2018_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 1 under the Securities Exchange Act of 1934 (“Exchange Act”)
is one of several Commission rules that apply to a class of broker-dealers known as over-the
counter (“OTC”) derivatives dealers.
Under appendix F, an OTC derivatives dealer may apply to the Commission for
authorization to compute net capital charges for market and credit risk in accordance with
appendix F in lieu of computing securities haircuts under paragraph (c)(2)(vi) of Exchange Act
Rule 15c3-1. 2 Rule 15c3-1 is the Commission’s net capital rule for broker-dealers. The
application must contain, among other things, a description of the methods used for computing
market and credit risk, including a description of all statistical models used for pricing OTC
derivative instruments and for computing value-at-risk (“VAR”), a description of controls over
those models, and a statement regarding whether the firm has developed its own internal VAR
models. The application must also contain a description of the firm’s internal risk management
systems and how those systems meet certain requirements in Exchange Act Rule 15c3-4. 3
In addition, if the OTC derivatives dealer materially amends its VAR model or internal
risk management control system, the firm must file an application describing the changes, which
must be approved by the Commission before the changes may be implemented.
In addition to obtaining Commission approval of its application, the VAR models of OTC
derivatives dealers must meet certain enumerated qualitative and quantitative requirements. 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 generated for determining market risk, and once each quarter the firm must identify the
number of business days for which the actual daily net trading loss exceeded the corresponding
daily VAR measure; the firm must conduct stress tests of VAR model and develop appropriate
procedures to follow in response to the results of those tests; and the firm must provide the
Commission with evidence that its VAR model takes account of specific risk if the firm intends
to use the model to compute capital charges for equity price risk.
Under paragraph (a)(5) of Rule 15c3-1, a broker-dealer for which the Commission has
granted its application to compute capital charges in accordance with appendix F is required to
maintain tentative net capital of not less than $100 million and net capital of not less than $20
million.
1
2
3

17 CFR 240.15c3-1f.
17 CFR 240.15c3-1.
17 CFR 240.15c3-4.

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2. Information Collection Purpose and Use
Appendix F to 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 provide
OTC derivatives dealers an alternative method for computing net capital charges for market and
credit risk, while ensuring that OTC derivatives dealers have, on hand at all times, sufficient
liquid resources to meet their obligations and liabilities.
3. Consideration Given to Information Technology
Firms subject to appendix F use automated systems for computing their capital
requirements. Because there are relatively few OTC derivatives dealers, it is not economically
feasible for the Commission to develop a system which would allow for electronic filing of OTC
derivatives dealers’ applications under appendix F.
4. Duplication
OTC derivatives dealers are not otherwise required to obtain, maintain, and report the
information required by appendix F, so no duplication exists.
5. Effect on Small Entities
Appendix F does not affect small entities because OTC derivatives dealers must maintain
tentative net capital of not less than $100 million and net capital of not less than $20 million.
6. Consequences of Not Conducting Collection
Collecting the required information 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)(2).
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.

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10. Confidentiality
Under paragraph (a)(4) of appendix F, applications for authorization to use appendix F and
applications to amend VAR models or the broker-dealer’s internal risk management system shall be
deemed to be 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, three OTC derivatives dealers have been approved to use appendix F. Two
OTC derivatives dealers have applied to use appendix F, and the staff expects that one additional
OTC derivatives dealer will apply to use appendix F during the next three years.
The Commission estimates that the three approved OTC derivatives dealers and two OTC
derivatives dealers with pending applications (if approved) will spend an average of
approximately 1,000 hours each per year reporting information concerning their VAR models
and internal risk management systems, for an annual burden of 5,000 hours. 4
The Commission estimates that the one additional entity expected to apply to use
appendix F will take approximately 1,000 hours to prepare the application, 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 reporting information concerning
its VAR model and internal risk management system, for an annual burden of 667 hours per
year. 5
13. Costs to Respondents
The Commission believes that there are no reporting costs associated with the rule.
14. Costs to Federal Government
There are no additional costs to the Federal Government.

4
5

Five (5) OTC derivatives dealers x 1,000 hours = 5,000 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).

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15. Changes in Burden
The Commission now estimates that a total of six OTC derivatives dealers will be
approved to use appendix F within the next three years, consisting of the three broker-dealers
currently approved, the two broker-dealers with pending applications, and one additional brokerdealer expected to apply.
The Commission previously estimated that a total of five entities would be approved to
use appendix F at the end of three years, consisting of four current OTC derivatives dealers and
one anticipated applicant.
IC

IC Title

Annual No. of Responses

5

1

1

1

0

New Registrant Maintenance

1

1

Total for all ICs

6

7

Existing Dealer Maintenance

IC2

New Registrant Start-up

IC3

Requested

Annual Time Burden (Hrs.)
Previously
approved
4,000

IC1

Previously
approved
4

Change

Requested
5,000

1,000

333

333

0

0

667

667

0

1

5,000

6,000

1,000

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.

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