2015_15c3-1f(Appendix_F)_Supporting_Statement

SUPPORTING STATEMENT
for the Paperwork Reduction Act Information Collection Submission for
Appendix F to Rule 15c3-1
A. JUSTIFICATION
1. Information Collection Necessity
Appendix F to Rule 15c3-1 is one of several rules that tailor capital, margin, and other
broker-dealer regulatory requirements to OTC derivative dealers. Registration as an OTC
derivatives dealer is optional. Under Rule 15c3-1, 1 a broker-dealer that elects to register as an OTC
derivatives dealer is required to maintain tentative net capital of not less than $100 million and
net capital of not less than $20 million. The purpose of Appendix F 2 to the net capital rule is to
ensure that OTC derivative dealers maintain sufficient liquid resources to meet their liabilities.
Under Appendix F’s alternative net capital requirements, the Commission may authorize
an OTC derivatives dealer to use Value-at-Risk (“VaR”) models to calculate capital charges for
market risk and to take alternative charges for credit risk than those currently prescribed for
broker-dealers. In order to use VaR models under Appendix F, an OTC derivatives dealer must
file an application with, and obtain authorization from, the Commission. The application, among
other things, must describe the VaR model, including whether the firm has developed its own
model and how the qualitative and quantitative aspects of Appendix F are incorporated into the
model. In addition to obtaining Commission approval of its application, an OTC derivatives
dealer must maintain its model according to certain prescribed standards. Maintenance of the
model requires an OTC derivatives dealer to create and maintain certain information. For
example, the OTC derivatives dealer must conduct backtesting by comparing each of its most
recent 250 business days’ actual net trading profit or loss with the corresponding daily VaR
measures. Finally, the OTC derivatives dealer must submit a description of its risk management
control system implemented pursuant to Rule 15c3-4.
The statutory authority for Appendix F is embodied in Sections 15(c)(3) and 23(a) of the
Securities Exchange Act, 15 USC 78o(c)(3), 78w. Appendix F was promulgated under Section
15(c)(3) of the Securities Exchange Act of 1934, as amended, which directed the Commission to
adopt minimum financial responsibility requirements for all brokers and dealers.
2. Information Collection Purpose and Use
Appendix F of Rule 15c3-1 is an integral part of the Commission’s financial
responsibility program for OTC derivatives dealers. The purpose of Appendix F is to ensure that
OTC derivatives dealers have, on hand at all times, sufficient liquid resources to meet their
obligations and liabilities. Appendix F enables the Commission monitor the financial condition
of OTC derivatives dealers. If the information is not required to be collected, the Commission

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17 CFR 240.15c3-1.
17 CFR 240.15c3-1f.

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would not be able to monitor the financial condition of OTC derivatives dealers, thus weakening
the protection of investors and the public.
3. Consideration Given to Information Technology
Firms subject to Appendix F utilize automated systems for computing their capital
requirements. Because the staff expects relatively few OTC derivatives dealers to register, it is
not economically feasible for the Commission to develop a system which would allow for
electronic filing.
4. Duplication
OTC derivatives dealers are not otherwise required to obtain and maintain the
information required by the Rule.
5. Effect on Small Entities
Registered broker-dealers must maintain a minimum amount of net capital. However, the
Rule subjects small entities to different requirements. Appendix F to the Rule does not affect
small entities because the required minimum net capital, by definition, excludes small entities.
6. Consequences of Not Conducting Collection
Conducting the required activities less frequently would lessen the protection afforded to
the public.
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).
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 gifts or payments will be given to respondents.
10. Confidentiality
The Commission regards the information obtained pursuant to the filings and notices
required by the Rule to be confidential. Such information is of a financial natural and generally

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is not disclosed to the public. The statutory basis for the Commission’s refusal to disclose such
information to the public is the exemption contained in Section (b)(4) of the Freedom of
Information Act, 5 U.S.C. 552, which essentially provides that the requirement of public
dissemination does not apply to commercial or financial information which is privileged or
confidential.
11. Sensitive Questions
No questions of a sensitive nature are asked. The information collection does not collect
any Personally Identifiable Information (PII).
12. Information Collection Burden
At present, Appendix F applies to four OTC derivatives dealers registered with the
Commission. These OTC derivatives dealers will spend an average of approximately 1,000 hours
each per year maintaining the model, for an annual recurring burden of 4,000 hours. 3
The Commission anticipates that one additional entity will register as an OTC derivatives
dealer during the next three years. The Commission estimates that, on average, a firm initially
will take approximately 1,000 hours to develop and establish a system model, for an annual
burden of 333 hours per year amortized over three years.
In the years after it registers, the new registrant will spend an average of approximately
1,000 hours each year maintaining the system model, for an annual burden of 667 hours per year
amortized over three years. 4
The staff believes that compliance personnel will develop an OTC derivative dealer’s VaR model,
financial reporting specialists and compliance personnel will prepare the application describing the OTC
derivative dealer’s VaR model, and that financial reporting specialists will monitor the OTC derivative
dealer’s maintenance of the information on the VaR model. The staff estimates that the hourly salary of a
financial reporting manager is $266 per hour, 5 and the hourly salary of a senior compliance staff is $217 per
hour 6. Based upon these numbers, the total one time internal start-up cost of compliance for one respondent is
$246,400.00. 7

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Four (4) OTC derivatives dealers x 1,000 hours = 4,000 hours.
Assuming the registrant registers in the first year, it will have the monitoring burden of 1,000 hours per
year in each of the next two years. ((1,000 hours x 2 year) / 3 years = 667 hours).
$266 per hour figure for a financial reporting manager is from SIFMA’s Management & Professional
Earnings in the Securities Industry 2013, modified by Commission staff to account for an 1800-hour workyear and multiplied by 5.35 to account for bonuses, firm size, employee benefits and overhead.
$217 per hour figure for a senior compliance examiner manager is from SIFMA’s Management &
Professional Earnings in the Securities Industry 2013, modified by Commission staff to account for an
1800-hour work-year and multiplied by 5.35 to account for bonuses, firm size, employee benefits and
overhead.
[(600 hours × $266) + (400 hours × $217)] × one (1) OTC derivatives dealer = $246,400.

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13. Costs to Respondents
There is no cost to respondents apart from the monetization of the initial compliance cost
stated in number 12.
14. Costs to Federal Government
The Division estimates that it will cost approximately $3,600 to review the one
anticipated submission required by the Rule based on our computation of the value of staff time
devoted to this activity and the related overhead. These estimates have been computed pursuant
to the GSA Guide to Estimating Reporting Costs (1973).
15. Changes in Burden
The Commission estimates that a total of five entities will be registered as OTC
derivatives dealers at the end of the next three years, consisting of the four current OTC
derivatives dealers and one anticipated registrant. This is in contrast with the prior estimate of
eight OTC derivatives dealers, consisting of four current OTC derivatives dealers and four
anticipated registrants.
The decrease in a one-time burden of establishing a system model from 4,000 hours to
1,000 hours is due to the fact that there is only one entity expected to develop and establish
system models. Therefore, because only five OTC derivatives dealers are ultimately expected to
be registered with the Commission over the next three years, the annual recurring burden will be
5,000 hours.
16. Information Collection Planned for Statistical Purposes
Not applicable. The information collection is not used for statistical purposes
17. Approval to Omit OMB Expiration Date
The Commission is not seeking approval to omit the OMB expiration date.
18. Exceptions to Certification for Paperwork Reduction Act Submissions
The Commission is not seeking an exception to the certification statement.
B. COLLECTIONS OF INFORMATION EMPLOYING STATISTICAL METHODS
This collection does not involve statistical methods.