Supporting Statement (Rule 18a-10-- Request for New OMB Number)

Supporting Statement (Rule 18a-10-- Request for New OMB Number).pdf

Rule 18a-10 - Alternative compliance mechanism for security-based swap dealers that are registered as swap dealers and have limited security-based swap activities

OMB: 3235-0785

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2021-08-16 - New collection (Request for a new OMB Control Number)

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SUPPORTING STATEMENT for the Paperwork Reduction Act Information Collection
Submission for Rule 18a-10 – Alternative compliance mechanism for security-based swap
dealers that are registered as swap dealers and have limited security-based swap activities.
Request for New OMB Number
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

Rule 18a-10, as originally adopted, provides an alternative compliance mechanism
pursuant to which stand-alone security-based swap dealers (“SBSDs”)1 registered as a swap
dealer that predominantly engages in a swaps business, and that meets certain conditions set
forth in the rule, may elect to comply with the capital, margin, and segregation requirements of
the Commodity Exchange Act (“CEA”) and the U.S. Commodity Futures Trading
Commission’s (“CFTC”) rules in lieu of complying with Rules 18a-1, 18a-3, and 18a-4, as
adopted. 2 Rule 18a-10 requires the firm to provide a written disclosure to its counterparties
after it begins operating pursuant to the rule. The disclosure requirement is designed to alert the
counterparty that the firm is not complying with these Commission rules notwithstanding the
fact that the firm is registered with the Commission as an SBSD. This will provide the
counterparty with the opportunity to assess the implications of transacting with the SBSD under
these circumstances.
Furthermore, Rule 18a-10 requires the firm to immediately notify the Commission and
the CFTC in writing if it fails to meet a condition in the rule. This notice – by immediately
alerting the Commission and the CFTC of the firm’s status – will provide the agencies with the
opportunity to promptly evaluate the situation and coordinate any regulatory responses such as
increased monitoring of the firm.
Adoption of Rule 18a-10
On June 21, 2019, in accordance with Section 764 of the Dodd-Frank Wall Street
Reform and Consumer Protection Act (the “Dodd-Frank Act”), 3 which added section 15F to
the Securities Exchange Act of 1934 (the “Exchange Act”), 4 the Securities and Exchange
1

The alternative compliance mechanism in Rule 18a-10, as adopted, is not available to nonbank SBSDs that
are registered as either a broker-dealer or an OTC derivatives dealer. Consequently, term “stand-alone
SBSD,” in the context of discussing the alternative compliance mechanism, refers to a stand-alone SBSD
that is not also registered as an OTC derivatives dealer.

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

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

Commission (the “Commission”) adopted Rule 18a-10. The Commission did not propose
Rule 18a-10, and Rule 18a-10 was not proposed in connection with the proposing release for
Rules 18a-1, 18a-3, or 18a-4. Instead, the adoption of Rule 18a-10 followed from comments
received in connection with the proposal of other rules, including Rules 18a-1, 18a-3, and 18a4, suggesting that the Commission provide an alternative compliance mechanism for SBSDs
that are registered as swap dealers that predominantly engage in a swaps business to permit
such entities to comply with the rules of the CFTC applicable to swap dealers.
Following the adoption of Rule 18a-10, the burdens associated with the Rule were
included in the Collection of Information in Rule 18a-3 (OMB No. 3235-0702), 5 and were
approved on November 19, 2019.6
The compliance date for Rules 18a-1, 18a-3, and 18a-4, is October, 6, 2021. 7 As a
result, in order to use the alternative compliance mechanism set forth in Rule 18a-10 with
respect to Rules 18a-1, 18a-3, and 18a-4, Rule 18a-10 would have the same compliance date.
Because the compliance date has not yet occurred, the information collection burdens associated
with these rules, including the information collection burdens associated with Rule 18a-10 that
were previously submitted, reviewed and approved, have not yet begun.
September 2019 Amendments to Rule 18a-10
On September 19, 2019, the Commission adopted amendments to Rule 18a-10. 8
Specifically, the Commission amended the Rule 18a-10 to reference recordkeeping and
reporting requirements of the CEA and the CFTC’s rules, as well as Commission Rules 18a-5,
18a-6, 18a-7, 18a-8, and 18a-9 in order to add these requirements to the full alternative
compliance mechanism described above. Consequently, these amendments will permit firms
that operate under Rule 18a-10 to elect to comply with the recordkeeping and reporting
requirements of the CEA and the CFTC’s rules in lieu of complying with Rules 18a-5, 18a-6,
18a-7, 18a-8, and 18a-9, and will also require SBSDs to comply with the requirement to
provide a written disclosure to its counterparties after it begins operating pursuant to the rule
indicating that the SBSD is complying with the applicable recordkeeping and reporting
requirements of the CEA and the CFTC’s rules in lieu of complying with Rules 18a-5, 18a-6,
18a-7, 18a-8, and 18a-9.
The Commission also added new paragraph (b)(4) to Rule 18a-10 which requires
5

See 17 CFR 240.18a-3. See also Supporting Statement for Paperwork Reduction Act Information
Collection Submission for Rule 18a-3 – Non-cleared security-based swap margin requirements for
security-based swap dealers and major security-based swap participants for which there is not a prudential
regulator, available at https://www.reginfo.gov/public/do/PRAViewDocument?ref_nbr=201907-3235-017.

See OMB Control Number History (reginfo.gov).

See https://www.sec.gov/page/key-dates-registration-security-based-swap-dealers-and-major-securitybased-swap-participants

See Recordkeeping and Reporting Requirements for Security-Based Swap Dealers, Major Security-Based
Swap Participants, and Broker-Dealers; Final Rule, Exchange Act Release No. 87005 (Sep. 19, 2019), 84
FR 68550 (Dec. 16, 2019).

SBSDs operating under Rule 18a-10 to simultaneously notify the Commission whenever the
SBSD is required to notify the CFTC concerning the SBSD’s capital, books and records,
liquidity, margin operations, or segregation operations.
The Commission also amended Rule 18a-10 to add certain clarifying language to
provide that a firm must treat a security-based swap or collateral related to a security-based
swap as a swap or collateral related to a security-based swap, as applicable, if the CEA or the
CFTC’s rules do not specifically address a security-based swap or collateral related to a
security-based swap.
Similar to Rules 18a-1, 18a-3, and 18a-4, as discussed above, the compliance date for
Rules 18a-5 through 18a-9 is October 6, 2021. 9 As a result, the compliance date for Rule 18a10, including the amendments described above, is October 6, 2021.
Revision to Information Collection and Request for New OMB Number
The Commission is revising the estimated burdens for the information collection in
Rule 18a-10 as a result of the amendments, described above, that were adopted in connection
with the adopting or recordkeeping and reporting requirements for security-based swap dealers
and major security-based swap participants. 10 The Commission is also requesting a separate
OMB number for Rule 18a-10 in order to separate the burdens associated with Rule 18a-10
from Rule 18a-3 and to include the revised burden estimates associated with the amendments
to Rule 18a-10 described above.
2.

Purpose and Use of the Information Collection

Information collection under Rule 18a-10, as adopted is integral to the Commission’s
financial responsibility program for certain stand-alone SBSDs. The disclosure requirement
under Rule 18a-10, as adopted, is designed to alert the counterparty that the firm is not
complying with these Commission rules notwithstanding the fact that the firm is registered with
the Commission as an SBSD. This will provide the counterparty with the opportunity to assess
the implications of transacting with the SBSD under these circumstances.
Rule 18a-10 requires notification to the Commission if the SBSD chooses the alternative
compliance mechanism described in the rule. The Commission believes stand-alone SBSDs
that meet the conditions of Rule 18a-10 should be permitted to adhere to capital, margin, and
segregation requirements of the CEA and the CFTC’s rules (which, potentially, could include a
bank-like capital standard) because, among other reasons, they will be predominantly engaging
in a swaps business and, therefore, the CFTC will have a heightened regulatory interest in these
firms as compared to the Commission’s regulatory interest.
9

See https://www.sec.gov/page/key-dates-registration-security-based-swap-dealers-and-major-securitybased-swap-participants

Consideration Given to Information Technology

The information collections will not require that respondents use any specific
information technology system either to prepare or submit information collections under Rule
18a-10.
4.

Duplication

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

Effect on Small Entities

The information collections required under Rule 18a-10 would not place burdens on small
entities. The stand-alone SBSDs subject to the information collections under the rule are not
expected to be small entities.
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 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).
8.

Consultations Outside the Agency

The Commission did not propose a collection of information with respect to Rule 18a-10
because the Commission did not propose Rule 18a-10, as adopted. The Commission also did not
propose amendments to Rule 18a-10. Instead, the Commission adopted Rule 18a-10, and
adopted the amendments discussed in this supporting statement, in response to comments made
relating to other proposed rules urging the Commission to harmonize its requirements with those
of the Commodity Futures Trading Commission regarding swap dealers. 11
9.

Payment or Gift

No payment or gift is provided to respondents.
10.

Confidentiality

The information collected by the Commission under Rule 18a-10 is kept confidential to
11

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
(Jun. 21, 2019), 84 FR 43872 (Aug. 22, 2019); See also, Recordkeeping and Reporting Requirements for
Security-Based Swap Dealers, Major Security-Based Swap Participants, and Broker-Dealers; Final Rule,
Exchange Act Release No. 87005 (Sep. 19, 2019), 84 FR 68550 (Dec. 16, 2019).

the extent permitted by the Freedom of Information Act (5 U.S.C. § 552 et seq.).
11.

Sensitive Questions

No information of a sensitive nature will be required under this collection of information. The
agency has determined that neither a PIA nor a SORN are required in connection with the collection of
information.

12.

Burden of Information Collection

Rule 18a-10 contains an alternative compliance mechanism pursuant to which a standalone SBSD that is registered as a swap dealer and predominantly engages in a swaps business
may elect to comply with the capital, margin, segregation, and recordkeeping and reporting
requirements of the CEA and the CFTC’s rules in lieu of complying with Commission Rules 18a1 and 18a-3 through 18a-9. The Commission estimates the following hour burdens for the
information collection in Rule 18a-10.
Develop Disclosure Language (Rule 18a-10(b)(2))
The Commission estimates paperwork burden associated with developing new disclosure
language under paragraph (b)(2) of Rule 18a-10 will require each of the 3 stand-alone SBSDs to
spend 5 hours of in-house counsel time. This would create a total one-time industry burden of
15 hours, or 5 hours on an annualized basis. 12 This estimate assumes little or no reliance on
standardized disclosure language. This estimate was previously reviewed and approved and has
not changed from its initial estimate.
Incorporate Disclosure Language (Rule 18a-10(b)(2))
Based on previous experience, the Commission staff estimates that the average SBSD will
have approximately 1,000 counterparties at any given time and that the cost of incorporating new
disclosure language into the trading documentation of an average SBSD would require 10 hours
of in-house counsel time, for a total of 10,000 hours per stand-alone SBSD and approximately
30,000 hours for all 3 stand-alone SBSDs, or 10,000 hours 13 on an annualized basis. 14 This
estimate was previously reviewed and approved and has not changed from its initial estimate.
Update Disclosures (Rule 18a-10(b)(2))
The Commission expects that the majority of the paperwork burden associated with the
12

3 stand-alone SBSDs x 5 in-house counsel hours = 15 hours. Annualized, the hour burden would be 5
hours industry-wide (15 hours/3 years = 5 hours) and 1.67 per stand-alone SBSD (5 hours/3 stand-alone
SBSDS = 1.67).

This number (10,000) is different from the number that is represented in the summary of hourly burden
chart (9,990) because of a different order of operations and rounding in arriving at the final hour burden.

3 stand-alone SBSDs x 10 hours x 1,000 counterparties = 30,000. Annualized, this hour burden would be
10,000 hours industry wide (30,000 hours/3 years = 10,000 hours) and 3,333.33 hours per stand-alone
SBSD (10,000 hours/3 stand-alone SBSD = 3,333 hours).

new disclosure requirements under paragraph (b)(2) of Rule 18a-10, as adopted, will be
experienced during the first year as language is developed. After the new disclosure language is
developed and incorporated into trading documentation, the Commission believes that the
ongoing burden associated with paragraph (b)(2) of Rule 18a-10 will be limited to periodically
updating the disclosures. The Commission estimates that this ongoing paperwork burden will
not exceed 5 hours per stand-alone SBSD, for a total of 15 hours annually for all 3 standalone SBSDs. 15 This estimate was previously reviewed and approved and has not changed from
its initial estimate.
Notices (Rule 18a-10(b)(3))
Based on the number of notices currently filed by broker-dealers, the Commission staff
estimates that the notice requirement of paragraph (b)(3) of Rule 18a-10 will result in annual hour
burdens to stand-alone SBSDs. The Commission staff estimates that 1 stand-alone SBSD will file
notice annually with the Commission. In addition, based on the estimates for similar collections
of information, the Commission staff estimates that it will take a stand-alone SBSD
approximately a half hour to file this notice, resulting in an industry-wide annual hour
burden of a half hour. 16 This estimate was previously reviewed and approved and has not
changed from its initial estimate.
Simultaneous Notification (Rule 18a-10(b)(4))
Based on the number of notices currently filed by broker-dealers, the Commission staff
estimates that the notice requirement of paragraph (b)(3) of Rule 18a-10 will result in annual hour
burdens to stand-alone SBSDs. The Commission staff estimates that annually 1 stand-alone
SBSD will transmit a copy of a notice to the Commission that was submitted to the CFTC. The
Commission staff estimates that it will take a stand-alone SBSD approximately a 5 minutes
for a stand-alone SBSD to provide the Commission with a copy of the notice, resulting in an
industry-wide annual hour burden of a 0.083 hours. 17 This estimate represents a new burden
associated with amendments adopted to Rule 18a-10 in connection with the adoption of
recordkeeping and reporting requirements for security-based swap dealers and major securitybased swap participants. 18
Alternative Compliance Mechanism (Rule 18a-10(d)(1) and (d)(2))
Finally, under paragraphs (d)(1) and (d)(2) of Rule 18a-10, respectively, a stand-alone
SBSD can make an election to operate under the alternative compliance mechanism, during the
registration process or after the firm registers as an SBSD, by providing written notice to the
15

3 stand-alone SBSDs x 5 hours = 15 hours.

1 stand-alone SBSD x 1 notice x 30 minutes = 30 minutes.

1 notice per year x (5 minutes per notice ÷ 60 minutes per hour) = 0.0833 hours.

Commission and the CFTC of its intent to operate pursuant to the rule. The Commission believes
that in the first 3 years of the effective date of the rule that the 3 nonbank SBSDs that elect to
operate under Rule 18a-10 will file the notice as part of their application process. Therefore, the
Commission believes that the time it would take an entity to file a notice as part of the application
process would be de minimis and, therefore, would not result in an hour burden for this collection
of information or any collection of information associated with registering with the Commission
as an SBSD. Further, since the Commission believes that the 3 nonbank SBSDs will elect to
operate under the rule as part of their registration process, the Commission believes that there will
be no respondents, and no paperwork hour or cost burden under the PRA associated with
paragraph (d)(2) of Rule 18a-10, as adopted.
Summary of Hourly Burdens

Name of
Information
Collection

Rule 18a-10(b)(2)
(Develop Disclosure
Language)
Rule 18a-10(b)(2)
(Incorporate
Disclosure
Language)
Rule 18a-10(b)(2)
(Update
Disclosures)
Rule 18a-10(b)(3)
(Notices)
Rule 18a-10(b)(4)
(Simultaneous
Notification)

13.

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

Total
Annual
Burden
Per Entity

1.67

5.01

3.333

3,333

10,000

0
0
0

Type of
Burden

Number
of
Entities
Impacted

Annual
Responses
per Entity

Third-Party

Third Party

1,000

Third Party

Total
Industry
Burden

Reporting

.5 (rounds to
1)

Reporting

0.083

0.083 (rounds
to 0)

TOTAL HOURLY BURDEN FOR ALL RESPONDENTS

10,021.093

Small
Business
Entities
Affected

Costs to Respondents

The Commission does not expect any cost burdens associated with Rule 18a-10, as
adopted.
14.

Cost to Federal Government

The staff does not anticipate this information collection to impose additional costs to
the Federal Government.
15.

Changes in Burden

All but one of the burdens in this collection of information were previously included in
OMB No. 3235-0702 and, other than being moved to a new OMB number, are unchanged.
However, and as described above, the Commission amended Rule 18a-10 to adopt a new
requirement that stand alone SBSDs provide notice to the Commission at the same time that it is
required to provide notification to the CFTC regarding the SBSD’s capital, books and records,
liquidity, margin operations, or segregation operations. The estimated burden associated with
this simultaneous notification requirement is 0.083 hours. The changes in the estimated burdens
7

associated with Rule 18a-10 are summarized in the table below.
Name of Information
Collection

Annual
Industry
Burden

Annual Industry
Burden
Previously
Reviewed

Change in
Burden

Reason for Change

Rule 18a-10(b)(4)
(Simultaneous
Notification)

0.083

Amendment to the rule.

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.

File Type	application/pdf
Author	OFR
File Modified	2021-05-04
File Created	2021-05-04