SUPPORTING STATEMENT 18A-2 (3235-0699) Final Rule v.2

SUPPORTING STATEMENT for the Paperwork Reduction Act Information Collection
Submission for Rule 18a-2 – Capital requirements for major security-based swap
participants for which there is not a prudential regulator.
3235-0699
This submission is being made pursuant to the Paperwork Reduction Act of 1995, 44
U.S.C. Section 3501 et seq.
A.

JUSTIFICATION
1.

Necessity of Information Collection

On June 21, 2019, in accordance with Section 764 of the Dodd-Frank Wall Street Reform
and Consumer Protection Act (the “Dodd-Frank Act”), 1 which added section 15F to the
Securities Exchange Act of 1934 (the “Exchange Act”), 2 the Securities and Exchange
Commission (the “Commission”) adopted Rule 18a-2 to establish capital requirements for
nonbank major security-based swap participants that are also not registered as broker-dealers
(“MSBSPs”). 3 In particular, a nonbank MSBSP is required at all times to have and maintain
positive tangible net worth. The rule establishes collection of information requirements.
Under Rule 18a-2, as adopted, MSBSPs also need to comply with Rule 15c3-4, which
requires OTC derivatives dealers and other firms subject to its provisions to establish, document,
and maintain a system of internal risk management controls to assist the firm in managing the
risk associated with its business activities, including market, credit, leverage, liquidity, legal, and
operational risks.
2.

Purpose and Use of the Information Collection

Information collections under Rule 18a-2, as adopted, are integral parts of the
Commission’s financial responsibility program for nonbank MSBSPs. The requirement to
establish, document, and maintain a system of internal risk management controls will be imposed
on MSBSPs because, by definition, they maintain materially large positions in security-based
swap markets and will pose substantial risk to the stability of those markets should they default
on their obligations. The collections of information in Rule 18a-2, as adopted, will facilitate the
monitoring of the financial condition of nonbank MSBSPs by the Commission and its staff.

1

See Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376
(2010).

2

See 15 U.S.C. 78o-10(e)(2)(B).

3

See Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major SecurityBased Swap Participants and Capital Requirements for Broker-Dealers, Exchange Act Release No. 86175.

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3.

Consideration Given to Information Technology

The information collections under Rule 18a-2, as adopted, do not require that respondents
use any specific information technology system either to prepare or submit information
collections under the rule.
4.

Duplication

This information collection does not duplicate any existing information collection.
5.

Effect on Small Entities

The information collections that are required under Rule 18a-2, as adopted, do not place
burdens on small entities. The information collections under the rule are relevant only to market
participants whose security-based swap market activity exceeds a large threshold of notional
amounts, such that small market participants are exempted.
6.

Consequences of Not Conducting Collection

If the required information collections are not conducted or are conducted less frequently,
the protection afforded to counterparties and the U.S. financial and system would be diminished.
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).

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8.

Consultations Outside the Agency

The Commission requested comment on the collection of information
requirements in the proposing release in October 2012. 4 In addition, in 2018, the
Commission reopened the comment period and requested additional comment on the
proposed rules and amendments (including potential modifications to proposed rule
language). 5 While the Commission did not receive specific comments with respect to the
proposed collection of information with respect to Rule 18a-2, as proposed to be adopted,
the Commission received a number of comment letters in response to the 2012 proposal. 6
9.

Payment or Gift

No payment or gift is provided to respondents.
10.

Confidentiality

The information that is collected by the Commission under Rule 18a-2, as adopted, is
kept confidential to the extent permitted by the Freedom of Information Act (5 U.S.C. § 552 et
seq.).
11.

Sensitive Questions

No questions of a sensitive nature are asked. The information collection does not collect
any Personally Identifiable Information (“PII”). 7 At the same time, however, Commission staff
understands that there may be instances when certain information (including, but not limited to, a
person’s name, email, or phone number) could be provided by a respondent in response to one of
the collections of information. However, Commission staff does not envision any circumstance
in which a social security number would be provided pursuant to any of the collections of
information. As such, we believe that the treatment of any PII with the collection of information
associated with this rule is not likely to implicate the Federal Information Security Management
Act of 2002 or the Privacy Act of 1974.

4

See Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major SecurityBased Swap Participants and Capital Requirements for Broker-Dealers, Exchange Act Release No. 68071
(Oct. 18, 2012), 77 FR 70213, 70299 (Nov. 23, 2012).

5

See Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major SecurityBased Swap Participants and Capital Requirements for Broker-Dealers, Exchange Act Release No. 84409
(Oct. 11, 2018), 83 FR 53007 (Oct. 19, 2018) (“Capital, Margin, and Segregation Comment Reopening”).

6

Comments available at https://www.sec.gov/comments/s7-08-12/s70812.shtml.

7

The term “Personally Identifiable Information” refers to information which can be used to distinguish or
trace an individual’s identity, such as their name, social security number, biometric records, etc. alone, or
when combined with other personal or identifying information which is linked or linkable to a specific
individual, such as date and place of birth, mother’s maiden name, etc.

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12.

Burden of Information Collection

The staff estimates that Rule 18a-2, as adopted, will require in total, on an industry-wide
basis, (1) a one-time burden of 10,000 recordkeeping hours, and (2) an annual ongoing burden of
1,250 recordkeeping hours.
The staff estimates that 5 or fewer nonbank entities will register with the Commission as
MSBSPs. These MSBSPs will be required to establish, document, and regularly review and
update risk management control systems with respect to market, credit, leverage, liquidity, legal
and operational risks. Based on similar estimates for OTC derivatives dealers, the Commission
staff believes that an MSBSP will spend approximately 2,000 hours to implement its risk
management control system, resulting in a one-time industry-wide hour burden of 10,000
recordkeeping hours. 8
Based on similar estimates for OTC derivatives dealers, the staff further estimates that
these firms will spend approximately 250 hours per year reviewing and updating their risk
management control systems, resulting in an annual industry-wide hour burden of 1,250
recordkeeping hours. 9
Taken together, the annualized recordkeeping burden for the total industry is
4,583.35 hours. 10
Summary of Hourly Burdens

Name of
Information
Collection

Rule 18a-2 (Hour
Burden)

13.

Type of
Burden

Number
of
Entities
Impacted

Annual
Responses
per Entity

Recordkeeping

5

1

Initial
Burden
per
Entity
per
Response

Initial
Burden
Annualized
per Entity
per
Response

Ongoing
Burden
per
Entity
per
Response

Annual
Burden
Per
Entity
per
Response

2,000

666.67

250

916.67

Total
Annual
Burden
Per
Entity

Total
Industry
Burden

916.67

4,583.35

TOTAL HOURLY BURDEN FOR ALL RESPONDENTS

4,583.35

Small
Business
Entities
Affected

0

Costs to Respondents

Because nonbank MSBSPs may not initially have the systems or expertise internally to
meet the risk management requirements of Rule 18a-2, as adopted, these firms will likely hire an
outside risk management consultant to assist them in implementing their risk management
systems. The staff therefore estimates that these firms will hire an outside management
consultant for approximately 200 hours, for a one-time external recordkeeping cost of $80,000
8

5 MSBSPs x 2,000 hours = 10,000 hours. This one-time burden annualized is 3,333.33 hours industrywide (10,000 hours/3 = 3,333.33) and 666.67 hours per firm (3,333.33/5 MSBSPs = 666.666, rounded to
666.67).

9

5 MSBSPs x 250 hours/year = 1,250 hours/year.

10

5 MSBSPs x (2,000 hours/3 years) + 1,250 hours = 4,583.33 hours.

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per respondent, or $26,666.67 per respondent annualized over 3 years, 11 and a total industry
cost of $400,000, or $133,333.33 12 annualized over 3 years.
Nonbank MSBSPs may incur start-up costs to comply with Rule 18a-2, including
information technology costs. The information technology systems of a nonbank MSBSP may
be in varying stages of readiness to enable these firms to meet the requirements of the rules so
the cost of modifying their information technology systems could vary significantly. Based on
the estimates for similar collections of information, 13 the Commission staff expects that a
nonbank MSBSP will incur an average of approximately $16,000 for initial hardware and
software external expenses, which, over three years, equals an annualized cost of $5,333.33 per
nonbank MSBSP. 14 This will result in a one-time industry-wide external cost of $80,000, or
$26,666.67 15 annualized over 3 years. Based on the estimates for these similar collections of
information, the average ongoing external cost to meet the requirements of Rule 18a-2 will be
approximately $20,500 per nonbank MSBSP. This will also result in an ongoing annual
industry-wide external recordkeeping cost of $102,500. 16 Taken together, the annualized cost
burden for the total industry is $129,166.66. 17
Summary of Dollar Costs

Name of
Information
Collection

Rule 18a-2 – Outside
management
consultant costs
Rule 18a-2 –
Information
technology costs

14.

Type of
Burden

Number
of
Entities
Impacted

Annual
Responses
per Entity

Initial
Cost per
Entity per
Response

Initial Cost
Annualized
per Entity
per Response

Ongoing
Cost per
Entity per
Response

Recordkeeping

5

Recordkeeping

5

Annual
Cost Per
Entity per
Response

1

$80,000

$26,666.67

0

0

1

$16,000.00

$5,333.33

$20,500.00

$25,833.33

Total
Annual
Cost Per
Entity

Total
Industry Cost

Small
Business
Entities
Affected

$26,666.67

$133,333.35

0

$25,833.33

$129,166.65

0

TOTAL COST FOR ALL RESPONDENTS

$262,500.00

Cost to Federal Government

The staff does not anticipate this information collection to impose additional costs to the
Federal Government.
11

200 hours * $400/hour = $80,000. Annualized, this burden is $26,666.67 per respondent ($80,000/3 =
$26,666.667, rounded to $26, 666.67).

12

5 MSBSPs x 200 hours x $400/hour = $400,000. Annualized, this industry-wide burden is $133,333.33
($400,000 / 3 years = $133,333.333, rounded to $133,333.33).

13

See Risk Management Controls for Broker or Dealers with Market Access, Exchange Act Release No. 6321
(Nov. 3, 2010), 75 FR 69792, 69814 (Nov. 15, 2010).

14

$16,000 / 3 years = $5,333.333, rounded to $5,333.33.

15

5 MSBSPs x $16,000 / 3 years = $26,666.666, rounded to $26,666.67.

16

5 MSBSP x $20,500 = $102,500.

17

5 MSBSPs x $16,000 / 3 years + $102,500 = $129,166.66.

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15.

Changes in Burden

There are no changes in burden. However, the cost estimate, which was previously
submitted as a single entry, has been separated into two entries in order to explain the the
estimates more effectively.
16.

Information Collected Planned for Statistical Purposes

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

OMB Expiration Date Display Approval

The Commission is not seeking approval to not display the OMB approval expiration
18.

Exceptions to Certification for Paperwork Reduction Act Submissions

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

COLLECTIONS OF INFORMATION EMPLOYING STATISTICAL METHODS
This collection does not involve statistical methods.

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