Supporting Statement for Proposed Rules 15Fi-1 15Fi-2 and 15Fi-3

Supporting Statement for Proposed Rules 15Fi-1 15Fi-2 and 15Fi-3.pdf

Rules 15Fi-3 through 15Fi-5 – Risk Mitigation Techniques for Uncleared Security-Based Swaps

OMB: 3235-0777

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SUPPORTING STATEMENT for the Paperwork Reduction Act Information Collection
Submission for Rules 15Fi-3 through 15Fi-5 – Risk Mitigation Techniques for Uncleared
Security-Based Swaps
New Information Collection Request
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

Section 15F(i)(1) of the Exchange Act, as added by Section 764(a) of Title VII of the
Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), 1 requires
each registered security-based swap dealer (“SBS dealer”) and each registered major securitybased swap participant (“major SBS participant”) (each SBS dealer and each major SBS
participant hereafter referred to as an “SBS Entity”) to conform with such standards as may be
prescribed by the Commission, by rule or regulation, that relate to timely and accurate
confirmation, processing, netting, documentation, and valuation of all security-based swaps. 2
Section 15F(i)(2) of the Exchange Act provides that the Securities and Exchange Commission
(“Commission”) shall adopt rules governing documentation standards for SBS Entities. 3
Accordingly, on December 18, 2018, the Commission proposed a series of new rules that
would require the application of specific risk mitigation techniques to portfolios of securitybased swaps not submitted for clearing. 4 Specifically:
•

Proposed Rule 15Fi-3 would require SBS Entities to reconcile outstanding security-based
swaps with applicable counterparties on a periodic basis.

•

Proposed Rule 15Fi-4 would require SBS Entities to engage in certain forms of portfolio
compression exercises with their counterparties, as appropriate.

•

Proposed Rule 15Fi-5 would require SBS Entities execute written security-based swap
trading relationship documentation with each of its counterparties prior to, or
contemporaneously with, executing a security-based swap transaction.

Each of these proposed rules would impose new collection of information requirements
on SBS Entities. The title of these new collections of information is, collectively, “Rules 15Fi-

1

Public Law 111–203, 124 Stat. 1376 (2010). Unless otherwise indicated, references to “Title VII” in this
release are to Subtitle B of Title VII of the Dodd-Frank Act.

2

15 U.S.C. 78o-10(i)(1).

3

15 U.S.C. 78o-10(i)(2).

4

See Risk Mitigation Techniques for Uncleared Security-Based Swaps, Exchange Act Release No. 84861 (Dec.
18, 2018), 84 FR 4614 (Feb. 15, 2019) (“Risk Mitigation Proposing Release”).

3—15Fi-5 – Risk Mitigation Techniques for Uncleared Security-Based Swaps.” 5
2.

Purpose and Use of the Information Collection

A. Proposed Rule 15Fi-3: Portfolio Reconciliation
The information shared by counterparties to a security-based swap transaction
periodically during the portfolio reconciliation process, as contemplated by the underlying
requirements in proposed Rule 15Fi-3, should play an important role in assisting those
counterparties in identifying and resolving discrepancies involving key terms of their
transactions on an ongoing basis. This information also should allow those counterparties to
improve their management of internal risks related to the enforcement of their rights and the
performance of their obligations under a security-based swap.
For example, the information obtained and provided in the course of portfolio
reconciliation should help ensure that the counterparties to a security-based swap are and remain
in agreement with respect to all material terms throughout the life of the transaction, thereby
mitigating the possibility that a discrepancy could unexpectedly affect either side’s ability to
perform any or all of its obligations under the contract, including those obligations related to the
posting of collateral. Moreover, requiring SBS Entities to agree in writing with each of their
counterparties on the terms of the portfolio reconciliation (including, if applicable, agreement on
the selection of any third party service provider who may be performing the reconciliation)
should help to minimize any discrepancies regarding the portfolio reconciliation process itself,
thereby ensuring that it operates in as efficient and cost-effective means possible.
Finally, the requirement to report certain unresolved valuation disputes to the
Commission should assist the Commission in identifying potential issues with respect to an SBS
Entity’s internal valuation methodology and also could serve as an indication of a widespread
market disruption in cases where the Commission receives a large number of such notices from
multiple firms.

5

The Risk Mitigation Proposing Release also contains requirements that would amend the following existing
collections of information:
•

Rule 17a-3 – Records to be made by certain brokers and dealers (OMB control number 3235-0033);

•

Rule 17a-4 – Records to be preserved by certain brokers and dealers (OMB control number 3235-0279);

•

Rule 18a-5 – Records to be made by certain security-based swap dealers and major security-based swap
participants (OMB control number 3235-0745);

•

Rule 18a-6 – Records to be preserved by certain security-based swap dealers and major security-based
swap participants (OMB control number 3235-0751); and

•

Rule 3a71-6 – Substituted Compliance for Foreign Security-Based Swap Dealers (OMB control number
3235-0715).

Analyses of the amendments to those existing collections are being submitted to OMB as separate supporting
statements.

2

1. Proposed Rule 15Fi-4: Portfolio Compression
The underlying portfolio compression requirements in Proposed Rule 15Fi-4 should help
market participants by eliminating redundant uncleared derivatives contracts, thereby potentially
reducing a market participant’s credit risk to its direct counterparties, including by eliminating all
outstanding contracts with some counterparties, without affecting the market participant’s overall
economic position. The proposed rule also should lead to processing improvements for market
participants by virtue of the fact that both SBS Entities and their counterparties should ultimately
have fewer trades to manage, maintain, and settle, resulting in fewer opportunities for processing
errors, failures, or other problems that could develop throughout the lifecycle of a transaction.
2. Proposed Rule 15Fi-5: Written Trading Relationship Documentation
The information required to be contained in the underlying written trading relationship
documentation pursuant to proposed Rule 15Fi-5 should help ensure that each SBS Entity
mitigates risk with respect to its security-based swap portfolio by, among other things, enhancing
clarity and legal certainty from the outset of a transaction regarding each party’s rights and
obligations. This outcome should help to reduce exposure to, among other things, counterparty
credit risk and promote agreement regarding the proper valuation and other material terms of a
security-based swap.
3.

Consideration Given to Improved Information Technology

The proposed rules do not prescribe particular forms or methods of compliance for SBS
Entities so as to allow flexibility with respect to new technologies as they develop. For example,
Commission staff notes that market participants currently engaging in portfolio reconciliation
and portfolio compression exercises in both the swap and security-based swap markets are doing
so using automated processes, some of which are being offered by third party vendors. Under
the proposal, SBS Entities would be permitted to use such platforms in connection with proposed
Rules 15Fi-3 and 15Fi-4, so long as they comply with specific elements set forth in those rules.
Similarly, although proposed Rule 15Fi-5 requires that an SBS Entity’s trading relationship
document with it counterparties be “in writing,” it does not specify how the underlying
documentation is required to be memorialized, stored, or used. As a result, SBS Entities would
have the discretion to allow for the trading relationship documentation created pursuant to
proposed Rule 15Fi-5 to be executed, stored, and monitored in electronic format. Such methods
of storage and use also could apply to the policies and procedures requirements in all three
proposed rules.
4.

Duplication

Commission staff expects that many SBS Entities will be dually-registered with the
Commodity Futures Trading Commission (“CFTC”) as swap dealers and major swap
participants. As the proposed rules are largely similar to those adopted by the CFTC, duallyregistered entities will already have procedures and systems in place to collect the information.
However, the information provided to the CFTC will address swaps while the information
provided to the Commission will address SBS. With respect to mixed swaps, duplicative
information may be provided to both the CFTC and the Commission, depending on the facts and
circumstances. In these instances, the requirement to provide duplicative information to the
3

Commission and CFTC would be unavoidable due to the fact that the Dodd-Frank Act provides
that the two agencies share jurisdiction over mixed swaps.
5.

Effects on Small Entities

Based on feedback from industry participants about the security-based swap market,
entities that would register as SBS dealers or major SBS participants would likely exceed the
thresholds defining “small entities”. Thus, it is unlikely that the requirements under proposed
Rules 15Fi-3 through 15Fi-5 would affect small entities.
6.

Consequences of Not Conducting Collection

If adopted, Rules 15Fi-3 through 15Fi-5 would be promulgated pursuant to Section
15F(i)(2) of the Exchange Act, which requires that the Commission “adopt rules governing
documentation standards for security-based swap dealers and major security-based swap
participants.” 6 Accordingly, the collections of information are at the heart of each of the
underlying documentation requirements of the proposed rules, such that not conducting them (or
reducing the frequency of collection) would not be consistent with the statutory provisions or the
intended effects of the proposal. Moreover, the policies and procedures required to be
established, maintained, and followed pursuant to Proposed Rules 15Fi-3 through 15Fi-5 are
instrumental in focusing and assessing compliance with the underlying rules, consistent with
how similar requirements are used in numerous other Commission rules. Thus, eliminating such
collections (or reducing the frequency of collection) also would be inconsistent with the
applicable statutory provisions and the intended effects of the proposal.
7.

Inconsistencies with Guidelines in 5 CFR 1320.5(d)(2)

Not applicable. The final rules are not inconsistent with 5 CFR 1320.5(d)(2)
8.

Consultations Outside the Agency

In February 2019, the Commission requested comment on the collection of information
requirements in the Risk Mitigation Proposing Release. 7 A copy of the applicable release is
attached. Comments on Commission releases are generally received from registrants, investors,
and other market participants. In addition, the Commission and staff participate in ongoing
dialogue with representatives of various market participants and staff from other financial
regulators (including the CFTC and foreign financial regulators) through public conferences,
meetings, and informal exchanges. Any comments received on this proposed rulemaking will be
posted on the Commission’s public website, and made available through
http://www.sec.gov/rules/proposed.shtml. The Commission will consider all comments received
prior to publishing the final rule, and will explain in any adopting release how the final rule
responds to such comments, in accordance with 5 C.F.R. 1320.11(f).
9.

Payment or Gift

6

15 U.S.C. 78o-10(i)(2) (emphasis added).

7

See Risk Mitigation Proposing Release, 84 FR at 4639.

4

No payment or gift is provided to respondents.
10.

Confidentiality

Proposed Rule 15Fi–3(c) would require an SBS Entity to promptly notify the
Commission of any security-based swap valuation dispute in excess of $20,000,000 (or its
equivalent in any other currency) if not resolved within: (1) three business days, if the dispute is
with a counterparty that is an SBS Entity; or (2) five business days, if the dispute is with a
counterparty that is not an SBS Entity. The Commission requested comment as to whether these
notices should be submitted to the Commission on a confidential basis. Moreover, although the
rule does not expressly require it, SBS Entities may choose to voluntarily include in a notice the
name of one or more persons to contact with any follow-up questions on the contents of the
notice, along with each person’s work phone number and/or work email address.
No other information would be submitted directly to the Commission under proposed
Rules 15Fi–3 through 15Fi–5. To the extent that the Commission receives confidential
information pursuant to this collection of information that is otherwise not publicly available,
including in connection with examinations or investigations, that information will be kept
confidential, subject to the provisions of the Freedom of Information Act, 5 U.S.C. § 552, and
the Commission’s rules thereunder (17 CFR 200.80(b)(4)(iii)).
11.

Sensitive Questions

No information of a sensitive nature will be required under this collection of information.
Furthermore, other than contact information that may be voluntarily included in a notice of a
security-based swap valuation dispute submitted to the Commission pursuant to proposed Rule
15Fi-3(c) (as described in Item 10 above), we do not believe that the collection of information
will otherwise contain Personally Identifiable Information (“PII”). 8 The agency has determined
that the information collection does not constitute a system of record for purposes of the Privacy
Act. Information is not retrieved by a personal identifier. In accordance with Section 208 of the
E-Government Act of 2002, the agency has determined that the information collection does not
trigger the Privacy Impact Assessment (PIA) requirement.
12.

Burden of Information Collection

The staff estimates, based on data obtained from the CFTC, the Depository Trust &
Clearing Corporation and conversations with market participants, that approximately 50 entities
may meet the definition of SBS dealer, and up to five entities may meet the definition of major
SBS participant. Further, we estimate that approximately 35 entities will be dually registered
with the CFTC as swap entities. Accordingly, we have used these estimates for the calculation
of reporting burdens. The proposal is being made pursuant to the Commission’s authority to
8

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.

5

prescribe standards by rule or regulation, and is being categorized as a program change due to
agency discretion.
A summary of the estimated hour burdens is in the following chart, with a more detailed
explanation below.
Summary of Hourly Burdens
Name of
Information
Collection

Number
of
Entities
Impacted

Small
Business
Entities
Affected

Type of
Burden

Reconciliation
with other SBS
Entities

55

0

Recordkeeping

Reconciliation
with non-SBS
Entities

55

0

35

0

Recordkeeping

20

0

Recordkeeping

Valuation Dispute
Notices

55

0

Reporting

Compression and
Offsets with All
Counterparties

55

0

Recordkeeping

35

0

Recordkeeping

20

0

Recordkeeping

55

0

Recordkeeping

Reconciliation
Policies and
Procedures
(Dual SEC/CFTC)
Reconciliation
Policies and
Procedures
(SEC Only)

Compression
Policies and
Procedures
(Dual SEC/CFTC)
Compression
Policies and
Procedures
(SEC Only)
Prepare and
Negotiate
Documentation
Documentation
Policies and
Procedures
(Dual SEC/CFTC)
Documentation
Policies and
Procedures
(SEC Only)
Periodic Audit of
Documentation

Recordkeeping

35

0

Recordkeeping

20

0

Recordkeeping

55

0

Recordkeeping

Ongoing
or Initial
Burden

Annual
Responses
per Entity

Burden
per Entity
per
Response

Annual
Burden
Per
Entity

Ongoing

760

0.25

190

Initial
One-Time

N/A

N/A

N/A

Ongoing

455

0.5

227.5

Initial
One-Time

N/A

N/A

N/A

Ongoing

1

40

40

Initial
One-Time

N/A

1

0.33

Ongoing

1

40

40

Initial
One-Time

N/A

80

26.67

Ongoing

1

24

24

Initial
One-Time

N/A

N/A

N/A

Ongoing

736

0.1715

124.16

Initial
One-Time

N/A

N/A

N/A

Ongoing

1

40

40

Initial
One-Time

N/A

1

0.33

Ongoing

1

40

40

Initial
One-Time

N/A

80

26.67

Ongoing

N/A

N/A

N/A

Initial
One-Time

N/A

10,771.36

3,590

Ongoing

1

40

40

Initial
One-Time

N/A

1

0.33

Ongoing

1

40

40

Initial
One-Time

N/A

80

26.67

Ongoing

368

10

3680

Initial
One-Time

N/A

N/A

N/A

10,450

TOTAL ANNUAL INDUSTRY BURDEN

6

Annual
Industry
Burden

12,512.5

1411.67

1333.33

1,320

6,828.8

1411.67

1333.33

197,450

1411.67

1333.33

202,400
439,196.3

A. Proposed Rule 15Fi-3 (Portfolio Reconciliation)
1. Portfolio Reconciliation with Other SBS Entities
Under proposed Rule 15Fi-3(a), the approximately 55 respondent SBS Entities would be
required to reconcile security-based swap portfolios with other SBS Entities on a daily, weekly,
or quarterly basis, depending upon the size of the portfolio. 9 For purposes of this requirement,
we preliminarily estimate that each SBS Entity will engage in security-based swap transactions
with approximately one-third of the other 54 SBS Entities, meaning that an SBS Entity will
maintain security-based swap portfolios with approximately 18 SBS Entities. Of this total, we
preliminarily believe that, on average, two SBS Entity counterparty portfolios will require daily
reconciliation (i.e., a portfolio consisting of 500 or more uncleared security-based swaps), four
SBS Entity counterparty portfolios will require weekly reconciliation (i.e., a portfolio of more
than 50 but fewer than 500 uncleared security-based swaps), and the remaining 12 SBS Entity
counterparty portfolios will require quarterly reconciliation (i.e. a portfolio of no more than 50
uncleared security-based swaps). 10 We therefore estimate that each SBS Entity will engage in an
average of 760 portfolio reconciliations with other SBS Entities per year. 11
We also preliminarily believe that each portfolio reconciliation is likely to be conducted
through an automated process. 12 As a result, we preliminarily believe that each reconciliation
will require an average of 30 minutes to complete in total (which is the combined estimate for
both counterparties), regardless of the size of the security-based swap portfolio with the
applicable counterparty. 13 Using these figures, the Commission preliminarily estimates that
compliance with proposed Rule 15Fi-3(a), as it relates to engaging in portfolio
reconciliation with other SBS Entities, will impose an average annual burden of
approximately 190 hours annually on each of the estimated 55 SBS Entity respondent, for
an estimated average annual burden of 10,450 hours in the aggregate. 14
9

See Risk Mitigation Proposing Release, 84 FR at 4641 n. 171 (citing a number of prior Commission releases
estimating that approximately 50 entities may meet the definition of SBS dealer, and up to five entities may
meet the definition of major SBS participant).

10

These estimates are consistent with those used by the CFTC in connection with its portfolio reconciliation rule.
See Confirmation, Portfolio Reconciliation, and Portfolio Compression Requirements for Swap Dealers and
Major Swap Participants, 75 FR 81519, 81528 (Dec. 28, 2010).

11

This estimate uses 252 business days for purposes of the daily portfolio reconciliation requirement, which is
consistent with the definition of “business day” in proposed Rule 15Fi-1(b).

12

Commission staff recognizes that some respondents may choose to engage a third-party vendor to conduct
portfolio reconciliations. For simplicity, however, the burden estimate is based upon SBS Entities conducting
these activities internally, without the use of third-party vendors.

13

Because the 30 minute estimate is for the entire reconciliation process, without respect to how that time is
allocated between the two parties, to avoid double-counting we have divided it by one-half in the context of
security-based swap portfolios between two SBS Entities, resulting in an estimate of 15 minutes per
reconciliation per counterparty for those portfolios.

14

Rule 15Fi-3(a)(1) and 15Fi-3(b)(1) also require an SBS Entity to agree in writing with each of its counterparties
on the terms of the portfolio reconciliation including, if applicable, agreement on the selection of any third party
service provider who may be performing the reconciliation. Commission staff believes that SBS Entities to
undertake this agreement as part of the written trading relationship documentation each is required to enter into

7

2. Portfolio Reconciliation with Non-SBS Entities
Pursuant to proposed Rule 15Fi-3(b), each SBS Entity would be required to establish,
maintain, and follow written policies and procedures reasonably designed to ensure that it
engages in portfolio reconciliation for all security-based swaps (other than security-based swaps
that will be cleared by a clearing agency) in which its counterparty is not an SBS Entity. 15 In
calculating the burden of performing the portfolio reconciliations required by these policies and
procedures, staff preliminarily estimates that (1) there are currently 13,082 market participants in
security-based swaps who will not be required to register as SBS Entities, 16 and (2) each SBS
Entity will have an average of approximately 350 of these non-SBS Entity market participants as
counterparties. 17 Further, we preliminarily believe that reconciliations with these parties will be
conducted on a quarterly basis for 10% of these portfolios (i.e., portfolios with more than 100
uncleared security-based swaps), and on an annual basis for the remaining 90% of these
portfolios (i.e., portfolios that do not involve 100 or more uncleared security-based swaps).
Accordingly, of the estimated 350 security-based swap portfolios that an SBS Entity maintains
with non-SBS Entities, approximately 90% (or 315) will require only one portfolio reconciliation
each year (for a total of 315 annual reconciliations), and 10% (or 35) will require quarterly
portfolio reconciliations (for a total of 140 quarterly reconciliations), resulting in a total of 455
portfolio reconciliations per SBS Entity per year
We further estimate that each portfolio reconciliation between an SBS Entity and a nonSBS Entity will require an average of 30 minutes to complete (which is the combined estimate
for both counterparties). 18 Using these figures, the Commission preliminarily estimates that
compliance with proposed Rule 15Fi-3(b), as it relates to conducting portfolio
reconciliations with non-SBS Entities, will impose an annual hourly burden of
approximately 227.5 hours for each of the estimated 55 SBS Entity respondents, for an
estimated average annual burden of approximately 12,512.5 hours in the aggregate.
3. Establishing, Maintaining, and Enforcing Written Policies and Procedures (Dual
SEC/CFTC Entities)
Proposed Rule 15Fi-3 also contains policies and procedures requirements applicable to
SBS Entities in connection with engaging in portfolio reconciliation with both SBS Entities and
other counterparties. As previously noted, Commission staff estimates that of the estimated 55
with its counterparties as a result of proposed Rule 15Fi-5. Thus, the estimate here does not account for this
burden, which is instead assumed to form part of the burden of complying with Rule 15Fi-5.
15

The estimated hourly burden for preparing these policies and procedures is discussed below.

16

In the Economic Analysis in the Risk Mitigation Proposing Release, the Commission estimated that there are
approximately 13,137 market participants in the security-based swap market. See Risk Mitigation Proposing
Release, 84 FR at 4651. Subtracting the estimated 55 SBS Entities from this figure results in an estimated
13,082 non-SBS Entities.

17

This estimate is based upon the assumption that each non-SBS Entity market participant will do business with,
on average, between one or two SBS Entities and is calculated as follows: ((13,082 non-SBS Entity market
participants/55 SBS Entities) x 1.5 SBS Entities per non-SBS market participants) = approximately 350 nonSBS Entity counterparties per SBS Entity.

18

This figure is identical to the estimate used for reconciliations between two SBS Entities (before dividing by
one-half to avoid double-counting).

8

persons that may register with the Commission as SBS Entities, approximately 35 will be duallyregistered with the CFTC as Swap Entities. 19 In addition, and as we previously noted, the
CFTC’s adopted final rules on portfolio reconciliation written policies and procedures are
substantively identical to those proposed by Rule 15Fi-3. Accordingly, these entities are already
required to establish, maintain, and follow written policies and procedures as they relate to the
reconciliation of their swap portfolios, and these policies and procedures would be expected to
be largely consistent with those that would be required with respect to their security-based swap
portfolios. Assuming that these existing policies and procedures would simply need to be
amended to apply to security-based swap transactions upon adoption of proposed Rule 15Fi-3,
we preliminarily estimate that the initial burden of revising these policies and procedures would
be one hour per respondent (or .33 hours on a three-year annualized basis) for each of the 35
dually-registered SBS Entities, for an estimated one-time initial burden of 35 hours in the
aggregate (or 11.67 hours on a three-year annualized basis). Once these policies and procedures
are established, we believe that that it will take an average of 40 hours annually to revise and
maintain these policies and procedures per respondent, 20 for an estimated average annual burden
of 1,400 hours in the aggregate for all 35 respondents. 21 Combining the initial and annual
burdens associated with creating and updating the required policies and procedures results
in a total estimated average annual burden of 1,411.67 hours in the aggregate for all of the
estimated 35 respondents that may be registered with both the SEC and CFTC.
4. Establishing, Maintaining, and Enforcing Written Policies and Procedures (SEC-Only
Entities)
With respect to the remaining 20 SBS Entities that will not be dually-registered with the
CFTC, staff preliminarily estimates, based on prior estimates in earlier Dodd-Frank rulemakings,
that these policies and procedures would require an average of 80 hours per non-duallyregistered respondent to initially prepare and implement (or 26.67 hours on a three-year
annualized basis) for each of the 20 Commission-only SBS Entities, for an estimated one-time
initial burden of 1,600 hours in the aggregate (or 533.33 hours on a three year-annualized
basis). 22 Once these policies and procedures are established, we believe that that it will take an
average of 40 hours annually to revise and maintain these policies and procedures per
respondent, for an estimated average annual burden of 800 hours in the aggregate for all 20
19

See Business Conduct Standards for Security-Based Swap Dealers and Major Security-Based Swap
Participants, Release No. 77617 (Apr. 14, 2016), 81 FR 29960, 30098 (May 13, 2016) (“Business Conduct
Standards Adopting Release”).

20

Although dually-registered SBS Entities would technically need to revise and maintain their policies and
procedures to ensure compliance with both the Commission’s and CFTC’s rules, we have preliminarily decided
to conservatively assume that all of the estimated hours would be incurred in connection with compliance with
the collection of information associated with proposed Rule 15Fi-3.

21

This estimate is based on Commission staff discussions with market participants and is calculated as follows:
[((Compliance Attorney at 20 hours) + (Director of Compliance at 10 hours) + (General Counsel at 10 hours))]
= 40 hours per SBS Entity. See Trade Acknowledgment and Verification of Security-Based Swap Transactions,
Exchange Act Release No. 78011 (June 8, 2016), 81 FR 39807, 39831 n. 243 (June 17, 2016) (“Trade
Acknowledgment and Verification Adopting Release”).

22

This estimate is based on Commission staff discussions with market participants and is calculated as follows:
[((Compliance Attorney at 40 hours) + (Director of Compliance at 20 hours) + (Deputy General Counsel at 20
hours))] = 80 hours per SBS Entity. See Trade Acknowledgment and Verification Proposing Release, 81 FR at
39807, 39831 n. 242.

9

respondents. 23 Combining the initial and annual burdens associated with creating and
updating the required policies and procedures results in a total estimated average annual
burden of 1.333.33 hours in the aggregate for all 20 respondents that may be registered
only with the SEC.
5. Reporting of Certain Valuation Disputes
Proposed Rule 15Fi-3(c) would require each SBS Entity to promptly notify the
Commission (and any applicable prudential regulator for an SBS Entity that is also a bank), in a
form and manner acceptable to the Commission, of any security-based swap valuation dispute in
excess of $20,000,000 (or its equivalent in any other currency) if not resolved within a
prescribed time period. In the Risk Mitigation Proposing Release, the Commission noted that the
rule was designed to provide SBS Entities with flexibility to determine the most efficient and
cost-effective form and manner of making such submissions, so long as it is deemed to be
acceptable by the Commission. 24 Accordingly, Commission staff preliminarily does not expect
there to be any initial burden of designing a system for submitting these notices. Staff also
preliminarily believes that the associated ongoing hourly burden of preparing and submitting
such notices would be minimal. In addition, until SBS Entities are registered with the
Commission, it is difficult for us to determine the typical number of valuation disputes meeting
the applicable thresholds that SBS Entities would be required to submit on an annual basis. As
such, Commission staff preliminarily estimates that each of the 55 SBS Entity respondents
will spend on average of 24 hours each year complying with this requirement, for an
estimated average annual burden of 1,320 hours in the aggregate.
B. Proposed Rule 15Fi-4: Portfolio Compression
1. Conducting Bilateral Offsets and Portfolio Compression
In addition, respondents will incur additional hourly burdens as they undertake bilateral
offsets and portfolio compression exercises consistent with these written policies and procedures.
As noted above staff believes that each of the 55 estimated SBS Entities will be counterparty to
an average of 18 other SBS Entities and 350 non-SBS Entities, for a total of 368 counterparties.
For purposes of conducting bilateral offsets and portfolio compression exercises, we
preliminarily estimate that (1) each SBS Entity will have an average of one set of security-based
swaps that are eligible for annual bilateral offset with each of these 368 counterparties, (2) each
SBS Entity will conduct an annual bilateral compression exercise with one-third, or six of its 18
SBS Entity counterparties, (3) each SBS Entity will conduct an annual bilateral compression
exercise with each of its 350 non-SBS Entity counterparties, and (4) each SBS Entity will engage
in multilateral compression exercises at an average rate of 12 exercises per year.
Commission staff also preliminarily believes that each bilateral offset and portfolio
compression exercise is likely to be conducted through an automated process. As a result, we
believe that (1) each bilateral offset will require on average five minutes of respondent time to
complete with each of the 350 non-SBS Entity counterparties, (2) each bilateral offset will
require on average 2.5 minutes of respondent time to complete with each of the 18 SBS Entity
23

See supra note 22.

24

See Risk Mitigation Proposing Release, 84 FR at 4621 n. 47, 4643.

10

counterparties, 25 (3) each bilateral compression will require an average of 15 minutes of
respondent time to complete with each of the 350 non-SBS Entity counterparties, (4) each
bilateral compression will require an average of 7.5 minutes with each of the six SBS Entity
counterparties, 26 and (5) each multilateral compression exercise will require an average of 30
minutes of respondent time to complete 12 times annually. In each of those hourly burdens, the
figure used is the combined estimate for both counterparties. Accordingly, the Commission
estimates the average annual hourly burden for these activities to be 124.16 hours for each
of the 55 SBS Entity respondents, for an estimated average annual burden of 6,828.8 hours
in the aggregate.
2. Establishing, Maintaining, and Enforcing Written Policies and Procedures (Dual
SEC/CFTC Entities)
As previously noted, the approximately 35 SBS Entities that will be dually-registered
with the CFTC as Swap Entities are already required to establish, maintain, and follow relevant
written policies and procedures related to bilateral offsets and portfolio compression exercises
involving their swap portfolios, and these policies and procedures would be expected to be
largely consistent with those that would be required with respect to their security-based swap
portfolios. Assuming that these existing policies and procedures would simply need to be
amended to apply to security-based swap transactions upon adoption of proposed Rule 15Fi-4,
we preliminarily estimate that the initial burden of revising these policies and procedures would
be one hour per respondent (or .33 hours on a three-year annualized basis) for each of the 35
dually-registered SBS Entities, for an estimated one-time initial burden of 35 hours in the
aggregate (or 11.67 hours on a three-year annualized basis). Once these policies and procedures
are established, we believe that that it will take an average of 40 hours annually to revise and
maintain these policies and procedures per respondent, 27 for an estimated average annual burden
of 1,400 hours in the aggregate for all 35 respondents. 28 Combining the initial and annual
burdens associated with creating and updating the required policies and procedures results
in a total estimated average annual burden of 1,411.67 hours in the aggregate for all of the
approximately 35 respondents may be registered with both the SEC and CFTC.

25

Similar to our estimates in the context of the portfolio reconciliation requirements, because the five minute
estimate is for the entire bilateral offset process, without respect to how that time is allocated between the two
parties, to avoid double-counting we have divided it by one-half in the context of security-based swap portfolios
between two SBS Entities, resulting in an estimate of 2.5 minutes per bilateral offset for those portfolios.

26

Again, we have divided the 15 minute estimate to complete the bilateral compression exercise by one-half in the
context of security-based swap portfolios between two SBS Entities, resulting in an estimate of 7.5 minutes per
bilateral compression for those portfolios.

27

See supra note 21.

28

See supra note 22.

11

3. Establishing, Maintaining, and Enforcing Written Policies and Procedures (SEC-Only
Entities)
With respect to the remaining 20 SBS Entities that are not dually-registered with the
CFTC, Commission staff preliminarily estimates, based on prior estimates in earlier Dodd-Frank
rulemakings, that these policies and procedures would require an average of 80 hours per nondually-registered respondent to initially prepare and implement (or 26.67 hours on a three-year
annualized basis) for each of the 20 Commission-only SBS Entities, for an estimated average
annual burden of 1,600 hours in the aggregate (or 533.33 hours on a three-year annualized
basis). 29 Once these policies and procedures are established, we estimate that it will take an
average of 40 hours annually to revise and maintain these policies and procedures per
respondent, for an estimated average annual burden of 800 hours in the aggregate for all 20
respondents. Combining the initial and annual burdens associated with creating and
updating the required policies and procedures results in a total estimated average annual
burden of 1.333.33 hours in the aggregate for all 20 respondents that may be registered
only with the SEC.
C. Proposed Rule 15Fi-5: Written Trading Relationship Documentation
1. Preparation of Written Trading Relationship Documentation
As noted above, Commission staff preliminarily estimates that each SBS Entity will have
18 SBS Entity counterparties and 350 non-SBS Entity counterparties, for a total of 368
counterparties per SBS Entity. For the purposes of the underlying documentation requirements,
and based on staff discussions with market participants, we understand that many SBS Entities
already have in place industry-standard written trading relationship documentation that is likely
to contain many of the elements required by this proposed rule. With this in mind, staff
preliminarily estimates that (1) the initial burden per respondent to negotiate and draft written
trading relationship documentation with 350 non-SBS Entities that is compliant with proposed
Rule 15Fi-5 will be approximately 30 hours (which is the combined estimate for both
counterparties), or (10,500 hours for each of the 55 estimated SBS Entities), and (2) the initial
burden per respondent to negotiate and draft written trading relationship documentation with 18
SBS Entities that is compliant with proposed Rule 15Fi-5 will be approximately 15 hours (or 270
hours for each of the 55 SBS Entities). 30 These estimates are averages, and both account for the
fact that some SBS Entities may lack appropriate documentation in certain respects and will need
to enter into new documentation with counterparties, while in other cases existing documentation
will need only to be modified to be brought into compliance. These estimates are further based
on an assumption that, in each case, the written documentation will always include the valuation
agreements set forth in proposed Rule 15Fi-5(b)(4), notwithstanding the fact that the rule only
requires this information in certain circumstances.

29

See supra note 22.

30

As was the case in calculating the PRA estimates for the portfolio reconciliation and portfolio compression
requirements, because the 30 hours estimate is for the entire process of negotiating and executing written
trading relationship documentation, without respect to how that time is allocated between the two parties, to
avoid double-counting we have divided it by one-half in the context of counterparties that are also SBS Entities,
resulting in an estimate of 15 hours to negotiate and execute such documentation.

12

Based on these estimates and assumptions, Commission staff estimates that the
requirement to prepare written relationship documentation in accordance with proposed
Rule 15Fi-5 will result in an estimated one-time initial burden of 10,770 hours for each of
the 55 SBS Entity respondents, for an estimated average one-time burden of 592,350 hours
in the aggregate (or 197,450 on a three-year annualized basis). The Commission also
estimates that there will be little need to modify the written trading relationship
documentation on an ongoing basis once it is in place, and therefore is not estimating any
additional annual hourly burden for ongoing modifications.
2. Establishing, Maintaining, and Enforcing Written Policies and Procedures
As previously noted, the approximately 35 SBS Entities that will be dually-registered
with the CFTC as Swap Entities are already required to establish, maintain, and follow written
policies and procedures requiring the execution of written trading relationship documentation are
substantively identical to those proposed by Rule 15Fi-5. Accordingly, these 35 entities are
already required to establish, maintain, and follow relevant written policies as they relate to the
execution of written trading relationship documentation involving their swap portfolios, and
these policies and procedures would be expected to be largely consistent with those that would
be required with respect to their security-based swap portfolios. Assuming that these existing
policies and procedures would simply need to be amended to apply to security-based swap
transactions upon adoption of proposed Rule 15Fi-5, we preliminarily estimate that the average
initial burden of revising these policies and procedures would be one hour per respondent (or .33
hours on a three-year annualized basis) for each of the 35 dually-registered SBS Entities, for an
estimated one-time burden of 35 hours in the aggregate (or 11.67 hours on a three-year
annualized basis). Once these policies and procedures are established, we believe that that it
will take an average of 40 hours annually to revise and maintain these policies and procedures
per respondent, 31 for an estimated average annual burden of 1,400 hours in the aggregate for all
35 respondents. 32 Combining the initial and annual burdens associated with creating and
updating the required policies and procedures results in a total estimated average annual
burden of 1,411.67 hours in the aggregate for all of the approximately 35 respondents may
be registered with both the SEC and CFTC.
3. Establishing, Maintaining, and Enforcing Written Policies and Procedures (SEC-Only
Entities)
With respect to the remaining 20 SBS Entities that are not dually-registered with the
CFTC, Commission staff preliminarily estimates, based on prior estimates in earlier Dodd-Frank
rulemakings, that these policies and procedures would require an average of 80 hours per nondually-registered respondent to initially prepare and implement (or 26.67 hours on a three-year
annualized basis) for each of the 20 Commission-only SBS Entities, for an estimated average
annual burden of 1,600 hours in the aggregate (or 533.33 hours on a three year-annualized
basis). 33 Once these policies and procedures are established, we estimate that it will take an
average of 40 hours annually to revise and maintain these policies and procedures per respondent
31

See supra note 21.

32

See supra note 22.

33

See supra note 22.

13

(including both dually-registered and non-dually-registered SBS Entities), for an estimated
average annual burden of 800 hours in the aggregate for all 20 respondents. Combining the
initial and annual burdens associated with creating and updating the required policies and
procedures results in a total estimated average annual burden of 1.333.33 hours in the
aggregate for all 20 respondents that may be registered only with the SEC.
4. Audit of Security-Based Swap Trading Relationship Documentation
With regard to having an independent auditor conduct the required periodic audit of
written trading relationship documentation and the requirement to retain a record of each such
audit, staff estimates that it will take an average of 10 hours to audit an SBS Entity’s
documentation with each of its 368 counterparties, for a total of 3,680 hours per SBS
Entity, or 202,400 hours for all 55 SBS Entity respondents.
D. Summary
Combining the total estimates included above, Commission staff estimates that the
total estimated aggregate burden for will be 439,196.30 hours annually for all three new
rules. These estimates are derived from a number of different sources. With respect to the
requirements to: (1) reconcile portfolios of security-based swaps (with both SBS and non-SBS
Entities); (2) providing notices of valuation disputes; (3) participate in compression exercises and
bilateral offsets (with both SBS and non-SBS Entities); (4) prepare and negotiating new written
security-based swap trading relationship documentation; and (5) audit the documentation
policies, the estimates were consistent with the those used by the CFTC in the course of adopting
a similar rules. 34 For the requirement to establish, maintain, and enforce written policies and
procedures, the estimates were consistent with those used in other rulemakings that contained
similar requirements for SBS Entities. 35
13.

Costs to Respondents

Other than the costs associated with the burden of information collection discussed in
Item 12 above, none of the rules would impose any additional costs other on respondents. At the
same time, however, Commission staff understands that some at least some respondents may
choose to utilize third parties to comply with the requirements underlying the collections of
information. For example, respondents may choose to utilize the services of a third party vendor
to perform the reconciliations required by proposed Rule 15Fi-3 or the compression exercises
contemplated by proposed Rule 15Fi-4. Once compliance with these rules is required,
Commission staff would expect to have access to the information necessary to determine how
many market participants will use such third party services, nor do we have data on the
monetized costs of using such services. Accordingly, this PRA analysis is based entirely on
hourly burdens without monetizing those costs. Because cost is likely to be a significant factor
in determining whether market participants are likely to use third party vendors in these
34

See Swap Trading Relationship Documentation Requirements for Swap Dealers and Major Swap Participants,
76 FR 6715, 6723 (Feb. 8, 2011).

35

See Trade Acknowledgment and Verification of Security-Based Swap Transactions, Exchange Act Release No.
78011 (June 8, 2016), 81 FR 39807, 39831 (June 17, 2016).

14

instances, Commission staff believes that relying solely on the hourly burdens is likely to be
provide a more conservative estimate.
14.

Cost to Federal Government

Not applicable. The federal government does not incur a cost for this collection of
information since it relates to a recordkeeping burden for the respondents.
15.

Changes in Burden

Not applicable. This is the initial submission of these estimated burdens.
16.

Information Collection 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.

15


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