Form 11-K 30days.2022

SUPPORTING STATEMENT
for the Paperwork Reduction Act Information Collection Submission for
Rule 17a-12/Form X-17A-5 Part II
OMB Control No. 3235-0498

A.

JUSTIFICATION
1.

Necessity of Information Collection

Section 17(a)(1) of the Securities Exchange Act of 1934 ("Exchange Act") requires
registered broker-dealers to make, keep, furnish, and disseminate records and reports prescribed
by the Commission as necessary or appropriate in the public interest, for the protection of
investors, or otherwise in furtherance of the purposes of the Exchange Act. Section 17(e) of the
Exchange Act requires every registered broker-dealer to file annually with the Commission a
balance sheet and income statement certified by an independent public accountant or by an
accounting firm registered with the Public Company Accounting Oversight Board, if the firm is
required to be registered under the Sarbanes-Oxley Act of 2002, and such other information
concerning its financial condition as the Commission, by rule, may prescribe as necessary or
appropriate in the public interest or for the protection of investors. Pursuant to this authority, in
October 1998 the Commission enacted Rule 17a-12 (“Reports to be made by certain OTC
derivatives dealers”)1 and amended Form X-17A-5 to add Part II2 to establish the basic periodic
reporting structure for OTC (over-the-counter) derivatives dealers. Rule 17a-12 requires OTC
derivatives dealers registered with the Commission to file quarterly Financial and Operational
Combined Uniform Single Reports (“FOCUS” reports) on Part II of Form X-17A-5 and annual
audit reports with the Commission. The provisions of Rule 17a-12 are similar to those contained
in Exchange Act Rule 17a-5 (“Reports to be made by certain brokers and dealers”)3 but take into
consideration the more limited and unique business conducted by OTC derivatives dealers.
The quarterly filings must include certain information specified in the Framework for
Voluntary Oversight of the Derivatives Policy Group (“DPG").4 This credit and market risk
information, which must be reported on Schedules I - V and VII of Part II of Form X-17A-5,
enables the Commission to ascertain the nature and scope of a firm’s OTC derivatives activity
and to monitor the firm’s risk exposure.
Rule 17a-12 also requires that OTC derivatives dealers file an annual audited report.
Among other things, the audited report must include a statement of financial condition, a
statement of income, a statement of cash flows, a statement of changes in owners’ equity, a
1

17 CFR 240,17a-12.

2

17 CFR 249.617.

3

17 CFR 240.17a-5.

4

See Framework for Voluntary Oversight, Derivatives Policy Group (Mar. 1995).

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statement of changes in subordinated liabilities, and supporting schedules, including a
computation of net capital. The report must be audited by an independent public accountant.
Concurrently with the annual audited report, OTC derivatives dealers must file supplemental
reports by the auditor, including an accountant’s report on material inadequacies and reportable
conditions, an accountant’s report on management controls, and an accountant’s report on
inventory pricing and modeling.
2.

Purpose and Use of the Information Collection

The information collected under Rule 17a-12 is essential to the regulation and oversight
of OTC derivatives dealers and the primary means the Commission uses to monitor and enforce
compliance with the Commission’s financial responsibility rules as prescribed by the Exchange
Act. These quarterly FOCUS and annual audited reports are used to evaluate the securitiesrelated and other activities each OTC derivatives dealer is engaged in, the extent to which it is
engaged in those activities, and how economic events and government policies might affect
various segments of the securities industry. In addition, the Commission staff reviews FOCUS
report information as part of its preparation for examinations and inspections. A firm’s failure to
comply with this rule would severely impair the Commission’s ability to protect customers,
industry counter-parties, and others.
3.

Consideration Given to Information Technology

Most OTC derivatives dealers and other firms engaged in swaps and related activities use
automated systems to prepare information provided on Part II of Form X-17A-5. As so few OTC
derivatives dealers have registered with the Commission, it is not economically feasible for the
Commission to develop a system which would allow for electronic filing of this form.
4.

Duplication

OTC derivatives dealers are not otherwise required to obtain and maintain the
information required by the rule.
5.

Effect on Small Entities

The rule does not affect small entities.
6.

Consequences of Not Conducting Collection

If the collection were not made, or were made less frequently, the protection afforded to
the public would be lessened.
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 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 to Respondents

Not applicable. No payment or gift was provided to respondents.
10.

Confidentiality

Information provided by OTC derivatives dealers in FOCUS reports, supporting
schedules, and annual audited reports is confidential pursuant to Rule 17a-12(a)(2) and (c)(3).
The statutory basis for this confidential treatment is the exemption contained in Section (b)(4) of
the Freedom of Information Act, 5 U.S.C. 552, which provides that the requirement for public
dissemination does not apply to commercial or financial information which is privileged or
confidential.
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 information.
12.

Burden of Information Collection

There are currently five OTC derivatives dealers registered with the Commission. The
staff anticipates that three of these OTC derivatives dealers will register with the Commission as
Security-Based Swap Dealers in the next three years. As a consequence of these entities
registering as Security-Based Swap Dealers, they will become subject to Rule 18a-7 under the
Exchange Act, rather than Rule 17a-12 and only two OTC derivatives dealers will be subject to
the requirements of Rule 17a-12. The staff estimates that the average amount of time necessary
to prepare and file the information required by the rule is 80 hours per OTC derivatives dealer
per year to prepare the OTCDD quarterly reports on Part II of Form X-17A-5 (based upon 4
quarterly responses per year and an average of 20 hours spent preparing each response) and 100
hours per OTC derivatives dealer per year to prepare the annual audited report and supporting
schedules. Thus the total annual time burden for each OTC derivatives dealer is approximately
180 hours per year and the aggregate annual time burden for the two OTC derivatives dealers
anticipated to not register as Security-Based Swap Dealers is approximately 360 hours per year (2
x 180 = 360). The estimates of the annual time burden are based upon discussions with industry
participants.

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Summary of Hourly Burdens
Name of
Information
Collection

Total
Number of
Respondents

Small
Business
Entities
Affected

Rule 17a12/Form X17A-5 Part II

2

Rule 17a-12
– Annual
audited
Report and
Supporting
Schedules

2

Burden
per
Entity
per
Response

Annual
Burden
Per
Entity
(Hours)

Annual Industry
Burden

4

20

80

160

1

100

100

200

Type of
Burden

Ongoing
or
Initial
Burden

Annual
Responses
per Entity

0

Reporting

Ongoing

0

Reporting

Ongoing

TOTAL ANNUAL INDUSTRY BURDEN

13.

360

Costs to Respondents

The Commission estimates that the average annual reporting cost per OTC derivatives
dealer for the independent public accountant to examine the financial statements is
approximately $46,300 per respondent. Based on this estimate, the total industry-wide annual cost
is approximately $92,600 ($46,300 x 2).
Collection of
Information

Type of
Burden

Total Number
of Respondents

Total Number
of Responses
Per Year

Type of
Burden

Ongoing Burden Per
Response Per Year
Per Respondent

Total Reporting
Burden For All
Respondents

Rule 17a-12 – Annual
audited Report and
Supporting Schedules

Reporting

2

2

Ongoing

$46,300

$92,600

TOTAL ANNUAL COST FOR ALL RESPONDENTS

14.

$92,600

Costs to Federal Government

Rule 17a-12, is not expected to result in costs to the federal government due to
contracting, information technology, development, hiring one or more new employees, or
reallocating existing employees.

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15.

Explanation of Changes in Burden

The annual hour burden has decreased from approximately 1,080 hours to approximately
360 hours and the annual cost burden has decreased from approximately $277,800 to
approximately $92,600 because the estimated number of respondents subject to the rule has
decreased from 6 to 2.
16.

Information Collection Planned for Statistical Purposes

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

Approval to Omit OMB Expiration Date

The Commission is not seeking approval to omit the 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.