SUPPORTING STATEMENT 18A-3 (Revised 8-13-2013)

SUPPORTING STATEMENT
for the Paperwork Reduction Act Information Collection Submission
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.
A.

JUSTIFICATION
1.

Necessity of Information Collection

In accordance with Section 764 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 (the “Dodd-Frank Act”), the Securities and Exchange Commission (the
“Commission”) has proposed new Rule 18a-3 to set forth minimum margin requirements for
nonbank security-based swap dealers (“SBSDs”) and nonbank major security-based swap
participants (“MSBSPs”). 1 The rule would establish a new collection of information
requirement with respect to SBSDs. The Commission staff estimates that there will be a total of
25 respondents subject at least in part to these new requirements.
Under proposed Rule 18a-3, nonbank SBSDs would 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 would require 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 would also
be 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 would require that the monitoring procedures and guidelines must include, at a
minimum, procedures and guidelines for:

1

•

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;

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 (Nov. 23, 2012).

•

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.

2.

Purpose and Use of the Information Collection

Information collection under Rule 18a-3 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 noncleared security-based swap counterparties. These information collections would facilitate the
collection of adequate levels of margin assets by nonbank SBSDs so as to protect them against
counterparty default on both current and projected future exposures.
3.

Consideration Given to Information Technology

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

Duplication

We are not aware of that this information collection duplicates 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 that would be subject to the rule are not expected to be small
entities.

6.

Consequences of Not Conducting Collection

If the required information collections were not conducted or were conducted less
frequently, the protection afforded to counterparties and the U.S. financial and banking 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 has issued a release soliciting comment on the new “collection of
information” requirements and associated paperwork burdens. 2 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 proposed rulemaking will be
posted on the Commission’s public website, and made available through
http://www.sec.gov/comments/s7-08-12/s70812.shtml. The Commission will consider all
comments received prior to publishing the final rule, and will explain in any adopting release
how the final rule responds to such comments, in accordance with 5 C.F.R. 1320.11(f).
9.

Payment or Gift

No payment or gift would be provided to respondents.
10.

Confidentiality

The information collected by the Commission under Rule 18a-4 would be 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 would be required.
12.

Burden of Information Collection

The staff estimates that Rule 18a-3 will require in total, on an industry-wide basis, (1) a
one-time burden of 5,250 recordkeeping hours, and (2) an annual burden of 1,500 recordkeeping
hours.

2

Id.

The Commission staff estimates that there would be 25 nonbank SBSDs 3 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 hours burden of 5,250 recordkeeping
hours. 4 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 1,500 recordkeeping hours. 5
13.

Costs to Respondents

The staff estimates that 9 out of the 25 nonbank SBSDs would not have previous
experience developing margining models (particularly those SBSDs that are not already
operating as broker-dealers), and would engage an outside management consultant to review
their models, at a rate of $400 per hour for 5 hours. This would result in a one-time industrywide external recordkeeping cost of $6,000, 6 annualized over 3 years.
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

Not applicable. The information collection is related to a new rule.
16.

Information Collected Planned for Statistical Purposes

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

Approval to Omit OMB Expiration Date

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

Exceptions to Certification

Not applicable. This collection complies with the requirements in 5 CFR 1320.9.
3

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
security-based 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.

4

25 nonbank SBSDs x 210 hrs = 5,250 hrs. These amounts are annualized over three years resulting in 70
hours per nonbank SBSD per year and an industry wide annual burden of 1750 recordkeeping hours.

5

25 nonbank SBSDs x 60 hrs = 1,500 hrs.

6

9 nonbanks SBSDs x $400/hr x 5 hrs / 3 years = $6,000. This amount annualized is $666.66 per nonbank
SBSD.

B.

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