DGL FINAL REVISED 2022 Rule 18a-3 SUPPORTING STATEMENT 3235-0702 clean (003) (002)rw

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 establish 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 nonbank SBSDs are required to monitor
the risk of each account that holds non-cleared security based swaps for a counterparty and to
establish, maintain, and document procedures and guidelines for monitoring the risk of
accounts as part of its risk management control system required under Exchange Act 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:
1

This OMB Control Number previously included the collections of information in Rule 18-10 as well as the
ones in Rule 18a-3. The Commission subsequently requested a separate OMB Control Number for the
collections of information in Rule 18a-10. OMB approved that request on February 9, 2022, and the
collections of information for Rule 18a-10 are now in OMB Control Number 3235-0785. As a result, the
Commission is now changing the burdens in this OMB Control Number 3235-0702 to remove the ones
previously included for Rule 18a-10. The Collections of information in Rule 18a-10 were included in OMB
Control Number 3235-0702 because Rule 18a-10 was not proposed, but was adopted concurrently with 18a-3
as a result of comments received on the proposal for Rule 18a-3. The Commission later amended Rule 18a10 and revised the collections of information in Rule 18a-10 and, at that time, requested a separate OMB
Control Number. See PRA ICR Documents for 3235-0785 on (reginfo.gov).

2

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

3

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

4

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. 86175.

•

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;

•

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

2

•

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, paragraph (d)(2) of Rule 18a-3 provides that a nonbank SBSD seeking
approval to use a model to calculate initial margin will be subject to an application process
consistent with Exchange Act Rule 15c3-1e and paragraph (d) of Exchange Act 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 the nonbank SBSD’s initial margin methodology. 5
2.

Purpose and Use of the Information Collection

Information collections under Rule 18a-3 are 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 noncleared security-based swap counterparties. These information collections will facilitate the
collection of adequate levels of margin assets by nonbank SBSDs to protect them against
counterparty default on both current and potential future exposures.
Under Rule 18a-3, 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 assist examiners in
evaluating whether SBSDs are in compliance with requirements in the rule.

5

While Rule 18a-3 contains requirements that apply to both nonbank SBSDs and MSBSPs, the particular
requirements that constitute a collection of information relate only to nonbank SBSDs.

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.
5.

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

Sensitive Questions

The information collection does not collect personally identifiable information. The
agency has determined that neither a PIA nor a SORN are required in connection with the
collection of information.
4

12.

Burden of Information Collection

The total annual hour burden associated with Rule 18a-3 is approximately 2,243 hours
calculated as follows:
Counterparty Risk Monitoring Procedures (Rule 18a-3(e))
The Commission staff estimates that there are 7 nonbank SBSDs that are subject to Rule
18a-3. The staff further estimates that each would spend an average of approximately 210
hours establishing and documenting their Rule 18a-3 counterparty risk monitoring procedures,
for a one-time industry-wide hour burden of approximately 1,470 recordkeeping hours (490
hours per year when annualized over three years). 6 In addition, the staff estimates that each
nonbank SBSD would spend an average of approximately 60 hours per year reviewing risks
associated with its counterparties, for an annual industry-wide burden of approximately 420
recordkeeping hours. 7 Taken together, the annual hour burden for the total industry is
approximately 910 hours per year (490 + 420).8
Initial Margin Model (Rule 18a-3(d))
A nonbank SBSD may use a model to calculate initial margin, if the use of the model
has been approved by the Commission. 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. The staff
estimates that five non-bank SBSDs have sought Commission approval to use an internal
model to calculate initial margin, resulting in a total industry-wide one-time hour burden of
approximately 250 hours (approximately 83 hours per year when annualized over three years). 9
The Commission also estimates that each nonbank SBSD will spend approximately 250 hours
per year reviewing, updating, and back testing their initial margin model, resulting in a total

6

7 nonbank SBSDs x 210 hours = 1,470 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 490
recordkeeping hours (7 x 70 = 490).

7

7 nonbank SBSDs x 60 hours = 420 hours.

8

490 hours + 420 hours = 910 hours.

9

5 nonbank SBSDs x 50 hours = 250 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 83.33
recordkeeping hours per year rounded down to 83 hours.

5

industry-wide annual hour burden of approximately 1,250 recordkeeping hours. 10 In total, the
Commission estimates an annual hour burden of approximately 1,333 hours per year (83
+ 1,250). 11
Summary of Hour 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

7

1

210.00

Recordkeeping

5

1

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

130.00

910

0

16.67

250.00

266.67

266.67

1,333

0

TOTAL HOURLY BURDEN FOR ALL RESPONDENTS

2,243

Total
Industry
Burden

Small
Business
Entities
Affected

Costs to Respondents

The total annual cost burden associated with Rule 18a-3 is approximately $3,333
calculated as follows:
The 7 respondents subject to the collection of information may incur start-up costs in
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 2
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 5
nonbank SBSDs, 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 5 nonbank
SBSDs 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 approximately $10,000, or $3,333 12 per year
when annualized over 3 years.

10

5 nonbank SBSDs x 250 hours = 1,250 hours.

11

(250 hours / 3 years ) + 1,250 hours = 1,333.33 hours rounded down to 1,333 hours.
5 nonbank SBSDs x $400/hour x 5 hours = $10,000. This amount annualized over three years is $3,333.33
per year rounded down to $3,333.

12

6

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

5

1

$2,000.00

14.

Initial Cost
Annualized
per Entity
per
Response

Ongoing
Cost per
Entity per
Response

Annual
Cost Per
Entity per
Response

0

$666.67

$666.67

Total
Annual
Cost Per
Entity

Total
Industry
Cost

$666.67

3.333

TOTAL COST FOR ALL RESPONDENTS

3,333

Small
Business
Entities
Affected

0

Cost to Federal Government

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

Changes in Burden

The changes in burden result from the following decreases in the estimates of the number
of respondents: (a) the number of SBSDs that are subject to Rule 18a-3 is now estimated to be 7
instead of the previous estimate of 22; (b) the number of SBSDs that have sought Commission
approval to use an internal model to calculate initial margin is now estimated to be 5 instead of
the previous estimate of 22; and (c) the number of non-bank SBSDs not registered as brokerdealers is now estimated to be 5 rather than the previous estimate of 6.
In addition, as noted in Footnote 1 above, this OMB Control Number 3235-0702
previously included burdens for the collections of information in Rule 18a-10. Since the burdens
for that rule are now accounted for in OMB Control Number 3235-0785, the Commission has
removed them from Control Number 3235-0702.
A chart summarizing all of the changes in burden is below.

Name of Information
Collection

Current
Annual
Industry
Burden

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

2,860

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

5,867

Revised Annual
Industry Burden

910

Change in
Burden

(1,950)

1,333

(4,534)

7

Reason for Change

Change in staff estimate of entities
impacted
Change in staff estimate of entities
impacted.

Rule 18a-3 (Cost
Burden)

$4,000

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

5

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

10,000

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

15

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

16.

1

$3,333

($667)

Change in staff estimate of entities
impacted.

(5)

Removal of Rule 18a-10 burden
from OMB Control Number 32350702

0

(10,000)

Removal of Rule 18a-10 burden
from OMB Control Number 32350702

0

(15)

Removal of Rule 18a-10 burden
from OMB Control Number 32350702

(1)

Removal of Rule 18a-10 burden
from OMB Control Number 32350702

0

0

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.

8