PRA Supporting Statement for Exemptive Order Granting Conditional Exemptions for Portfolio Margining of SB Swaps

SUPPORTING STATEMENT
for the Paperwork Reduction Act Information Collection Submission for
“Order Granting Conditional Exemptions Under the Securities Exchange Act of 1934 in
Connection with Portfolio Margining of Swaps and Security-Based Swaps”
A. JUSTIFICATION
1. Necessity of Information Collection
No statute or regulation mandates the information collection. The information collection is
necessary or appropriate in the public interest and consistent with the protection of investors to
grant the conditional exemptions provided by the Commission’s Order, which was issued
pursuant to Section 36 of the Exchange Act.
2. Purpose and Use of the Information Collection
The information collection requirements are intended (1) to provide customers of broker-dealers
and futures commission merchants with appropriate agreements, disclosures, and opinions to
clarify key aspects of the regulatory framework that will govern their participation in a program
to commingle and portfolio margin cleared credit default swap positions and (2) to ensure that
appropriate levels of margin are collected.
3. Consideration Given to Information Technology
Use of any particular technology is not mandated to satisfy the information collection. Advances
in information technology, such as advances in word processing and document production, may
reduce the burden of producing and transmitting the contracts, disclosures, and legal opinions.
4. Duplication
Because the Order provides original, conditional exemptive relief, the Commission does not
believe that any of the information collection duplicates any existing information collection.
Furthermore, because respondents were not required to provide the disclosures, opinions, and
other information required by the information collection prior to the Order, the Commission does
not believe that any existing information was already available to satisfy the purposes of the
information collection.
5.

Effect on Small Entities
None of the respondents to the information collection will be small businesses or other small
entities.

6. Consequences of Not Conducting Collection
Not imposing the information collection requirements would deprive customers of broker-dealers
and futures commission merchants that elect to offer a program to commingle and portfolio
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margin customer positions in cleared credit default swaps in accounts maintained in accordance
with Section 4d(f) of the Commodities Exchange Act and the rules thereunder of disclosures and
other information needed to make a determination about whether to participate in such a
program. Not imposing the collection of information requirements would also deprive the
Commission of information needed to ensure that appropriate margins are collected.
Reducing the information available to customers may discourage customer participation in
portfolio margining programs and/or lead to confusion about the parameters of such programs
and the protections afforded to customers in such programs. Also, if the Commission is unable to
obtain the necessary information from a broker-dealer/future commission merchant, the
Commission may not be able to approve of the broker-dealer/future commission merchant’s
margin methodology and ensure that the appropriate margin has been collected.
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 has issued a release soliciting comment on the new “collection of information”
requirements and associated paperwork burdens. A copy of the release is attached. Comments
on Commission releases are generally received from registrants, investors, and other market
participants. In addition, the Commission and staff participate in ongoing dialogue with
representatives of various market participants through public conferences, meetings and informal
exchanges. Any comments received on this release will be posted on the Commission’s public
website, and made available through http://www.sec.gov/rules/exorders.shtml. The Commission
will consider all comments received.
9. Payment or Gift
The collection of information does not provide any payment or gift to respondents.
10. Confidentiality
The information collection provides that to the extent the Commission receives confidential
information, the Commission is committed to protecting the confidentiality of such information,
subject to the provisions of applicable law. Cited as examples are Exchange Act Section 24, 15
U.S.C. 78x (governing the public availability of information obtained by the Commission) and 5
U.S.C. 552 et seq. (Freedom of Information Act— ‘‘FOIA’’). FOIA Exemption 4 provides an
exemption for ‘‘trade secrets and commercial or financial information obtained from a person
and privileged or confidential.’’ 5 U.S.C. 552(b)(4). FOIA Exemption 8 provides an exemption
for matters that are ‘‘contained in or related to examination, operating, or condition reports
prepared by, on behalf of, or for the use of an agency responsible for the regulation or
supervision of financial institutions.’’ 5 U.S.C. 552(b)(8).

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11. Sensitive Questions
The information collection does not pose any questions of a sensitive nature.
12. Burden of Information Collection
The Commission estimates that 57 firms may seek to avail themselves of the conditional
exemptive relief provided by the Order and therefore would be subject to the information
collection. The Commission bases this estimate on conversations with industry participants, its
review of FOCUS reports filed with the Commission and previous estimates regarding the
number of entities that may fit within the definition of security-based swap dealer and major
security-based swap participant.
The Commission estimates that the burden associated with entering into non-conforming
subordination agreements with non-affiliate cleared credit default swap customers under
paragraph IV(b)(1)(ii) of the Order will impose an initial, one-time burden of 20,000 hours per
respondent. The Commission estimates that each respondent will have, on average, 1,000 nonaffiliate credit default swap customers and that for each such customer, a respondent will spend
approximately 20 hours developing a subordination agreement. This burden is a third party
disclosure burden.
The Commission estimates that the burden associated with entering into non-conforming
subordination agreements with affiliate cleared credit default swap customers under paragraph
IV(b)(2)(ii) of the Order will impose an initial, one-time burden of 220 hours per respondent.
The Commission estimates that each respondent will have, on average, 11 affiliate credit default
swap customers and that for each such customer, a respondent will spend approximately 20
hours developing a subordination agreement. This burden is a third party disclosure burden.
The Commission estimates that the burden associated with obtaining opinions of counsel from
affiliate cleared credit default swap customers under paragraph IV(b)(2)(iii) of the Order will
impose an initial, one-time burden of 22 hours per respondent. The Commission estimates that
each respondent will have, on average, 11 non-affiliate cleared credit default swap customers and
that for each such customer, a respondent will spend approximately 2 hours developing and
reviewing the required opinion. This burden is a third party disclosure burden.
The Commission estimates that the burden associated with seeking the Commission’s approval
of margin methodologies under paragraph IV(b)(5) of the Order will impose an initial, one-time
burden of 1,000 hours per respondent. This burden is a reporting burden.
The Commission estimates that the burden associated with disclosing information to customers
under paragraph IV(b)(6) of the Order will impose an initial, one-time burden of 8 hours per
respondent. This burden is a third party disclosure burden.

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13. Costs to Respondents 1
The Commission estimates that each respondent will incur a one-time cost of $40,000 in outside
legal counsel expenses, at a cost of $400 per hour, in connection with entering into nonconforming subordination agreements with non-affiliate cleared credit default swap customers
under paragraph IV(b)(1)(ii) of the Order.
The Commission estimates that each respondent will incur a one-time cost of $8,000 in outside
legal counsel expenses, at a cost of $400 per hour, in connection with obtaining opinions of
counsel from affiliate cleared credit default swap customers under paragraph IV(b)(2)(iii) of the
Order.
14. Cost to Federal Government
The information collection does not impose any cost to the Federal Government.
15. Changes in Burden
The information collection does not include any changes or adjustments in any previously
reported burdens.
16. Information Collection Planned for Statistical Purposes
The information collection will not be published or otherwise used for statistical purposes.
17. Approval to Omit OMB Expiration Date
The Commission is not seeking approval omit the OMB expiration date.
18. Exceptions to Certification for Paperwork Reduction Act Submissions
This collection complies with the requirements in 5 CFR 1320.9.

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For purposes of this section, the cost to respondents is a one-time cost, but has been annualized.

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