Rule 3a71-3 Supporting Statement 2019 (11-18-19 edits per OMB request)

SUPPORTING STATEMENT for the Paperwork Reduction Act Information Collection
Submission for Exchange Act Rule 3a71-3
OMB Number 3235-0717
This submission is being made pursuant to the Paperwork Reduction Act of 1995, 44 U.S.C.
Section 3501 et seq.
A.

JUSTIFICATION
1.

Information Collection Necessity

Various requirements contained in Title VII of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (“Title VII”) apply to cross-border security based swap transactions.
However, certain Title VII requirements do not apply to certain cross-border security-based swap
transactions conducted through a foreign branch of a U.S. bank. For example, in the rules
implementing the de minimis and position thresholds in the security-based swap dealer and
major security-based swap participant definitions, a non-U.S. person is not required to count its
transactions with a U.S. person that constitute transactions conducted through a foreign branch of
the counterparty, when the U.S. person counterparty is a registered security-based swap dealer.1
Additionally, in the rules implementing provisions of Title VII relating to business conduct
standards and the designation of a chief compliance officer for security-based swap dealers and
major security-based swap participants,2 Rule 3a71-3(c) provides an exception from application
of certain of the business conduct requirements to registered security-based swap dealers and
major security-based swap participants to certain security-based swap transactions that are
conducted through the foreign branch of a U.S.-person counterparty.
The Commission recognizes that verifying whether a security-based swap transaction
falls within the definition of a “transaction conducted through a foreign branch” of a
counterparty could require significant due diligence by transaction counterparties. The
Commission continues to believe that the representations described in Rule 3a71-3(a)(3)(ii)
mitigate the operational difficulties that could arise in connection with investigating the activities
of a counterparty to ensure compliance with the rules. When determining whether a securitySee Application of “Security-Based Swap Dealer” and “Major Security-Based Swap
Participant” Definitions to Cross-Border Security-Based Swap Activities, Exchange Act Release
72472 (Jun. 25, 2014), 79 FR 47278 (Aug. 12, 2014). See also Security-Based Swap
Transactions Connected with a Non-U.S. Person's Dealing Activity That Are Arranged,
Negotiated, or Executed By Personnel Located in a U.S. Branch or Office or in a U.S. Branch or
Office of an Agent; Security-Based Swap Dealer De Minimis Exception, Exchange Act Release
77104 (Feb. 10, 2016), 81 FR 8597 (Feb. 19, 2016).
1

2

See Business Conduct Standards for Security-Based Swap Dealers and Major SecurityBased Swap Participants, Exchange Act Release 77617 (Apr. 14, 2016), 81 FR 29959 (May 13,
2016) (“Business Conduct Adopting Release”). See also Business Conduct Standards for
Security-Based Swap Dealers and Major Security-Based Swap Participants; Correction,
Exchange Act Release 77617A (May 19, 2016), 81 FR 32643 (May 24, 2016).

based swap is a “transaction conducted through a foreign branch” of a counterparty, as defined in
Rule 3a71-3(a)(3)(i), a party may rely on a representation from its counterparty “that the
security-based swap transaction is arranged, negotiated, and executed on behalf of the foreign
branch solely by persons located outside the United States, unless such person knows or has
reason to know that the representation is not accurate; for the purposes of [the] final rule a person
would have reason to know the representation is not accurate if a reasonable person should
know, under all the facts of which the person is aware, that it is not accurate.”
Further, under the rules, a non-U.S. person performing its security-based swap dealer or
major security-based swap participant analysis require the non-U.S. person to determine whether
its security-based swap counterparties are U.S. persons because certain security-based swaps in
which the counterparty is not a U.S. person do not have to be counted against the applicable
thresholds. The definition of “U.S. Person” as defined in Rule 3a71-3 includes a provision
permitting persons to rely on representations from a counterparty that the counterparty does not
satisfy the criteria set forth in Rule 3a71-3(a)(4)(i), unless such person knows or has reason to
know that the representation is not accurate. For purposes of the rule a person has reason to
know the representation is not accurate if a reasonable person should know, under all of the facts
of which the person is aware, that it is not accurate.
The Commission continues to believe that this provision providing for representations
further facilitate consistent application of the “U.S. Person” definition to specific entities across
market participants. The provisions also help mitigate the operational difficulties and costs that
could arise in connection with investigating the status of a counterparty. It permits the party best
positioned to make this determination to perform an analysis of its own U.S.-person status and
convey, in the form of a representation, the results of that analysis to its counterparty. In
addition, such representations help reduce the potential for inconsistent classification and
treatment of a person by its counterparties and promote uniform application of Title VII. The
rule permitting reliance on representations with respect to a counterparty’s U.S.-person status
applies only to the definition of “U.S. person” as used in the rule and does not apply to any
determinations of a person’s U.S.-person status under any other provision of the federal
securities laws, including Commission rules, regulations, interpretations, or guidance.
Rule 3a71-3 is adopted and in effect. However, the compliance date for Rule 3a71-3 is
dependent upon the adoption of another rule that has been proposed, but not yet adopted. As a
consequence, no entity is currently required to comply with Rule 3a71-3, and the previously
approved burdens and costs were not incurred.
2.

Information Collection Purpose and Use

The representations contemplated by Rule 3a71-3 are be relied upon by counterparties to
determine whether such transaction is a “transaction conducted through a foreign branch” of a
counterparty, as defined in Rule 3a71-3(a)(3)(i), as well as to verify whether a security-based
swap counterparty is a ‘‘U.S. person.’’ Counterparties to security-based swap transactions may
voluntarily give such representations to one another to reduce operational costs and allow each
party to ascertain whether such transaction is subject to certain Title VII requirements. Because

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any representations provided to counterparties under Rule 3a71-3 constitute voluntary third-party
disclosures, the Commission will not typically receive these disclosures.
3.

Consideration Given to Information Technology

Rule 3a71-3 does not prescribe any particular method of making representations that a
transaction is a “transaction conducted through a foreign branch,” or that a person does not meet
the criteria for U.S.-person status. As discussed more fully below, the Commission continues to
believe that respondents will elect to incorporate these representations in trade documentation
and that the form of the representations will likely be consistent with current trade
documentation practices.
4.

Duplication

There are no other rules governing cross-border security-based swap dealing activity and,
therefore, Rule 3a71-3 does not duplicate any other information collection.
5.

Effect on Small Entities

Not applicable. None of the respondents subject to the information collection are a small
entity.
6.

Consequences of Not Conducting Collection

The information collection under Rule 3a71-3 is designed to mitigate the operational
difficulties that could arise in connection with investigating the activities or the U.S.-person
status of a counterparty to ensure compliance with the rules. Certain Title VII requirements do
not apply to cross-border security-based swap transactions conducted through a foreign branch of
a U.S. bank where the foreign branch is the counterparty to the transaction and the transaction is
arranged, negotiated, and executed on behalf of the foreign branch solely by persons located
outside the United States. If the representations in Rule 3a71-3 are not obtained, and the
corresponding information collection is not conducted, parties to security-based swap transactions
could be required to engage in significant due diligence with respect to their counterparties in order
to establish whether or not these conditions obtain for any given security-based swap transaction,
potentially incurring significant financial and temporal expense.
Under the rules, a non-U.S. person’s security-based swap dealer and major security-based
swap participant analysis require it to determine whether its security-based swap counterparties
are U.S. persons because certain security-based swaps in which the counterparty is not a U.S.
person do not have to be counted against the applicable thresholds. If the representations related
to U.S.-person status are not obtained, and the corresponding information collection is not
conducted, non-U.S. market participants could be required to perform their own analysis of their
counterparties’ U.S.-person status. The provisions also help mitigate the operational difficulties
and costs that could arise in connection with investigating the status of a counterparty.

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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

Not applicable.
10.

Confidentiality

The Commission will not typically receive confidential information as a result of the
collection of information relating to the representations described in Rule 3a71-3 because these
representations will be provided voluntarily between counterparties to certain security-based swap
transactions. However, to the extent that the Commission receives confidential information
described in Rule 3a71-3 through our examination and oversight program, an investigation, or some
other means, such information would be kept confidential, subject to the provisions of applicable
law (e.g., Freedom of Information Act, 5 U.S.C. 552).
11.

Sensitive Questions

The information collection does not prescribe any particular method of making
representations and the Commission will not typically receive these disclosures. The
information collection will constitute voluntary third-party disclosures that may include name
and work contact information. The information is manually submitted via mail to counterparties
and the collection will likely be incorporated into trade documentation. Based on the business
practice of handling the information collection, the collection does not constitute a system of
records under the Privacy Act and does not require a PIA of the E-Government Act of 2002.
12.

Information Collection Burden

The following estimates reflect the Commission’s experience with burden estimates for
similar requirements and discussions between the Commission staff and market participants.
The Commission continues to believe that the representations contemplated by Rule 3a71-3 will,
in most cases, be made through amendments to the parties’ existing trading documentation (e.g.,
the schedule to a master agreement). The Commission continues to believe that, because trading
relationship documentation is established between two counterparties, whether a counterparty is
able to represent that it is entering into a “transaction conducted through a foreign branch” or that
it does not meet the criteria of the “U.S. person” definition will not change on a transaction-bytransaction basis and, therefore, such representations will generally be made in the schedule to a
master agreement, rather than in individual confirmations. Because these representations relate
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to new regulatory requirements, the Commission continues to anticipate that counterparties will
elect to develop and incorporate these representations in trading documentation soon after the
effective date of the Commission’s security-based swap regulations, rather than incorporating
specific language on a transactional basis. The Commission continues to believe that
counterparties will be able to adopt, where appropriate, standardized language across all of their
security-based swap trading relationships. The Commission continues to believe that this
standardized language will be developed by individual respondents or through a combination of
trade associations and industry working groups.
a. Representations regarding a “transaction conducted through a foreign branch”
Pursuant to Rule 3a71-3, parties to security-based swaps are permitted to rely on certain
representations from their counterparties when determining whether a transaction falls within the
definition of a “transaction conducted through a foreign branch.” The Commission staff
continues to estimate that, once the compliance date has passed, a total of 50 entities will incur
burdens under this collection of information, whether solely in connection with the business
conduct requirements or also in connection with the application of the de minimis exception.
These estimates are based on our understanding of the over-the-counter (OTC) derivatives
markets, including the size of the market, the number of counterparties that are active in the
market, and how market participants currently structure security-based swap transactions.
The Commission continues to estimate the one-time third-party disclosure burden
associated with developing representations under this collection of information will be, for each
U.S. bank counterparty that makes such representations, no more than five hours, and up to
$2,000 for the services of outside professionals, for an estimate of approximately 250 hours3 or
83.33 hours4 per year when annualized over three years, across all security-based swap
counterparties that make such representations.5 This estimate assumes little or no reliance on
standardized disclosure language.
The Commission continues to expect that the majority of the burden associated with the
new disclosure requirements will be experienced during the first year as language is developed
and trading documentation is amended. After the new representations are developed and
incorporated into trading documentation, the Commission continues to believe that the ongoing
third-party disclosure burden associated with this requirement will be 10 hours per U.S. bank
counterparty for verifying representations with existing counterparties, for a total of
approximately 500 hours6 across all applicable U.S. bank counterparties.7
3

50 (total number of entities) * 5 hours = 250 hours.

4

250 hours (total hours to develop representations) ÷ 3 years = 83.33 hours.

5

See Business Conduct Adopting Release at 30096.

6

50 (total number of entities) * 10 hours = 500 hours.

7

The Commission staff estimates that this burden will consist of 10 hours of in-house
5

Collection of
Information

Representation
Regarding a
Transaction
Conducted
Through a
Foreign Branch

Type of
Burden

Small
Business
Entities
Affected

Total
Number of
Respondents

Third-Party

0

50

Ongoing or
Initial
Burden

Total
Number of
Responses
Per Year
Per
Respondent

Initial
Burden Per
Response
Per Year

Annualized
Burden Per
Year Per
Respondent

Ongoing
Burden Per
Response
Per Year
Per
Respondent

Total Burden For
All Respondents

Initial

1

5

1.667

N/A

83.33

Ongoing

1

N/A

10

10

TOTAL ANNUAL INDUSTRY BURDEN

500

583.33

b. Representations regarding U.S.-person status
Pursuant to Rule 3a71-3(a)(4)(iv), persons may rely on representations from a
counterparty that the counterparty does not satisfy the criteria defining U.S. person set forth in
Rule 3a71-3(a)(4)(i), unless such person knows or has reason to know that the representation is
not accurate. Commission staff continues to estimate, based on its understanding of OTC
derivatives markets, including the domiciles of counterparties that are active in the market, that,
once the compliance date has passed, up to 2,400 entities will provide representations that they
do not meet the criteria necessary to be U.S. persons.
As with representations regarding whether a transaction is conducted through a foreign
branch, the Commission continues to estimate the maximum total third-party disclosure burden
associated with developing new representations will be, for each counterparty that makes such
representations, no more than five hours and up to $2,000 for the services of outside
professionals, for a maximum of approximately 12,000 hours8 or 4,000 hours9 per year when
annualized over three years, across all security-based swap counterparties that makes such
representations. This estimate assumes little or no reliance on standardized disclosure language.
The Commission continues to expect that the majority of the burden associated with the
new disclosure requirements will be experienced during the first year as language is developed
and trading documentation is amended. After the new representations are developed and
incorporated into trading documentation, the Commission continues to believe that the annual
third-party disclosure burden associated with this requirement will be no more than
approximately 10 hours per counterparty for verifying representations with existing

counsel time for each security-based swap market participant that makes such representations.
See Business Conduct Adopting Release, at 30097, note 1581.
8

2,400 (total number of entities) *5 hours = 12,000 hours.

9

12,000 hours (total hours to develop representations) ÷ 3 years = 4,000 hours.

6

counterparties and onboarding new counterparties, for a maximum of approximately 24,000
hours10 across all applicable security-based swap counterparties.

Collection of
Information

Type of
Burden

Small
Business
Entities
Affected

Representations
Regarding
U.S.-Person
Status

Third-Party

0

Total
Number of
Respondents

2,400

Ongoing or
Initial
Burden

Total
Number of
Responses
Per Year
Per
Respondent

Initial
Burden Per
Response
Per Year

Annualized
Burden Per
Year Per
Respondent

Ongoing
Burden Per
Response
Per Year
Per
Respondent

Total Burden For
All Respondents

Initial

1

5

1.667

N/A

4,000

Ongoing

1

N/A

10

10

24,000

TOTAL ANNUAL INDUSTRY BURDEN

13.

28,000

Costs to Respondents
a. Representations regarding a “transaction conducted through a foreign branch”

The Commission continues to believe that some of the entities that will have to comply
with Rule 3a71-3 once the compliance date has passed, will seek outside counsel to help them
develop new representations contemplated by Rule 3a71-3. For PRA purposes, the Commission
continues to assume that all 50 respondents will seek outside counsel for the first year only and
will, on average, consult with outside counsel for a cost of up to $2,000. The Commission also
continues to assume that none of the 50 respondents will seek outside legal services for year two
or year three. Thus, the cost over the three-year period will be $100,00011 or $33,33312 per year
when annualized over three years, across all security-based swap counterparties that make such
representations. The total labor cost per respondent will be approximately $666.6713 when
annualized over three years.

10

2,400 (total number of entities) * 10 hours = 24,000 hours.

11

50 (estimated number of entities) * $2,000 (cost of outside counsel) = $100,000.

12

$100,000 (total cost to seek outside counsel over three years) ÷ 3 years = $33,333.33.

13

$33,333 (total labor cost to seek outside counsel per year) ÷ 50 (estimated number of
entities that will seek outside counsel to help them develop new representations contemplated by
Rule 3a71-3(a)(3)(ii)) = $666.67.
7

Collection of
Information

Type of
Burden

Small
Business
Entities
Affected

Representation
Regarding a
Transaction
Conducted
Through a
Foreign Branch

ThirdParty

0

Total
Number of
Respondents

Total
Number of
Responses
Per Year

Initial Cost
Per
Response
Per Year
Per
Respondent

Ongoing
Cost Per
Response
Per Year
Per
Respondent

Total
Annualized
Cost Per
Year Per
Respondent

Total Cost For All
Respondents

50

1

$2,000

$0

$666.67

$33,333.33

b. Representations regarding U.S.-person status
The Commission continues to believe that some of the entities that will have to comply
with Rule 3a71-3 once the compliance date has passed, will seek outside counsel to help them
develop new representations contemplated by Rule 3a71-3. For PRA purposes, the Commission
continues to assume that all 2,400 respondents will seek outside legal for the first year only and
will, on average, consult with outside counsel for a cost of up to $2,000. The Commission also
continues to assume that none of the 2,400 respondents will seek outside legal services for year
two or year three. Thus, the cost over the three-year period will be $4,800,00014 or $1,600,00015
per year when annualized over three years, across all security-based swap counterparties that
make such representations. The total labor cost per respondent will be approximately $666.6716
when annualized over three years.

Collection of
Information

Type of
Burden

Small
Business
Entities
Affected

Representations
Regarding U.S.Person Status

ThirdParty

0

14.

Total
Number of
Respondents

Total
Number of
Responses
Per Year

Initial Cost
Per
Response
Per Year
Per
Respondent

Ongoing
Cost Per
Response
Per Year
Per
Respondent

Total
Annualized
Cost Per
Year Per
Respondent

Total Cost For All
Respondents

2,400

1

$2,000

$0

$666.67

$1,600,000.00

Cost to Federal Government

Not applicable. The Commission does not anticipate any contracting, IT, or development
costs, and does not anticipate hiring new employees in connection with the information collection.

14

2,400 (total number of entities) * $2,000 = $4,800,000.

15

$4,800,000 (total cost over three years) ÷ 3 years = $1,600,000.

16

$1,600,000 (total labor cost to seek outside counsel per year) ÷ 2,400 (estimated number
of entities that will seek outside counsel to help them develop new representations contemplated
by Rule 3a71-3(4)(iv)) = $666.67.
8

15.

Changes in Burden

There is no change in burden. As noted above, the compliance date for Rule 3a71-3 has not
yet passed, and the staff has not changed its estimates of the burdens and costs the respondents will
incur when the compliance date is in effect.
16.

Information Collections Planned for Statistical Purposes

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

OMB Expiration Date Display Approval

The Commission is not seeking approval to omit the OMB approval 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.

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