Supporting Statement 17a-12 (2) 2019 DGL FINAL

SUPPORTING STATEMENT
for the Paperwork Reduction Act Information Collection Submission for
Rule 17a-12/Form X-17A-5 Part IIB
A.

JUSTIFICATION
1.

Necessity of Information Collection

Section 17(a)(1) of the Securities Exchange Act of 1934 ("Exchange Act") requires
registered broker-dealers to make, keep, furnish, and disseminate records and reports prescribed
by the Commission as necessary or appropriate in the public interest, for the protection of
investors, or otherwise in furtherance of the purposes of the Exchange Act. Section 17(e) of the
Exchange Act requires every registered broker-dealer to file annually with the Commission a
balance sheet and income statement certified by an independent public accountant or by an
accounting firm registered with the Public Company Accounting Oversight Board, if the firm is
required to be registered under the Sarbanes-Oxley Act of 2002, and such other information
concerning its financial condition as the Commission, by rule, may prescribe as necessary or
appropriate in the public interest or for the protection of investors. Pursuant to this authority, in
October 1998 the Commission enacted Rule 17a-12 (“Reports to be made by certain OTC
derivatives dealers”) 1 and amended Form X-17A-5 to add Part IIB 2 to establish the basic periodic
reporting structure for OTC (over-the-counter) derivatives dealers. Rule 17a-12 requires OTC
derivatives dealers registered with the Commission to file quarterly Financial and Operational
Combined Uniform Single Reports (“FOCUS” reports) on Part IIB of Form X-17A-5 and annual
audit reports with the Commission. The provisions of Rule 17a-12 are similar to those contained
in Exchange Act Rule 17a-5 (“Reports to be made by certain brokers and dealers”) 3 but take into
consideration the more limited and unique business conducted by OTC derivatives dealers.
The quarterly filings must include certain information specified in the Framework for
Voluntary Oversight of the Derivatives Policy Group (“DPG"). 4 This credit and market risk
information, which must be reported on Schedules I - V and VII of Part IIB of Form X-17A-5,
enables the Commission to ascertain the nature and scope of a firm’s OTC derivatives activity
and to monitor the firm’s risk exposure.
Rule 17a-12 also requires that OTC derivatives dealers file an annual audit report.
Among other things, the audit report must include a statement of financial condition, a statement
of income, a statement of cash flows, a statement of changes in owners’ equity, a statement of
changes in subordinated liabilities, and supporting schedules, including a computation of net
capital. The report must be audited. Concurrently with the annual audit report, OTC derivatives
1

17 CFR 240,17a-12.

2

17 CFR 249.617.

3

17 CFR 240.17a-5.

4

See Framework for Voluntary Oversight, Derivatives Policy Group (Mar. 1995).

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dealers must file supplemental reports by the auditor, including an accountant’s report on
material inadequacies and reportable conditions, an accountant’s report on management controls,
and an accountant’s report on inventory pricing and modeling.
2.

Purpose and Use of the Information Collection

The information collected under Rule 17a-12 is essential to the regulation and oversight
of OTC derivatives dealers and the primary means the Commission uses to monitor and enforce
compliance with the Commission’s financial responsibility rules as prescribed by the Exchange
Act. These quarterly FOCUS and annual audit reports are used to evaluate the securities-related
and other activities each OTC derivatives dealer is engaged in, the extent to which it is engaged
in those activities, and how economic events and government policies might affect various
segments of the securities industry. In addition, the Commission staff reviews FOCUS report
information as part of its preparation for examinations and inspections. A firm’s failure to
comply with this rule would severely impair the Commission’s ability to protect customers,
industry counter-parties, and others.
3.

Consideration Given to Information Technology

Most OTC derivatives dealers and other firms engaged in swaps and related activities use
automated systems to prepare information provided on Part IIB of Form X-17A-5. As so few
OTC derivatives dealers have registered with the Commission, it is not economically feasible for
the Commission to develop a system which would allow for electronic filing of this form.
4.

Duplication

OTC derivatives dealers are not otherwise required to obtain and maintain the
information required by the rule.
5.

Effect on Small Entities

The rule does not affect small entities.
6.

Consequences of Not Conducting Collection

If the collection were not made, or were made less frequently, the protection afforded to
the public would be lessened.
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

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on this collection of information was published. No public comments were received.
9.

Payment or Gift to Respondents

Not applicable. No payment or gift was provided to respondents.
10.

Confidentiality

Information provided by OTC derivatives dealers in FOCUS reports, supporting
schedules, and annual audited reports is confidential pursuant to Rule 17a-12(a)(2) and (c)(3).
The statutory basis for this confidential treatment is the exemption contained in Section (b)(4) of
the Freedom of Information Act, 5 U.S.C. 552, which provides that the requirement for public
dissemination does not apply to commercial or financial information which is privileged or
confidential.
11.

Sensitive Questions

Form X-17A-5IIB is a paper collection, not an electronic collection. Only business
contact information is collected, and information is retrieved by a non-personal identifier. No
information of a sensitive nature, including social security numbers, will be required under this
collection of information. The information collection does not collect personally identifiable
information (PII). The agency has determined that a system of records notice (SORN) and
privacy impact assessment (PIA) are not required in connection with the collection of
information.
12.

Burden of Information Collection

There are currently three OTC derivatives dealers registered with the Commission. The
staff anticipates that three more OTC derivatives dealers will register with the Commission in the
next three years. The staff estimates that the average amount of time necessary to prepare and
file the information required by the rule is 80 hours per OTC derivatives dealer per year to
prepare the quarterly reports on Part IIB of Form X-17A-5 (based upon 4 quarterly responses per
year and an average of 20 hours spent preparing each response) and 100 hours per OTC
derivatives dealer per year to prepare the annual audit report and supporting schedules. Thus the
total reporting burden for each OTC derivatives dealer is approximately 180 hours per year. The
total annual reporting burden for the six current and anticipated OTC derivatives dealers is
estimated to be 1,080 hours per year (6 x 180 = 1,080). The estimates of the annual burden are
based upon discussions with industry participants.
13.

Costs to Respondents

The Commission estimates that the average annual reporting cost per broker-dealer for
the independent public accountant to examine the financial statements is approximately $46,300
per broker-dealer. Based on this estimate, the total industry-wide annual reporting cost is
approximately $277,800 ($46,300 x 6).

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14.

Costs to Federal Government

Rule 17a-12, is not expected to result in costs to the federal government due to
contracting, information technology, development, hiring one or more new employees, or
reallocating existing employees.
15.

Explanation of Changes in Burden

The number of firms registered with the Commission as OTC derivatives dealers has
changed from four firms to three firms. The staff now expects that three more firms will register
with the Commission as an OTC derivatives dealer within the next three years. Formerly, the
staff estimated that one more firm would register as an OTC derivatives dealer. Therefore, the
total number of respondents has changed from five to six. As a result, the total annual hour
reporting burden and the annual industry-wide reporting cost have changed.
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 expiration date.
18.

Exceptions to Certification for Paperwork Reduction Act Submissions

This collection complies with the requirements in 5 CFR 1320.9.
B.

Collection of Information Employing Statistical Methods
This collection does not involve statistical methods.