18a-4 Supporting statement 2022

SUPPORTING STATEMENT for the Paperwork Reduction Act Information Collection
Submission for Rule 18a-4 – Segregation requirements for security-based swap dealers and
major security-based swap participants.
3235-0700
This submission is being made pursuant to the Paperwork Reduction Act of 1995, 44
U.S.C. Section 3501 et seq.
A.

JUSTIFICATION
1.

Information Collection Necessity

On June 21, 2019, in accordance with Section 763 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-4 to set forth segregation requirements for
security-based swap dealers (“SBSDs”) and major security-based swap participants (“MSBSPs”)
that are not registered as broker-dealers.3 The rule establishes a number of new collections of
information requirements.
Rule 18a-4 establishes segregation requirements for cleared and non-cleared securitybased swap transactions, which applies to non-broker-dealer SBSDs (i.e., bank SBSDs and
nonbank stand-alone SBSDs), as well as notification requirements for non-broker-dealer SBSDs
and MSBSPs.4 The rule requires non-broker-dealer SBSDs to open and maintain special
accounts with banks and obtain written acknowledgements from, and enter into written contracts
with, the banks. Non-broker-dealer SBSDs are also required to at all times maintain in a special
account, through deposits into the account, cash and/or qualified securities in amounts computed
in accordance with the formula set forth in Exhibit A to Rule 18a-4. The rule also requires that
the computations necessary to determine the amount required to be maintained in the special
bank account must be made on a weekly basis.
In addition, the rule requires that both non-broker-dealer SBSDs and MSBSPs provide
notice to a counterparty pursuant to Section 3E(f) of the Exchange Act prior to the execution of
the first non-cleared security-based swap transaction with the counterparty occurring after the
effective date of the adopted rule. The rule also requires non-broker-dealer SBSDs to obtain
agreements from counterparties that do not choose to require segregation of funds or other
property pursuant to Section 3E(f) of the Exchange Act or paragraph (c)(3) of Rule 18a-4 in
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.

4

The Commission has also adopted amendments to Rule 15c3-3 under the Exchange Act (17 CFR 240.15c33) to establish segregation requirements for broker-dealers, including broker-dealer SBSDs that are parallel
to the requirements in Rule 18a-4 applicable to SBSDs that are not broker-dealers.

1

which the counterparty agrees to subordinate all of its claims against the SBSD to the claims of
security-based swap customers of the SBSD. Finally, Rule 18a-4 also requires all registered
foreign SBSDs that enter into security-based swaps to provide counterparties that are not U.S.
persons certain disclosures regarding the potential treatment of their collateral and the role of
U.S. and foreign law in any insolvency proceedings.5
2.

Information Collection Purpose and Use

Rule 18a-4 is integral to the Commission’s financial responsibility program for SBSDs as
it is designed to protect the rights of security-based swap customers and their ability to promptly
obtain their property from an SBSD. The collection of information requirements in the rule
facilitates the process by which the Commission and its staff monitor how SBSDs are fulfilling
their custodial responsibilities to security-based swap customers. Rule 18a-4 also requires that
an SBSD provide certain notices to its counterparties.6 These notices alert counterparties to the
alternatives available to them with respect to segregation of non-cleared security-based swaps.
The Commission and its staff will use this new collection of information to confirm that
registrants are providing the requisite notice to counterparties.
3.

Consideration Given to Information Technology

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

Duplication

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

Effect on Small Entities

The information collections required under Rule 18a-4 do not place burdens on small
entities. The information collections are relevant only to market participants whose securitybased swap market activity exceeds certain thresholds of notional amounts so as to trigger
registration requirements with the Commission, 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 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).

5

See paragraph (e) of Rule 18a-4.

6

See paragraphs (a) and (c) of Rule 18a-4.

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 collected by the Commission under Rule 18a-4, 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
information collection.
12.

Burden of Information Collection

Special Accounts (Rule 18a-4(a))
Rule 18a-4 requires non-broker-dealer SBSDs to establish certain special accounts with
banks and obtain written acknowledgements from, and enter written agreements with, those
banks. These special accounts include: (1) qualified clearing agency accounts; (2) qualified
SBSD accounts; and (3) special accounts for the exclusive benefit of security-based swap
customers (collectively, the “special accounts”). There are currently two non-broker-dealer
SBSDs. The Commission previously estimated that there would be three non-broker-dealer
SBSDs. The Commission does not expect that there will be any new non-broker-dealer SBSDs
in the next three years, but the Commission estimates that any new firm would have to open an
average of 6 special accounts (2 for each type of special account). Based on the Commission
staff’s experience with similar requirements under Rule 15c3-3, the staff estimates that each nonbroker-dealer SBSD will spend approximately 30 hours drafting and obtaining the written
acknowledgement and agreement for each account. As there are no new respondents, at this time
there is no industry-wide one-time burden associated with this requirement. (IC1)
The staff also estimates that 25% of non-broker-dealer SBSDs (or 1 SBSD) will, in any
given year, establish a new account for each type of special account totaling 3 special accounts a
year (and it takes 30 hours to draft and obtain the written acknowledgment and agreement for
each account) because, for example, they changed their banking relationships. This will result
in an ongoing industry-wide burden of 90 recordkeeping hours per year.7 (IC2)

7

1 non-broker-dealer SBSD x 3 special accounts x 30 hours = 90 hours.

3

Customer Reserve Computation (Rule 18a-4(c))
Rule 18a-4 requires SBSDs to perform weekly computations of the customer reserve
amount, and ensure that the relevant special accounts hold sufficient cash and/or qualified
securities to meet that amount. Based on the staff’s experience with similar computations
performed by broker-dealers under Rule 15c3-3, the staff estimates that each of the two nonbroker-dealer SBSDs will spend on average 2.5 hours per week for each computation. This will
result in an ongoing industry-wide burden of 260 recordkeeping hours per year.8 (IC3)
Counterparty Notice (Rule 18a-4(d)(1))
Both non-broker-dealer SBSDs and MSBSPs are required under Rule 18a-4 to give
counterparties notice that they may elect segregation of their collateral, as required by the DoddFrank Act. This notice is given once, prior to the counterparty’s first trade with the non-brokerdealer SBSD or MSBSP. All non-broker-dealer SBSDs and MSBSPs are subject to this
requirement, and there are 40 such firms. The staff previously estimated that there would be 38
such firms. The staff estimates that the two new firms will have an average of 1,000
counterparties to which they would have to send notices, spending an average of ten minutes per
counterparty. This will result in a one-time burden for the two new firms of 120 third party
disclosure hours per year (when annualized over 3 years).9 (IC4)
The staff estimates that, on average, non-broker-dealer SBSDs and MSBSPs will initiate
security-based swap trading with 200 new counterparties per year. This will result in an
ongoing industry-wide burden of 1,360 third-party disclosure hours per year.10 (IC5)
Subordination Agreements (Rule 18a-4(d)(2))
Rule 18a-4 requires that non-broker-dealer SBSDs obtain subordination agreements from
counterparties that elect to either require individual segregation with a third-party or waive
segregation. There are currently two non-broker-dealer SBSDs. The Commission previously
estimated that there would be three non-broker-dealer SBSDs. The Commission does not expect
that there will be any new non-broker-dealer SBSDs in the next three years, but the Commission
estimates that any new firm would spend on average 200 hours internally to draft and prepare
standard subordination agreements. As there are no new respondents, at this time there is no
industry-wide one-time burden associated with this requirement. (IC6)
As discussed above, the staff estimates that non-broker-dealer SBSDs will on average
have approximately 1,000 counterparties at any given time. The staff further estimates that half
of these counterparties will either elect individual segregation or waive segregation altogether.
The staff estimates that the two non-broker-dealer SBSDs will each spend an average of 20 hours
per counterparty to enter into a written subordination agreement for each of the 500
counterparties. As stated above, as there are no new respondents, at this time there is no
8

52 weeks x 2.5 hours/week = 130 hours. 2 non-broker-dealer SBSDs x 130 hours = 260 hours.

9

Each response is 1/6 hour = .1667 hours, rounded to .17 hours. This amount annualized over 3 years is .056
hours, rounded to .06 hours. 2 firms x 1,000 counterparties x .06 hours = 120 hours.

4

industry-wide one-time burden associated with this requirement. (IC7)
The staff also estimates that half of the estimated 200 new counterparties non-brokerdealer SBSDs are expected to add per year will either elect individual segregation or waive
segregation altogether. This will result in an ongoing industry-wide burden of 4,000 thirdparty disclosure hours per year.11 (IC8)
Disclosures to U.S. Counterparties (Rule 18a-4(e)(3))
Rule 18a-4 requires registered foreign SBSDs to provide disclosures to their U.S.
counterparties regarding the potential treatment of segregated assets in insolvency proceedings.
There are 29 registered foreign SBSDs. The staff previously estimated that there would be 22
registered foreign SBSDs. The staff estimates that there will be up to 30 potential jurisdictions
in which trade associations or industry working groups may be able to develop standard
disclosure forms that can be adopted by foreign SBSDs with little or no modification. The
Commission estimates that each notice will require 5 hours of in-house counsel time for each
agreement jurisdiction. This will result in a one-time burden for the seven new registered
foreign SBSDs of 351 third-party disclosure hours per year (when annualized over 3
years).12 (IC9)
As stated above, there are seven new registered foreign SBSDs and the Commission
estimates that each new foreign SBSD will have 50 active non-U.S. counterparties. The
Commission further estimates that the total paperwork burden associated with incorporating new
disclosure language into each foreign SBSD’s trading documentation will require 10 hours ofinhouse counsel time for each of the firm’s 50 active non-U.S. counterparties. This will result in
a one-time burden for the seven new firms of 1,166 third-party disclosure hours per year
(when annualized over 3 years).13 (IC10)
The Commission also estimates that each of the 29 foreign SBSDs will spend 5 hours a
year updating these disclosures. This will result in an ongoing industry-wide burden of 145
third-party disclosure hours per year.14 (IC11)
Exemptions (Rule 18a-4(f))
There are currently 31 bank SBSDs and stand-alone nonbank SBSDs. The Commission
previously estimated that there would be 31 such firms. The Commission does not expect that
there will be any new such firms in the next three years, but the Commission estimates that for
any new firm the paperwork burden associated with developing new disclosure language under
paragraph (f)(3) of Rule 18a-4 will be 5 hours of in-house counsel time. This estimate assumes
11

2 non-broker-dealer SBSDs x 20 hours x 100 counterparties = 4,000 hours. The annual burden per
respondent is 2,000 hours per year.

12

5 hours annualized over 3 years is 1.67 hours. 30 jurisdictions x 7 foreign SBSDs x 1.67 hours = 350.7
hours, rounded to 351 hours.

13

10 hours annualized over 3 years is 3.33 hours. 3.33 hours x 50 counterparties x 7 foreign SBSDs = 1,165.5
hours, rounded to 1,166 hours.

14

5 hours x 29 foreign SBSDs = 145 hours, or 5 hours per foreign SBSD.

5

little or no reliance on standardized disclosure language. As there are no new respondents, at this
time there is no industry-wide one-time burden associated with this requirement. (IC12)
In addition, the Commission estimates that the average SBSD will have approximately
1,000 counterparties at any given time. As stated above, the Commission estimates that the
burden associated with incorporating new disclosure language into the trading documentation of
an SBSD will require 10 hours of-in house counsel time. As stated above, as there are no new
respondents, at this time there is no industry-wide one-time burden associated with this
requirement. (IC13)
Furthermore, the Commission expects that the majority of the paperwork burden
associated with the new disclosure requirements under paragraph (f)(3) of Rule 18a-4 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 (f)(3) will be limited to periodically updating the
disclosures. This will result in an ongoing industry-wide burden of 155 third-party
disclosure hours per year.15 (IC14)

Summary of Hourly Burdens16

Annual
Responses
per Entity

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

0

6

30.00

10.00

0

10

60.00

0

Recordkeeping

1

3

0

0

30.00

30.00

90.00

90

3

Rule 18a-4(c)
(Customer
Reserve
Computation)—
Ongoing Burden

Recordkeeping

2

52

0

0

2.50

2.50

130.00

260

4

Rule 18a-4(d)(1)
(Counterparty
Notice)—Initial
Burden

Third-Party

2

1,000

.17

.06

0

.06

60

120

Type of
Burden

Number
of
Entities
Impacted

1

Rule 18a-4(a)
(Special
Accounts)—
Initial Burden

Recordkeeping

2

Rule 18a-4(a)
(Special
Accounts)—
Ongoing Burden

IC

Name of
Information
Collection

15

31 SBSDs x 5 hours per SBSD = 155 hours, or 5 hours per SBSD.

16

The hour burdens in this chart have been separated out by both type of burden (e.g., recordkeeping,
reporting, or third-party/disclosure), and whether the burden is an initial burden or an ongoing one. These
burdens have been collapsed in ROCIS.

6

Total
Industry
Burden

5

Rule 18a-4(d)(1)
(Counterparty
Notice)—
Ongoing Burden

Third-Party

40

200

0

0

.17

.17

34

6

Rule 18a-4(d)(2)
(Subordinations
Agreements,
Drafting)—Initial
Burden

Recordkeeping

0

1

200

66.67

0

66.67

66.67

0

7

Rule 18a-4(d)(2)
(Subordination
Agreements,
Entering Into)—
Initial Burden

Third-Party

0

500

20

6.67

0

6.67

3,335.00

0

8

Rule 18a-4(d)(2)
(Subordination
Agreements)—
Ongoing Burden

Third-Party

2

100

0

0

20.00

20.00

2,000.00

4,000

9

Rule 18a-4(e)(3)
(Disclosures to
U.S.
Counterparties,
Developing
Forms)—Initial
Burden

Third-Party

7

30

5

1.67

0

1.67

50.10

351

10

Rule 18a-4(e)(3)
(Disclosures to
U.S.
Counterparties,
Incorporating
New
Language)—
Initial Burden

Third-Party

7

50

10

3.33

0

3.33

166.50

1,166

11

Rule 18a-4(e)(3)
(Disclosures to
U.S.
Counterparties)—
Ongoing Burden

Third-Party

29

1

0

0

5

5

5

Rule 18a-4(f)
(Exemptions,
Developing
Disclosure
Language)—
Initial Burden

Third-Party

0

1

5

1.67

0

1.67

1.67

0

Rule 18a-4(f)
(Exemptions,
Incorporating
Disclosure
Language)—
Initial Burden

Third-Party

0

1,000

10

3.33

0

3.33

3,333.33

0

12

13

7

1,360

145

14

Rule 18a-4(f)
(Exemptions)—
Ongoing Burden

Third-Party

31

1

0

0

5

5

5

155

TOTAL HOURLY BURDEN FOR ALL RESPONDENTS

13.

7,647

Costs to Respondents

Counterparty Notice (Rule 18a-4(d)(1))
As stated above, out of the 40 SBSDs and MSBSPs, two are new firms. The staff
estimates that these new firms will engage outside counsel for 10 hours to draft and review the
template counterparty notice regarding segregation at a cost $400 per hour resulting in a onetime third party disclose cost for these two firms of $2,667 (when annualized over 3
years).17 (IC 15)
Subordination Agreements (Rule 18a-4(d)(2))
As stated above, there are currently two non-broker-dealer SBSDs. The Commission
previously estimated that there would be three non-broker-dealer SBSDs. The Commission does
not expect that there will be any new non-broker-dealer SBSDs in the next three years, but the
Commission estimates that any new firm would hire an outside counsel at a cost of $400 per
hour to review the template subordination agreement, requiring on average a total of 20 hours.
As there are no new respondents, at this time there is no industry-wide one-time burden
associated with this requirement. (IC16)
Summary of Dollar Costs

Initial Cost
per Entity
per
Response

Initial Cost
Annualized
per Entity per
Response

1

$4,000.00

$1,333.33

1

$8,000.00

$2,666.67

Type of
Burden

Number
of Entities
Impacted

Annual
Responses
per Entity

15

Rule 18a-4(d)(1)
(Counterparty Notice,
Outside Counsel
Review)—Initial Cost

Third-Party

2

16

Rule 18a-4(d)(2)
(Subordination
Agreements, Outside
Counsel Review)—
Initial Cost

Recordkeeping

0

IC

Name of Information
Collection

17

Ongoing
Cost per
Entity per
Response

20 hours x $400/hour / 3 years = $2,666.67, rounded to $2,667.

8

Small
Business
Entities
Affected

Annual Cost
Per Entity
per Response

Total Annual
Cost Per
Entity

$0.00

$1,333.33

$1,333.33

$2,667

0

$0.00

$2,666.67

$2,666.67

0

0

TOTAL COST FOR ALL RESPONDENTS

$2,667

Total Industry
Cost

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

The changes in burden, summarized in the chart below, are due to changes in the
Commission’s estimate of the number of respondents. In particular:






A change in the number of non-broker-dealer SBSDs from 3 to 2;
A change in the number of registered foreign SBSDs from 22 to 29;
A change in the number of non-broker-dealer SBSDs and MSBSPs from 38 to 40;
A change in the number of bank SBSDs from 25 to 29; and
A change in the number of standalone nonbank SBSDs from 6 to 2.
Changes in Burden

IC

Name of
Information
Collection

Type of Burden

Number of
Respondents

Number of
Respondents
Previously
Reviewed

Annual
Industry
Burden

Annual
Industry
Burden
Previously
Reviewed

Change in
Burden

1

Rule 18a-4(a)
(Special
Accounts)—
Initial Burden

Recordkeeping

0

3

0

180

(180)

2

Rule 18a-4(a)
(Special
Accounts)—
Ongoing Burden

Recordkeeping

1

1

90

90

0

3

4

5

Rule 18a-4(c)
(Customer
Reserve
Computation)—
Ongoing Burden

Recordkeeping

2

3

260

390

(Counterparty
Notice)—Initial
Burden

Third-Party

2

38

120

2,280

Rule 18a-4(d)(1)
(Counterparty
Notice)—
Ongoing Burden

Third-Party

40

38

1,360

1292

9

(130)

(2,160)

68

Reason for
Change

New
Estimate of
Number of
Respondents

n/a

New
Estimate of
Number of
Respondents

New
Estimate of
Number of
Respondents
New
Estimate of
Number of
Respondents

6

7

Rule 18a-4(d)(2)
(Subordinations
Agreements,
Drafting)—Initial
Burden
Rule 18a-4(d)(2)
(Subordination
Agreements,
Entering Into)—
Initial Burden

8

Rule 18a-4(d)(2)
(Subordination
Agreements)—
Ongoing Burden

9

Rule 18a-4(e)(3)
(Disclosures to
U.S.
Counterparties,
Developing
Forms)—Initial
Burden

10

11

12

13

Rule 18a-4(e)(3)
(Disclosures to
U.S.
Counterparties,
Incorporating
New
Language)—
Initial Burden

Recordkeeping

Third-Party

0

3

0

3

0

0

200

10,000

(200)

(10,000)

(2,000)
Third-Party

2

3

4,000

6,000

(749)
Third-Party

7

22

351

1,100

New
Estimate of
Number of
Respondents

New
Estimate of
Number of
Respondents

New
Estimate of
Number of
Respondents
New
Estimate of
Number of
Respondents

New
Estimate of
Number of
Respondents
Third-Party

7

22

1,166

3,667

(2,501)

Rule 18a-4(e)(3)
(Disclosures to
U.S.
Counterparties)—
Ongoing Burden

Third-Party

29

22

145

110

Rule 18a-4(f)
(Exemptions,
Developing
Disclosure
Language)—
Initial Burden

Third-Party

0

31

0

52

(52)

Rule 18a-4(f)
(Exemptions,
Incorporating
Disclosure
Language)—
Initial Burden

Third-Party

0

31

0

103, 333

(103,
333)

10

35

New
Estimate of
Number of
Respondents

New
Estimate of
Number of
Respondents

New
Estimate of
Number of
Respondents

14

15

16

Rule 18a-4(f)
(Exemptions)—
Ongoing Burden
Rule 18a-4(d)(1)
(Counterparty
Notice, Outside
Counsel
Review)—Initial
Cost
Rule 18a-4(d)(2)
(Subordination
Agreements,
Outside Counsel
Review)—Initial
Cost

16.

Third-Party

Third-Party

Recordkeeping

31

31

2

38

0

3

155

$2,666

0

155

$50,667

$8,000

0

($48,000)

($8,000)

n/a

New
Estimate of
Number of
Respondents

New
Estimate of
Number of
Respondents

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.

11