broker-dealer MSBSPs, replace their use of Part II, Part IIA, Part IIB,
or Part II CSE of the FOCUS Report. The Commission believes these
proposed rules and rule amendments will help regulators determine
whether relevant market participants comply with the proposed capital,
margin, and segregation requirements.\1210\ Additionally, the
Commission is proposing technical amendments to Rules 17a-3, 17a-4,
17a-5, and 17a-11, which will apply to all registered broker-dealers.
---------------------------------------------------------------------------

    \1209\ In addition, paragraph (a)(5) of Rule 17a-5, as proposed
to be amended, and paragraph (e) of Rule 17a-11, as proposed to be
amended, would require ANC broker-dealers to make additional reports
related to the liquidity stress test conducted pursuant to paragraph
(f) of Rule 15c3-1. The Commission is also proposing certain other
amendments to Rules 17a-3, 17a-4, 17a-5, and 17a-11, as discussed
above.
    \1210\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70213.
---------------------------------------------------------------------------

    With regard to the proposed rules and rule amendments relating to
security-based swap recordkeeping and reporting, the baseline for the
economic analysis is the OTC derivatives markets as they exist today.
The baseline includes any recordkeeping and reporting rules currently
applicable to participants in the OTC derivatives market including
applicable rules previously adopted by the Commission \1211\ but
excluding the rules proposed here. The current OTC derivatives market
participants and the current reporting and recordkeeping regimes for
those entities are discussed more fully below. With respect to the
proposed technical amendments to Rules 17a-3, 17a-4, 17a-5, and 17a-11,
the baseline for purposes of this economic analysis is the current
recordkeeping and reporting regime for broker-dealers under such
rules.\1212\
---------------------------------------------------------------------------

    \1211\ The Commission notes that it has temporarily excluded
security-based swaps from the definition of ``security.'' See Order
Granting Temporary Exemptions under the Securities Exchange Act of
1934 in Connection with the Pending Revision of the Definition of
``Security'' to Encompass Security-Based Swaps, and Request for
Comment, 76 FR 39927; Order Extending Temporary Exemptions under the
Securities Exchange Act of 1934 in Connection with the Pending
Revision of the Definition of ``Security'' to Encompass Security-
Based Swaps, and Request for Comment, 78 FR 10218 (extending
exemptive relief through February 11, 2014). Thus, for purposes of
the Commission's baseline analysis for broker-dealers, security-
based swap activities would be excluded.
    \1212\ See 17 CFR 240.17a-3; 17 CFR 240.17a-4; 17 CFR 240.17a-5;
17 CFR 240.17a-11.
---------------------------------------------------------------------------

    While the Commission does not have comprehensive information on the
U.S. OTC derivatives markets, the Commission is using the limited data
currently available in considering the effects of the proposals.\1213\
The Commission requests that commenters identify sources of data and
information as well as provide data and information to assist the
Commission in analyzing the economic consequences of the proposed
rules. The Commission also requests comment on all aspects of this
initial economic analysis, including on whether the analysis has: (1)
identified all benefits and costs, including all effects on efficiency,
competition, and capital formation; (2) given due consideration to each
benefit and cost, including each effect on efficiency, competition, and
capital formation; and (3) identified and considered reasonable
alternatives to the proposed new rules and rule amendments.
---------------------------------------------------------------------------

    \1213\ Information that is available for the purposes of this
economic analysis includes an analysis of the market for single-name
credit default swaps performed by the Commission's Division of
Economic and Risk Analysis (f/k/a the ``Division of Risk, Strategy,
and Financial Innovation''). See Memorandum from Commission's
Division of Risk, Strategy, and Financial Innovation to File (Mar.
15, 2012), available at http://www.sec.gov/comments/s7-39-10/s73910-154.pdf (``CDS Data Analysis'').
---------------------------------------------------------------------------

    The sections below present an overview of the OTC derivatives
markets, a discussion of the general costs and benefits of the proposed
recordkeeping and reporting requirements, and a discussion of the costs
and benefits of each proposed amendment and new rule. The Economic
Analysis also includes a discussion of the potential effects of the
proposed amendments and new rules on competition, efficiency, and
capital formation. The final section of the Economic Analysis consists
of a discussion of implementation considerations.

B. Baseline of Economic Analysis

1. OTC Derivatives Market
    As stated above, to assess the costs and benefits of these rules, a
baseline must be established against which the rules may be evaluated.
For the purposes of this economic analysis, the baseline is the OTC
derivatives markets \1214\ as they exist today, including applicable
rules adopted by the Commission but excluding the rules

proposed here.\1215\ The markets as they exist today are dominated,
both globally and domestically, by a small number of firms, generally
entities affiliated with or within large commercial banks.\1216\
---------------------------------------------------------------------------

    \1214\ OTC derivatives may include forwards, swaps, and options
on foreign exchange, and interest rate, equity, and commodity
derivatives.
    \1215\ The baseline, however, for the proposed amendments to
Rules 17a-3, 17a-4, 17a-5, and 17a-11 is the current recordkeeping
and reporting regime for broker-dealers under these rules.
    \1216\ See, e.g., Bank for International Settlements (``BIS''),
Statistical Release: OTC derivatives statistics at end-June 2013
(November 2013), available at http://www.bis.org/publ/otc_hy1311.pdf. See also ISDA Margin Survey 2012.
---------------------------------------------------------------------------

    The OTC derivatives markets have been described as opaque because,
for example, transaction-level data about OTC derivatives trading
generally is not publicly available.\1217\ This economic analysis is
supported, where possible, by data currently available to the
Commission from the Depository Trust & Clearing Corporation Trade
Information Warehouse (``DTCC-TIW''). This evaluation takes into
account data regarding the security-based swap market and especially
data regarding the activity--including activity that may be suggestive
of dealing behavior--of participants in the single-name credit default
swap market.\1218\ While a large segment of the security-based swap
market is comprised of credit default swaps, these derivatives do not
comprise the entire security-based swap market.
---------------------------------------------------------------------------

    \1217\ See Orice M. Williams, Director, Financial Markets and
Community Investment, General Accountability Office, Systemic Risk:
Regulatory Oversight and Recent Initiatives to Address Risk Posed by
Credit Default Swaps, GAO-09-397T, 2, 5, 27 (Mar. 2009), available
at http://www.gao.gov/new.items/d09397t.pdf. See also Robert E.
Litan, The Brookings Institution, The Derivatives Dealers' Club and
Derivatives Market Reform: A Guide for Policy Makers, Citizens and
Other Interested Parties 15-20 (Apr. 7, 2010), available at http://
www.brookings.edu/~/media/research/files/papers/2010/4/
07%20derivatives%20litan/0407--derivatives--litan.pdf; Security-
Based Swap Data Repository Registration, Duties, and Core
Principles, Exchange Act Release No. 63347 (Nov. 19, 2010), 75 FR
77306, 77354 (Dec. 10, 2010); International Organization of
Securities Commissions, The Credit Default Swap Market, Report FR05/
12 (June 2012), available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD385.pdf (stating although the amount of public
information on credit default swaps has increased over recent years,
the credit default swap market is still quite opaque).
    \1218\ See CDS Data Analysis.
---------------------------------------------------------------------------

    Available information about the global OTC derivatives markets
suggests that swap transactions, in contrast to security-based swap
transactions, dominate trading activities, notional amounts, and market
values.\1219\ For example, the BIS estimates that the total notional
amounts outstanding and gross market value of global OTC derivatives
were over $693 trillion and $20.2 trillion, respectively, as of the end
of June 2013.\1220\ Of these totals, the BIS estimates that foreign
exchange contracts, interest rate contracts, and commodity contracts
comprised approximately 95% of the total notional amount and 93% of the
gross market value.\1221\ Credit default swaps, including index credit
default swaps, comprised approximately 3.5% of the total notional
amount and 3.6% of the gross market value. Equity-linked contracts,
including forwards, swaps, and options, comprised approximately an
additional 1.0% of the total notional amount and 3.5% of the gross
market value.\1222\
---------------------------------------------------------------------------

    \1219\ See BIS Statistical Release: OTC derivatives statistics
at end-June 2013 (reflecting data reported by central banks in
thirteen countries: Australia, Belgium, Canada, France, Germany,
Italy, Japan, the Netherlands, Spain, Sweden, Switzerland, the
United Kingdom, and the U.S.).
    \1220\ Id. at 5.
    \1221\ Id.
    \1222\ Id. Similarly, the OCC has found that interest rate
products comprised 81% of the total notional amount of OTC
derivatives held by bank dealers whereas credit derivative contracts
comprised 5%. See OCC, Quarterly Report on Bank Trading and
Derivatives Activities, Third Quarter 2013, available at http://www.occ.gov/topics/capital-markets/financial-markets/trading/derivatives/dq313.pdf.
---------------------------------------------------------------------------

    Security-based swaps represent a relatively small subset of the
overall global OTC derivatives market.\1223\ Consistent with the
Commission's authority over this subset of the OTC derivatives
market,\1224\ the recordkeeping, reporting, and notification
requirements under proposed Rules 18a-5 through 18a-9 would apply only
to those firms that participate in the security-based swap markets
(although some of these firms may be dually-registered with the CFTC or
the prudential regulators and thus may be subject to the recordkeeping
and reporting rules of the CFTC and the prudential regulators governing
swaps generally).\1225\ In addition, although the proposed
recordkeeping, reporting, and notification requirements apply to all
security-based swaps, not just single-name credit default swaps, the
data on single-name credit default swaps are currently sufficiently
representative of the market to help inform this economic analysis
because when measured by notional value, single-name credit default
swaps account for 95% of all SBS transactions.\1226\ The majority of
these single-name credit default swaps, both in terms of aggregate
total notional amount and total volume by product type reference
corporate and sovereign entities.\1227\
---------------------------------------------------------------------------

    \1223\ For example, as of the end of June, 2013, BIS reports
that the global notional amount outstanding of OTC derivatives was
$692,908 billion. Interest rate contracts, which generally are not
security-based swaps, comprised approximately 83.31% of the overall
OTC derivatives market. Foreign exchange contracts, another type of
OTC derivative which generally is not a security-based swap,
comprised another 11.69% of the overall derivatives market. See BIS
Statistical Release: OTC derivatives statistics at end-June 2013, p.
5.
    \1224\ See 15 U.S.C. 78o-10(f)(1) and (2).
    \1225\ See, e.g., Swap Data Recordkeeping and Reporting
Requirements: Pre-Enactment and Transition Swaps (Final Rule), 77 FR
35200 (June 12, 2012); Swap Dealer and Major Swap Participant
Recordkeeping, Reporting, and Duties Rules; Futures Commission
Merchant and Introducing Broker Conflicts of Interest Rules; and
Chief Compliance Officer Rules for Swap Dealers, Major Swap
Participants, and Futures Commission Merchants, 77 FR 20128 (Apr. 3,
2012).
    \1226\ See Further Definition of ``Swap Dealer,'' ``Security-
Based Swap Dealer,'' ``Major Swap Participant,'' ``Major Security-
Based Swap Participant'' and ``Eligible Contract Participant'', 77
FR 30636. See also Further Definition of ``Swap,'' ``Security-Based
Swap,'' and ``Security-Based Swap Agreement''; Mixed Swaps;
Security-Based Swap Agreement Recordkeeping, 77 FR 48208.
    \1227\ Data compiled by the Commission's Division of Economic
and Risk Analysis on credit default transactions from the DTCC-TIW
from January 1, 2011 through December 31, 2011. See Capital, Margin,
and Segregation Requirements for Security-Based Swap Dealers and
Major Security-Based Swap Participants and Capital for Broker-
Dealers, 77 FR 70301.
---------------------------------------------------------------------------

    While the number of transactions in single-name credit default
swaps is larger than the number of index credit default swaps, the
aggregate total notional amount of index credit default swaps exceeds
the notional amount of single-name credit default swaps.\1228\ For
example, the total aggregate notional amount for single-name credit
default swaps was $6.2 trillion, while the aggregate total notional
amount for index credit default swaps was $16.8 trillion over the
sample period of January 1, 2011 through December 31, 2011. For the
same sample period, however, single-name credit default swaps totaled
69% of transactional volume, while index credit default swaps comprised
31% of the total transactional volume.\1229\ The majority of trades in
both notional amount and volume for both single-name and index credit
default swaps over the 2011 sample period were new trades in contrast
to assignments, increases, terminations or exits.\1230\ The analysis of
the 2011 data further shows that, as measured by total notional amount
and total volume, the majority of single-name and index credit default
contracts have a tenor of five years.\1231\ In addition, the data from
the sample period indicates that the geographical distribution of
counterparties' parent country domiciles in single name

contracts are concentrated in the U.S., United Kingdom, and
Switzerland.\1232\
---------------------------------------------------------------------------

    \1228\ Id. This data also shows the average mean and median
single-name and index credit default swap notional transaction size
is $6.47 million and $4.12 million, and $39.22 million and $14.25
million, respectively.
    \1229\ Id.
    \1230\ Id.
    \1231\ Id.
    \1232\ Id.
---------------------------------------------------------------------------

    As described more fully in the CDS Data Analysis,\1233\ based on
2011 transaction data, Commission staff identified entities currently
transacting in the credit default swap market that may register as
SBSDs by analyzing various criteria of their dealing activity. The
results suggest that there is currently a high degree of concentration
of potential dealing activity in the single-name credit default swap
market. For example, using the criterion that dealers are likely to
transact with many counterparties who themselves are not dealers, the
analysis of the 2011 data shows that only 28 out of 1,084 market
participants have three or more counterparties that themselves are not
recognized as dealers by ISDA.\1234\ In addition, the analysis suggests
that dealers appear, based on the percentage of trades between buyer
and seller principals, in the majority of all trades on either one or
both sides in single-name and index credit default swaps.\1235\
Additionally, according to the OCC, at the end of the first quarter of
2012, derivatives activity in the U.S. banking system continues to be
dominated by a small group of large financial institutions. Four large
commercial banks represent 93% of the total banking industry notional
amounts and 81% of industry net current credit exposure.\1236\
---------------------------------------------------------------------------

    \1233\ See CDS Data Analysis.
    \1234\ Id. at Table 3c. The analysis of this transaction data is
imperfect as a tool for identifying dealing activity, given that the
presence or absence of dealing activity ultimately turns upon the
relevant facts and circumstances of an entity's security-based swap
transactions, as informed by the dealer-trader distinction. Criteria
based on the number of an entity's counterparties that are not
recognized as dealers nonetheless appear to be useful for
identifying apparent dealing activity in the absence of full
analysis of the relevant facts and circumstances, given that
engaging in security-based swap transactions with non-dealers would
be consistent with the conduct of seeking to profit by providing
liquidity to others, as anticipated by the dealer-trader
distinction. See Further Definition of ``Swap Dealer,'' ``Security-
Based Swap Dealer,'' ``Major Swap Participant,'' ``Major Security-
Based Swap Participant'' and ``Eligible Contract Participant'', 77
FR 30599 (discussing the dealer-trader distinction).
    \1235\ See CDS Data Analysis.
    \1236\ See OCC, Quarterly Report on Bank Trading and Derivatives
Activities, Third Quarter 2013, p.1.
---------------------------------------------------------------------------

    This concentration to a large extent appears to reflect the fact
that those larger entities are well-capitalized and therefore possess
competitive advantages in engaging in OTC security-based swap dealing
activities by providing potential counterparties with adequate
assurances of financial performance.\1237\ Also, the high barriers to
entry indicate that only a limited number of entities conduct business
in this space.
---------------------------------------------------------------------------

    \1237\ See, e.g., Craig Pirrong, Rocket Science, Default Risk
and The Organization of Derivatives Markets, Working Paper 17-18
(2006), available at http://www.cba.uh.edu/spirrong/Derivorg1.pdf
(noting that counterparties seek to reduce risk of default by
engaging in credit derivative transactions with well-capitalized
firms). See also Further Definition of ``Swap Dealer,'' ``Security-
Based Swap Dealer,'' ``Major Swap Participant,'' ``Major Security-
Based Swap Participant'' and ``Eligible Contract Participant'', 77
FR 30739-30742.
---------------------------------------------------------------------------

    Other than OTC derivatives dealers, which are subject to
significant limitations on their activities, broker-dealers
historically have not participated in a significant way in security-
based swap trading for at least two reasons. First, because the
Exchange Act has not previously defined security-based swaps as
``securities,'' they have not been required to be traded through
registered broker-dealers.\1238\ And second, a broker-dealer engaging
in security-based swap activities is currently subject to existing
regulatory requirements, including capital, margin, segregation,
recordkeeping, reporting, notification, and securities count
requirements. Specifically, the existing broker-dealer capital
requirements make it relatively costly to conduct these activities in
broker-dealers.\1239\ Instead of occurring at broker-dealers, security-
based swap activities are currently mostly concentrated in entities
that are affiliated with broker-dealers, but not in broker-dealers
themselves.\1240\
---------------------------------------------------------------------------

    \1238\ See 15 U.S.C. 78c(a)(10) and (a)(68) (defining
``security'' and ``security-based swap'', respectively).
    \1239\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70217-70257.
    \1240\ See ISDA Margin Survey 2012.
---------------------------------------------------------------------------

    End users enter into OTC derivatives transactions to take
investment positions or to hedge commercial and financial risk. These
non-dealer end users of OTC derivatives are, for example, commercial
companies, governmental entities, financial institutions, and
investment vehicles.\1241\ Available data suggests that the largest end
users of credit default swaps are, in descending order, hedge funds,
asset managers, and banks, which may have a commercial need to hedge
their credit exposures against a wide variety of entities or may take
an active view on credit risk.\1242\ Based on the available data, the
Commission further estimates that these end users currently participate
in the security-based swap markets on a very limited basis.\1243\
Finally, this baseline will be further discussed in the applicable
sections of the release below.
---------------------------------------------------------------------------

    \1241\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital for Broker-Dealers, 77 FR 70302.
    \1242\ See CDS Data Analysis.
    \1243\ Id.
---------------------------------------------------------------------------

Request for Comment
    The Commission generally requests comment about its preliminary
estimates of the scale and composition of the OTC derivatives market,
including the relative size of the security-based swap segment of that
market. The Commission also requests comment on the Commission's
understanding of which entities are engaged in the OTC derivatives
market, as well as the business practices of broker-dealer, bank, and
stand-alone SBSDs and MSBSPs currently engaged in the OTC derivatives
markets. In addition, the Commission requests that commenters provide
data and sources of data to quantify:
    1. The average daily and annual volume of OTC derivatives
transactions;
    2. The volume of transactions in each class of OTC derivatives
(e.g., interest rate swaps, index credit default swaps, single-name
credit default swaps, currency swaps, commodity swaps, and equity-based
swaps);
    3. The total notional amount of all pending swap transactions;
    4. The total gross exposure of all pending swap transactions;
    5. The total notional amount of all pending security-based swap
transactions;
    6. The total gross exposure of all pending security-based swap
transactions;
    7. The types and numbers of dealers in OTC derivatives (e.g.,
banks, broker-dealers, unregulated entities);
    8. The types and numbers of dealers in OTC derivatives that engage
in both a swap and security-based swap business;
    9. The types and numbers of dealers in OTC derivatives that engage
only in a swap business;
    10. The types and numbers of dealers in OTC derivatives that engage
only in a security-based swap business;
    11. The current recordkeeping practices with respect to security-
based swap and swap transactions;
    12. The current reporting practices with respect to swap
transactions;
    13. The current securities count practices with respect to OTC
derivatives participants; and
    14. The current financial reporting practices of OTC derivatives
participants.

2. OTC Derivatives Market Participants and Broker-Dealers
    The Commission has not promulgated final registration rules for
SBSDs and MSBSPs. Therefore, there are no entities currently registered
as SBSDs or MSBSPs. As discussed above, the Commission anticipates that
certain entities (stand-alone firms, banks, and registered broker-
dealers) may register as SBSDs or MSBSPs, but the number and type of
these registrants is uncertain. Below, the Commission has summarized
the current recordkeeping practices of these entities, although as
noted below, the Commission does not have information regarding the
practices of some of these entities. The Commission also has provided
below an overview of the entities registered with the Commission as
broker-dealers.
a. Stand-Alone SBSDs and Stand-Alone MSBSPs
    Currently, there are firms that are neither banks nor broker-
dealers that participate in the market for security-based swaps. For
these firms, the economic baseline would be the reports and records
these firms currently generate in the ordinary course of their
business. The Commission believes that firms engaged in the security-
based swap market would produce financial reports that are included in
the financial reports it is proposing, such as a balance sheet and an
income statement quarterly and at year end, as a part of ordinary
prudent business practices. Such firms may not, however, produce annual
audited financial statements. The Commission also believes that firms
engaged in the security-based swap business would need, as a matter of
prudent business practice, to maintain records documenting the firm's
derivatives positions. Further, the Commission would expect that these
firms would maintain these records for the duration they held a given
position and for some period of time thereafter. However, the
Commission does not believe that these firms would necessarily have any
regulatory reporting activities. In sum, the baseline for nonbank and
non-broker-dealer firms would be the recordkeeping, record retention,
and financial reporting activities (if any) those firms currently
undertake. Given that the Commission has not previously regulated these
firms, the Commission does not have information regarding the
recordkeeping and reporting costs these nonbank and non-broker-dealer
firms would presently incur in the ordinary course of business.
Moreover, while the Commission has estimated the current costs of
recordkeeping and reporting for broker-dealer and banks below, the
Commission does not believe these nonbank and non-broker-dealer firms
are currently subject to analogous recordkeeping and reporting
requirements. As noted above, the Commission believes that these firms
would, however, as a matter of routine business practice maintain some
records documenting their business activities. Any new costs imposed by
the proposed rules would be incremental to costs currently being
incurred by these entities. In order to help the Commission assess the
costs associated with the proposed recordkeeping and reporting
requirements, and the extent to which the proposed recordkeeping and
reporting rules add costs above those already incurred by these firms
in the ordinary course of business, the Commission requests comment.
Specific cost estimates would be particularly helpful to the
Commission's analysis.
b. Bank Security-Based Swap Dealers and Bank Major Security-Based Swap
Participants
    Banks are already subject to recordkeeping and retention
requirements by the prudential regulators.\1244\ In addition, banks
must file financial statements and supporting schedules known as ``call
reports'' with their prudential regulator.\1245\ The Commission
believes that the most common form of call report for a bank that would
register as an SBSD or MSBSP is FFIEC Form 031.\1246\ Like the FOCUS
Report, FFIEC Form 031 elicits financial and operational information
about a bank, which is entered into uniquely numbered line items. A
bank must report detail about its assets, liabilities, and equity
capital on Schedule RC to FFIEC Form 031.\1247\ A bank must report
detail about its regulatory capital on Schedule RC-R to FFIEC Form
031.\1248\ The information elicited on Schedule RC-R is designed to
facilitate an analysis of the bank's regulatory capital. A bank must
report detail about its income (loss) and expenses on Schedule RI to
FFIEC Form 031.\1249\
---------------------------------------------------------------------------

    \1244\ See, e.g., 12 CFR 12.3 (Department of Treasury); 12 CFR
219.21 et seq. (FDIC); 12 CFR 344.4 (FDIC).
    \1245\ See 12 U.S.C. 324; 12 U.S.C. 1817; 12 U.S.C. 161; 12
U.S.C. 1464.
    \1246\ FFIEC Form 031 is filed by banks with domestic and
foreign offices, which the Commission believes will characterize
most bank SBSDs.
    \1247\ See FFIEC Form 031, Schedule RC, Balance Sheet, Lines 1-
29. Schedule RC also has a ``Memoranda'' section that which elicits
information about bank's external auditors and fiscal year end date.
See FFIEC Form 031, Schedule RC, Balance Sheet, Memoranda, Lines 1-
2.
    \1248\ See FFIEC Form 031, Schedule RC-R, Regulatory Capital,
Lines 1-62. Schedule RC-R also has a ``Memoranda'' section that
elicits detail about derivatives. See FFIEC Form 031, Schedule RC-R,
Regulatory Capital, Memoranda, Lines 1-2.
    \1249\ See FFIEC Form 031, Schedule RI, Income Statement, Lines
1-14. Schedule RI also has a ``Memoranda'' section that elicits
further detail about income (loss). See FFIEC Form 031, Schedule RI,
Income Statement, Memoranda, Lines 1-14.
---------------------------------------------------------------------------

    The Commission has estimated the cost of the existing
recordkeeping, record retention, reporting, and notification
requirements that are applicable to nationally chartered banks under
existing regulations issued by the OCC. The Commission arrived at the
estimate by examining the universe of existing PRA collections to which
national banks are subject and selecting those collections which
represent regulations that are analogous to the recordkeeping, record
retention, reporting, and notification rules the Commission is
proposing herein.\1250\ The Commission then estimated that reporting
burdens generate approximately $79/hour of cost for national banks and
that recordkeeping burdens generate approximately $30/hour of cost for
national banks.\1251\ The Commission estimates that national banks
currently incur $54,120,368 of costs to comply with the OCC's financial
reporting, notification and recordkeeping rules.\1252\ The OCC's rules
generally relate to banking activities, not securities and security-
based swap activities. The Commission thus recognizes that some of the
costs reflected in the OCC's rules may not be analogous to costs that
may be imposed by the Commission's proposed rules. Nonetheless, these
cost estimates may help provide context and cost ranges with respect to
the nationally chartered banks impacted by the Commission's proposed
rules.
---------------------------------------------------------------------------

    \1250\ PRA collections for OCC-regulated national banks,
together with PRA collections for other federal regulatory agency
rules, are available at www.reginfo.gov/public/do/PRAMain.
    \1251\ This assumption is derived from OCC staff's description
of the hourly costs it estimates in connection with Paperwork
Reduction Act burdens. For the purposes of this Economic Analysis,
the Commission assumes that reporting burdens will be performed 5%
by clerical staff at $20 an hour, 10% by managerial or technical
staff at $40 an hour, 55% by senior management at $80 an hour, and
30% by legal counsel at $100 an hour, which, in the aggregate,
equals $79 an hour. The Commission assumes that recordkeeping
burdens will be performed 70% by clerical staff at $20 an hour, 20%
by managerial or technical staff at $40 an hour, and 10% by senior
management at $80 an hour, which in the aggregate, equals $30 an
hour.
    \1252\ The Commission derived the estimates of the hourly burden
associated with these OCC rules from the number of hours approved
for information collection purposes by the Office of Management and
Budget. See the chart below for a representation of the calculation
methodology:

----------------------------------------------------------------------------------------------------------------
                                                              Annual hourly     Compensation        Estimated
                  Reporting/recordkeeping                   industry  burden   rate (per hour)     annual cost
----------------------------------------------------------------------------------------------------------------
Interagency Call Report (FFIEC 031 and 041)...............           406,141               $79       $32,085,139
Foreign Branch Call Report (FFIEC 041)....................             4,651                79           367,429
Country Exposure Report (FFIEC 009).......................             8,384                79           662,336
Exchange Act Disclosures Reported to the OCC..............               523                79            32,785
Recordkeeping Requirements for Securities Transactions....             6,944                30           208,320
Disclosure of Financial and Other Information.............               669                79            52,851
Interagency Guidance on Asset Securitization Activities...               778                30            23,340
Advanced Capital Adequacy Framework Reporting.............           137,500                79        10,862,500
Liquidity Risk Report.....................................            43,992                79         3,475,368
General Reporting and Recordkeeping by Savings                        61,362                30         1,840,860
 Associations.............................................
Notice or Application for Capital Distributions...........               546                79            43,134
Annual Stress Test Rule and Stress Test Reporting                     73,876                79         5,836,204
 Templates................................................
Recordkeeping and Disclosure Provisions Associated with               16,120                30           483,600
 Stress Testing Guidance..................................
    Total Costs...........................................  ................  ................        55,614,969
----------------------------------------------------------------------------------------------------------------

c. Entities Registered as Broker-Dealers
    As of April 1, 2013, there were 4,545 broker-dealers registered
with the Commission. The broker-dealers registered with the Commission
vary significantly in terms of their size, business activities, and the
complexity of their operations.\1253\ The Commission has previously
estimated that as of December 31, 2011, nine broker-dealers dominate
the broker-dealer industry, holding over half of all capital held by
broker-dealers.\1254\ However, other than OTC derivatives dealers,
which are subject to significant limitations on their activities,
broker-dealers historically have not participated in a significant way
in security-based swap trading.\1255\
---------------------------------------------------------------------------

    \1253\ See Broker-Dealer Reports, 78 FR 51967.
    \1254\ See Broker-Dealer Reports, 78 FR 51968.
    \1255\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70302.
---------------------------------------------------------------------------

i. Rules 17a-3 and 17a-4
    The Commission is proposing amendments to Rules 17a-3 and 17a-4 to
establish additional recordkeeping requirements for broker-dealer
SBSDs, broker-dealer MSBSPs,\1256\ and broker-dealers that conduct
security-based swap activities but are not registered as SBSDs.\1257\
The baseline for this economic analysis with respect to the proposed
amendments to Rules 17a-3 and 17a-4 is the broker-dealer recordkeeping
regime as it exists today.
---------------------------------------------------------------------------

    \1256\ See section II.A.2. of this release.
    \1257\ The proposed amendments to the recordkeeping and
reporting rules would apply to all broker-dealers that conduct
security-based swap activities. The de minimis exception provided in
Exchange Act Rule 3a71-2 applies solely to registration as an SBSD.
See 17 CFR 240.3a71-2(a)(1) .
---------------------------------------------------------------------------

    Under current Rule 17a-3, broker-dealers must make and keep certain
books and records.\1258\ The Commission estimates that current Rule
17a-3 imposes $191,858,085 of annual costs on broker-dealers.\1259\
Current Rule 17a-4 requires that firms preserve the records made and
kept under Rule 17a-3, as well as additional records, including written
agreements, communications relating to its business as such, and
records reflecting inputs into the FOCUS Report. The rule also
establishes retention periods for all records required to be made under
Rule 17a-3 and required to be preserved under Rule 17a-4, along with
storage media requirements for those firms that preserve records
electronically. The Commission estimates that current Rule 17a-4
imposes $95,454,090 of annual costs on broker-dealers.\1260\
---------------------------------------------------------------------------

    \1258\ See 17 CFR 240.17a-3.
    \1259\ (2,449,755 hours x $63/hour national hourly rate for a
compliance clerk) + $37,523,520 in external costs = $191,858,085.
See supra section IV.D.1. (PRA estimate of the total initial and
annual recordkeeping and reporting burden for current Rule 17a-3).
    \1260\ (1,154,430 hours x $63/hour national hourly rate for a
compliance clerk) + $22,725,000 in external costs = $95,454,090. See
supra section IV.D.2. (PRA estimate of the total initial and annual
recordkeeping and reporting burden for current Rule 17a-4).
---------------------------------------------------------------------------

ii. Rule 17a-5
    The existing broker-dealer financial reporting requirements appear
in Rule 17a-5. The baseline for this economic analysis with respect to
the proposed amendments to Rules 17a-5 is the broker-dealer financial
reporting requirements as they exist today (as recently amended). The
Commission estimates that current Rule 17a-5 imposes $210,776,086 of
annual costs on broker-dealers.\1261\
---------------------------------------------------------------------------

    \1261\ (734,294 hours x $269/hour national hourly rate for a
compliance manager) + $13,251,000 in external costs = $210,776,086.
See supra section IV.D.3. (PRA estimate of the total initial and
annual recordkeeping and reporting burden for current Rule 17a-5).
---------------------------------------------------------------------------

    Rule 17a-5, as recently amended, has two main elements: (1) broker-
dealers must file periodic unaudited reports containing information
about their financial and operational condition on a FOCUS Report; and
(2) broker-dealers must annually file financial statements and certain
reports and a report covering the financial statements and reports
prepared by an independent public accountant registered with the PCAOB
in accordance with PCAOB standards.\1262\ In addition to these two main
elements, a few other aspects of Rule 17a-5 are described below.
---------------------------------------------------------------------------

    \1262\ Id. These requirements are described in more detail
below.
---------------------------------------------------------------------------

a. Periodic Reports
    Broker-dealers periodically report information about their
financial and operational condition on the FOCUS Report Part II, Part
IIA, Part IIB, or Part II CSE. Each version of the report is designed
for a particular type of broker-dealer and the information to be
reported is tailored to the type of broker-dealer. Specifically: (1) a
broker-dealer that does not hold customer funds or securities completes
and files the FOCUS Report Part IIA; (2) a broker-dealer that holds
customer funds or securities completes and files the FOCUS Report Part
II; (3) an OTC derivatives dealer completes and files the FOCUS Report
Part IIB; and (4) an ANC broker-dealer completes and files the FOCUS
Report Part II CSE. The FOCUS Report Part II CSE elicits the most
detailed information of the four versions, including the most detail
about a firm's derivatives activities.
b. Annual Audited Reports and Related Notifications
    Under the recently adopted amendments to Rule 17a-5, a broker-
dealer is required to, among other things, annually file reports with
the Commission that are audited by a PCAOB-registered independent
public

accountant, disclose certain financial information to customers, notify
the Commission of a change of accountant, and notify the Commission of
its DEA's approval of a change in its fiscal year.\1263\ The recent
rule amendments also require the independent public accountant to
notify the broker-dealer if the accountant discovers an instance of
non-compliance with certain broker-dealer rules or determines that any
material weakness exists.\1264\
---------------------------------------------------------------------------

    \1263\ See 17 CFR 240.17a-5(d), (g), and (n)(1). Paragraph
(n)(2) of Rule 17a-5 requires that the notice contain a detailed
explanation for the reasons for the change and requires that changes
in the filing period for the annual reports be approved in writing
by the broker-dealer's DEA.1
    \1264\ See Broker-Dealer Reports, 78 FR 51910.
---------------------------------------------------------------------------

c. Customer Statements
    Paragraph (c) of Rule 17a-5 requires, among other things, that
certain broker-dealers annually send their customers audited and
unaudited statements regarding their financial condition. A broker-
dealer is exempt from sending the statement of financial condition to
customers if the broker-dealer, among other things: (1) sends its
customers semi-annual statements relating to the firm's net capital
and, if applicable, the identification of any material weaknesses; and
(2) makes the statement of financial condition described above
available on the broker-dealer's Web site home page and maintains a
toll-free number that customers can call to request a copy of the
statement.\1265\
---------------------------------------------------------------------------

    \1265\ See 17 CFR 240.17a-5(c)(5).
---------------------------------------------------------------------------

d. Additional ANC Broker-Dealer Reports
    Paragraph (a)(6) of Rule 17a-5 requires ANC broker-dealers to
periodically file certain reports with the Commission.\1266\ The
reports contain information related to the ANC broker-dealer's use of
internal models to calculate market and credit risk charges when
computing net capital.\1267\
---------------------------------------------------------------------------

    \1266\ See 17 CFR 240.17a-5(a)(6).
    \1267\ Id.
---------------------------------------------------------------------------

iii. Rule 17a-11
    The existing broker-dealer notice requirements are contained in
Rule 17a-11. The baseline for this economic analysis with respect to
the proposed amendments to Rule 17a-11 is the broker-dealer
notification requirements as they exist today. Rule 17a-11 specifies
the circumstances under which a broker-dealer must notify the
Commission and other securities regulators about its financial or
operational condition, as well as the form that the notice must
take.\1268\ The Commission estimates that current Rule 17a-11 imposes
$119,167 of annual costs on broker-dealers in the aggregate.\1269\
---------------------------------------------------------------------------

    \1268\ See 17 CFR 240.17a-11.
    \1269\ 443hours x $269/hour national hourly rate for a
compliance manager = $119,167. See supra section IV.D.4. (PRA
estimate of the total initial and annual recordkeeping and reporting
burden for current Rule 17a-11).
---------------------------------------------------------------------------

a. Failure to Meet Minimum Capital Requirements
    Paragraph (b) of Rule 17a-11 requires a broker-dealer to notify the
Commission if the firm's net capital or, if applicable, tentative net
capital declines below the minimum amount required under Rule 15c3-
1.\1270\ Paragraph (b)(2) of Rule 17a-11 requires an OTC derivatives
dealer or an ANC broker-dealer to also notify the Commission when its
tentative net capital falls below the minimum required for these types
of broker-dealers.\1271\
---------------------------------------------------------------------------

    \1270\ See 17 CFR 240.17a-11(b).
    \1271\ See 17 CFR 240.17a-11(b)(2).
---------------------------------------------------------------------------

b. Early Warning of Potential Capital or Model Problem
    Paragraph (b)(2) of Rule 17a-11 requires an OTC derivatives dealer
or an ANC broker-dealer to also notify the Commission when its
tentative net capital falls below the minimum required for these types
of broker-dealers.\1272\ Paragraph (c) of Rule 17a-11 specifies four
events that, if they occur, trigger a requirement that a broker-dealer
send notice promptly (but within twenty-four hours) to the
Commission.\1273\ These notices are designed to provide the Commission
with ``early warning'' that the broker-dealer may experience financial
difficulty.\1274\ The events triggering the early warning notification
requirements are:
---------------------------------------------------------------------------

    \1272\ Id.
    \1273\ See 17 CFR 240.17a-11(c).
    \1274\ See Early Warning Rule, Securities Exchange Act Release
No. 32586 (July 7, 1993), 58 FR 37655 (July 13, 1993).
---------------------------------------------------------------------------

     The computation of a broker-dealer subject to the
aggregate indebtedness standard of Rule 15c3-1 shows that the firm's
aggregate indebtedness is in excess of 1,200% of its net capital;
\1275\
---------------------------------------------------------------------------

    \1275\ See 17 CFR 240.17a-11(c)(1). As discussed above, for
certain types of broker-dealers, the minimum net capital requirement
is the greater of a fixed-dollar amount specified in the rule and an
amount determined by applying a 15-to-1 aggregate indebtedness to
net capital ratio. See 17 CFR 240.15c3-1(a)(1)(i). Consequently,
requiring notification when a broker-dealer has a 12-to-1 aggregate
indebtedness to net capital ratio provides notice before the firm
reaches the minimum 15-to-1 requirement.
---------------------------------------------------------------------------

     The computation of a broker-dealer which has elected to
use the alternative standard of calculating net capital under Rule
15c3-1 shows that the firm's net capital is less than 5% of aggregate
debit items computed in accordance with Appendix A of Rule 15c3-
3;\1276\
---------------------------------------------------------------------------

    \1276\ See 17 CFR 240.17a-11(c)(2). As discussed above, for
certain types of broker-dealers, the minimum net capital requirement
is the greater of a fixed-dollar amount specified in the rule and an
amount determined by applying a 2% of aggregate debit items ratio.
See 17 CFR 240.15c3-1(a)(1)(ii). Consequently, requiring
notification when a broker-dealer has net capital equal to 5% of
aggregate debit items provides notice before the firm reaches the 2%
minimum requirement.
---------------------------------------------------------------------------

     A broker-dealer's net capital computation shows that its
total net capital is less than 120% of its required minimum level of
net capital or of its required minimum level of tentative net capital,
in the case of an OTC derivatives dealer; \1277\
---------------------------------------------------------------------------

    \1277\ See 17 CFR 240.17a-11(c)(3).
---------------------------------------------------------------------------

     With respect to an OTC derivatives dealer, the occurrence
of the fourth and each subsequent backtesting exception under Appendix
F of Rule 15c3-1 during any 250 business day measurement period.\1278\
---------------------------------------------------------------------------

    \1278\ See 17 CFR 240.17a-11(c)(4).
---------------------------------------------------------------------------

c. Failure to Make and Keep Current Books and Records
    Paragraph (d) of Rule 17a-11 requires a broker-dealer that fails to
make and keep current the books and records required under Rule 17a-3
to notify the Commission of this fact on the same day that the failure
arises.\1279\ The notice must specify the books and records which have
not been made or which are not current.\1280\ A broker-dealer is
required to report to the Commission within 48 hours of the original
notice what the broker or dealer has done or is doing to correct the
situation.\1281\
---------------------------------------------------------------------------

    \1279\ See 17 CFR 240.17a-11(d).
    \1280\ Id.
    \1281\ Id.
---------------------------------------------------------------------------

d. Material Weakness
    Paragraph (e) of Rule 17a-11 requires a broker-dealer to provide
notification about a material weakness as that term is defined in Rule
17a-5.\1282\ Specifically, paragraph (e) provides that, whenever a
broker-dealer discovers or is notified by an independent public
accountant of a material weakness as defined in Rule 17a-5, the broker-
dealer must: (1) give notice to the Commission within twenty-four hours
of the discovery or notification of the material weakness; and (2)
transmit a report within forty-eight hours of the notice indicating
what the broker-dealer has done or is doing to correct the
situation.\1283\
---------------------------------------------------------------------------

    \1282\ See 17 CFR 240.17a-11(e). See also 17 CFR 240.17a-5(g).
    \1283\ See 17 CFR 240.17a-11(e)(1) and (2). See also Broker-
Dealer Reports, 78 FR 51939 (discussing amendment of material
weakness standard in Rule 17a-5). As discussed above in section
II.B.3.a. of this release, the Commission is proposing to use the
concept of material weakness in proposed Rule 18a-7.

---------------------------------------------------------------------------

e. Failure to Make a Required Reserve Deposit
    An additional broker-dealer notification is required under Exchange
Act Rule 15c3-3, rather than Rule 17a-11. Specifically, under paragraph
(i) of Rule 15c3-3, a broker-dealer is required to notify the
Commission and its DEA if it fails to make a required deposit into its
customer reserve account under Rule 15c3-3.\1284\
---------------------------------------------------------------------------

    \1284\ See 17 CFR 240.15c3-3(i).
---------------------------------------------------------------------------

C. Analysis of the Proposed Program and Alternatives

1. Overview--The Proposed Recordkeeping, Reporting, Notification, and
Securities Count Program
    Generally, the proposed recordkeeping, reporting, notification, and
securities count requirements are intended to update the recordkeeping,
reporting, notification, and securities count requirements for broker-
dealers, including broker-dealer SBSDs and broker-dealer MSBSPs, to
account for their security-based swap activities. The proposal is also
intended to establish recordkeeping, reporting, and notification
requirements for SBSDs and MSBSPs that are not registered as broker-
dealers as well as a securities count requirement for stand-alone
SBSDs. The recordkeeping, reporting, notification, and securities count
rules being proposed are based upon the comprehensive system of
recordkeeping, reporting, notification, and securities count rules
applicable to broker-dealers, as proposed to be modified to capture and
document the security-based swap activities of broker-dealers, SBSDs,
and MSBSPs. The recordkeeping, reporting, notification, and securities
count rules and rule amendments being proposed today represent the
manner in which SBSDs and MSBSPs will document, report, and retain
evidence of their compliance with, among other things, the previously
proposed capital, margin, and segregation rules. The Commission
believes that these rules, by their nature, will have a more limited
economic impact as compared to the Commission's capital, margin, and
segregation proposals.\1285\
---------------------------------------------------------------------------

    \1285\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70213.
---------------------------------------------------------------------------

    In proposing these requirements, the Commission is considering both
the potential benefits of improving the oversight, transparency, risk
documentation and management of security-based swap activities, and the
potential costs to firms, the financial markets, and the U.S. financial
system if broker-dealers, SBSDs, and MSBSPs are required to comply with
the proposed rules.
    The Commission notes that there are certain instances when it is
difficult to quantify the potential benefits and costs of the proposed
rules. For example, firms that choose to register in some capacity as
an SBSD or MSBSP may not currently be subject to Commission, CFTC, or
prudential regulation. For these firms, the Commission is not certain
of such firms' current recordkeeping, reporting, notification, and
securities count practices with respect to their security-based swap
activities and thus it is difficult to reliably gauge the economic
effect of the proposed rules and rules amendments on these firms. With
regard to other classes of regulated entities, the Commission staff's
experience with broker-dealers under the existing recordkeeping,
reporting, notification, and securities count rules gives it a better
understanding of the compliance-related costs (such as those related to
retaining attorneys, accountants, and other professionals) and in such
cases the Commission has prepared below a summary of its preliminary
estimate of those costs.\1286\
---------------------------------------------------------------------------

    \1286\ See infra section V.E.
---------------------------------------------------------------------------

    As discussed in section II. of the release, the current broker-
dealer recordkeeping, reporting, notification, and securities count
requirements serve as the template for the proposals for several
reasons. The financial markets in which SBSDs and MSBSPs are expected
to operate are similar to the financial markets in which broker-dealers
operate in that they are driven in significant part by dealers that buy
and sell on a regular basis and that take principal risk. The
Commission believes it should take a similar regulatory approach for
similar markets.
    The Commission also believes that in order to prevent regulatory
arbitrage, and to help ensure appropriate accountability and oversight,
security-based swap activity should be regulated in a similar manner
irrespective of whether it is conducted by, for example, a broker-
dealer or stand-alone SBSD. The proposals applicable to stand-alone
SBSDs and stand-alone MSBSPs seek to regulate these firms' security-
based swap activity consistent with the regulation of security-based
swap activities conducted at broker-dealers, while reflecting the
business model of such entities.\1287\ The Commission is seeking to
provide all security-based swap activity, irrespective of the entity
within which such activity is conducted, a level regulatory playing
field while being cognizant of the fact that firms with a more limited
business should also be subject to an appropriately circumscribed set
of regulations.
---------------------------------------------------------------------------

    \1287\ In this regard, the Commission notes the proposal
excludes a number of recordkeeping requirements for bank SBSDs and
bank MSBSPs. As discussed above in section I. of this release,
section 15F(f)(1)(B) of the Exchange Act requires such institutions
to keep only those books and records of all activities related to
the conduct of business as an SBSD or MSBSP.
---------------------------------------------------------------------------

    Moreover, the rules ultimately adopted, in conjunction with other
requirements established under the Dodd-Frank Act, could have a
substantial impact on international commerce and the relative
competitive position of intermediaries operating in various, or
multiple, jurisdictions. In particular, intermediaries operating in the
U.S. and in other jurisdictions could be advantaged or disadvantaged if
corresponding requirements are not established in other jurisdictions
or if the Commission's rules are substantially more or less stringent
than corresponding requirements in other jurisdictions. This could,
among other potential impacts, affect the propensity of intermediaries
and other market participants based in the U.S. to participate in non-
U.S. markets and the propensity of non-U.S.-based intermediaries and
other market participants to participate in U.S. markets. Accordingly,
substantial differences between the U.S. and foreign jurisdictions in
the costs of complying with the requirements established under the
Dodd-Frank Act, including the reporting, recordkeeping, notification,
and security count requirements for security-based swaps between U.S.
and foreign jurisdictions, could have international implications.\1288\
---------------------------------------------------------------------------

    \1288\ See Cross-Border Security-Based Swap Activities; Re-
Proposal of Regulation SBSR and Certain Rules and Forms Relating to
Registration of Security-Based Dealers and Major Security-Based Swap
Participants, 78 FR 31034.
---------------------------------------------------------------------------

    The Commission also preliminarily believes that there are cost and
compliance benefits to be realized by utilizing an existing, well-known
set of rules as a starting point. The Commission notes that the broker-
dealer recordkeeping, notification, securities count, and reporting
requirements have existed for many years and have facilitated the
accountability and oversight of broker-dealers. From the perspective of
trying to minimize

regulatory costs and compliance concerns, the Commission would expect
that broker-dealer SBSDs and broker-dealer MSBSPs would already be
familiar with the structure and content of the recordkeeping and
reporting requirements. The Commission believes that these compliance
and cost benefits could be realized even by firms that are not
currently registered as broker-dealers given that some of the new
registrants would likely be part of larger financial firms that have a
broker-dealer affiliate, thus providing a source of in-house experience
with the Commission's broker-dealer rules. Even for those firms that
have no source of such in-house expertise, the Commission expects that
starting with the existing broker-dealer rules should require less
expenditure than if the Commission created entirely new rules given
that outside expertise with the current broker-dealer rules is readily
available. Notwithstanding this belief, the Commission acknowledges
that its proposals would likely still require new expenditures for
these firms. In order to aid its analysis, the Commission requests
comment on the use of the existing broker-dealer rules as a model. The
Commission also requests comment on whether there are other existing
rule sets that would be more appropriate.
    In determining appropriate recordkeeping, reporting, notification,
and securities count requirements, the Commission assesses and
considers a number of different costs and benefits, and the
determinations it ultimately makes can have a variety of economic
consequences for the relevant firms, markets, and the financial system
as a whole. The recordkeeping, reporting, notification, and securities
count requirements in particular are broadly intended to facilitate
effective oversight and improve internal risk management via requiring
robust internal procedures for creating and retaining records central
to the conduct of business as an SBSD or MSBSP. Requiring registered
firms to comply with recordkeeping and reporting rules should help
ensure more effective regulatory oversight. The proposed rules would
help the Commission determine whether an SBSD or MSBSP is operating in
compliance with the Exchange Act and the rules thereunder.
    The Commission also believes that the proposed rules could promote
technology improvements. Those SBSDs and MSBSPs that do not have the
technology to store and maintain the information required by the
proposed rules will need to invest in technology. The technology
improvements could help SBSDs and MSBSPs, particularly those that
conducted the security-based swap business outside of any regulated
entity, more effectively track their trading and risk exposure in
security-based swaps. To the extent that these firms can better track
their risk, this should help them better manage risk.
    The Commission also believes that the required annual audit of
nonbank SBSDs' and nonbank MSBSPs' financial statements and the public
availability of firms' Statement of Financial Condition would permit
customers and counterparties to have access to financial information
that would permit them to better assess the financial condition of the
firm. While it is difficult to quantify the current level of market
confidence in the security-based swap marketplace, the Commission
staff's experience is that market participants' willingness to engage
in activities increases when such participants are better able to
understand the financial condition of other market participants and
counterparties.
    The Commission also recognizes that there will be costs associated
with the proposal. Those costs include the costs of complying with the
proposed rules, one-time and ongoing financial reporting costs, and
costs associated with ongoing record maintenance.
2. Alternatives to the Proposed Recordkeeping, Reporting, Notification,
and Securities Count Rules
    The Commission recognizes that there may be other appropriate
approaches to establishing recordkeeping, reporting, and notification
requirements. In the course of preparing and considering the rules it
is proposing today, Commission staff reviewed and analyzed analogous
rule sets utilized by the Commission's fellow federal regulators, with
a view towards determining whether there may be other practicable
alternatives. In a number of instances, Commission staff also consulted
with staff from its fellow regulators regarding the proposals herein.
    The Commission believes the proposals herein are broadly consistent
with the approach taken by the CFTC. The CFTC's proposed and ultimately
final rules were modeled on an existing set of the rules.\1289\ For
existing broker-dealers and firms affiliated with existing broker-
dealers, the Commission believes that starting with an existing and
known set of rules offers practical benefits for both the regulator and
the regulated entities, as compared with starting with a wholly new set
of rules. The Commission acknowledges that the benefits of this
approach would be much more limited for firms such as stand-alone
entities that are not currently broker-dealers and are not affiliated
with broker-dealers.
---------------------------------------------------------------------------

    \1289\ See Swap Dealer and Major Swap Participant Recordkeeping,
Reporting, and Duties Rules; Futures Commission Merchant and
Introducing Broker Conflicts of Interest Rules; and Chief Compliance
Officer Rules for Swap Dealers, Major Swap Participants, and Futures
Commission Merchants, 77 FR 20171 (stating swap dealer and major
swap participant rules are modeled on existing rules as well as
those of the Commission).
---------------------------------------------------------------------------

    Although it is not possible to precisely compare rule sets across
agencies, the Commission believes that the recordkeeping rules it is
proposing are similar to those of the CFTC in terms of their level of
prescriptiveness. For example, paragraph (a)(1) of Rule 17a-3 sets
forth the requirement that a broker-dealer make and keep current a
trade blotter. The Commission is also proposing very similar provisions
in paragraphs (a)(1) and (b)(1) of proposed Rule 18a-5, designed to
apply, respectively, to stand-alone SBSDs and stand-alone MSBSPs, as
well as bank SBSDs and bank MSBSPs. Paragraph (a)(2) of the
corresponding CFTC rule, Rule 202 (``Daily Trading Records''),
prescribes that swap dealers and major swap participants shall make and
keep trade execution records that are very similar.\1290\
---------------------------------------------------------------------------

    \1290\ See 17 CFR 23.202(a)(2).
---------------------------------------------------------------------------

    In considering whether there were other practicable regulatory
alternatives, the Commission also examined rules of the prudential
regulators. For example, the OCC has rules governing recordkeeping and
confirmation requirements for securities transactions effected by
national banks.\1291\ Paragraph (a)(1) of the OCC rule governing the
record that a national bank effecting securities transactions for
customers must maintain, Rule 12.3, appears broadly consistent with
paragraph (a)(6) of Rule 17a-3, as proposed to be amended, as well as
with paragraph (b)(7) of proposed Rule 18a-5.\1292\
---------------------------------------------------------------------------

    \1291\ See 12 CFR 12.3.
    \1292\ Compare 12 CFR 12.3(a), with paragraph (a)(6) of Rule
17a-3, as proposed to be amended, and paragraph (b)(7) of proposed
Rule 18a-5.
---------------------------------------------------------------------------

    The Commission considered regulatory approaches outside of those
utilized by other regulators. One alternative would be for all SBSDs
and MSBSPs to keep and report the same records and other financial
reports. While technically possible and arguably simpler to implement
and administer, the Commission does not believe such a requirement
would be justified given the different capital, margin, and segregation
proposals that would apply

to each participant. For example, since a stand-alone MSBSP would not
be subject to a minimum net capital requirement under the proposed
capital rules that would be applicable to SBSDs and MSBSPs (it would be
subject to a positive tangible net worth standard instead),\1293\ it
may be unduly burdensome to require stand-alone MSBSPs to calculate and
report in Form SBS the amount of net capital it holds. Hence, while the
Commission considered such a simpler approach, the Commission
preliminarily believes that such an approach would be confusing and
unduly burdensome for firms required to complete and file Form SBS and
would introduce significant compliance challenges beyond those imposed
by the proposed rules and rule amendments.
---------------------------------------------------------------------------

    \1293\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70213.
---------------------------------------------------------------------------

    Another alternative to the rules the Commission is proposing would
be rules that are less prescriptive. Under such rules, detailed record
production and retention requirements could be replaced by more general
references to the types of information the firm needs to document and
retain for examination purposes. This approach could promote a
consistent view and management of recordkeeping and reporting
obligations within a large financial firm that has numerous
subsidiaries. This approach would also have the advantage of likely
being less costly, as the firm would be more able to conform its
existing recordkeeping practices at the parent and the subsidiaries.
While this approach has its benefits, the financial markets and
transactions in which SBSDs and MSBSPs are expected to operate and
engage in, respectively, are similar to the financial markets and
transactions in which broker-dealers operate, and the Commission
preliminarily believes these similarities argue for a consistent
regulatory approach.\1294\ In addition, as discussed above, the
objectives of these broker-dealer requirements are similar to the
objectives underlying the proposals regarding securities-based
swaps.\1295\ Notwithstanding its preliminary analysis of the issue, the
Commission requests comment on whether there are existing alternative
rule sets that could provide such a model, and the appropriateness of
those alternatives relative to what the Commission has proposed.
---------------------------------------------------------------------------

    \1294\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70216 (stating a similar rationale for basing the proposed capital,
margin, and segregation requirements for SBSDs on the broker-dealer
capital, margin, and segregation requirements).
    \1295\ See supra section I.
---------------------------------------------------------------------------

    The Commission has also considered alternatives to the financial
reporting rules being proposed. For example, with respect to bank SBSDs
and bank MSBSPs, one alternative would be to permit these firms to use
the existing financial reports made with their respective prudential
regulators. This approach would allow the firms to avoid creating and
filing an additional financial report with the Commission, and would
likely result in fewer compliance-related costs. The Commission is
aware of the burdens and costs associated with preparing an additional
regulatory submission such as Form SBS, but the proposal is designed to
ameliorate those burdens. Thus, while proposed Form SBS seeks specific
transaction and position data regarding bank SBSDs' and bank MSBSPs'
security-based swap activities, the other required financial data in
Form SBS for bank SBSDs and bank MSBSPs come directly from the filings
these firms currently make with their respective prudential
regulators.\1296\ The Commission invites comment on whether there are
other ways of obtaining information regarding bank SBSDs' and bank
MSBSPs' security-based swaps transactions and positions that would be
less costly or burdensome and that would also facilitate Commission
oversight of the transactions, positions, and financial condition of
these firms.
---------------------------------------------------------------------------

    \1296\ See supra section II.B.2.b.
---------------------------------------------------------------------------

    The Commission has also considered alternative financial reporting
arrangements for stand-alone SBSDs or stand-alone MSBSPs. For example,
the Commission is aware that the CFTC proposed that stand-alone swap
dealers and stand-alone major swap participants be required to submit
monthly unaudited financial statements within 17 business days of the
end of the month, as well as GAAP financial statements within 90 days
of the end of the fiscal year.\1297\ The CFTC did not prescribe any
additional forms such as what the Commission is proposing with Form
SBS. The Commission preliminarily believes that that the information
elicited by Form SBS should assist the Commission and the firms' DEAs
to conduct effective examinations of broker-dealer SBSDs and broker-
dealer MSBSPs. The broker-dealer SBSD and broker-dealer MSBSP reporting
requirements would promote transparency of the financial and
operational condition of the broker-dealer SBSD or broker-dealer MSBSP
to the Commission and to the public. In order to aid its analysis of
whether there are other more appropriate alternatives relative to what
it has proposed, the Commission requests comment.
---------------------------------------------------------------------------

    \1297\ See Capital Requirements of Swap Dealers and Major Swap
Participants, 76 FR 27813 (discussion of proposed CFTC Regulation
23.106).
---------------------------------------------------------------------------

    The Commission has also considered alternatives to the notification
and securities count proposals.\1298\ An alternative to the proposed
notification proposal would be to not have such a rule, or to have
fewer events give rise to notification. Similarly, with respect to the
quarterly securities count proposal, the Commission believes the
alternative would be to specify a less frequent count or to omit a
requirement for securities count.
---------------------------------------------------------------------------

    \1298\ See supra section II.D.1. (summarizing rationale
underlying Rule 17a-13).
---------------------------------------------------------------------------

    The Commission has proposed the notification and securities count
proposals because it preliminarily believes that the rules are an
appropriate component of its oversight of the financial responsibility
of firms engaged in a security-based swap business. The broker-dealer
recordkeeping, reporting, notification, and security count requirements
are part of the broker-dealer financial responsibility rules.\1299\ The
financial responsibility rules are designed to work together to
establish a comprehensive regulatory program designed to promote the
prudent operation of broker-dealers and the safeguarding of customer
securities and funds held by broker-dealers. In this regard, the
notification and securities count proposals (in conjunction with the
recordkeeping and reporting proposals) are designed to promote
compliance with the capital, margin, and segregation requirements for
broker-dealers. The proposed recordkeeping, reporting, notification,
and securities count requirements applicable to SBSDs and MSBSPs along
with the proposed capital, margin, and segregation requirements for
these registrants, are designed to establish a comprehensive financial
responsibility program for SBSDs and MSBSPs. Like the broker-dealer
rules, the proposed recordkeeping, reporting, notification, and
securities count requirements applicable to SBSDs and MSBSPs are
designed to promote compliance with the proposed capital, margin, and
segregation requirements applicable to SBSDs and MSBSPs. Omitting such
proposals would create regulatory

disparities between broker-dealers, banks, and stand-alone SBSDs and
stand-alone MSBSPs. For these reasons, the Commission preliminarily
believes that alternative approaches would not be as effective in
helping to ensure compliance with the proposed capital, margin, and
segregation requirements applicable to SBSDs and MSBSPs. However, in
order to assist its analysis of the proposed notification and
securities count proposals, as well whether there are more appropriate
alternatives, the Commission requests comment.
---------------------------------------------------------------------------

    \1299\ See 17 CFR 240.3a40-1.
---------------------------------------------------------------------------

3. Requirements To Make and Keep Records
a. Rule 17a-3, as Proposed To Be Amended
    Rule 17a-3 is proposed to be amended to account for security-based
swap activities of broker-dealers, including broker-dealer SBSDs and
broker-dealer MSBSPs.\1300\ The Commission is also proposing to add new
provisions to Rule 17a-3 that would relate to its recently proposed
capital, margin, and segregation requirements applicable to SBSDs and
MSBSPs.\1301\
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    \1300\ See, e.g., paragraph (a)(1) of Rule 17a-3, as proposed to
be amended (proposed addition of information that must be included
in security-based swap purchase and sale blotters).
    \1301\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70257-70274 (proposed margin requirements applicable to SBSDs).
---------------------------------------------------------------------------

    In addition, as discussed above, the Commission has proposed
amendments to Rule 15c3-1 that would establish liquidity stress test
requirements for ANC broker-dealers.\1302\ The Commission is proposing
to amend Rule 17a-3 to include a requirement that ANC broker-dealers
make and keep current a report of the results of the monthly liquidity
stress test, a record of the assumptions underlying the liquidity
stress test, and the liquidity funding plan required under the proposed
amendments to Rule 15c3-1.\1303\
---------------------------------------------------------------------------

    \1302\ See paragraph (f) of Rule 15c3-1, as proposed to be
amended. See also Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70252-70254.
    \1303\ See paragraph (a)(24) of Rule 17a-3, as proposed to be
amended.
---------------------------------------------------------------------------

    The Commission would also add new provisions to Rule 17a-3 that are
designed to create a record of the broker-dealer's compliance with
business conduct standards that the Commission proposed pursuant to
Exchange Act section 15F(h), and with the designated compliance officer
requirement in Exchange Act section 15F(k) and Rule 15Fk-1.\1304\
---------------------------------------------------------------------------

    \1304\ See, e.g., paragraphs (a)(28) through (a)(30) of Rule
17a-3, as proposed to be amended. See also Business Conduct
Standards for Security-Based Swap Dealers and Major Security-Based
Swap Participants, 76 FR 42396.
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    The Commission is also proposing some changes that are designed to
eliminate obsolete or rarely used provisions of Rule 17a-3.\1305\ For
example, the Commission is proposing to remove references in the rule
to ``members,'' as a distinct class of registrant in addition to
brokers and dealers.\1306\ These references are redundant because the
rule applies to brokers and dealers, which would include ``members'' of
a national securities exchange since all such members are also broker-
dealers.
---------------------------------------------------------------------------

    \1305\ See supra section II.A.2.b. (describing additional
proposed amendments to Rule 17a-3).
    \1306\ See, e.g., paragraph (a)(3) of Rule 17a-3, as proposed to
be amended.
---------------------------------------------------------------------------

    Generally, the Commission would not expect the proposed changes to
Rule 17a-3 to have a material economic effect, although as analyzed
below the Commission does expect that there will be costs related to
complying with the proposed rules.\1307\ In order to assist its
analysis the Commission generally requests comment about the general
costs and benefits of the proposed rules. The Commission requests data
to assess the costs and benefits of the proposals described above.
---------------------------------------------------------------------------

    \1307\ See infra section V.E.
---------------------------------------------------------------------------

b. Proposed Rule 18a-5
    The Commission is proposing new Rule 18a-5--which is modeled on
Rule 17a-3, as proposed to be amended--to require stand-alone SBSDs,
stand-alone MSBSPs, bank SBSDs, and bank MSBSPs to make and keep
current certain records.\1308\ Not all of the provisions of Rule 17a-3
would be imported into proposed Rule 18a-5 because some of Rule 17a-3's
provisions relate to activities that are not expected or permitted of
stand-alone SBSDs and stand-alone MSBSPs. Further, and as described
above,\1309\ the proposed requirements for bank SBSDs and bank MSBSPs,
which would be included in paragraph (b) of proposed Rule 18a-5, are
more limited than the proposed requirements that would apply to stand-
alone SBSDs and stand-alone MSBSPs, which would be included in
paragraph (a) of proposed Rule 18a-5. More limited requirements would
apply to bank SBSDs and bank MSBSPs because the Commission's authority
under section 15F(f)(1)(B)(i) of the Exchange Act is tied to activities
related to their business as an SBSD or MSBSP,\1310\ banks are already
subject to the existing recordkeeping requirements from prudential
regulators, and the prudential regulators are responsible for capital,
margin, and other prudential requirements applicable to bank SBSDs and
bank MSBSPs.
---------------------------------------------------------------------------

    \1308\ See supra section II.A.2.a. (describing proposed Rule
18a-5).
    \1309\ Id.
    \1310\ See 15 U.S.C. 78o-10(f)(1)(B)(i).
---------------------------------------------------------------------------

    The Commission believes proposed Rule 18a-5 would provide improved
regulatory oversight of the security-based swap activities of stand-
alone SBSDs, stand-alone MSBSPs, bank SBSDs, and bank MSBSPs. For
reasons discussed above, the Commission preliminarily believes that the
approach it has taken with respect to Rule 18a-5--basing it upon an
existing rule (Rule 17a-3)--is a better approach than starting with a
wholly new rule. The Commission believes that many non-broker-dealer
SBSDs and non-broker-dealer MSBSPs will be affiliates of broker-dealers
that already have familiarity with Rule 17a-3 upon which proposed Rule
18a-5 is modeled. Greater familiarity with the rule should ease
compliance burdens and costs for those firms. The Commission
acknowledges that with respect to firms not so affiliated, this
approach would seem much less likely to ease compliance burdens. In
order to aid the Commission's analysis of the effects on these
unaffiliated firms, and whether there are better alternatives, the
Commission requests comment.
    As discussed in section V.C.1., above, the Commission believes that
the proposed requirements to make and keep records could improve the
regulatory oversight, risk documentation, and risk management of
security-based swap activities.
    The proposed requirements to make and keep records could also
create costs to firms.\1311\ These increased costs may cause firms to
cease participating in the market, thereby potentially reducing
efficiency due to loss of competition. In order to inform its analysis
of the costs and benefits involved with the proposals, the Commission
requests comment. Data to evaluate the costs and benefits of proposed
Rule 18a-5 would be particularly useful to the Commission's analysis.
---------------------------------------------------------------------------

    \1311\ See infra section V.E. (discussing implementation
considerations).
---------------------------------------------------------------------------

c. Request for Comment on Recordkeeping Provisions
    The Commission also requests data to evaluate the impact of the
proposals against the baseline. In addition, the

Commission requests comment in response to the following questions:
    1. In general terms, would the proposed rules result in effective
documentation of the security-based swap transactions of broker-
dealers, broker-dealer SBSDs, broker-dealer MSBSPs, stand-alone SBSDs,
stand-alone MSBSPs, bank SBSDs, and bank MSBSPs? Please explain.
    2. In general, would the proposed rules and rule amendments impact
the capital of entities that would need to register as SBSDs or MSBSPs?
For example, would the costs involved negatively impact the
availability of funding to conduct the security-based swap activities?
If so, what would be the extent of the impact to these entities?
    3. How important is it that the recordkeeping and reporting rules
for SBSDs and MSBSPs be analogous to the existing recordkeeping and
reporting requirements for broker-dealers? How valuable or worthwhile
are the benefits involved with this approach? How costly is such an
approach?
    4. To what extent would the proposed regulatory requirements impact
the amount of liquidity provided for or required by security-based swap
market participants, and to what extent will that affect the funding
cost for the financial sector in particular and the economy in general?
Please quantify.
    5. Do the proposed record-making requirements provide a reasonable
and workable solution for broker-dealers, SBSDs and MSBSPs? Please
explain. Are there preferable alternatives? If so, describe those
alternatives. Please specifically address why such alternatives are
preferable and the nature to which they fulfill the Commission's need
to ensure that the financial responsibility requirements applicable to
broker-dealers, broker-dealer SBSDs, broker-dealer MSBSPs, stand-alone
SBSDs, stand-alone MSBSPs, bank SBSDs, and bank MSBSPs are followed.
    6. If an SBSD or MSBP currently already has sufficient technology
to track its trading and risk exposure in security-based swaps, what
additional costs, if any, would arise from the proposed rules?
4. Requirements To Preserve Records
    As discussed above,\1312\ Rule 17a-4 requires a broker-dealer to
preserve certain types of records.\1313\ The rule also prescribes the
time periods these records and the records required to be made and kept
current under Rule 17a-3 must be preserved and the manner in which they
must be preserved.\1314\ The Commission is proposing amendments to Rule
17a-4 to account for the security-based swap activities of broker-
dealers, including broker-dealer SBSDs and broker-dealer MSBSPs, as
well as certain technical amendments. With respect to stand-alone
SBSDs, stand-alone MSBSPs, bank SBSDs, and bank MSBSPs, the Commission
is proposing new Rule 18a-6--modeled on Rule 17a-4, as proposed to be
amended--to establish record preservation requirements for stand-alone
SBSDs, stand-alone MSBSPs, bank SBSDs, and bank MSBSPs.
---------------------------------------------------------------------------

    \1312\ See supra section II.A.3.a. (discussing Rule 17a-4
retention requirements).
    \1313\ See 17 CFR 240.17a-5(b).
    \1314\ See 17 CFR 240.17a-5(a) and 240.17a-5(b)(1). Generally,
the three year and six year retention periods in Rule 17a-4 track
the self-regulatory organization requirements and certain State
regulations that were in effect prior to the adoption of the
National Securities Market Improvements Act of 1996, and they
largely represent a codification of prudent recordkeeping practices
of many broker-dealers. Books and Records Requirements for Brokers
and Dealers Under the Securities Exchange Act of 1934, 66 FR 55819;
National Securities Market Improvements Act of 1996, Public Law 104-
290, 104 Stat. 3416 (1996).
---------------------------------------------------------------------------

a. Rule 17a-4, as Proposed To Be Amended
    As described above,\1315\ paragraph (a) of Rule 17a-4 provides that
broker-dealers subject to Rule 17a-3 must preserve for a period of not
less than six years, the first two in an easily accessible place,
certain records required to be made and kept current under Rule 17a-3.
---------------------------------------------------------------------------

    \1315\ See supra section II.A.3.a. (discussing Rule 17a-4
retention requirements).
---------------------------------------------------------------------------

Three-Year Preservation Requirement for Rule 17a-3 Records
    As discussed above,\1316\ paragraph (b)(1) of Rule 17a-4 provides
that broker-dealers must preserve for at least three years, the first
two in an easily accessible place,\1317\ certain records required to be
made and kept current under Rule 17a-3.\1318\ The Commission is
proposing to add cross-references to certain new paragraphs that would
be added to Rule 17a-3 to address security-based swap activities of
broker-dealers, including broker-dealer SBSDs and broker-dealer MSBSPs.
---------------------------------------------------------------------------

    \1316\ See supra section II.A.3.a. (discussing Rule 17a-4
retention requirements).
    \1317\ The Commission has stated that ``Rule 17a-4 seeks to
address the tension between the need for quick production of
specific records and the volume of records generated on a daily
basis, by requiring that more current records be retained in an
``easily accessible place,'' which the Commission has not defined.
See Commission Guidance to Broker-Dealers on the Use of Electronic
Storage Media under the Electronic Signatures in Global and National
Commerce Act of 2000 with Respect to Rule 17a-4(f), 66 FR 22916.
    \1318\ See 17 CFR 240.17a-4(b)(1).
---------------------------------------------------------------------------

    The Commission preliminarily believes that the majority of the
economic effects, ranging from firm-specific costs to effects on the
overall security-based swap market, will be associated with the
requirement that broker-dealers, including broker-dealer SBSDs and
broker-dealer MSBSPs, make and keep current certain records as set
forth in Rule 17a-3, as proposed to be amended. However, in order to
assist it in considering the full range of costs and any economic
effects associated with the proposed recordkeeping rules, the
Commission requests data to assess the costs and benefits of the
proposals.
Three-Year Preservation Requirement for Certain Other Records Made or
Received
    Paragraph (b) of Rule 17a-4 also provides that broker-dealers must
preserve for a period of not less than three years, the first two in an
easily accessible place, other categories of records if the broker-
dealer makes or receives the record.\1319\ As discussed above,\1320\
the Commission is proposing amendments to these provisions in paragraph
(b) of Rule 17a-4 to account for security-based swaps, and is proposing
amendments that would require broker-dealers, including broker-dealer
SBSDs and broker-dealer MSBSPs, to preserve certain additional records
related to security-based swap activities. For example, the Commission
is proposing to amend the preservation requirement in paragraph (b)(4)
of Rule 17a-4 to include ``recordings of telephone calls required to be
maintained pursuant to section 15F(g)(1) of the [Exchange] Act.'' The
amendment would establish a preservation period for recorded telephonic
communications that have been recorded and relate to security-based
swap activity.
---------------------------------------------------------------------------

    \1319\ See 17 CFR 240.17a-4(b)(2) through (12).
    \1320\ See supra section II.A.3.a. (discussing paragraph (b) of
Rule 17a-4, as proposed to be amended).
---------------------------------------------------------------------------

    As discussed above in section V.C.1. of this release, the
Commission believes that the proposed amendments to Rule 17a-4 will
result in benefits of improving the regulatory oversight, risk
documentation, and risk management of security-based swap activities.
The Commission anticipates that there will also be costs related to the
proposal.\1321\ The Commission believes that the majority of the costs
incurred by broker-dealer SBSDs and broker-dealer MSBSPs relating to
recorded telephone

calls would enhance the internal controls and procedures relating the
treatment of security-based swap-related telephone calls recorded by
the firm. The Commission requests comment on the costs or benefits that
may accrue in connection with the proposal.
---------------------------------------------------------------------------

    \1321\ See infra section V.E. (discussing implementation
considerations).
---------------------------------------------------------------------------

b. Proposed Rule 18a-6
    As described above, Rule 18a-6 is modeled on the retention
requirements of Rule 17a-4, but modified to account for differences
applicable to stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs, and
bank MSBSPs.\1322\
---------------------------------------------------------------------------

    \1322\ See supra section II.A.3.a. (discussing proposed
amendments to Rules 17a-4 and 18a-6).
---------------------------------------------------------------------------

Six-Year Preservation Requirement
    The Commission proposes that many, but not all, of the same
recordkeeping requirements that would be applicable to broker-dealer
SBSDs and broker-dealer MSBSPs under the proposed amendments to Rule
17a-4 would also apply to stand-alone SBSDs, stand-alone MSBSPs, bank
SBSDs, and bank MSBSPs under proposed Rule 18a-6.
    Paragraph (a) of Rule 18a-6 would require that certain records
required to be created and maintained under Rule 18a-5 be preserved for
a period of not less than six years, the first two in an easily
accessible place. Further, paragraph (a)(1) of proposed Rule 18a-6
would apply to stand-alone SBSDs and stand-alone MSBSPs. Paragraph
(a)(2) of proposed Rule 18a-6 would apply to bank SBSDs and bank
MSBSPs.
Three-Year Preservation Requirement for Other Rule 18a-5 Records
    As discussed above,\1323\ paragraphs (a) and (b) of proposed Rule
18a-5 would require stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs,
and bank MSBSPs to make and keep current records that are modeled on
the records required to be made and kept under Rule 17a-3. Paragraph
(b)(1) of proposed Rule 18a-6 would require that records required to be
made by stand-alone SBSDs and stand-alone MSBSPs under Rule 18a-5, be
retained for three years, the first two years in an easily accessible
place. Paragraph (b)(2) of proposed Rule 18a-6 would establish a three-
year record retention period for certain delineated records, as well as
the records required to be made by bank SBSDs and bank MSBSPs under
Rule 18a-5.
---------------------------------------------------------------------------

    \1323\ See supra section II.A.2.a. (discussing paragraphs (a)
and (b) of proposed Rule 18a-5).
---------------------------------------------------------------------------

Three-Year Preservation Requirement for Certain Other Records Made or
Received
    The Commission is also proposing in paragraph (b) of Rule 18a-6
that stand-alone SBSDs, stand-alone MSBSPs, bank SBSDs, and bank MSBSPs
must preserve for a period of not less than three years, the first two
years in an easily accessible place, other categories of records if the
SBSD or MSBSP makes or receives the record.\1324\
---------------------------------------------------------------------------

    \1324\ See supra section II.A.3.a. (discussing provision-by-
provision retention provisions in Rules 17a-4 and proposed Rule 18a-
6).
---------------------------------------------------------------------------

    As discussed below, the Commission preliminarily believes that
there will be costs stemming from the requirement that stand-alone
SBSDs, stand-alone MSBSPs, bank SBSDs, and bank MSBSPs make and keep
current certain records as set forth in proposed Rule 18a-5.\1325\ As
further discussed below, the Commission preliminarily believes that the
requirement to retain these records, once made and kept current, should
represent a marginal cost to registrants.\1326\
---------------------------------------------------------------------------

    \1325\ See infra section V.E.
    \1326\ Id.
---------------------------------------------------------------------------

    In order to assist its evaluation of the costs and benefits, as
well as any larger economic effects associated with the proposal, the
Commission requests comment.
5. Reporting
    As stated above, Rule 17a-5 has two main elements: (1) a
requirement that broker-dealers file periodic unaudited reports
containing information about their financial and operational condition
on a FOCUS Report; and (2) a requirement that broker-dealers annually
file financial statements and certain reports and a report covering the
financial statements and reports prepared by an independent public
accountant registered with the PCAOB in accordance with PCAOB
standards.\1327\
---------------------------------------------------------------------------

    \1327\ Id. These requirements are described in more detail
below.
---------------------------------------------------------------------------

    The reporting program codified in Rule 17a-5 is designed, among
other things, to promote compliance with Rules 15c3-1 and 15c3-3 and to
assist the Commission, SROs, and state securities regulators in
conducting effective examinations of broker-dealers. Those publicly
available broker-dealer reporting requirements, such as the statement
of financial condition, would promote transparency of the financial and
operational condition of the broker-dealer to the Commission, the
firm's DEA, and to the public.
    The Commission preliminarily believes that the economic effects
associated with the new reporting requirements would depend upon the
nature of the filings such registrants make today based upon their
registration status (e.g., broker-dealer vs. non-broker-dealer). The
Commission preliminarily believes that the majority of the economic
effects associated with the Title VII rulemakings will stem from the
requirements relating to capital, margin, and segregation \1328\ as
compared to the proposed rules in the instant rulemaking.
---------------------------------------------------------------------------

    \1328\ For example, the Commission anticipates substantial
economic costs to arise as a result of the capital, margin, and
segregation requirements that have been proposed to apply to SBSDs
and MSBSPs. See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers,77 FR
70299-70328.
---------------------------------------------------------------------------

    The Commission is cognizant, however, that the proposed reporting
requirements could create costs to firms, and indirectly to the
financial markets. For example, the Commission recognizes that there
will be new compliance and audit costs associated with the required
financial report and compliance report. While the Commission is aware
of these costs, section 15F(f) of the Exchange Act provides the
Commission with authority to require each registered SBSD to make a
report regarding, among other things, the financial condition of the
firm. The Commission believes that it would be impractical to monitor
the financial condition of SBSDs without periodic financial reports,
including annual audited reports, that elicit detail about these firms'
security-based swap activities.
    The Commission notes that it has proposed steps to minimize costs
where appropriate and consistent with its statutory mandate. For
example and as described in more detail below,\1329\ for stand-alone
SBSDs, the Commission would not require the filing of several of the
reports that are required to be filed by broker-dealers, such as the
Form Custody or the information filed with SIPC by broker-
dealers.\1330\ Further, the decision to model Form SBS on the current
FOCUS Report was made in part to reduce the uncertainty and additional
compliance costs that would stem from devising an entirely new
reporting form and rules. While the Commission understands that stand-
alone SBSDs may not currently be registered as broker-dealers and thus
may not currently be filing the FOCUS Report (and thus have no
familiarity with it), many stand-alone SBSDs may be affiliated with or
part of a larger

financial firm that contains a broker-dealer, thus providing a source
of experience, internal to the firm, with the FOCUS Report which in
turn may reduce the compliance-related costs. Moreover, the accounting
and legal communities are familiar with the FOCUS Report, so the
Commission preliminarily believes that this familiarity should mitigate
the compliance costs for stand-alone SBSDs insofar as outside
assistance is well-versed with the FOCUS Report. At the same time, the
Commission acknowledges that there may be stand-alone SBSDs affiliated
with, for example, FCMs, and those firms would conceivably benefit from
rules based upon or similar to CFTC rules.
---------------------------------------------------------------------------

    \1329\ See supra section II.B.2.b.
    \1330\ See 17 CFR 240.17a-5(a)(4) and (e)(4).
---------------------------------------------------------------------------

    In order to aid its analysis of the economic effects relating to
the proposed reporting requirements, the Commission requests comment.
Comments setting forth specific costs related to the proposed reporting
requirements, as well as benefits, would be particularly helpful to the
Commission's analysis.
a. Broker-Dealer SBSDs and Broker-Dealer MSBSPs
Form SBS
    As described above,\1331\ broker-dealer SBSDs and broker-dealer
MSBSPs would file proposed Form SBS instead of a particular version of
the FOCUS Report. An ANC broker-dealer that currently files FOCUS Part
II CSE that registers with the Commission as an SBSD or MSBSP would
experience the smallest marginal impact on its reporting obligations.
This is the case because proposed Form SBS is modeled upon Part II CSE,
but includes additional line items and sections to elicit more detail
about security-based swap and swap activities.\1332\ Similarly, for
dealers currently registered as OTC derivatives dealers, to the extent
these firms decide to register as broker-dealer SBSDs or broker-dealer
MSBSPs, the Commission preliminarily believes that the burdens involved
would be similarly modest to those encountered by the ANC broker-
dealers because Part IIB of the FOCUS Report contains many similar line
items as Part II CSE.\1333\
---------------------------------------------------------------------------

    \1331\ See supra section II.B.2. (discussing broker-dealer
SBSDs' and broker-dealer MSBSPs' use of proposed Form SBS).
    \1332\ Id.
    \1333\ See supra section II.B.2.b.
---------------------------------------------------------------------------

    The information elicited by Form SBS from the ANC broker-dealers
and OTC derivatives dealers that decide to register as broker-dealer
SBSDs or broker-dealer MSBSPs should assist the Commission and the
firms' DEAs to conduct effective examinations of broker-dealer SBSDs
and broker-dealer MSBSPs. The broker-dealer SBSD and broker-dealer
MSBSP reporting requirements would promote transparency of the
financial and operational condition of the broker-dealer SBSD or
broker-dealer MSBSP to the Commission and to the public.
    With respect to the economic effects associated with this aspect of
the proposal, the Commission preliminarily believes that the scope of
additional information requested in Form SBS, generally related to the
firms' security-based swap activities, is relatively circumscribed
relative to what these registrants report in Part II CSE or Part IIB of
the FOCUS Report.
    With respect to broker-dealers that currently do not file FOCUS
Part II CSE or FOCUS Part IIB, the Commission believes the economic
impact and, more specifically, the costs associated with complying with
new Form SBS, may be more substantial. This is the case because, as
described above,\1334\ Form SBS elicits much of the same information as
FOCUS Part II CSE and FOCUS Part IIB, but includes additional line
items and sections to elicit more detail about security-based swap and
swap activities. Accordingly, for those firms not currently filing
FOCUS Part II CSE or FOCUS Part IIB, there will be a greater change, in
terms of the amount of information that will be elicited on the form.
These firms may incur greater compliance-related costs.
---------------------------------------------------------------------------

    \1334\ See supra section II.B.2.
---------------------------------------------------------------------------

    The Commission has carefully considered Form SBS in light of its
experience with broker-dealer regulation and in relation to its new
statutory responsibilities under section 15F of the Exchange Act and
preliminarily believes that Form SBS would promote compliance with
Rules 15c3-1 and 15c3-3 and to assist the Commission, SROs, and state
securities regulators in conducting effective examinations of broker-
dealer SBSDs and broker-dealer MSBSPs. The proposed broker-dealer SBSD
and broker-dealer MSBSP reporting requirements would promote
transparency of the financial and operational condition of the broker-
dealer to the Commission, the firm's DEA, and to the public.
    The Commission has designed Form SBS to elicit the information that
it believes it needs to effectively oversee the financial condition of
broker-dealer SBSDs and broker-dealer MSBSPs. To aid its analysis of
whether there are parts of Form SBS that could be curtailed or
eliminated in order to lessen compliance-related costs, the Commission
requests comment. To the extent that commenters believe that
information the Commission has proposed to elicit is unnecessary,
specific reasons for such a view would be particularly helpful.
Moreover, if commenters object to certain sections of Form SBS,
specific estimates of the costs to comply with those sections would
also aid the Commission's analysis of regulatory necessity. Finally, in
order to help it consider and evaluate the full range of effects
associated with the proposal, the Commission requests data to assess
the costs and benefits of the proposals with respect to the various
classes of registrants (e.g., Part IIA filers, Part II filers, Part IIB
filers, and Part II CSE filers).
Audited Annual Reports
    As discussed below, the Commission anticipates that there may be
costs associated with broker-dealer SBSDs or broker-dealer MSBSPs
completing and filing the annual reports required under paragraph (d)
of Rule 17a-5.\1335\ Currently, as described in more detail above,
broker-dealers are required to file on an annual basis a financial
report that includes many parts of the FOCUS Report in a format
consistent with the version of FOCUS Report filed by the broker-
dealer.\1336\ The proposed amendments to the financial report would
include additional information about the broker-dealer's security-based
swap activity not included in the financial report currently filed by
broker-dealer.\1337\ Moreover, the proposal would increase the cost of
completing the annual compliance report filed by a broker-dealer SBSD
because the compliance report for such firms would include statements
about the firm's compliance with proposed Rule 18a-4, the proposed
customer segregation rule that would apply to broker-dealer
SBSDs.\1338\
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    \1335\ See infra section V.E. (relating to implementation
considerations).
    \1336\ See 17 CFR 240.17a-5(d)(2).
    \1337\ Compare, e.g., FOCUS Report Part II CSE, Statement of
Financial Condition, Line 4, with Form SBS, Statement of Financial
Condition, Line 4.
    \1338\ See supra section II.B.3.a.; see infra section V.E.
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    The Commission also anticipates that the cost to audit the annual
reports filed by broker-dealer SBSDs or broker-dealer MSBSPs would
rise.\1339\ Currently, and as described in more detail above, broker-
dealers are required to engage a PCAOB-registered independent public
accountant to conduct an annual audit

of the broker-dealer's annual reports.\1340\ The Commission believes
the additional required components to the financial report and the
compliance report would increase the costs of ongoing compliance as
well as the annual audit.
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    \1339\ Id.
    \1340\ See supra section II.B.1.
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Liquidity Stress Test
    As discussed above,\1341\ the Commission has proposed amendments to
Rule 15c3-1 that would establish liquidity stress test requirements for
ANC broker-dealers, which would include ANC broker-dealer SBSDs.\1342\
Under the proposed liquidity stress test requirements, ANC broker-
dealers would be required, among other things, to: (1) Perform a
liquidity stress test at least monthly that takes into account certain
assumed conditions lasting for 30 consecutive days; and (2) maintain at
all times liquidity reserves based on the results of the liquidity
stress test comprised of unencumbered cash or U.S. government
securities.\1343\ The proposed liquidity stress test requirement is
designed to provide an additional level of protection against
disruptions in the firm's ability to obtain funding for a firm with
significant proprietary positions in securities or derivatives.\1344\
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    \1341\ See supra section II.A.2.a.
    \1342\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70252-70254. See also paragraph (f) of Rule 15c3-1, as proposed to
be amended.
    \1343\ Id.
    \1344\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70314.
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    The Commission is proposing that ANC broker-dealers report to the
Commission the results of the liquidity stress test on a monthly
basis.\1345\ The Commission has discussed the economic effects
associated with the liquidity stress test requirement and requested
comment on those effects.\1346\ As discussed below, the Commission
preliminarily believes that paragraph (a)(5)(vii) of Rule 17a-5 would
create a cost to file the report, but that such costs would not
materially contribute to the economic effects associated with the
liquidity stress test proposal.\1347\
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    \1345\ See paragraph (a)(5)(vii) of Rule 17a-5, as proposed to
be amended.
    \1346\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70314.
    \1347\ See infra section V.E.
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    As discussed above in section V.C.1. of this release, above, the
Commission believes that the proposed reporting requirements will
result in benefits of improving the oversight, transparency, and
accountability of security-based swap activities.
    In order to help it consider and evaluate the full range of effects
associated with the proposal, the Commission requests comment on the
anticipated benefits and costs of this portion of the proposed rule
changes. Quantitative and qualitative data would be particularly useful
to the Commission in helping it evaluate the proposals.
b. Stand-Alone SBSDs
Form SBS
    As described in more detail above,\1348\ stand-alone SBSDs would be
required to file Form SBS with the Commission or its designee on a
monthly basis.\1349\ Given that stand-alone SBSDs are not broker-
dealers, these firms would not have experience filing the FOCUS Report,
and thus reporting on Form SBS could represent a significant
undertaking. While the Commission expects that stand-alone SBSDs
currently prepare financial statements that encompass their security-
based swap activity, the reporting on Form SBS may require that firms
establish new systems that facilitate the reporting of the required
information.\1350\ Relative to what these firms generate now, Form SBS
would likely elicit greater detail about the registrant's security-
based swap positions, which in turn would require the registrants to
have additional details about the firm's security-based swap positions
in order to be able to provide the security-based swap information
elicited by Form SBS. Since many of the entities that the Commission
expects will register as stand-alone SBSDs are currently not regulated,
they are likely to be unaccustomed to completing and filing detailed
reports with financial regulators. Therefore, and as discussed below,
the Commission anticipates that stand-alone SBSDs will bear substantial
costs in connection with completing and filing Form SBS.\1351\
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    \1348\ See supra section II.B.2.
    \1349\ The Commission estimates that nine of the approximately
fifty entities that it anticipates to register with the Commission
as SBSDs will be stand-alone SBSDs.
    \1350\ For example, stand-alone SBSDs would be required to
submit computations relating to the firm's level of net capital, net
capital required, and amount required to be held in the special
reserve account for the exclusive benefit of security-based swap
customers. See supra section II.B.2.
    \1351\ See infra section V.E.
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Audited Annual Reports
    In addition, stand-alone SBSDs would be required to generate and
file its financial report and compliance report with the Commission on
an annual basis.\1352\ While the Commission expects that stand-alone
SBSDs currently prepare financial statements that encompass their
security-based swap activity, under the proposed rules, stand-alone
SBSDs would be required to prepare a financial report in a format
consistent with Form SBS, which includes numerous entries,
computations, and schedules that a stand-alone SBSD may not prepare on
its own accord. The compliance report would contain several statements
and descriptions related to the firm's compliance with the financial
responsibility rules that would be entirely new for most stand-alone
SBSD registrants. Stand-alone SBSDs would be required to hire a PCAOB-
registered independent public accountant to prepare an audit report
covering annual reports. As explained below, the Commission estimates
that all stand-alone SBSDs would incur compliance-related costs
engaging a PCAOB-registered accountant to perform the audit.\1353\
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    \1352\ See paragraph (c) of proposed Rule 18a-7.
    \1353\ See infra section V.E.
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Stand-Alone ANC SBSD Reporting Requirements
    For stand-alone ANC SBSDs, there would be a number of additional
monthly and quarterly reporting requirements, independent of those on
Form SBS.\1354\ The additional stand-alone ANC SBSD reports are modeled
on parallel reporting requirements for ANC broker-dealers.\1355\
Consequently, stand-alone ANC SBSDs would be required to file the same
types of additional reports relating to their use of internal models
and liquidity stress tests as ANC broker-dealers, including ANC broker-
dealer SBSDs.
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    \1354\ See supra section II.B.3.a. See also paragraph (a)(3) of
proposed Rule 18a-7.
    \1355\ Compare paragraph (a)(3) of proposed Rule 18a-7, with
paragraph (a)(5) of Rule 17a-5, as proposed to be amended.
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    As discussed below, the Commission preliminarily believes that
stand-alone ANC SBSDs may incur compliance costs related to, among
other things, preparing and filing the additional reports that would be
required under the proposed rules.\1356\ The Commission believes the
additional reports that stand-alone ANC SBSDs would be required to file
with the Commission would give rise to less substantial

compliance costs relative to the other costs under the proposal because
the additional reporting obligations for such firms are relatively few
and are generally closely related to their use of internal models
approved by the Commission to calculate market and credit risk. Stand-
alone ANC SBSDs would incur the majority of costs associated with these
internal models in designing and operating the models themselves rather
than the reports arising from these models.
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    \1356\ See infra section V.E. See also paragraph (a)(3) of
proposed Rule 18a-7.
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    The Commission also preliminarily believes that utilizing the new
reporting requirements would have the benefit of helping the Commission
evaluate whether a stand-alone SBSD is operating in compliance with the
Exchange Act and the rules thereunder. For stand-alone SBSDs that
previously did not produce detailed financial statements, the proposal
could require these firms to upgrade their technology to store and
maintain the information they need to report on Form SBS. These
upgrades would likely entail costs for the firms, discussed below, but
also possibly help these firms more efficiently track their trading and
risk exposure in security-based swaps.\1357\ The Commission also
preliminarily believes that the availability of Form SBS will greatly
enhance the Commission's ability to oversee the financial condition of
these registrants, and the public availability of a firm's audited
Statement of Financial Condition and net capital computations will
facilitate the public's evaluation of the financial health of a
registrant.
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    \1357\ See infra section V.E.
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    In order to assist its evaluation of any potential economic effects
associated with the proposals, the Commission requests data to help it
evaluate the costs and benefits commenters believe would result.
c. Stand-Alone MSBSPs
    The Commission preliminarily believes the economic impact
associated with the proposed reporting requirements on stand-alone
MSBSPs would be significantly less than the effects upon stand-alone
SBSDs. As with stand-alone SBSDs, the reporting requirement would be an
entirely new obligation for stand-alone MSBSPs. However, there would be
a number of important differences between the reporting requirements of
stand-alone MSBSPs as compared to stand-alone SBSDs.
Form SBS
    First, stand-alone MSBSPs would be required to complete a simpler
Computation of Tangible Net Worth, compared to the much longer and
complex Computation of Net Capital and Computation of Minimum
Regulatory Capital Requirements sections in Part 1 of the form that
stand-alone SBSDs are required to complete.\1358\ The Commission
believes that stand-alone SBSDs and stand-alone MSBSPs will incur costs
completing those parts of Form SBS that are applicable to such
entities, as discussed below.\1359\ Moreover, stand-alone SBSDs would
not be required to complete the sections in Part 1 of Form SBS that
require firms to compute the amount that must be maintained in the
security-based swap customer reserve account or the section relating to
information for the possession or control requirements for security-
based swap customers because stand-alone MSBSPs generally will not be
subject to those requirements under proposed Rule 18a-4.\1360\
Furthermore, stand-alone MSBSPs would not be required to complete and
file a number of sections of Part 1 of the form that relate to the
operational data related to the firm; specifically, they would not be
required to complete and file the Capital Withdrawals, Capital
Withdrawals Recap, and the Financial and Operational Data sections of
Form SBS.\1361\
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    \1358\ Compare Form SBS, Computation of Tangible Net Worth, with
Form SBS, Computation of Net Capital (Filer Authorized to Use
Models) and Form SBS, Computation of Minimum Regulatory Capital
Requirements (Non-Broker-Dealer).
    \1359\ See infra section V.E.
    \1360\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, 77 FR
70274-70288.
    \1361\ See Form SBS, Capital Withdrawals, Capital Withdrawals
Recap, and Financial and Operational Data.
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Audited Annual Reports
    Stand-alone MSBSPs would be required to comply with the proposed
requirements relating to the preparation, auditing, and filing of the
annual reports.\1362\ As discussed below, the Commission estimates that
all stand-alone MSBSPs would incur costs stemming from the requirement
to engage a PCAOB-registered auditor.\1363\ The Commission anticipates
that stand-alone MSBSPs will incur fewer costs in complying with these
requirements as compared to stand-alone SBSDs because stand-alone
MSBSPs would not be required to file the compliance report or the
exemption report.
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    \1362\ See supra section II.B.3.a.
    \1363\ See infra section V.E.
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    As discussed above in section V.C.1. of this release, the
Commission believes that the proposed reporting requirements for stand-
alone MSBSPs will result in benefits by improving the regulatory
oversight of security-based swap activities. The Commission also
recognizes that the proposed reporting requirements would create costs.
Preliminarily, the Commission believes most of these costs would be
compliance-related, as discussed in more detail below.\1364\ In order
to help it consider and evaluate the full range of costs and larger
economic effects, if any, associated with the proposed requirement for
stand-alone MSBSPs to complete and submit Form SBS, and to submit
annual audited financial statements, the Commission requests comment.
Data to assess the costs and benefits of the reporting requirements
that would apply to stand-alone MSBSPs would be particularly useful.
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    \1364\ See infra section V.E.
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d. Bank SBSDs and Bank MSBSPs
    As described above,\1365\ bank SBSDs and bank MSBSPs would also
have to periodically complete and file Form SBS with the Commission.
However, relative to broker-dealer SBSDs, broker-dealer MSBSPs, stand-
alone SBSDs, and stand-alone MSBSPs, banks would report less
information on Form SBS. The financial information bank SBSDs and bank
MSBSPs would provide in Part 2 of the Form is based on the ``call
report'' banks file with the prudential regulators.\1366\ Bank SBSDs
and bank MSBSPs would also report, in Part 5 of Form SBS, information
relating to their security-based swap activities, consistent with the
directive in section 15F(f) of the Exchange Act. Bank SBSDs and bank
MSBSPs would also be required to report on change of fiscal year, as
well as if the registrant changes accountants. However, bank SBSDs and
bank MSBSPs would not be required to complete and file the audited
financial report. The Commission has limited the number of schedules
that would be required to be completed and filed by bank SBSDs and bank
MSBSPs within Part 5 of Form SBS to one schedule that elicits detailed
information about the firm's security-based swap positions. This
requirement in Part 5 would require the bank SBSD or bank MSBSP to
create and maintain additional details about the firm's security-based
swap positions in order to be able to disclose the necessary detail on
Form SBS.
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    \1365\ See supra section II.B.2.
    \1366\ See 12 U.S.C. 324; 12 U.S.C. 1817; 12 U.S.C. 161; 12
U.S.C. 1464.
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    As discussed in more detail below, the Commission preliminarily
believes that bank SBSDs and bank MSBSPs will

incur compliance costs related to reporting the information that would
be required on Form SBS.\1367\ However, the Commission has limited the
number of schedules to be reported in Part 5 to one schedule that is
generally derived from the bank SBSD's or bank MSBSP's call report.
Thus, the Commission does not believe Part 2 would require substantial
additional effort to complete.\1368\
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    \1367\ See infra section V.E.
    \1368\ Whenever possible, the Commission has proposed the same
line item numbers as are used for the call report (but appended with
the letter ``b'' in Form SBS) to facilitate a bank SBSD's or bank
MSBSP's use of data from the call report.
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    The Commission preliminarily believes the reporting requirements
for bank SBSDs and bank MSBSPs would help ensure that registrants
follow applicable capital, margin, and segregation rules. The
Commission believes that such capital, margin, and segregation rules
are an integral part to ensuring that security-based swap activity is
conducted in a financially responsible manner.
    The Commission requests comment about its analysis of the costs and