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pdfSUPPORTING 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
(OMB Control No. 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 (17 CFR 240.18a-2) to establish capital
requirements for nonbank major security-based swap participants that are also not registered as
broker-dealers (“nonbank 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, nonbank MSBSPs also need to comply with Exchange Act Rule 15c34 (17 CFR 240.15c3-4), 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 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 nonbank 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 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.
1
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).
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
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
The information collection does not collect personally identifiable information. The
agency has determined that neither a PIA nor a SORN are required in connection with the
collection of information
2
12.
Burden of Information Collection
The staff previously estimated that 5 or fewer nonbank entities would register with the
Commission as MSBSPs. The staff continues to estimate that 5 or fewer nonbank entities will
register with the Commission as MSBSPs, although currently no such entities have registered.
These nonbank 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 each nonbank MSBSP will spend approximately 2,000 hours to implement its
risk management control system, resulting in a one-time industry-wide hour burden of
approximately 10,000 recordkeeping hours, or approximately 3,333 hours per year when
annualized over 3 years. 4
Based on similar estimates for OTC derivatives dealers, the staff further estimates that
each of these firms will spend approximately 250 hours per year reviewing and updating its risk
management control systems, resulting in an ongoing annual industry-wide hour burden of
approximately 1,250 recordkeeping hours per year. 5
Taken together, the total industry-wide recordkeeping hour burden is
approximately 4,583 hours per year. 6
Summary of Hour Burdens
Name of
Information
Collection
Rule 18a-2 (Hour
Burden)
Type of
Burden
Number
of
Entities
Impacted
Annual
Responses
per Entity
Recordkeeping
5
1
Initial
OneTime
Hour
Burden
Per
Entity
Total
Initial
One-Time
Hour
Burden
Total
Initial
One-Time
Hour
Burden
Annualized
Over
Three
Years
10,000
3,333
2,000
Ongoing
Annual
Hour
Burden
Per
Entity
Total
Ongoing
Annual
Hour
Burden
250
1,250
Total
Annual
Industry
Hour
Burden
TOTAL ANNUAL HOUR BURDEN FOR ALL RESPONDENTS
13.
Small
Business
Entities
Affected
4,583
0
4,583
Costs to Respondents
(a) Management Consultant Costs: Because nonbank MSBSPs may not initially have the
systems or expertise internally to meet the risk management requirements of Rule 18a-2, these
firms will likely hire an outside risk management consultant to assist them in implementing their
risk management systems. The staff estimates that each firm will hire an outside management
consultant for approximately 200 hours at a cost of approximately $400 per hour, for a one-time
4
5 MSBSPs x 2,000 hours = 10,000 hours. This one-time burden annualized over a 3-year period is
approximately 3,333 hours industry-wide (10,000 hours/3 = 3,333.33 rounded down to 3,333).
5
5 MSBSPs x 250 hours/year = 1,250 hours/year.
6
2,000 hours/3 years = 3,333.33 + 1,250 hours = 4,583.33 hours rounded down to 4,583
3
external management consulting cost of approximately $80,000 per respondent, and a total onetime industry management consulting cost of approximately $400,000, or approximately
$133,333 per year 7 when annualized over 3 years.
(b) Information Technology Costs: 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 Rule 18a-2, so the cost of modifying their information technology systems could
vary significantly among firms. Based on estimates for similar collections of information, 8 the
Commission staff expects that each nonbank MSBSP will spend an average of approximately
$16,000 for one-time initial hardware and software external expenses, for a total one-time
industry-wide external information technology cost of approximately $80,000, or approximately
$26,667 per year 9 when annualized over 3 years. Based on the estimates for these similar
collections of information, the average ongoing external cost to meet the information technology
requirements of Rule 18a-2 will be approximately $20,500 per nonbank MSBSP. This will also
result in an ongoing annual industry-wide external information technology cost of approximately
$102,500. 10 Taken together, the total industry-wide information technology related cost burden
is approximately $129,167 per year. 11
Therefore, the total industry-wide recordkeeping cost burden is approximately $262,500
per year ($133,333 + $129,167 = $262,500).
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
Recordkeeping
5
Recordkeeping
5
Total Initial
One-Time
Cost
Annualized
Over Three
Years
Total Annual
Industry Cost
Small
Business
Entities
Affected
0
$133,333
$133,333
0
$102,500
$26,667
$129,167
0
TOTAL ANNUAL COSTS FOR ALL RESPONDENTS
$262,500
Initial
One-Time
Cost per
Entity
Total Initial
One-Time
Cost
Ongoing
Annual
Cost per
Entity
Total
Ongoing
Annual
Cost
1
$80,000
$400,000
0
1
$16,000.00
$80,000
$20,500
Costs to Federal Government
This information collection does not impose costs on the Federal Government.
7
5 MSBSPs x 200 hours x $400/hour = $400,000. Annualized over three years, this industry-wide burden is
approximately $133,333 per year ($400,000 / 3 years = $133,333.33 rounded down to $133,333).
8
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).
9
5 MSBSPs x $16,000 / 3 years = $26,666.666, rounded up to $26,667.
10
5 MSBSP x $20,500 = $102,500.
11
$80,000 / 3 years + $102,500 = $129,166.667 rounded up to $129,167.
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15.
Changes in Burden
There are no changes to the staff’s burden estimates.
16.
Information Collected 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.
COLLECTIONS OF INFORMATION EMPLOYING STATISTICAL METHODS
This collection does not involve statistical methods.
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| File Type | application/pdf |
| Author | Sheng, Teen |
| File Modified | 2022-06-21 |
| File Created | 2022-06-21 |