2024 Rule 18a-10 Supporting Statement

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.
OMB Number (3235-0785)
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-10. 3 Rule 18a-10, as originally adopted,
provides an alternative compliance mechanism pursuant to which stand-alone security-based
swap dealers (“SBSDs”) 4 registered as a swap dealer that predominantly engages in a swaps
business, and that meet 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. 5 Rule 18a-10 requires the firm to provide a written
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

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 18a- 4, 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), and were approved on
November 19, 2019. See 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 also
OMB Control Number History (reginfo.gov).

4

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 a broker-dealer or an OTC derivatives dealer.

5

See Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-

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.
September 2019 Amendments to Rule 18a-10
On September 19, 2019, the Commission adopted amendments to Rule 18a-10. 6
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, 18a7, 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 18a9, 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
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.
Revision to Information Collection and Request for New OMB Number
The Commission revised the estimated burdens for the information collection in Rule
Based Swap Participants and Capital Requirements for Broker-Dealers, Exchange Act Release No. 86175
(Jun. 21, 2019), 84 FR 43872 (Aug. 22, 2019).
6

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).

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. 7 The Commission also requested 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.
3.

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,
7

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).

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 required Federal Register notice with a 60-day comment period soliciting comments
on this information collection 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-10 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 information about individuals, therefore, a
PIA, SORN, and PAS are not required.
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. There are currently two stand-alone SBSDs operating pursuant to the
alternative compliance mechanism. The Commission does not anticipate that additional standalone SBSDs will elect to operate pursuant to this Rule during the next three years and, as a
result, the Commission estimates the following hour burdens for the information collection
burdens associated with Rule 18a-10.
Rule 18a-10(b)(2)
Paragraph (b)(2) of Rule 18a-10 requires stand-alone SBSDs to provide a written
disclosure to its counterparties after it begins operating pursuant to the rule. The Commission
estimates that the majority of the paperwork burden associated with the disclosure requirements
under paragraph (b)(2) of Rule 18a-10, as adopted, was experienced during the first year as the
required disclosure language was developed and incorporated into transaction documentation.
Since the new disclosure language has been developed and incorporated into transaction

documentation, the Commission believes that the information collection burden associated with
Rule 18a-10(b)(2) will be an ongoing burden limited to periodically updating the disclosures.
The burdens associated with the development, incorporation, and updating of the disclosure
language are estimated below.
Develop Disclosure Language (Rule 18a-10(b)(2))
The Commission previously estimated that the paperwork burden associated with
developing new disclosure language under paragraph (b)(2) of Rule 18a-10 would require each
stand-alone SBSD to spend 5 hours of in-house counsel time to develop the required disclosure.
As stated above, there are currently two stand-alone SBSDs which the Commission estimates have
already developed the required disclosure language. Consequently, the Commission estimates that no
stand-alone SBSDs will be required to develop disclosure language, and as a result there is no hour burden
for this collection of information.
Incorporate Disclosure Language (Rule 18a-10(b)(2))
Based on previous experience, the Commission staff estimated that the average stand-alone
SBSD would have approximately 1,000 counterparties at any given time and that the time 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. As stated above, there are currently two stand-alone SBSDs which the Commission
estimates have already incorporated the required disclosure language into the relevant transaction
documentation. Consequently, the Commission estimates that no stand-alone SBSDs will be required to
incorporate disclosure language in connection with this requirement, and as a result there is no hour burden
for this collection of information.
Update Disclosures (Rule 18a-10(b)(2))
The Commission estimates that the paperwork burden associated with updating the
disclosure language required under paragraph (b)(2) of Rule 18a-10 would result in each standalone SBSD taking 5 hours per year to make the necessary updates. The Commission estimates
that this ongoing paperwork burden will not exceed 5 hours per stand-alone SBSD, for a
total of 10 hours annually for the 2 stand-alone SBSDs.8
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

8

2 stand-alone SBSDs x 5 hours = 10 hours.

hour burden of a half hour. 9
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 standalone 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 5 minutes to provide the Commission with a copy of the notice, resulting in
an industry-wide annual hour burden of a 0.083 hours. 10
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
Commission and the CFTC of its intent to operate pursuant to Rule 18a-10. The Commission
previously estimated 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 would file the notice as part of their application
process. As noted above, there are currently 2 stand-alone SBSDs operating pursuant to the
Rule. While the Commission estimates that no additional stand-alone SBSDS will elect to
operate pursuant to the Rule, 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. Consequently, 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.
Total Industry Hour Burden: The Commission estimates the total annualized
ongoing industry hour burden attributable to rule 18a-10 to be 11 hours. 11 The table below
summarizes the estimated burdens.
Summary of Hourly Burdens

Name of
Information
Collection

Rule 18a-10(b)(2)
(Update
Disclosures)
Rule 18a-10(b)(3)
(Notices)

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

Type of
Burden

Number
of
Entities
Impacted

Annual
Responses
per Entity

Third Party

2

1

0

0

5

5

5

10

0

Reporting

1

1

0

0

.5

.5

.5

0.5 (rounds to
1)

0

9

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

10

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

11

10 hours + 1 hour = 11 hours.

Total
Annual
Burden
Per Entity

Small
Business
Entities
Affected

Total
Industry
Burden

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

13.

Reporting

1

1

0

0.083

0.083 (rounds
to 0)

TOTAL HOURLY BURDEN FOR ALL RESPONDENTS

11

0

0.083

0.083

0

Costs to Respondents

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

Cost to Federal Government

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

Changes in Burden

The estimated burdens have changed from those that were previously approved. The
table below summarizes the changes in the estimated burdens.
Summary of Change in Hourly Burden (Annual)
Name of
Information
Collection

Previously
Reviewed
Burden

Rule 18a-10(b)(2)
(Develop Disclosure
Language)

New Estimated
Burden

Change in
Burden

Reason for the Change

15 hours

0 hours

(15) hours

The burden was largely expected to be
experienced during the first year after the
adoption of the rule. Therefore, the burden has
already been incurred and is no longer
applicable.

10,000 hours

0 hours

(10,000) hours

The burden was largely expected to be
experienced during the first year after the
adoption of the rule. Therefore, the burden has
already been incurred and is no longer
applicable.

Rule 18a-10(b)(2)
(Update
Disclosures)

15 hours

10 hours

(5 hours)

Reduction in the number of respondents from 3
to 2.

Rule 18a-10(b)(3)
(Notices)

0.5 hours

0.5

No change

No change.

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

0.083 hours

0.083 hours

No change

No change.

Rule 18a-10(b)(2)
(Incorporate Disclosure
Language)

16.

Information Collected Planned for Statistical Purposes

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

OMB Expiration Date

date.

The Commission is not seeking approval to not display the OMB approval expiration
18.

Exceptions to Certification for Paperwork Reduction Act Submissions

This information collection complies with the requirements of 5 CFR 1320.9.
B.

COLLECTIONS OF INFORMATION EMPLOYEING STATISTICAL
METHODS
This information collection does not involve statistical methods.