 years) hours per nonbank SBSD per year and an industry wide annual burden of 366.67
recordkeeping hours. One or two nonbank SBSDs may choose to use standardized haircuts to compute
initial margin because it may be too costly for these firms to use an initial margin model. However, the
Commission is conservatively estimating that all 22 nonbank SBSDs will choose to use a model to compute
initial margin for purposes of this collection of information.

22 nonbank SBSDs x 250 hours = 5,500 hours.

(1,100 hours / 3 years) + 5,500 hours = 5,866.67 hours.

order to comply with this collection of information. These costs may vary depending on the size
and complexity of the nonbank SBSD. In addition, the start-up costs may be less for the 16
nonbank SBSD respondents also registered as broker-dealers because these firms may already be
subject to similar requirements with respect to other margin rules. For the remaining 6 nonbank
SBSDs,17 because these written procedures may be novel undertakings for these firms, the
Commission staff assumes these nonbank SBSDs will have their written risk analysis
methodology reviewed by outside counsel. Therefore, the staff estimates that these 6 nonbank
SBSDs and will engage an outside counsel to review their written risk analysis methodology, at
a rate of $400 per hour for 5 hours (i.e., $2,000 in legal costs). This will result in a one-time
industry-wide external recordkeeping cost of $12,000, or $4,000 18 annualized over 3 years.
Summary of Dollar Costs

Name of
Information
Collection

Type of
Burden

Number
of
Entities
Impacted

Annual
Responses
per Entity

Initial
Cost per
Entity per
Response

Rule 18a-3 (Cost
Burden)

Recordkeeping

$2,000.00

14.

Initial Cost
Annualized
per Entity
per
Response

$666.67

Ongoing
Cost per
Entity per
Response

Annual
Cost Per
Entity per
Response

$666.67

Total
Annual
Cost Per
Entity

Total
Industry
Cost

$666.67

$4,000.02

TOTAL COST FOR ALL RESPONDENTS

$4,000.02

Small
Business
Entities
Affected

Cost to Federal Government

The staff does not anticipate this information collection to impose additional costs to the
Federal Government.
15.

Changes in Burden

Name of Information
Collection

Rule 18a-3(e)
(Counterparty Risk
Monitoring Procedures)

Annual
Industry
Burden

2,860

Annual Industry
Burden
Previously
Reviewed

3250

Change in
Burden

Reason for Change

(390)

Reduction in the number of entities
impacted due to the adoption of a
new rule (Rule 18a-10) in the
SBSD Adopting Release.

Recall that this number has been reduced by 3 to account for the estimated 3 stand-alone SBSDs that will
elect to account for the adoption of Rule 18a-10, which will enable stand-alone SBSDs to elect an alternative
compliance mechanism and comply with the relevant requirements under the Commodity Exchange Act and
the CFTC’s rules.

6 nonbanks SBSDs x $400/hour x 5 hours= $4,000. This amount annualized is $666.67 per nonbank SBSD
($4,000/6 nonbank SBSDs = $666.666, rounded to $666.67).

Rule 18a-3(d) (Initial
Margin Model)

Rule 18a-3 (Cost
Burden)

16.

5,866.74

$4,000.02

$6,000.03

5,866.74

New provision adopted in the
amendments to Rule 15c3-1
described in the SBSD Adopting
Release, based on comments
received.

($2,000.01)

Reduction in the number of entities
impacted due to the adoption of a
new rule (Rule 18a-10) in the
SBSD Adopting Release.

Information Collected Planned for Statistical Purposes

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

OMB Expiration Date Display Approval

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

Exceptions to Certification for Paperwork Reduction Act Submissions

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

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

SUPPORTING STATEMENT for the Paperwork Reduction Act Information Collection
Submission for Rule 18a-10 – Alternative compliance mechanism for security-based swap
dealers that are registered as swap dealers and have limited security-based swap activities.
3235-0702
This submission is being made pursuant to the Paperwork Reduction Act of 1995, 44
U.S.C. Section 3501 et seq.
B.

JUSTIFICATION
1.

Necessity of Information Collection

On June 21, 2019, in accordance with Section 764 of the Dodd-Frank Wall Street Reform
and Consumer Protection Act (the “Dodd-Frank Act”), 19 which added section 15F to the
Securities Exchange Act of 1934 (the “Exchange Act”), 20 the Securities and Exchange
Commission (the “Commission”) adopted Rule 18a-10 to provide an alternative compliance
mechanism pursuant to which a stand-alone security-based swap dealers (“SBSDs”)21 that is
registered as a swap dealer and predominantly engages in a swaps business may elect to comply
with the capital, margin, and segregation requirements of the Commodity Exchange Act
(“CEA”) and the U.S. Commodity Futures Trading Commission’s (“CFTC”) rules in lieu of
complying with Rules 18a-1, 18a-3, and 18a-4, as adopted. 22
In order to qualify to operate pursuant to Rule 18a-10, the stand-alone SBSD cannot be
registered as a broker-dealer or an OTC derivatives dealer. Moreover, in addition to other
conditions, the aggregate gross notional amount of the firm’s security-based swap positions must
not exceed the lesser of a maximum fixed-dollar amount or 10% of the combined aggregate gross
notional amount of the firm’s security-based swap and swap positions. The maximum fixeddollar amount is set at a transitional level of $250 billion for the first 3 years after the compliance
date of the rule and then drops to $50 billion thereafter unless the Commission issues an order: (1)
maintaining the $250 billion maximum fixed-dollar amount for an additional period of time or
indefinitely; or (2) lowering the maximum fixed-dollar amount to an amount between $250
billion and $50 billion. The final rule further provides that the Commission will consider the
levels of security-based swap activity of the stand-alone SBSDs operating under the alternative
compliance mechanism and provide notice before issuing such an order.
19

See Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376
(2010).

See 15 U.S.C. 78o-10(e)(2)(B).

The alternative compliance mechanism in Rule 18a-10, as adopted, is not available to nonbank SBSDs that
are registered as either a broker-dealer or an OTC derivatives dealer. Consequently, term “stand-alone
SBSD,” in the context of discussing the alternative compliance mechanism, refers to a stand-alone SBSD that
is not also registered as an OTC derivatives dealer.

Rule 18a-10, as adopted, addresses how a firm would elect to operate pursuant to the rule.
Under paragraph (d)(1), a firm can make the election as part of the process of applying to register
as an SBSD. In this case, the firm must provide written notice to the Commission and the CFTC
during the registration process of its intent to operate pursuant to the rule. Upon being registered
as an SBSD, the firm can begin complying with Rule 18a-10, provided it meets the conditions
described in the rule. Under paragraph (d)(2) of Rule 18a-10, an SBSD can make the election
after the firm has been registered as an SBSD. In this case, the firm must provide written notice to
the Commission and the CFTC of its intent to operate pursuant to the rule and continue to comply
with Rules 18a-1, 18a-3, and 18a-4 for two months after the end of the month in which the firm
provides the notice or for a shorter period of time as granted by the Commission by order subject
to any conditions imposed by the Commission. The requirement that the firm continue complying
with the Commission’s rules for a period of time after making the election is designed to provide
the Commission and the CFTC with an opportunity to examine the firm before it begins operating
pursuant to the alternative compliance mechanism and to prepare for the firm no longer
complying with the Commission’s rules.
In addition, Rule 18a-10 requires the firm to provide a written disclosure to its
counterparties after it begins operating pursuant to the rule. The disclosure must be provided
before the first transaction with the counterparty after the firm begins operating pursuant to the
rule. The disclosure must notify the counterparty that the firm is complying with the applicable
capital, margin, and segregation requirements of the CEA and the CFTC’s rules in lieu of
complying with Rules 18a-1, 18a-3, and 18a-4. The disclosure requirement is designed to alert the
counterparty that the firm is not complying with these Commission rules notwithstanding the fact
that the firm is registered with the Commission as an SBSD. This will provide the counterparty
with the opportunity to assess the implications of transacting with the SBSD under these
circumstances.
Furthermore, Rule 18a-10 requires the firm to immediately notify the Commission and the
CFTC in writing if it fails to meet a condition in the rule. This notice – by immediately alerting
the Commission and the CFTC of the firm’s status – will provide the agencies with the
opportunity to promptly evaluate the situation and coordinate any regulatory responses such as
increased monitoring of the firm.
The Commission believes stand-alone SBSDs that meet the conditions of Rule 18a-10
should be permitted to adhere to capital, margin, and segregation requirements of the CEA and
the CFTC’s rules (which, potentially, could include a bank-like capital standard) because, among
other reasons, they will be predominantly engaging in a swaps business and, therefore, the CFTC
will have a heightened regulatory interest in these firms as compared to the Commission’s
regulatory interest. Consequently, a firm that is subject to Rule 18a-10 must comply with
applicable capital, margin, and segregation requirements of the CEA and the CFTC’s rules and a
failure to comply with one or more of those rules will constitute a failure to comply with Rule
18a-10. The rule establishes a new collection of information requirement with respect to standalone SBSDs.

Purpose and Use of the Information Collection

Information collection under Rule 18a-10, as adopted is integral to the Commission’s
financial responsibility program for certain stand-alone SBSDs. The disclosure requirement
under Rule 18a-10, as adopted, is designed to alert the counterparty that the firm is not
complying with these Commission rules notwithstanding the fact that the firm is registered with
the Commission as an SBSD. This will provide the counterparty with the opportunity to assess
the implications of transacting with the SBSD under these circumstances.
Rule 18a-10 will also require a notification of the Commission if the SBSD chooses the
alternative compliance mechanism described in the rule. The Commission believes stand-alone
SBSDs that meet the conditions of Rule 18a-10 should be permitted to adhere to capital,
margin, and segregation requirements of the CEA and the CFTC’s rules (which, potentially,
could include a bank-like capital standard) because, among other reasons, they will be
predominantly engaging in a swaps business and, therefore, the CFTC will have a heightened
regulatory interest in these firms as compared to the Commission’s regulatory interest.
3.

Consideration Given to Information Technology

The information collections will not require that respondents use any specific
information technology system either to prepare or submit information collections under Rule
18a-10.
4.

Duplication

This information collection does not duplicate any existing information collection.
5.

Effect on Small Entities

The information collections required under Rule 18a-10 would not place burdens on small
entities. The stand-alone SBSDs subject to the information collections under the rule are not
expected to be small entities.
6.
Consequences of Not Conducting Collection
If the required information collections are not conducted or are conducted less
frequently, the protection afforded to counterparties and the U.S. financial system 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 Commission requested comment on the collection of information requirements to

related rules (Rule 18a-1, 18a-3, and 18a-4) in the proposing release in October 2012. 23 In
addition, in 2018, the Commission reopened the comment period and requested additional
comment on the proposed related rules (Rule 18a-1, 18a-3, and 18a-4) and amendments
(including potential modifications to proposed rule language). 24 While the Commission did not
receive specific comments with respect to the proposed collection of information with respect
to these rules, as proposed to be adopted, the Commission received a number of comment
letters in response to the 2012 proposal. 25
The Commission did not propose a collection of information with respect to Rule 18a10, because the Commission did not propose Rule 18a-10, as adopted. 26 In response to
comments urging the Commission to harmonize requirements with the CFTC, 27 as well as
specific comments requesting that the Commission defer to the CFTC’s rules if a nonbank SBSD
is registered as a swap dealer and conducts only a limited amount of security-based swaps
23

See Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major SecurityBased Swap Participants and Capital Requirements for Broker-Dealers, Exchange Act Release No. 84409
(Oct. 11, 2018), 83 FR 53007 (Oct. 19, 2018) (“Capital, Margin, and Segregation Comment Reopening”).

Comments available at https://www.sec.gov/comments/s7-08-12/s70812.shtml.

The Commission did, however, request comment on harmonization in the proposing release. See, e.g.,
Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major SecurityBased Swap Participants and Capital Requirements for Broker-Dealers, 77 FR at 70217 (“The
Commission staff consulted with the prudential regulators and the CFTC in drafting the proposals
discussed in this release. In addition, the proposals of the prudential regulators and the CFTC were
considered in developing the Commission’s proposed capital, margin, and segregation requirements for
SBSDs and MSBSPs. The Commission’s proposals differ in some respects from proposals of the
prudential regulators and the CFTC, and such differences are described below in connection with the
relevant proposals. While some differences are based on differences in the activities of securities firms,
banks, and commodities firms, or differences in the products at issue, other differences may reflect an
alternative approach to balancing the relevant policy choices and considerations. Where these differences
exist, comment is sought on the advantages and disadvantages of each proposal and whether a given
proposal is appropriate based on differences in the business models of the types of entities that would be
subject to the respective proposal, the risks of these entities, and any other factors commenters believe
relevant.”); Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major
Security-Based Swap Participants and Capital Requirements for Broker-Dealers, 77 FR at 70264
(“However, comment is sought below in section II.B.3. of this release on the question of whether to define
the term eligible collateral in a manner that is similar to the proposals of the prudential regulators and the
CFTC.”).

Commenters sought harmonization with respect to the Commission’s capital requirements, margin
requirements, and segregation requirements. See, e.g., Letter from Stephen John Berger, Managing
Director, Government & Regulatory Policy, Citadel Securities (Nov. 19, 2018); Letter from Richard M.
Whiting, Executive Director and General Counsel, The Financial Services Roundtable (Feb. 22, 2013);
Letter from Walt L. Lukken, President and Chief Executive Officer, Futures Industry Association (Nov. 19,
2018); Letter from Sebastian Crapanzano and Soo-Mi Lee, Managing Directors, Morgan Stanley (Nov. 19,
2018); Letter from Stuart J. Kaswell, Executive Vice President, Managing Director, and General Counsel,
Managed Funds Association (Feb. 22, 2013); Letter from Kenneth E. Bentsen, Jr., President and CEO,
Securities Industry and Financial Markets Association (Nov. 19, 2018); Letter from Adam Jacobs, Director
of Markets Regulation, Alternative Investment Management Association (Feb. 22, 2013); Letter from Scott
O’Malia, Chief Executive Officer, International Swaps and Derivatives Association (Nov. 19, 2018).

business,28 the Commission is adopting new Rule 18a-10. These comments and their impact on
PRA estimates are discussed below.
9.

Payment or Gift

No payment or gift is provided to respondents.
10.

Confidentiality

The information collected by the Commission under Rule 18a-10, as adopted, is kept
confidential to the extent permitted by the Freedom of Information Act (5 U.S.C. § 552 et seq.).
11.

Sensitive Questions

No information of a sensitive nature, including social security numbers, will be required
under this collection of information. The information collection collects basic Personally
Identifiable Information (PII) 29 that may include name, work address, telephone number and
email address, but information is not retrieved by a personal identifier. The Commission has
determined that the information collection does not constitute a system of record for purposes of
the Privacy Act. As such, we believe that the treatment of any PII with the collection of
information associated with this rule is not likely to implicate the Federal Information Security
Management Act of 2002 or the Privacy Act of 1974.
12.

Burden of Information Collection

In response to comments urging the Commission to harmonize requirements with the

For example, one commenter stated that “[i]f the Commission and CFTC do not harmonize their capital
rules, they should defer to the capital rules of one another in the case of” an entity that is registered as an
SBSD and a swap dealer and “whose swaps or [security based swaps] represent a de minimis portion of the
[entity’s] combined swap and [security-based swap] business. See Letter from Kenneth E. Bentsen, Jr.,
President and CEO, Securities Industry and Financial Markets Association (Nov. 19, 2018). This
commenter further stated that “[i]n cases where the firm is predominantly engaged in swap activity,
imposing different capital requirements would be inefficient.” Id. Another commenter stated that “[i]f
harmonization is not achievable, the rules should be coordinated so that [the Commission] defers to the
capital and margin rules of the CFTC for an SBSD that is not a broker-dealer and whose [security-based
swaps] constitute a very small proportion of its business (e.g., less than 10% of the notional amount of its
outstanding combined swap and SBS positions).” See Adam Hopkins, Managing Director, Legal
Department, Mizuho Capital Markets LLC, Marcy S. Cohen, General Counsel and Managing Director,
ING Capital Markets LLC, and Michael Baudo, President and CEO, ING Capital Markets LLC (Nov. 16,
2018). See also Letter from Tom Quaadman, Executive Vice President, Center for Capital Markets
Competitiveness, U.S. Chamber of Commerce (Nov. 19, 2018). This commenter supported a safe harbor
that would allow firms to rely on their compliance with the rules of the Commission or the CFTC to satisfy
comparable requirements set by the other agency.

The term “Personally Identifiable Information” refers to information which can be used to distinguish or
trace an individual’s identity, such as their name, social security number, biometric records, etc. alone, or
when combined with other personal or identifying information which is linked or linkable to a specific
individual, such as date and place of birth, mother’s maiden name, etc.

CFTC, 30 as well as specific comments requesting that the Commission defer to the CFTC’s rules
if a nonbank SBSD is registered as a swap dealer and conducts only a limited amount of securitybased swaps business, 31 the Commission is adopting new Rule 18a-10. Rule 18a-10 contains an
alternative compliance mechanism pursuant to which a stand-alone SBSD that is registered as a
swap dealer and predominantly engages in a swaps business may elect to comply with the capital,
margin, and segregation requirements of the CEA and the CFTC’s rules in lieu of complying with
Rules 18a-1, 18a-3, and 18a-4.
The Commission estimates that 3 stand-alone SBSDs will elect to operate under Rule 18a10. These respondents were included in the proposing release in other collections of information
(Rule 18a-1 and Rule 18a-3, as proposed), and have been moved to the information collection for
new Rule 18a-10.
Develop Disclosure Language (Rule 18a-10(b)(2))
The Commission estimates paperwork burden associated with developing new disclosure
language under paragraph (b)(2) of Rule 18a-10 will require each of the 3 stand-alone SBSDs to
spend 5 hours of in-house counsel time. This would create a total one-time industry burden of
15 hours, or 5 hours on an annualized basis. 32 This estimate assumes little or no reliance on
30

3 stand-alone SBSDs x 5 in-house counsel hours = 15 hours. Annualized, the hour burden would be 5
hours industry-wide (15 hours/3 years = 5 hours) and 1.67 per stand-alone SBSD (5 hours/3 stand-alone

standardized disclosure language.
Incorporate Disclosure Language (Rule 18a-10(b)(2))
Based on previous experience, the Commission staff estimates that the average SBSD will
have approximately 1,000 counterparties at any given time and that the cost of incorporating new
disclosure language into the trading documentation of an average SBSD would require 10 hours
of in-house counsel time, for a total of 10,000 hours per stand-alone SBSD and approximately
30,000 hours for all 3 stand-alone SBSDs, or 10,000 hours 33 on an annualized basis. 34
Update Disclosures (Rule 18a-10(b)(2))
The Commission expects that the majority of the paperwork burden associated with the
new disclosure requirements under paragraph (b)(2) of Rule 18a-10, as adopted, will be
experienced during the first year as language is developed. After the new disclosure language is
developed and incorporated into trading documentation, the Commission believes that the
ongoing burden associated with paragraph (b)(2) of Rule 18a-10 will be limited to periodically
updating the disclosures. The Commission estimates that this ongoing paperwork burden will
not exceed 5 hours per stand-alone SBSD, for a total of 15 hours annually for all 3 standalone SBSDs. 35
Notices (Rule 18a-10(b)(3))
Based on the number of notices currently filed by broker-dealers, the Commission staff
estimates that the notice requirement of paragraph (b)(3) of Rule 18a-10 will result in annual hour
burdens to stand-alone SBSDs. The Commission staff estimates that 1 stand-alone SBSD will file
notice annually with the Commission. In addition, based on the estimates for similar collections
of information, the Commission staff estimates that it will take a stand-alone SBSD
approximately a half hour to file this notice, resulting in an industry-wide annual hour
burden of a half hour, which rounds up to 1 hour.36
Alternative Compliance Mechanism (Rule 18a-10(d)(1) and (d)(2))
Finally, under paragraphs (d)(1) and (d)(2) of Rule 18a-10, respectively, a stand-alone
SBSD can make an election to operate under the alternative compliance mechanism, during the
registration process or after the firm registers as an SBSD, by providing written notice to the
Commission and the CFTC of its intent to operate pursuant to the rule. The Commission believes
SBSDS = 1.67).
33

This number (10,000) is different from the number that is represented in the summary of hourly burden
chart (9,990) because of a different order of operations and rounding in arriving at the final hour burden.

3 stand-alone SBSDs x 10 hours x 1,000 counterparties = 30,000. Annualized, this hour burden would be
10,000 hours industry wide (30,000 hours/3 years = 10,000 hours) and 3,333.33 hours per stand-alone
SBSD (10,000 hours/3 stand-alone SBSD = 3,333 hours).

3 stand-alone SBSDs x 5 hours = 15 hours.

1 stand-alone SBSD x 1 notice x 30 minutes = 30 minutes.

that in the first 3 years of the effective date of the rule that the 3 nonbank SBSDs that elect to
operate under Rule 18a-10 will file the notice as part of their application process. Therefore, the
Commission believes that the time it would take an entity to file a notice as part of the application
process would be de minimis and, therefore, would not result in an hour burden for this collection
of information or any collection of information associated with registering with the Commission
as an SBSD. Further, since the Commission believes that the 3 nonbank SBSDs will elect to
operate under the rule as part of their registration process, the Commission believes that there will
be no respondents, and no paperwork hour or cost burden under the PRA associated with
paragraph (d)(2) of Rule 18a-10, as adopted.
Summary of Hourly Burdens

Name of
Information
Collection

Rule 18a-10(b)(2)
(Develop
Disclosure
Language)
Rule 18a-10(b)(2)
(Incorporate
Disclosure
Language)
Rule 18a-10(b)(2)
(Update
Disclosures)
Rule 18a-10(b)(3)
(Notices)

13.

Initial
Burden
per
Entity
per
Response

Initial
Burden
Annualized
per Entity
per
Response

Ongoing
Burden
per Entity
per
Response

Annual
Burden
Per Entity
per
Response

Total
Annual
Burden
Per Entity

1.67

5.01

3.333

3,333

10,000

.5
(rounds to 1)

TOTAL HOURLY BURDEN FOR ALL RESPONDENTS

10,021.01

Type of
Burden

Number
of
Entities
Impacted

Annual
Responses
per Entity

Third-Party

Third Party

1,000

Third Party

Reporting

Total
Industry
Burden

Small
Business
Entities
Affected

Costs to Respondents

The Commission does not expect any cost burdens associated with Rule 18a-10, as
adopted.
14.

Cost to Federal Government

The staff does not anticipate this information collection to impose additional costs to
the Federal Government.
15.

Changes in Burden

All information collections in this supporting statement are new. The Commission did not
propose a collection of information with respect to Rule 18a-10, because the Commission did not
propose Rule 18a-10. 37 In response to comments urging the Commission to harmonize
37

requirements with the CFTC, 38 as well as specific comments requesting that the Commission
defer to the CFTC’s rules if a nonbank SBSD is registered as a swap dealer and conducts only a
limited amount of security-based swaps business, 39 the Commission is adopting new Rule 18a-10.
Name of Information
Collection

Annual
Industry
Burden

Annual Industry
Burden
Previously
Reviewed

Change in
Burden

Reason for Change

SBSDs and MSBSPs. The Commission’s proposals differ in some respects from proposals of the
prudential regulators and the CFTC, and such differences are described below in connection with the
relevant proposals. While some differences are based on differences in the activities of securities firms,
banks, and commodities firms, or differences in the products at issue, other differences may reflect an
alternative approach to balancing the relevant policy choices and considerations. Where these differences
exist, comment is sought on the advantages and disadvantages of each proposal and whether a given
proposal is appropriate based on differences in the business models of the types of entities that would be
subject to the respective proposal, the risks of these entities, and any other factors commenters believe
relevant.”); Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major
Security-Based Swap Participants and Capital Requirements for Broker-Dealers, 77 FR at 70264
(“However, comment is sought below in section II.B.3. of this release on the question of whether to define
the term eligible collateral in a manner that is similar to the proposals of the prudential regulators and the
CFTC.”).
38

Rule 18a-10(b)(2)
(Develop Disclosure
Language)
Rule 18a-10(b)(2)
(Update Disclosure
Language)

10,000

Rule 18a-10(b)(2)
(Update Disclosures)

Rule 18a-10(b)(3)
(Notices)

16.

5.01

Rule 18a-10 was not previously
proposed, but was adopted based
on comments received on related
rules proposed by the Commission.

10,000

Rule 18a-10 was not previously
proposed, but was adopted based
on comments received on related
rules proposed by the Commission.

n/a

Information Collected Planned for Statistical Purposes

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

OMB Expiration Date Display Approval

The Commission is not seeking approval to not display the OMB approval expiration
18.

Exceptions to Certification for Paperwork Reduction Act Submissions

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

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

File Type	application/pdf
Author	Jane Wetterau
File Modified	2019-11-04
File Created	2019-11-04

SUPPORTING STATEMENT 18A-3 and 18A-10 (3235-0702) Final Rule v.3