Supporting Statement_Rule 15c3-4 2025 FINAL DGL REVISED

SUPPORTING STATEMENT
for the Paperwork Reduction Act Information Collection Submission for
Rule 15c3-4 – Internal Risk Management Control Systems for OTC Derivatives Dealers
(OMB Control No. 3235-0497)

A.

JUSTIFICATION
1.

Necessity of Information Collection

Rule 15c3-4 (17 CFR 240.15c3-4) under the Securities Exchange Act of 1934
(“Exchange Act”) requires broker-dealers that are registered with the U.S. Securities and
Exchange Commission (the “Commission”) as over-the-counter (“OTC”) derivatives dealers, or
ANC firms that use Appendix E to Rule 15c3-1 (17 CFR 240.15c3-1e), 1 to establish, document,
and maintain an internal risk management control system. In addition, security-based swap
dealers (“SBSDs”) that are subject to Rule 18a-1 (17 CFR 240.18a-1) must comply with Rule
15c3-4 as if they were OTC derivatives dealers. 2 In addition, broker-dealers that are also
registered as SBSDs must comply with Rule 15c3-4 as if they were OTC derivatives dealers. 3
Paragraph (b) of Rule 17a-4 (17 CFR 240.17a-4(b)) requires that a broker-dealer’s
documentation of its risk management control systems and periodic reviews thereof must be
preserved for a period of not less than three years, the first two years in an easily accessible
place. In addition, an OTC derivatives dealer, SBSD subject to Rule 18a-1, or ANC firm is
expected to be able to provide the Commission staff with a copy of its documented risk
management control procedures when it registers with the Commission as an OTC derivatives
dealer, SBSD subject to Rule 18a-1, or ANC firm and it is expected to be able to provide
examiners with a copy of such procedures when it is subsequently examined.
Rule 15c3-4 further sets forth the basic elements governing the establishment, execution,
and review of an OTC derivatives dealer’s, SBSD’s or an ANC firm’s risk management control
system. These elements are designed to ensure the integrity of an OTC derivatives dealer’s,
SBSD’s or an ANC firm’s risk measurement, monitoring, and management process, to clarify
accountability at the appropriate organizational level, and to define the permitted scope of the
dealer’s activity and level of risk.
Rule 15c3-4 is designed to ensure the integrity of the risk measurement, monitoring, and
management process, and to clarify accountability, at the appropriate organizational level, for
defining the permitted scope of activity and level of risk. All financial market participants are
1

2
3

The requirements of Rule 15c3-4 to adopt an internal risk management system also apply
to certain broker-dealers that compute specific net capital charges under Appendix E to
Rule 15c3-1 (which are collectively referred to as “ANC firms”). See Securities
Exchange Act Release No. 49380 (June 8, 2004), 69 FR 34472 (June 21, 2004) (S7-2203).
See paragraph (f) of Rule 18a-1. 17 CFR 240.18a-1(f).
See paragraph (a)(10)(ii) of Rule 15c3-1. 17 CFR 240.15c3-1(a)(10)(ii).

exposed to various types of risk, whether they conduct business in the standardized securities
markets or the OTC derivatives market. Because of these and other risks, an OTC derivatives
dealer, SBSD subject to Rule 18a-1, or ANC firm must comply with, among other things, Rule
15c3-4, which makes it necessary for such broker-dealer to implement a risk management
control system.
An OTC derivatives dealer, SBSD subject to Rule 18a-1, or ANC firm also is required
under Rule 15c3-4 to consider a number of issues impacting its business environment when
creating its risk management control system. For example, an OTC derivatives dealer, SBSD
subject to Rule 18a-1, or ANC firm must consider, among other things, the sophistication and
experience of relevant trading, risk management, and internal audit personnel and the firm’s
management philosophy, when designing and implementing its internal control system’s
guidelines, policies, and procedures. This ensures that the implemented control system
adequately addresses the risks posed by the business being conducted and the environment in
which it is being conducted. In addition, this enables the firm to implement specific policies and
procedures that are unique to its circumstances.
The Commission is statutorily authorized to promulgate Rule 15c3-4 under Section
15(c)(3) of the Exchange Act (15 U.S.C. §§78o). This section authorizes the Commission to
adopt rules and regulations regarding the financial responsibility of broker-dealers that the
Commission deems necessary or appropriate in the public interest or for the protection of
investors. Further statutory authority is found in Section 23(a) of the Exchange Act (15 U.S.C.
§78w).
2.

Purpose and Use of the Information Collection

Rule 15c3-4 is an integral part of the Commission’s financial responsibility program for
OTC derivatives dealers, SBSDs subject to Rule 18a-1, and ANC firms. The information
collected under Rule 15c3-4 is essential to the regulation and oversight of OTC derivatives
dealers, SBSDs subject to Rule 18a-1, and ANC firms and to their financial responsibility. More
specifically, requiring these firms to document the planning, implementation, and periodic
review of their risk management controls ensures that all pertinent issues are considered and that
the risk management controls are implemented properly and that they continue to adequately
address the risks faced by OTC derivatives dealers, SBSDs subject to Rule 18a-1, and ANC
firms.
A strong risk management control system is necessary for firms to manage the complex
risks arising from the business of an OTC derivatives dealer, SBSD subject to Rule 18a-1, or an
ANC firm. The implementation of risk management controls within financial intermediaries
promotes their stability, and consequently, the stability of the entire financial system by reducing
the risk of significant losses on the part of market participants. This, in turn, reduces the risk that
massive defaults could undermine the market as a whole. Specifically, internal risk management
controls provide two important functions: (1) to protect against firm-specific risks such as
operational, market, credit, leverage, legal, and liquidity risks; and (2) to protect the financial
industry from systemic risk.
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3.

Consideration Given to Information Technology

Each OTC derivatives dealer, SBSD subject to Rule 18a-1, and ANC firm utilizes or is
anticipated to utilize automated systems for preparing and reporting information about their
internal risk management control systems. Thus, improved technology would not reduce the
burden.
4.

Duplication

We are not aware of duplication of this information, because OTC derivatives dealers,
SBSDs subject to Rule 18a-1, and ANC firms are not otherwise required to obtain and maintain
the information required by Rule 15c3-4.
5.

Effect on Small Entities

Rule 15c3-4 does not and will not affect small entities because the definition of an OTC
derivatives dealer excludes small entities.
6.

Consequences of Not Conducting Collection

If the required activities were not conducted or were conducted less frequently (i.e., due
to a reduction in risk management procedures), the protection afforded to the public 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 collected by the Commission from OTC derivatives dealers, SBSDs
subject to Rule 18a-1, and ANC firms in accordance with Rule 15c3-4 is kept confidential to the
extent permitted by the Freedom of Information Act (5 U.S.C. § 552 et seq.). To the extent that
the information in this collection is provided to the Commission in connection with an
application by an OTC derivatives dealer, the assurance of confidentiality is provided in
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accordance with the applicable rules. 4
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

The total estimated time burden associated with the requirements of Rule 15c3-4 is
approximately 8,600 hours per year, calculated as described below.
At present, approximately seventeen respondents are required to comply with Rule 15c34, an increase of six respondents from the prior submission. The Commission anticipates that up
to six new respondents may become subject to the requirements of Rule 15c3-4 during the next
three years.
Based upon discussions with affected and potentially affected industry participants, the
Commission estimates that, on average, a firm initially will take approximately 2,000 hours
(666.666667 hours per year when annualized over three years) to establish and document its risk
management control system. Further, we estimate that, on average, a firm will take
approximately 200 hours each year to maintain its risk management control system.
Thus, under Rule 15c3-4, the estimated annual burden would be 3,400 hours for the
seventeen existing respondents currently required to comply with Rule 15c3-4 to maintain their
risk management control systems, 5 4,000 hours for the six new respondents to establish and
document their risk management control systems, 6 and 1,200 hours for the six new respondents
to maintain their risk management control systems. 7 The total estimated annual time burden is
thus 8,600 hours (3,400 + 4,000 + 1,200).

4

5
6
7

Securities Exchange Act Release No. 40594 (Oct. 23, 1998), 63 FR 593362 (November
3, 1998).
(200 hours x 17 firms) =3,400.
((2,000 hours/ 3 years) x 6 firms) = 4,000.
(200 hours x 6 firms) = 1,200.
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SUMMARY OF ANNUAL TIME BURDEN

Burden Type

Number of
Respondents

Number of
Annual
Reponses Per
Respondent

Record Keeping

17

1

15c3-4 New
Respondents –
Establish
Systems

Record Keeping

6

1

666.666667

4,000

15c3-4 New
Respondents –
Maintain
Systems

Record Keeping

6

1

200

1,200

Rule
15c3-4
Existing
Respondents –
Maintain
Systems

Time Per
Response
(Hours)

200

3,400

8,600

Total Aggregate Burden (Hours)

13.

Total Burden
Per Burden Type
(Hours)

Cost to Respondents

There are no capital or start-up costs or operation and maintenance costs associated with
the rule.
14.

Costs to Federal Government

Not applicable. The review of existing and anticipated respondents’ risk management
control systems, will be performed by Commission staff as part of their regular duties.
15.

Changes in Burden

The increase in estimated burden hours from 6,533 to 8,600 is due to an increase in the
estimated number of respondents subject to the requirements of the rule. We previously
estimated that 16 respondents (eleven existing respondents and five new respondents) would be
subject to the rule requirements. We now estimate that 23 respondents (seventeen existing
respondents and six new respondents) will be subject to the rule requirements.
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
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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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