04 Regulation AT AMENDMENT TO COLLECTION 3038-0023 COLLECTION PRA Supporting Statement_Supplemental NPRM

SUPPORTING STATEMENT FOR NEW AND

REVISED INFORMATION COLLECTIONS

OMB CONTROL NUMBER 3038-0023

(Registration Under the Commodity Exchange Act)

(Regulation Automated Trading—Supplement)

Justification

1. Explain the circumstances that make the collection of information necessary. Identify any legal or administrative requirements that necessitate the collection. Attach a copy of the appropriate section of each statute and regulation mandating or authorizing the collection of information.

Derivatives markets have transitioned from the manual processes to highly automated trading and trade matching systems. Modern DCMs and DCM market participants, in particular, are characterized by a wide array of algorithmic and electronic systems for the generation, transmission, management, and execution of orders, as well as systems used to confirm transactions, communicate market data, and link markets and market participants through high-speed networks. While technologies have evolved, the underlying functions of derivatives markets remain the same, as do the Commission’s responsibilities under the Commodity Exchange Act (the “CEA” or “Act”). Through proposed Regulation AT, the Commission is taking its next steps in ensuring that its regulatory standards and industry practices properly address current and foreseeable risks arising from automated trading, and promote responsible innovation and fair competition among markets and market participants.

The proposed regulations are intended to prevent and mitigate risks arising from algorithmic trading activity, increase transparency around DCMs electronic trade matching platforms and the use of self-trade prevention tools on DCMs, and foster transparency with respect to DCM programs and activities, including market maker and trading incentive programs, that have become more prominent as automated trading becomes the dominant market model. The obligations created by the proposed rules are essential to avoid prevent disruptions to market integrity, avoid systemic risk and promote responsible innovation and fair competition among boards of trade, other markets and market participants.

The Commission has amended this collection of information reflect the registration of an additional category of market participants. Proposed § 1.3(x)(1)(iii) would expand the definition of “floor trader,” as defined under Commission regulations, to include proprietary traders engaged in Algorithmic Trading using Direct Electronic Access (as such terms are defined in Regulaton AT) and who satisfy a volume threshold test. Such new floor traders would prepare and submit to the National Futures Association (“NFA”) a Form 7-R (for non-natural persons) and Form 8-R (for natural persons).

This collection of information is necessary to implement proposed § 1.3(x)(1)(iii) and the following provisions of the Act. Section 3(b) provides that it is the purpose of the Act to deter and prevent price manipulation or any other disruptions to market integrity; to ensure the financial integrity of all transactions subject to this chapter and the avoidance of systemic risk; to protect all market participants from fraudulent or other abusive sales practices and misuses of customer assets; and to promote responsible innovation and fair competition among boards of trade, other markets and market participants. Section 8a(5) provides the Commission with authority to promulgate rules as reasonably necessary to effectuate any of the provisions or to accomplish any of the purposes of the Act. Section 4c(a)(6) of the Act provides rulemaking authority to prohibit disruptive trading practices. Section 1a(23) of the Act provides that the Commission, by rule or regulation, may include within, or exclude from, the term ‘floor trader’ any person in or surrounding any pit, ring, post, or other place provided by a contract market for the meeting of persons similarly engaged who trades solely for such person’s own account if the Commission determines that the rule or regulation will effectuate the purposes of this Act.¹

2. Indicate how, by whom, and for what purpose the data would be used. Except for a new collection, indicate the actual use the agency has made of the information received from the current collection.

The information on registration applications is used to determine fitness for registration under the Act. This determination is normally made, in the first instance, by NFA, an industry-funded self-regulatory organization registered as a futures association under the Act that the Commission has authorized to perform registration functions. The Commission and NFA will use this registration data to ensure compliance with the CEA, Commission regulations and NFA rules, including compliance with proposed rules addressing the risks of automated trading (e.g., § 1.80 pre-trade risk control requirements and § 1.81 requirements relating to development, testing, and monitoring standards). Without this registration requirement, market participants actively trading on Commission-regulated markets using algorithmic trading systems that could malfunction and create systemic risk to all market participants would not required to comply with proposed rules addressing the risks of automated trading.

3. Describe whether, and to what extent, the collection of information involves the use of automated, electronic, mechanical, or other technological collection techniques or other forms of information technology, e.g. permitting electronic submission of responses, and the basis for the decision for adopting this means of collection. Also describe any consideration of using information technology to reduce burden.

The information is collected electronically to the extent possible. Certain data, such as fingerprint cards, are generally provided by paper, although submission of fingerprints digitally has begun.

4. Describe efforts to identify duplication. Show specifically why any similar information already available cannot be used or modified for use for the purposes described in Item 2 above.

Information of the type required to be collected as part of the registration process is not otherwise collected by the Commission. If an applicant concurrently or recently (within the preceding 90 days) submits a fingerprint card to another federal agency (the SEC), another set of fingerprints is not required.

5. If the collection of information involves small business or other small entities (Item 5 of OMB From 83-I), describe the methods used to minimize burden.

The Commission estimates that a maximum of 100 proprietary trading firms engaged in Algorithmic Trading will be considered “floor traders” under § 1.3(x)(1)(iii) of the proposed rulemaking. The Commission has minimized any burden to small business or other small entities by proposing regulations that represent an appropriate balancing of its goal of increased transparency and risk reduction against the burden placed on such entities. The proposed expansion of the definition of floor trader is limited to proprietary traders conducting Algorithmic Trading using Direct Electronic Access and who meet a volume threshold test. Further, the definition of AT Person is limited to entites that conduct Algorithmic Trading and who meet a volume threshold test. The Commission believes that entities with such capabilities are generally not small entities. The NPRM and Supplemental NPRM asked specific questions on the issue of how the proposed regulations will affect small entities, in particular, whether sole proprietorships would be considered AT Persons; whether Regulation AT requirements should vary depending on the size, sophistication or other attributes of the AT Person; whether the inclusion of the volume threshold test will mean that no natural persons will be AT Persons; and whether the proposed quantitative measures will mean that there will not be a substantial number of small entities impacted by the information collection.

6. Describe the consequence to the Federal Program or policy activities if the collection were conducted less frequently as well as any technical or legal obstacles to reducing burden.

Proposed § 1.3(x)(1)(iii) would require a one-time initial registration.

7. Explain any special circumstances that require the collection to be conducted in a manner:

• requiring respondents to report information to the agency more often than quarterly;

The regulations covered by this collection do not require the respondent to report any information to the Commission more often than quarterly, or even as often as quarterly. However, updating of information is required whenever necessary to maintain accurate and current registration information.

• requiring respondents to prepare a written response to a collection of information in fewer than 30 days after receipt of it:

Not applicable.

• requiring respondents to submit more than an original and two copies of any document;

Respondents are not required to submit more than an original and two copies of any documents to the Commission or third parties.

• requiring respondents to retain records other than health, medical, government contract, grant-in-aid, or tax records, for more than three years;

Not applicable.

• in connection with a statistical survey, that is not designed to produce valid and reliable results that can be generalized to the universe of study;

Not applicable.

• requiring the use of a statistical data classification that has not been reviewed and approved by OMB;

Not applicable.

• that includes a pledge of confidentiality that is not supported by authority established in statue or regulation, that is not supported by disclosure and data security policies that are consistent with the pledge, or which unnecessarily impedes sharing of data with other agencies for compatible confidential use; or

• The collection does not involve any pledge of confidentiality, requiring respondents to submit proprietary trade secrets, or other confidential information unless the agency can demonstrate that it has instituted procedures to protect the information's confidentiality to the extent permitted by law.

The Commission has procedures to protect the confidentiality of an applicant’s or registrant’s data. These are set forth in the Commission’s regulations at parts 145 and 147 of title 17 of the Code of Federal Regulations.

8. If applicable, provide a copy and identify the date and page number of publication in the Federal Register of the agency's notice required by 5 CFR 1320.8(d), soliciting comments on the information collection prior to submission to OMB. Summarize public comments received in response to that notice and describe actions taken by the agency in response to these comments. Specifically address comments received on cost and hour burden.

In the proposing Federal Register release, the Commission seeks public comment on any aspect of the proposed collection of information.

9. Explain any decision to provide any payment or gift to respondents, other than remuneration of contractors or grantees.

Not applicable. The Commission has neither considered nor made any payment or gift to a respondent.

10. Describe any assurance of confidentiality provided to respondents and the basis for the assurance in statute, regulations, or agency policy.

The Commission does not provide respondents with an assurance of confidentiality beyond that provided by applicable law. The Commission fully complies with section 8(a)(1) of the Commodity Exchange Act, which strictly prohibits the Commission, unless specifically authorized by the Commodity Exchange Act, from making public “data and information that would separately disclose the business transactions or market positions of any person and trade secrets or names of customers.” The Commission has procedures to protect the confidentiality of an applicant’s or registrant’s data. These are set forth in the Commission’s regulations at parts 145 and 147 of title 17 of the Code of Federal Regulations.

11. Provide additional justification for any questions of a sensitive nature, such as sexual behavior and attitudes, religious beliefs, and other matters that are commonly considered private. This justification should include the reasons why the agency considers the questions necessary, the specific uses to be made of the information, the explanation to be given to persons from whom the information is requested, and any steps to be taken to obtain their consent.

The regulations covered by this collection do not require the giving of sensitive information, as that term is used in Question 11.

12. Provide estimates of the hour burden of the collection of information. The Statement should:

• Indicate the number of respondents, frequency of response, annual hour burden and an explanation of how the burden was estimated. Unless directed to do so, agencies should not conduct special surveys to obtain information on which to base hour burden estimates. Consultation with a sample (fewer than ten) of potential respondents is desirable. If the hour burden on respondents is expected to vary widely because of differences in activity, size or complexity, show the range of estimated hour burden, and explain the reasons for the variance. Generally, estimates should not include burden hours for customary and usual business practices.

• If the request for approval covers more than one form, provide separate hour burden estimates for each form and aggregate the hour burdens in Item 13 of OMB Form 83-I.

• Provide estimates of annualized cost to respondents for the hours burdens for collections of information, identifying and using appropriate wage rate categories. The cost of contracting out or paying outside parties for information collection activities should not be included here. Instead, this cost should be included in Item 13.

See Attachment A.

13. Provide an estimate of the total annual cost burden to respondents or recordkeepers resulting from the collection of information. (Do not include the cost of any hour burden shown in Items 12 and 14).

• The cost estimate should be split into two components; (a) a total capital and start-up cost component (annualized over its expected useful life) and (b) a total operation and maintenance and purchase of services component. The estimates should take into account costs associated with generating, maintaining, and disclosing or providing the information. Include descriptions of methods used to estimate major costs factors including system and technology acquisition, expected useful life of capital equipment, the discount rate(s), and the time period over which costs will be incurred. Capital and start-up costs include, among other items, preparations for collecting information such as purchasing computers and software, monitoring, sampling, drilling and testing equipment, and record storage facilities.

• If cost estimates are expected to vary widely, agencies should present ranges of cost burdens and explain the reasons for the variance. The cost of purchasing or contracting out information collection services should be a part of this cost burden estimate, agencies may consult with a sample of respondents (fewer than ten), utilize the 60-day pre-OMB submission public comment process and use existing economic or regulatory impact analysis associated with the rulemaking containing the information collection, as appropriate.

• Generally, estimates should not include purchases of equipment or services, or portions thereof, made: (1) prior to October 1, 1995, (2) to achieve regulatory compliance with requirements not associated with the information collection, (3) for reasons other than to provide information or keep records for the government, or (4) as part of customary and usual business or private practices.

See Attachment A.

14. Provide estimates of the annualized costs to the Federal Government. Also provide a description of the method used to estimate cost, which should include quantification of hours, operational expenses (such as equipment, overhead, printing and support staff), and any other expense that would not have been incurred without this collection of information. Agencies may also aggregate cost estimates from Items 12, 13, and 14 in a single table.

It is not anticipated that the final regulations will impose any additional costs to the Federal Government.

15. Explain the reasons for any program changes or adjustments reported in Items 13 or 14 of the OMB Form 83-I.

Overall, estimated burden hours are increased due to an increase in the number of persons expected to apply for and maintain registration. Attachment A provides the estimated number of new respondents that would be considered “floor traders” and would be required to register with the Commission as AT Persons.

16. For collection of information whose results are planned to be published for statistical use, outline plans for tabulation, statistical analysis, and publication. Provide the time schedule for the entire project, including beginning and ending dates of the collection of information, completion of report, publication dates, and other actions.

This question does not apply.

17. If seeking approval to not display the expiration date for OMB approval of the information collection, explain the reasons that display would be inappropriate.

This question does not apply.

18. Explain each exception to the certification statement identified in Item 19, "Certification for Paperwork Reduction Act Submissions," of OMB Form 83-I.

This question does not apply.

Attachment A

OMB Control Number 3038-0023

(Registration Under the Commodity Exchange Act)

Third Party Reporting or Third Party Recordkeeping Burden

1. Regulation(s)	2. Estimated Number of Respondents	3. Estimated Number of Reports by Each Respondent	4. Estimated Average Number of Burden Hours per Response	5. Annual Number of Burden Hours per Respondent (3 x 4)	6. Estimated Average Burden Hour Cost	7. Total Average Hour Burden Cost Per Respondent (5 x 6)	8. Total Annual Responses (2 x 3)	9. Total Annual Number of Burden Hours (2 x 5)	10. Total Annual Burden Hour Cost of All Responses (2 x 7)
1.3(x)(1)(iii) – Registration with NFA (and CFTC)	100 floor traders	112	1	11	$963	$1,056	1100	1,100	$105,600

The following professions and hourly wages are referenced in the tables above.⁴

2013 SIFMA Report Profession and Code	Description of Role in Related Matters	Total mean 2012 compensation with bonus- 2013 SIFMA Report	Hourly wage rate (rounded)5
Project Manager (1030)	Project Manager	$97,1386	$70
Business Analyst (Intermediate) (602)	Business Analyst	$72,6507	$52
Business Analyst (Intermediate) (602)	Tester	$72,6508	$52
Programmer Analyst (Senior) (1607)	Developer	$103,8519	$75
Compliance Examiner (Senior) (409)	Senior Compliance Examiner	$79,99210	$58
Compliance Specialist (Senior) (406)	Senior Compliance Specialist	$78,25011	$57
Chief Compliance Officer (Mutual Funds/ Investment Advisory Services) (413)	Chief Compliance Officer	$192,36712	$139
Compliance Attorney (1103)	Compliance Attorney	$133,05913	$96

1 Additional proposed regulations pursuant to Regulation AT requiring a collection of information are separately addressed in corresponding supporting statements and OMB submissions to amend existing or create new information collections.

2 Each report will consist of one Form 7-R and an estimated 10 Forms 8-R.

3 Average salary per hour for a Compliance Attorney. For details concerning the average yearly and hourly salary rates for the professionals listed in these tables, please see the SIFMA chart below.

4 The hourly wage rates are based on salaries and bonuses across different professions that are listed in the SIFMA Report on Management & Professional Earnings in the Securities Industry 2013, modified to account for an 1800-hour work-year and multiplied by 1.3 to account for overhead and other benefits. The SIFMA Report on Management & Professional Earnings in the Securities Industry 2013 is available at http://www.sifma.org/research/item.aspx?id=8589940603.

5 The hourly wage rate represents the total mean 2012 compensation with bonus divided by 1800 hours and multiplied by 1.3 to account for overhead and other benefits.

6 See 2013 SIFMA Report, supra note 566, at 273.

7 See Id.at 136.

8 Id.

9 See Id.at 395.

10 See Id.at 113.

11 See Id. at 104.

12 See Id. at 119.

13 See Id. at 279.

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