elect to operate pursuant to the rule. Under paragraph (d)(1), a firm
can make the election as part of the process of applying to register as
an SBSD. In this case, the firm must provide written notice to the
Commission and the CFTC during the registration process of its intent
to operate pursuant to the rule. Under paragraph (d)(2) of Rule 18a-10,
an SBSD can make an election to operate under the alternative
compliance mechanism after the firm has been registered as an SBSD by
providing written notice to the Commission and the CFTC of its intent
to operate pursuant to the rule.
6. Amendments to Rule 3a71-6
    The Commission is amending Rule 3a71-6 to provide persons with the
ability to apply for substituted compliance with respect to the capital
and margin requirements of Section 15F(e) of the Exchange Act and Rules
18a-1, 18a-2, and 18a-3 thereunder.

B. Use of Information

    The Commission, its staff, and SROs, as applicable, will use the
information collected under Rules 18a-1, 18a-2, 18a-3, 18a-4, and 18a-
10, as well as the amendments to Rule 15c3-1 and Rule 15c3-3 to
evaluate whether an SBSD, MSBSP, or stand-alone broker-dealer is in
compliance with each rule that applies to the entity and to help
fulfill their oversight responsibilities. The Commission plans to use
the information collected pursuant to Rule 3a71-6, as amended, to
evaluate requests for substituted compliance with respect to the
capital and margin requirements. The collections of information also
will help to ensure that SBSDs, MSBSPs, and stand-alone broker-dealers
are meeting their obligations under the new rules and rule amendments
and have the required policies and procedures in place. In this regard,
the collections of information will be used by the Commission as part
of its ongoing efforts to monitor and enforce compliance with the
federal securities laws through, among other things, examinations and
inspections.
    Rules 18a-1 and 18a-2, and the amendments to Rule 15c3-1, are
integral parts of the Commission's financial responsibility program for
nonbank SBSDs and MSBSPs, and stand-alone broker-dealers. Rules 18a-1
and 15c3-1 are designed to ensure that nonbank SBSDs and stand-alone
broker-dealers, respectively, have sufficient liquidity to meet all
unsubordinated obligations to customers and counterparties and,
consequently, if the nonbank SBSD or stand-alone broker-dealer fails,
sufficient resources to wind-down in an orderly manner without the need
for a formal proceeding. The collections of information in Rule 18a-1,
Rule 18a-2 and the amendments to Rule 15c3-1 facilitate the monitoring
of the financial condition of nonbank SBSDs and MSBSPs, and stand-alone
broker-dealers by the Commission and its staff.
    Rule 18a-3 is intended to help ensure the safety and soundness of
the nonbank SBSD or MSBSP. Records maintained by these entities
relating to the collection of collateral required by Rule 18a-3 will
assist examiners in evaluating whether nonbank SBSDs are in compliance
with requirements in the rule.
    Rule 18a-4 and the amendments to Rule 15c3-3 are integral to the
Commission's financial responsibility program as they are designed to
protect the rights of security-based swap customers and their ability
to promptly obtain their property from an SBSD or stand-alone broker-
dealer. The collection of information requirements in the rule and
amendments will facilitate the process by which the Commission and its
staff monitor how SBSDs and stand-alone broker-dealers are fulfilling
their custodial responsibilities to security-based swap customers. Rule
18a-4 and the amendments to Rule 15c3-3 also require that an SBSD to
provide certain notices to its counterparties to alert them to the
alternatives available to them with respect to segregation of non-
cleared security-based swaps. The Commission and its staff will use
this new collection of information to confirm registrants are providing
the requisite notice to counterparties.
    Rule 18a-10 requires a stand-alone SBSD to: (1) Provide certain
disclosures to its counterparties to alert them that the firm will be
complying with the capital, margin, and segregation requirements of the
CEA and the CFTC's rules in lieu of Rules 18a-1, 18a-3, and 18a-4; (2)
to notify the Commission and the CFTC the firm is electing to operate
under the conditions of the rule; and (3) provide a notice to the
Commission and the CFTC if it fails to meet a condition of the rule.
The Commission and its staff will use this new collection of
information to confirm which registrants are operating under the
conditions of the rule. In addition, the Commission will use the
information to confirm that registrants are providing the requisite
disclosures to counterparties, and assist examiners in evaluating
whether SBSDs are in compliance with requirements in the rule.
    Finally, the requests for substituted compliance determinations
under Rule 3a71-6 are required when a person seeks a substituted
compliance determination with respect to the capital and margin
requirements applicable to foreign SBSDs and MSBSPs. Consistent with
Exchange Act Rule 0-13(h), the Commission will publish in the Federal
Register a notice that a complete application has been submitted, and
provide the public the opportunity to submit to the Commission any
information that relates to the Commission action requested in the
application.

C. Respondents

    The Commission estimated the number of respondents in the proposing
release.\825\ The Commission received no comment on these estimates and
continues to believe they are appropriate. However, the number of
respondents has been updated to include stand-alone broker-dealers
engaged in security-based swap activities as well as the number of
foreign SBSDs and MSBSPs. In addition, in response to comments
received, the Commission is adopting new Rule 18a-10, which has
resulted in the number of respondents being updated in Rules 18a-1, as
adopted, and Rule 18a-3, as adopted.
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    \825\ See Capital, Margin, and Segregation Proposing Release, 77
FR at 70292-93.
---------------------------------------------------------------------------

    The following charts summarize the Commission's respondent
estimates:

------------------------------------------------------------------------
                                                             Number of
                   Type of respondent                       respondents
------------------------------------------------------------------------
SBSDs...................................................              50
Bank SBSDs..............................................              25
Nonbank SBSDs...........................................              25
Broker-Dealer SBSDs.....................................              16
Non-broker-dealer SBSDs.................................              34
Stand-Alone SBSDs.......................................               9

ANC Broker-Dealer SBSDs.................................              10
Broker-Dealer SBSDs (Not Using Models)..................               6
Stand-Alone SBSDs (Using Models)........................               4
Stand-Alone SBSDs (Not Using Models)....................               2
Stand-Alone Broker-Dealers..............................              25
Nonbank MSBSPs..........................................               5
Nonbank SBSDs subject to Rule 18a-3.....................              22
Foreign SBSDs and MSBSPs................................              22
Foreign SBSDs and/or foreign MSBSPs submitting                         3
 substituted compliance applications....................
Bank SBSDs exempt from requirements of Rule 18a-4.......              25
Stand-Alone SBSDs exempt from requirements of Rule 18a-4               6
Stand-Alone SBSDs operating under Rule 18a-10...........               3
------------------------------------------------------------------------

    Consistent with prior releases, based on available data regarding
the single-name CDS market--which the Commission believes will comprise
the majority of security-based swaps--the Commission estimates that the
number of nonbank MSBSPs likely will be five or fewer and, in
actuality, may be zero.\826\ Therefore, to capture the likely number of
nonbank MSBSPs that may be subject to the collections of information
for purposes of the PRA, the Commission estimates that five entities
will register with the Commission as nonbank MSBSPs.\827\ The
Commission estimates there will be 1 broker-dealer MSBSP for the
purposes of calculating paperwork burdens, in recognition that broker-
dealer MSBSPs and stand-alone MSBSPs are subject to different burdens
under the new and amended rules in certain instances.
---------------------------------------------------------------------------

    \826\ See Registration Process for Security-Based Swap Dealers
and Major Security-Based Swap Participants, 80 FR at 48990. 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 at 30727.
    \827\ See Applications by Security-Based Swap Dealers or Major
Security-Based Swap Participants for Statutorily Disqualified
Associated Persons to Effect or Be Involved in Effecting Security-
Based Swaps, 84 FR at 4921.
---------------------------------------------------------------------------

    Consistent with prior releases, the Commission estimates that 50 or
fewer entities ultimately may be required to register with the
Commission as SBSDs, and 16 broker-dealers will likely seek to register
as SBSDs.\828\
---------------------------------------------------------------------------

    \828\ See Capital, Margin, and Segregation Proposing Release, 77
FR at 70292.
---------------------------------------------------------------------------

    Because many of the dealers that currently engage in OTC
derivatives activities are banks, the Commission estimates that
approximately 75% of the 34 non-broker-dealer SBSDs will be bank SBSDs
(i.e., 25 firms), and the remaining 25% will be stand-alone SBSDs
(i.e., 9 firms).\829\
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    \829\ The Commission does not anticipate that any firms will be
dually registered as a broker-dealer and a bank.
---------------------------------------------------------------------------

    Of the nine stand-alone SBSDs, the Commission estimates, based on
its experience with ANC broker-dealers and OTC derivatives dealers,
that four firms will apply to use internal models to compute net
capital under Rule 18a-1.\830\ This estimate has been reduced from six
in the proposing release \831\ to four to account the adoption of Rule
18a-10, which will enable stand-alone SBSDs to elect an alternative
compliance mechanism and comply with capital, margin, and segregation
requirements of the CEA and the CFTC's rules in lieu of Rules 18a-1,
18a-3, and 18a-4. Finally, in the proposing release, the Commission
estimated that 3 stand-alone SBSDs would not apply to use models.\832\
This estimate has been modified from 3 firms to 2 firms to account for
the nonbank SBSDs that will elect the alternative compliance mechanism
under Rule 18a-10.
---------------------------------------------------------------------------

    \830\ Internal models, while more risk-sensitive than
standardized haircuts, tend to substantially reduce the amount of
the deductions to tentative net capital in comparison to the
standardized haircuts because the models recognize more offsets
between related positions than the standardized haircuts. Therefore,
the Commission expects that stand-alone SBSDs that have the
capability to use internal models to calculate net capital will
choose to do so.
    \831\ See Capital, Margin, and Segregation Proposing Release, 77
FR at 70293.
    \832\ See 77 FR at 70293.
---------------------------------------------------------------------------

    Of the 16 broker-dealer SBSDs, the Commission estimates that 10
firms will operate as ANC broker-dealer SBSDs authorized to use
internal models to compute net capital under Rule 15c3-1.\833\
---------------------------------------------------------------------------

    \833\ Currently, 5 broker-dealers are registered as ANC broker-
dealers. The Commission has previously estimated that all current
and future ANC broker-dealers will also register as SBSDs. See
Recordkeeping and Reporting Requirements for Security-Based Swap
Dealers, Major Security-Based Swap Participants, and Broker-Dealers;
Capital Rule for Certain Security-Based Swap Dealers, 79 FR at
25261.
---------------------------------------------------------------------------

    The Commission estimates that 25 registered broker-dealers will be
engaged in security-based swap activities but will not be required to
register as an SBSD or MSBSP (i.e., will be stand-alone broker-
dealers). 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.\834\ First, because the
Exchange Act has not previously defined security-based swaps as
securities, security-based swaps have not been required to be traded
through registered broker-dealers.\835\ Second, a broker-dealer
engaging in security-based swap activities is currently subject to
existing regulatory requirements with respect to those activities,
including capital, margin, segregation, and recordkeeping requirements.
The existing financial responsibility requirements make it more costly
to conduct these activities in a broker-dealer than in an unregulated
entity. As a result, security-based swap activities are mostly
concentrated in affiliates of stand-alone broker-dealers.\836\
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    \834\ See Capital, Margin, and Segregation Proposing Release, 77
FR at 70302.
    \835\ See Section 761 of the Dodd-Frank Act (amending definition
of security in Section 3 of the Exchange Act).
    \836\ See ISDA Margin Survey 2015 (Aug. 2015). The ISDA survey
examines the state of collateral use and management among
derivatives dealers and end-users. The appendix to the survey lists
firms that responded to the survey, including broker-dealers. The
ISDA margin surveys cited in this release are available at https://www.isda.org/category/research/surveys/.
---------------------------------------------------------------------------

    For purposes of the exemption from the requirements of Rule 18a-4
for stand-alone SBSDs and bank SBSDs, the Commission estimates that 25
bank SBSDs and 6 stand-alone SBSDs will be exempt from the requirements
of Rule 18a-4 pursuant to paragraph (f) of the rule.\837\ For purposes
Rule 18a-10, the Commission estimates that 3 stand-alone SBSDS will
operate pursuant to the rule.\838\
---------------------------------------------------------------------------

    \837\ See paragraph (f) of Rule 18a-4, as adopted. The
Commission estimates that all 25 bank SBSDs will be exempt from the
requirements of Rule 18a-4. These bank SBSDs will be subject to
disclosure and notice requirements under paragraph (f) of Rule 18a-
4, as adopted.
    \838\ These respondents (2 stand-alone SBSDS using models and
one stand-alone SBSD not using models) have been moved from the
collections of information for proposed Rules 18a-1 and 18a-3. In
the proposing release, the Commission estimated that 25 nonbank
SBSDs would be subject to Rule 18a-3, as proposed. See Capital,
Margin, and Segregation Proposing Release, 77 FR at 70293. As a
result of the adoption of Rule 18a-10, the Commission estimates that
22 nonbank SBSDs will be subject to Rule 18a-3 (25 nonbank SBSDs
minus 3 stand-alone SBSDs electing to operate under Rule 18a-10 = 22
respondents). As discussed above, the collection of information for
Rule18a-10 is included with the collection of information for Rule
18a-3.
---------------------------------------------------------------------------

    For purposes of estimating the number of respondents with respect
to the amendments to Rule 3a71-6, applications for substituted
compliance may be filed by foreign financial authorities, or by non-
U.S. SBSDs or MSBSPs. Consistent with prior estimates, the Commission
staff expects that there may be approximately 22 non-

U.S. entities that may potentially register as SBSDs.\839\ Potentially,
all such non-U.S. SBSDs, or some subset thereof, may seek to rely on
substituted compliance in connection with the requirements being
adopted today.\840\ For purposes of the PRA, however, consistent with
prior estimates, the Commission estimates that 3 of these security-
based swap entities will submit such applications in connection with
the Commission's capital and margin requirements.\841\
---------------------------------------------------------------------------

    \839\ See Trade Acknowledgment and Verification of Security-
Based Swap Transactions, 81 FR at 39832.
    \840\ It is possible that some subset of MSBSPs will be non-U.S.
MSBSPs that will seek to rely on substituted compliance in
connection with the final capital and margin rules. See Trade
Acknowledgment and Verification of Security-Based Swap Transactions,
81 FR at 39832.
    \841\ See Trade Acknowledgment and Verification of Security-
Based Swap Transactions, 81 FR at 38392.
---------------------------------------------------------------------------

D. Total Initial and Annual Recordkeeping and Reporting Burden

    1. Rule 18a-1 and Amendments to Rule 15c3-1
    The burden estimates for Rule 18a-1 and the amendments to Rule
15c3-1 are based in part on the Commission's experience with burden
estimates for similar collections of information requirements,
including the current collection of information requirements for Rule
15c3-1.\842\
---------------------------------------------------------------------------

    \842\ The burden hours related to the proposed collection of
information requirements with respect to the proposed liquidity
stress test requirements for nonbank SBSDs that were included in the
proposing release have been deleted from the PRA collections of
information in this release because these requirements are not being
adopted today. See Capital, Margin, and Segregation Proposing
Release, 77 FR at 70294.
---------------------------------------------------------------------------

    First, under paragraph (a)(2) of Rule 18a-1, a stand-alone SBSD is
required to file an application for authorization to compute net
capital using internal models.\843\ The requirements for the
application are set forth in paragraph (d) of Rule 18a-1, which is
modeled on the application requirements of Appendix E to Rule 15c3-1
applicable to ANC broker-dealers.\844\
---------------------------------------------------------------------------

    \843\ A broker-dealer SBSD seeking Commission authorization to
use internal models to compute market and credit risk charges will
apply under the existing provisions of Appendix E to Rule 15c3-1.
    \844\ Consequently, the Commission is using the current
collection of information for Appendix E to Rule 15c3-1 as a basis
for this new collection of information. See Commission, Supporting
Statement for the Paperwork Reduction Act Information Collection
Submission for Rule 15c3-1.
---------------------------------------------------------------------------

    Based on its experience with ANC broker-dealers and OTC derivatives
dealers, the Commission expects that stand-alone SBSDs that apply to
use internal models to calculate net capital will already have
developed models and internal risk management control systems. Rule
18a-1 also contains additional requirements that stand-alone SBSDs may
not yet have incorporated into their models and control systems.
Therefore, stand-alone SBSDs will incur one-time hour burdens and
start-up costs in order to develop their models in accordance with Rule
18a-1, as well as submit the models along with their application to the
Commission for approval. While the Commission's burden estimates are
averages, the burdens may vary depending on the size and complexity of
each stand-alone SBSD.
    The Commission staff estimates that each of the 4 stand-alone SBSDs
that apply to use the internal models would spend approximately 1,000
hours to: (1) Develop and submit their models and the description of
its their risk management control systems to the Commission; (2) to
create and compile the various documents to be included with their
applications; and (3) to work with the Commission staff through the
application process. The hour burdens include approximately 100 hours
for an in-house attorney to complete a review of the application.
Consequently, the Commission staff estimates that the total burden
associated with the application process for the stand-alone SBSDs will
result in an industry-wide one-time hour burden of approximately 4,000
hours.\845\ In addition, the Commission staff allocates 75% (3,000
hours) of these one-time burden hours \846\ to internal burden and the
remaining 25% (1,000 hours) to external burden to hire outside
professionals to assist in preparing and reviewing the stand-alone
SBSD's application for submission to the Commission.\847\ The
Commission staff estimates $400 per hour for external costs for
retaining outside consultants, resulting in a one-time industry-wide
external cost of $400,000.\848\
---------------------------------------------------------------------------

    \845\ 4 stand-alone SBSDs x 1,000 hours = 4,000 hours.
    \846\ The internal hours likely will be performed by an in-house
attorney (1,000 hours), a risk management specialist (1,000 hours),
and a compliance manager (1,000 hours). Therefore, the estimated
internal cost for this hour burden is calculated as follows: (In-
house attorney for 1,000 hours at $422 per hour) + (risk management
specialist for 1,000 hours at $202 per hour) + (compliance manager
for 1,000 hours at $314 per hour) = $938,000.
    \847\ 4,000 hours x .75 = 3,000 hours; 4,000 hours x .25 = 1,000
hours. Larger firms tend to perform these tasks in-house due to the
proprietary nature of these models as well as the high fixed-costs
in hiring an outside consultant. However, smaller firms may need to
hire an outside consultant to perform certain of these tasks.
    \848\ 1,000 hours x $400 per hour = $400,000. See Financial
Responsibility Rules for Broker-Dealers, 78 FR 51823 (citing PRA
analysis in Product Definitions Adopting Release, 77 FR at 48334
(providing an estimate of $400 per hour to engage an outside
attorney)). See also Crowdfunding, Exchange Act Release No. 76324
(Oct. 30, 2015), 80 FR 71387 (Nov. 16, 2015); FAST Act Modernization
and Simplification of Regulation S-K, Exchange Act Release No. 81851
(Oct. 11, 2017), 82 FR 50988 (Nov. 2, 2017). The Commission
recognizes that the costs of retaining outside professionals may
vary depending on the nature of the professional services, but for
purposes of this PRA analysis, the Commission estimates that such
costs would be an average of $400 per hour.
---------------------------------------------------------------------------

    The Commission staff estimates that a stand-alone SBSD authorized
to use internal models will spend approximately 5,600 hours per year to
review and update the models and approximately 160 hours each quarter,
or approximately 640 hours per year, to backtest the models.
Consequently, the Commission staff estimates that the total burden
associated with reviewing and back-testing the models for the 4 stand-
alone SBSDs will result in an industry-wide annual hour burden of
approximately 24,960 hours per year.\849\ In addition, the Commission
staff allocates 75% (18,720 hours) \850\ of these burden hours to
internal burden and the remaining 25% (6,240 hours) to external burden
to hire outside professionals to assist in reviewing, updating and
backtesting the models.\851\ The Commission staff estimates $400 per
hour for external costs for retaining outside professionals, resulting
in an industry-wide external cost of $2.5 million annually.\852\
---------------------------------------------------------------------------

    \849\ 4 stand-alone SBSDs x (5,600 hours + 640 hours) = 24,960
hours.
    \850\ These functions likely will be performed by a risk
management specialist (9,360 hours) and a senior compliance examiner
(9,360 hours). Therefore, the estimated internal cost for this hour
burden is calculated as follows: (Risk management specialist for
9,360 hours at $202 per hour) + (senior compliance examiner for
9,360 hours at $241 per hour) = $4,122,380.
    \851\ 24,960 hours x .75 = 18,720; 24,960 hours x .25 = 6,240.
Larger firms tend to perform these tasks in-house due to the
proprietary nature of these models as well as the high fixed-costs
in hiring an outside consultant. However, smaller firms may need to
hire an outside consultant to perform these tasks.
    \852\ 6,240 hours x $400 per hour = $2,496,000.
---------------------------------------------------------------------------

    Stand-alone SBSDs electing to file an application with the
Commission to use an internal model will incur start-up costs including
information technology costs to comply with Rule 18a-1. Based on the
estimates for the ANC broker-dealers,\853\ it is expected that a stand-
alone SBSD will incur an average of approximately $8.0 million to
modify its information technology systems to meet the model
requirements of the Rule 18a-

1, for a total one-time industry-wide cost of $32 million.\854\
---------------------------------------------------------------------------

    \853\ See Alternative Net Capital Requirements for Broker-
Dealers That Are Part of Consolidated Supervised Entities, 69 FR
34428.
    \854\ 4 stand-alone SBSDs x $8 million = $32 million.
---------------------------------------------------------------------------

    Second, a nonbank SBSD is required to comply with most provisions
of Rule 15c3-4, which requires the establishment of a risk management
control system as if it were an OTC derivatives dealer.\855\ ANC
broker-dealers currently are required to comply with Rule 15c3-4.\856\
The Commission staff estimates that the requirement to comply with Rule
15c3-4 will result in one-time and annual hour burdens to nonbank
SBSDs. The Commission staff estimates that the average amount of time a
firm will spend implementing its risk management control system will be
2,000 hours,\857\ resulting in an industry-wide one-time hour burden of
24,000 hours across the 12 nonbank SBSDs not already subject to Rule
15c3-4.\858\
---------------------------------------------------------------------------

    \855\ See paragraph (f) to Rule 18a-1, as adopted; paragraph
(a)(10)(ii) of Rule 15c3-1, as amended.
    \856\ See paragraph (a)(7)(iii) of Rule 15c3-1, as amended.
    \857\ This estimate is based on the one-time burden estimated
for an OTC derivatives dealer to implement its controls under Rule
15c3-1. See OTC Derivatives Dealers, 62 FR 67940. This also is
included in the current PRA estimate for Rule 15c3-4. See
Commission, Supporting Statement for the Paperwork Reduction Act
Information Collection Submission for Rule 15c3-4.
    \858\ 25 nonbank SBSDs minus 10 ANC broker-dealer SBSDs = 15
nonbank SBSDs minus 3 nonbank SBSDs electing the alternative
compliance mechanism under Rule 18a-10, as adopted = 12 nonbank
SBSDs. 12 nonbank SBSDs x 2,000 hours = 24,000 hours. This number is
incremental to the current collection of information for Rule 15c3-1
with regard to complying with the provisions of Rule 15c3-4 and,
therefore, excludes the 10 respondents included in the collection of
information for that rule. This work will likely be performed by a
combination of an in-house attorney (8,000 hours), a risk management
specialist (8,000 hours), and an operations specialist (8,000
hours). Therefore, the estimated internal cost for this hour burden
is calculated as follows: (Attorney for 8,000 hours at $422 per
hour) + (risk management specialist for 8,000 hours at $202 per
hour) + (operations specialist for 8,000 hours at $139 per hour) =
$6,104,000.
---------------------------------------------------------------------------

    In implementing its policies and procedures, a nonbank SBSD is
required to document and record its system of internal risk management
controls. The Commission staff estimates that each of these 12 nonbank
SBSDs will spend approximately 250 hours per year reviewing and
updating their risk management control systems to comply with Rule
15c3-4, resulting in an industry-wide annual hour burden of
approximately 3,000 hours.\859\
---------------------------------------------------------------------------

    \859\ 12 nonbank SBSDs x 250 hours = 3,000 hours. These hour-
burden estimates are consistent with similar collections of
information under Appendix E to Rule 15c3-1. See Supporting
Statement for the Paperwork Reduction Act Information Collection
Submission for Rule 15c3-1. These hours likely will be performed by
a risk management specialist. Therefore, the estimated internal cost
for this hour burden is calculated as follows: Risk management
specialist for 3,000 hours at $202 per hour = $606,000.
---------------------------------------------------------------------------

    Nonbank SBSDs may incur start-up costs to comply with the
provisions of Rules 15c3-1 and 18a-1 that require compliance with Rule
15c3-4, including information technology costs. Based on the estimates
for similar collections of information,\860\ it is expected that a
nonbank SBSD will incur an average of approximately $16,000 for initial
hardware and software expenses, while the average ongoing cost will be
approximately $20,500 per nonbank SBSD to meet the requirements of the
Rule 18a-1 and the amendments to Rule 15c3-1, for a total industry-wide
initial cost of $192,000 and an ongoing cost of $246,000 per year.\861\
---------------------------------------------------------------------------

    \860\ See, e.g., Risk Management Controls for Brokers or Dealers
with Market Access, Exchange Act Release No. 63421 (Nov. 3, 2010),
75 FR 69792, 69814 (Nov. 15, 2010).
    \861\ 12 nonbank SBSDs x $16,000 = $192,000; 12 nonbank SBSDs x
$20,500 = $246,000.
---------------------------------------------------------------------------

    Third, under paragraph (c)(2)(vi)(P)(1)(iii) of Rule 15c3-1, as
amended, and paragraph (c)(1)(vi)(B)(1)(iii)(A) of Rule 18a-1, nonbank
SBSDs not authorized to use models are required to use an industry
sector classification system that is documented and reasonable in terms
of grouping types of companies with similar business activities and
risk characteristics used for CDS reference obligors for purposes of
calculating ``haircuts'' on non-cleared security-based swaps under
applicable net capital rules.
    As discussed above, the Commission staff estimates that 4 broker-
dealer SBSDs and 2 nonbank SBSDs not using models will utilize the CDS
haircut provisions under the amendments to Rules 15c3-1 and 18a-1,
respectively. Consequently, these firms will use an industry sector
classification system that is documented for the credit default swap
reference obligors. The Commission expects that these firms will
utilize external classification systems because of reduced costs and
ease of use as a result of the common usage of several of these
classification systems in the financial services industry. The
Commission staff estimates that nonbank SBSDs not using models will
spend approximately 1 hour per year documenting these industry sector
classification systems, for a total annual hour burden of 6 hours.\862\
---------------------------------------------------------------------------

    \862\ (2 nonbank SBSDs not using models x 1 hour) + (4 broker-
dealer SBSDs x 1 hour) = 6 hours. This work will likely be performed
by an internal compliance attorney. Therefore, the estimated
internal cost for this hour burden is calculated as follows:
Internal compliance attorney for 6 hours at $371 per hour = $2,226.
---------------------------------------------------------------------------

    Fourth, under paragraph (h) of Rule 18a-1, a nonbank SBSD is
required to file certain notices with the Commission relating to the
withdrawal of equity capital. Broker-dealers--which will include
broker-dealer SBSDs--currently are required to file these notices under
paragraph (e) of Rule 15c3-1. Based on the number of notices currently
filed by broker-dealers, the Commission staff estimates that the notice
requirements will result in annual hour burdens to stand-alone SBSDs.
The Commission staff estimates that each of the 6 stand-alone SBSDs
will file approximately 2 notices annually with the Commission. In
addition, the Commission staff estimates that it will take a stand-
alone SBSD approximately 30 minutes to file these notices, resulting in
an industry-wide annual hour burden of 6 hours.\863\
---------------------------------------------------------------------------

    \863\ (6 stand-alone SBSDs x 2 notices) x 30 minutes = 6 hours.
This estimate is based on the 30 minutes it is estimated to take a
broker-dealer to file a similar notice under Rule 15c3-1. See
Supporting Statement for the Paperwork Reduction Act Information
Collection Submission for Rule 15c3-1. The Commission believes
stand-alone SBSDs will likely perform these functions internally
using an internal compliance attorney. Therefore, the estimated
internal cost for this hour burden is calculated as follows:
Internal compliance attorney for 6 hours at $371 per hour = $2,226.
---------------------------------------------------------------------------

    Fifth, under Rule 18a-1d, a nonbank SBSD is required to file a
proposed subordinated loan agreement with the Commission (including
nonconforming subordinated loan agreements). Broker-dealers currently
are subject to such a requirement. Based on staff experience with Rule
15c3-1, the Commission staff estimates that each of the 6 stand-alone
SBSDs will spend approximately 20 hours of internal employee resources
drafting or updating its subordinated loan agreement template to comply
with the requirement, resulting in an industry-wide one-time hour
burden of approximately 120 hours.\864\ In addition, based on staff
experience with Rule 15c3-1, the Commission staff estimates that each
stand-alone SBSD will file 1 proposed subordinated loan agreement with
the Commission per year and that it will take a firm approximately 10
hours to prepare and file the agreement, resulting in an industry-wide
annual hour burden of approximately 60 hours.\865\
---------------------------------------------------------------------------

    \864\ 6 stand-alone SBSDs x 20 hours = 120 hours. This work will
likely be performed by an in-house attorney. Therefore, the
estimated internal cost for this hour burden is calculated as
follows: Attorney for 120 hours at $422 per hour = $50,640.
    \865\ 6 stand-alone SBSDs x 1 loan agreement x 10 hours = 60
hours. This work will likely be performed by an in-house attorney.
Therefore, the estimated internal cost for this hour burden is
calculated as follows: Attorney for 60 hours at $422 per hour =
$25,320.
---------------------------------------------------------------------------

    Finally, as a result of comments received, Rules 15c3-1 and 18a-1

permit a stand-alone broker-dealer and a nonbank SBSD to treat
collateral held by a third-party custodian to meet an initial margin
requirement of a security-based swap or swap customer as being held by
the stand-alone broker-dealer or nonbank SBSD for purposes of the
capital deduction in lieu of margin provisions of the rule if certain
conditions are met. The Commission staff estimates that the 16 broker-
dealer SBSDs and 6 stand-alone SBSDs will engage outside counsel to
draft and review the account control agreement at a cost of $400 per
hour for an average of 20 hours per respondent, resulting in a one-time
cost burden of $176,000 for these 22 entities.\866\ Based on staff
experience with the net capital and customer protection rules, the
Commission estimates that the 16 broker-dealer SBSDs and 6 stand-alone
SBSDs will enter into approximately 100 account control agreements per
year with security-based swap customers and that it will take
approximately 2 hours to execute each account control agreement,
resulting in an industry-wide annual hour burden of 4,400 hours.\867\
---------------------------------------------------------------------------

    \866\ (16 broker-dealer SBSDs + 6 stand-alone SBSDs) x $400 per
hour x 20 hours = $176,000.
    \867\ (16 broker-dealer SBSDs + 6 stand-alone SBSDs) x 100
account control agreements x 2 hours = 4,400 hours. This work will
likely be performed by an in-house attorney. Therefore, the
estimated internal cost for this hour burden is calculated as
follows: Attorney for 4,400 hours at $422 per hour = $1,856,800.
---------------------------------------------------------------------------

    The Commission staff estimates 16 broker-dealer SBSDs and 6 stand-
alone SBSDs will need to maintain written documentation of their legal
analysis of the account control agreement. Based on staff experience,
the Commission estimates that broker-dealers (including broker-dealer
SBSDs) and stand-alone SBSDs will meet this requirement split evenly
between obtaining a written opinion of outside legal counsel or through
the firm's own ``in-house'' analysis. The Commission estimates that the
approximate cost to a broker-dealer (including a broker-dealer SBSD) or
a stand-alone SBSD to obtain an opinion of counsel will be $8,000.\868\
This figure is based on an estimate of 20 hours per opinion for outside
counsel at $400 per hour, resulting in an industry-wide one-time cost
of $88,000.\869\ In addition, the Commission estimates it will take a
broker-dealer (including a broker-dealer SBSD) or a stand-alone SBSD
approximately 20 hours to conduct a written ``in house'' analysis,
resulting in an industry-wide one-time hour-burden of 220 hours.\870\
---------------------------------------------------------------------------

    \868\ Consistent with the business conduct release, an opinion
of counsel is estimated at $400 per hour multiplied by the number of
hours to produce the opinion. See Business Conduct Standards for
Security-Based Swap Dealers and Major Security-Based Swap
Participants, 81 FR 29960, 30137 n. 1732 (citing consistency with
the opinion of counsel paperwork burden in the release adopting a
registration process for SBSDs and MSBSPs).
    \869\ This estimate is based on the amount of time it is
estimated for a broker-dealer to obtain an opinion of outside
counsel as required under Appendix C to Rule 15c3-1 and staff
experience. (8 broker-dealer SBSDs + 3 stand-alone SBSDs) x $400 per
hour x 20 hours = $88,000.
    \870\ (8 broker-dealer SBSDs + 3 stand-alone SBSDs) x 20 hours =
220 hours. This work will likely be performed by an internal
compliance attorney. Therefore, the estimated internal cost for this
hour burden is calculated as follows: Compliance attorney for 220
hours at $371 per hour = $81,620.
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2. Rule 18a-2
    Rule 18a-2 requires nonbank MSBSPs to have and maintain positive
tangible net worth and implement a system of internal risk management
controls under Rule 15c3-4. The Commission staff estimates that the
average amount of time a firm will spend implementing its risk
management control system will be 2,000 hours,\871\ resulting in an
industry-wide one-time hour burden of 10,000 hours.\872\
---------------------------------------------------------------------------

    \871\ This estimate is based on the one-time burden estimated
for an OTC derivatives dealer to implement controls under Rule 15c3-
1. See OTC Derivatives Dealers, 62 FR 67940. This also is included
in the current PRA estimate for Rule 15c3-4. See Supporting
Statement for the Paperwork Reduction Act Information Collection
Submission for Rule 15c3-4.
    \872\ 5 MSBSPs x 2,000 hours = 10,000 hours. This work will
likely be performed by a combination of an internal compliance
attorney (3,333.33 hours), a risk management specialist (3,333.33
hours), and an operations specialist (3,333.33 hours). Therefore,
the estimated internal cost for this hour burden is calculated as
follows: (Internal compliance attorney for 3,333.33 hours at $371
per hour) + (risk management specialist for 3,333.33 hours at $202
per hour) + (operations specialist for 3,333.33 hours at $139 per
hour) = $2,373,330.96.
---------------------------------------------------------------------------

    In implementing its policies and procedures, a nonbank MSBSP will
be required to document and record its system of internal risk
management controls, and prepare and maintain written guidelines
regarding its internal control system. The Commission staff estimates
that each of the 5 nonbank MSBSPs will spend approximately 250 hours
per year reviewing and updating their risk management control systems
to comply with Rule 15c3-4, resulting in an industry-wide annual hour
burden of approximately 1,250 hours.\873\
---------------------------------------------------------------------------

    \873\ 5 MSBSPs x 250 hours = 1,250 hours. These hour burden
estimates are consistent with similar collections of information
under Appendix E to Rule 15c3-1. See Supporting Statement for the
Paperwork Reduction Act Information Collection Submission for Rule
15c3-1. This work will likely be performed by a risk management
specialist. Therefore, the estimated internal cost for this hour
burden is calculated as follows: Risk management specialist for
1,250 hours at $202 per hour = $252,500.
---------------------------------------------------------------------------

    Because nonbank MSBSPs may not initially have the systems or
expertise internally to meet the risk management requirements of Rule
18a-2, these firms will likely hire an outside risk management
consultant to assist them in implementing their risk management
systems. The Commission staff estimates that a nonbank MSBSP may hire
an outside management consultant for approximately 200 hours to assist
the firm for a total start-up cost to the nonbank MSBSP of $80,000 per
MSBSP, or a total of $400,000 for all nonbank MSBSPs.\874\
---------------------------------------------------------------------------

    \874\ 5 nonbank MSBSPs x $80,000 = $400,000.
---------------------------------------------------------------------------

    Nonbank MSBSPs may incur start-up costs to comply with Rule 18a-2,
including information technology costs. Based on the estimates for
similar collections of information,\875\ the Commission staff expects
that a nonbank MSBSP will incur an average of approximately $16,000 for
initial hardware and software expenses, while the average ongoing cost
will be approximately $20,500 per nonbank MSBSP to meet the
requirements of the Rule 18a-2, for a total industry-wide initial cost
of $80,000 and ongoing cost of $102,500.\876\
---------------------------------------------------------------------------

    \875\ See Risk Management Controls for Brokers or Dealers with
Market Access, 75 FR at 69814.
    \876\ 5 nonbank MSBSPs x $16,000 = $80,000. 5 nonbank MSBSPs x
$20,500 = $102,500.
---------------------------------------------------------------------------

3. Rule 18a-3
    Paragraph (e) of Rule 18a-3 requires a nonbank SBSD to establish
and implement risk monitoring procedures with respect to counterparty
accounts. Because these firms will be required to comply with Rule
15c3-4, the Commission staff estimates that each of the 22 nonbank
SBSDs will spend an average of approximately 210 hours establishing the
written risk analysis methodology, resulting in an industry-wide one-
time hour burden of approximately 4,620 hours.\877\ In

addition, based on staff experience, the Commission staff estimates
that a nonbank SBSD will spend an average of approximately 60 hours per
year reviewing the written risk analysis methodology and updating it as
necessary, resulting in an average industry-wide annual hour burden of
approximately 1,500 hours.\878\
---------------------------------------------------------------------------

    \877\ (25 nonbank SBSDs minus 3 stand-alone SBSDs electing the
alternative compliance mechanism under Rule 18a-10, as adopted = 22
nonbank SBSDs) x 210 hours = 4,620 hours. See generally Clearing
Agency Standards for Operation and Governance, 76 FR at 14510
(estimating 210 one-time burden hours and 60 annual hours to
implement policies and procedures reasonably designed to use margin
requirements to limit a clearing agency's credit exposures to
participants in normal market conditions and to use risk-based
models and parameters to set and review margin requirements). This
work will likely be performed internally by an assistant general
counsel (1,540 hours), an internal compliance attorney (1,540
hours), and a risk management specialist (1,540 hours). Therefore,
the estimated internal cost for this hour burden is calculated as
follows: (Assistant general counsel for 1,540 hours at $473 per
hour) + (risk management specialist for 1,540 hours at $202 per
hour) + (compliance attorney for 1,540 hours at $371 per hour) =
$1,610,840.
    \878\ 22 stand-alone SBSDs x 60 hours = 1,320 hours. This work
will likely be performed by an internal compliance attorney.
Therefore, the estimated internal cost for this hour burden is
calculated as follows: Compliance attorney for 1,320 hours at $371
per hour = $489,720.
---------------------------------------------------------------------------

    Start-up costs may vary depending on the size and complexity of the
nonbank SBSD. In addition, the start-up costs may be less for the 16
broker-dealer SBSDs because these firms may already be subject to
similar margin requirements.\879\ For the remaining 6 nonbank SBSDs,
because these written procedures may be novel undertakings for these
firms, the Commission staff assumes these nonbank SBSDs will have their
written risk analysis methodology reviewed by outside counsel. As a
result, the Commission staff estimates that these nonbank SBSDs will
likely incur $2,000 in legal costs, or $12,000 in the aggregate initial
burden to review and comment on these materials.\880\
---------------------------------------------------------------------------

    \879\ See, e.g., FINRA Rules 4210 and 4240. See also Business
Conduct Standards for Security-Based Swap Dealers and Major
Security-Based Swap Participants, 81 FR at 29967 (noting burden for
paragraph (g) of Rule 15Fh-3 is based on existing FINRA rules).
    \880\ The Commission staff estimates the review of the written
risk analysis methodology will require 5 hours of outside counsel
time at a cost of $400 per hour. See also Business Conduct Standards
for Security-Based Swap Dealers and Major Security-Based Swap
Participants, 81 FR at 30093.
---------------------------------------------------------------------------

    Based on comments received, the Commission modified the language in
the final rule to provide that a nonbank SBSD may use a model to
calculate the initial margin amount under the rule, if the use of the
model has been approved by the Commission. Paragraph (d) of Rule 18a-3,
as adopted, provides that a nonbank SBSD seeking approval to use a
margin model will be subject to an application process and ongoing
conditions set forth in Rule 15c3-1e and paragraph (d) of Rule 18a-1
governing the use of internal models to compute net capital.
    Based on staff experience, the Commission estimates it will take a
nonbank SBSD approximately 50 hours to prepare and submit an
application to the Commission to seek authorization to use a model to
calculate initial margin. Based on observations regarding market
participants' implementation of final swap margin rules adopted by
other regulators, the Commission believes it is likely that 22 nonbank
SBSDs will seek Commission approval to use a model to calculate initial
margin resulting in a total industry-wide one-time hour burden of 1,100
hours.\881\ The Commission also estimates that each nonbank SBSD will
spend approximately 250 hours per year reviewing, updating, and
backtesting their initial margin model, resulting in a total industry-
wide annual hour burden of 5,500 hours.\882\
---------------------------------------------------------------------------

    \881\ 22 nonbank SBSDs x 50 hours = 1,100 hours. This work will
likely be performed by an in-house attorney. Therefore, the
estimated internal cost for this hour burden is calculated as
follows: Attorney for 1,100 hours at $422 per hour = $464,200. A
nonbank SBSD may use standardized haircuts to compute initial margin
because of the cost of using an initial margin model. However, the
Commission is conservatively estimating that 22 nonbank SBSDs will
choose to use a model to compute initial margin for purposes of this
collection of information.
    \882\ 22 nonbank SBSDs x 250 hours = 5,500 hours. This work will
likely be performed internally by a compliance attorney (2,750
hours) and a risk management specialist (2,750 hours). Therefore,
the estimated internal cost for this hour burden is calculated as
follows: (Risk management specialist for 2,750 hours at $202 per
hour) + (compliance attorney for 2,750 hours at $371 per hour) =
$1,575,750.
---------------------------------------------------------------------------

4. Rule 18a-4 and Amendments to Rule 15c3-3
    As discussed above in section II.C. of this release, the Commission
is amending Rule 15c3-3 to establish security-based swap segregation
requirements for stand-alone broker-dealers and broker-dealer SBSDs and
adopting Rule 18a-4 to establish largely parallel segregation
requirements applicable to stand-alone and bank SBSDs, as well as
notification requirements for nonbank SBSDs. The Commission estimates
that 41 respondents, consisting of 25 stand-alone broker-dealers and 16
broker-dealer SBSDs, will be subject to the physical possession or
control and reserve account requirements for security-based swaps in
paragraph (p) of Rule 15c3-3. \883\ The Commission estimates that 17
respondents, consisting of 16 broker-dealer SBSDs and 1 broker-dealer
MSBSP, will be subject to paragraph (p)(4)(i)'s counterparty
notification requirement with respect to non-cleared security-based
swap transactions. The Commission estimates that 16 broker-dealer SBSDs
will be subject to the requirement to obtain a subordination agreement
from counterparties in paragraph (p)(4)(ii) of Rule 15c3-3.
---------------------------------------------------------------------------

    \883\ The 16 broker-dealer SBSD respondents were included in the
proposed collection of information for proposed Rule 18a-4. Other
than the addition of paragraph (p) to Rule 15c3-3, as amended, the
Commission is not amending the requirements of existing Rule 15c3-3.
---------------------------------------------------------------------------

    Rule 18a-4, as adopted, will apply to SBSDs and MSBSPs that are not
also registered as broker-dealers with the Commission.\884\ The
Commission estimates that 3 stand-alone SBSDs and 4 MSBSPs will be
subject to the collection of information requirements of Rule 18a-4, as
adopted (because the Commission estimates that the 25 bank SBSD and 6
stand-alone SBSDs will be exempt from the omnibus segregation
requirements).\885\
---------------------------------------------------------------------------

    \884\ See Rule 18a-4, as adopted.
    \885\ 50 SBSDs minus 16 broker-dealer SBSDs minus 25 bank SBSDs
minus 6 stand-alone SBSDs = 3 stand-alone SBSDs. 5 nonbank MSBSPs
minus 4 nonbank MSBSPs that are not broker-dealers = 1 broker-dealer
MSBSP.
---------------------------------------------------------------------------

    Under Rule 18a-4 and the amendments to Rule 15c3-3, SBSDs and
broker-dealers engaged in security-based swap activities are required
to establish special reserve accounts with banks and obtain written
acknowledgements from, and enter into written contracts with, the
banks. Based on staff experience with Rule 15c3-3, the Commission staff
estimates that each of the 44 respondents \886\ will establish 6
special reserve accounts at banks (2 for each type of special reserve
account). Further, based on staff experience with Rule 15c3-3, the
Commission staff estimates that each respondent will spend
approximately 30 hours to draft and obtain the written acknowledgement
and agreement for each account, resulting in an industry-wide one-time
hour burden of approximately 7,920 hours.\887\ The Commission staff
estimates that 25%\888\ of the 44 respondents (approximately 11
respondents) will establish a new special reserve account each year
because, for example, they change their banking relationship, for each
type of special reserve account. Therefore, the Commission staff
estimates an industry-wide annual hour burden of approximately 990
hours.\889\
---------------------------------------------------------------------------

    \886\ 16 broker-dealer SBSDs + 3 stand-alone SBSDs + 25 stand-
alone broker-dealers = 44 respondents.
    \887\ 44 respondents x 6 special reserve accounts x 30 hours =
7,920 hours. This work will likely be performed by an internal
compliance attorney. Therefore, the estimated internal cost for this
hour burden is calculated as follows: Compliance attorney for 7,920
hours at $371 per hour = $2,938,320.
    \888\ This number is based on the currently approved PRA
collection for Rule 15c3-3. See Commission, Supporting Statement for
the Paperwork Reduction Act Information Collection Submission for
Rule 15c3-3.
    \889\ 11 SBSDs x 3 types of special reserve accounts x 30 hours
= 990 hours. This work will likely be performed by an internal
compliance attorney. Therefore, the estimated internal cost for this
hour burden is calculated as follows: Internal compliance attorney
for 990 hours at $371 per hour = $367,290.
---------------------------------------------------------------------------

    Paragraph (c)(1) of Rule 18a-4 and paragraph (p)(3)(i) of Rule
15c3-3

provide that the SBSD or broker-dealer engaged in security-based swap
activities must at all times maintain in a special reserve account,
through deposits into the account, cash and/or qualified securities in
amounts computed in accordance with the formula set forth in Exhibit A
to Rule 18a-4 and Exhibit B to Rule 15c3-3. Paragraph (c)(3) of Rule
18a-4 and paragraph (p)(3)(iii) of Rule 15c3-3 provide that the
computations necessary to determine the amount required to be
maintained in the special bank account must be made on a weekly basis.
Based on experience with the Rule 15c3-3 reserve computation paperwork
burden hours and with the OTC derivatives industry, the Commission
staff estimates that it will take 1-5 hours to compute each reserve
computation, and that the average time spent across all the respondents
will be approximately 2.5 hours. Accordingly, the Commission staff
estimates that the resulting industry-wide annual hour burden is
approximately 5,720 hours.\890\
---------------------------------------------------------------------------

    \890\ 44 respondents x 52 weeks x 2.5 hours/week = 5,720 hours.
This work will likely be performed by a financial reporting manager.
Therefore, the estimated internal cost for this hour burden is
calculated as follows: Financial reporting manager for 5,720 hours
at $295 per hour = $1,687,400.
---------------------------------------------------------------------------

    Under paragraph (d)(1) of Rule 18a-4, paragraph (f)(2) of Rule 18a-
4, and paragraph (p)(4)(i) of Rule 15c3-3, an SBSD or an MSBSP is
required to provide a notice to a counterparty prior to their first
non-cleared security-based swap transaction after the compliance date.
All 50 SBSDs and 5 MSBSPs are required to provide these notices to
their counterparties. The Commission staff estimates that these 55
entities will engage outside counsel to draft and review the notice at
a cost of $400 per hour for an average of 10 hours per respondent,
resulting in a one-time cost burden of $220,000 for all of these 55
entities.\891\
---------------------------------------------------------------------------

    \891\ (50 SBSDs + 5 MSBSPs) x $400 per hour x 10 hours =
$220,000. This work will likely be performed by an outside counsel
with expertise in financial services law to help ensure that
counterparties are receiving the proper notice under the statutory
requirement.
---------------------------------------------------------------------------

    The number of notices sent in the first year the rule is effective
will depend on the number of counterparties with which each SBSD or
MSBSP engages in security-based swap transactions. The number of
counterparties an SBSD or MSBSP has will vary depending on the size and
complexity of the firm and its operations. The Commission staff
estimates that each of the 50 SBSDs and 5 MSBSPs will have
approximately 1,000 counterparties at any given time.\892\ Therefore,
the Commission staff estimates that approximately 55,000 notices will
be sent in the first year the rule is effective.\893\ The Commission
staff estimates that each of the 50 SBSDs and 5 MSBSPs will spend
approximately 10 minutes sending out the notice, resulting in an
industry-wide one-time hour burden of approximately 9,167 hours.\894\
The Commission staff further estimates that the 50 SBSDs and 5 MSBSPs
will establish account relationships with 200 new counterparties per
year. Therefore, the Commission staff estimates that approximately
11,000 notices will be sent annually,\895\ resulting in an industry-
wide annual hour burden of approximately 1,833 hours.\896\
---------------------------------------------------------------------------

    \892\ The Commission previously estimated that there are
approximately 10,900 market participants in security-based swap
transactions. See Business Conduct Standards for Security-Based Swap
Dealers and Major Security-Based Swap Participants, 81 FR at 30089.
Based on the 10,900 market participants and Commission staff
experience with the securities and OTC derivatives industry, the
Commission staff estimates that each SBSD and MSBSP will have 1,000
counterparties at any given time. The number of counterparties may
widely vary depending on the size of the SBSD or MSBSP. A large firm
may have thousands or counterparties at one time, while a smaller
firm may have substantially less than 1,000. The Commission staff
also estimates, based on staff experience, that these entities will
establish account relationships with approximately 200 new
counterparties per year, or approximately 20% of a firm's existing
counterparties.
    \893\ (50 SBSDs + 5 MSBSPs) x 1,000 counterparties = 55,000
notices.
    \894\ 55,000 notices x (10 minutes/60 minutes) = 9,167 hours. A
compliance clerk will likely send these notices. Therefore, the
estimated internal cost for this hour burden is calculated as
follows: Compliance clerk for 9,167 hours at $71 per hour =
$650,857.
    \895\ (50 SBSDs + 5 MSBSPs) x 200 counterparties = 11,000
notices.
    \896\ 11,000 notices x (10 minutes/60 minutes) = 1,833 hours. A
compliance clerk will likely send these notices. Therefore, the
estimated internal cost for this hour burden is calculated as
follows: Compliance clerk for 1,833 hours at $71 per hour =
$130,143.
---------------------------------------------------------------------------

    Under paragraph (d)(2) of Rule 18a-4 and paragraph (p)(4)(ii) of
Rule 15c3-3, an SBSD is required to obtain subordination agreements
from certain counterparties. The Commission staff estimates that each
SBSD will spend, on average, approximately 200 hours to draft and
prepare standard subordination agreements, resulting in an industry-
wide one-time hour burden of 3,800 hours.\897\ Because the SBSD will
enter into these agreements with security-based swap customers, after
the SBSD prepares a standard subordination agreement in-house, the
Commission staff also estimates that an SBSD will have outside counsel
review the standard subordination agreements and that the review will
take approximately 20 hours at a cost of approximately $400 per hour.
As a result, the Commission staff estimates that each SBSD will incur
one-time costs of approximately $8,000,\898\ resulting in an industry-
wide one-time cost of approximately $152,000.\899\
---------------------------------------------------------------------------

    \897\ 200 hours x 19 SBSDs = 3,800 hours. An in-house attorney
will likely draft these agreements because the Commission staff
expects that drafting contracts will be one of the typical job
functions of an in-house attorney. Therefore, the estimated internal
cost for this hour burden is calculated as follows: Attorney for
3,800 hours at $422 per hour = $1,603,600.
    \898\ $400 x 20 hours = $8,000.
    \899\ $8,000 x 19 SBSDs = $152,000.
---------------------------------------------------------------------------

    As discussed above, the Commission staff estimates that each of the
19 SBSDs would have approximately 1,000 counterparties at any given
time. The Commission staff further estimates that approximately 50% of
these counterparties will either elect individual segregation or, if
permitted, to waive segregation altogether.\900\ The Commission staff
estimates that an SBSD will spend 20 hours per counterparty to enter
into a written subordination agreement, resulting in an industry-wide
one-time hour burden of approximately 190,000 hours.\901\ Further, as
discussed above, the Commission staff estimates that each of the 19
SBSDs will establish account relationships with 200 new counterparties
per year. The Commission staff further estimates that 50% or 100 of
these counterparties will either elect individual segregation or, if
permitted, to waive segregation altogether. Therefore, the Commission
staff estimates an industry-wide annual hour burden of approximately
38,000 hours.\902\
---------------------------------------------------------------------------

    \900\ Based on discussions with market participants, the
Commission staff understands that many large buy-side financial end
users currently ask for individual segregation and the Commission
staff assumes that many of these end users will continue to do so.
However, Commission staff believes that some smaller end users may
choose to avoid the potential additional cost associated with
individual segregation. Therefore, the Commission staff estimates
that approximately 50% of counterparties will either elect
individual segregation or, if permitted, to waive segregation
altogether.
    \901\ 19 SBSDs x 500 counterparties x 20 hours = 190,000. This
work will likely be performed by an internal compliance attorney
(95,000 hours) and a compliance clerk (95,000 hours). Therefore, the
estimated internal cost for this hour burden is calculated as
follows: (Internal compliance attorney for 95,000 hours at $371 per
hour) + (compliance clerk for 95,000 hours at $71 per hour) =
$41,990,000.
    \902\ 19 SBSDs x 100 counterparties x 20 hours = 38,000 hours.
This work will likely be performed by an internal compliance
attorney (19,000 hours) and a compliance clerk (19,000 hours).
Therefore, the estimated internal cost for this hour burden is
calculated as follows: (Compliance attorney for 19,000 hours at $371
per hour) + (compliance clerk for 19,000 hours at $71 per hour) =
$8,398,000.

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

    Paragraph (e) of Rule 18a-4 establishes exemptions for foreign
stand-alone or bank SBSDs and MSBSPs from the segregation requirements
in Section 3E of the Exchange Act, and the rules and regulations
thereunder, with respect to certain transactions. The Commission
previously estimated that there will be 22 foreign SBSDs, but does not
have sufficient information to reasonably estimate the number of
foreign firms that are dually registered as broker-dealers or are
foreign banks, how many U.S. counterparties foreign stand-alone or bank
SBSDs will have, and how many eligible firms will opt out of complying
with Section 3E of the Exchange Act and the rules and regulations
thereunder. Moreover, as discussed above, the Commission estimates that
the 25 bank SBSDs and 6 stand-alone SBSDs will be exempt from the
omnibus segregation requirements. Therefore, the Commission is making
the conservative estimate that 22 foreign SBSDs will be subject to
paragraph (e) of Rule 18a-4.
    Under paragraph (e)(3) of Rule 18a-4, foreign SBSDs are required to
provide disclosures in writing to their U.S. counterparties. The
Commission believes that, in most cases, these disclosures will be made
through amendments to the foreign SBSD's existing trading
documentation.\903\ Because these disclosures relate to new regulatory
requirements, the Commission anticipates that all foreign SBSDs will
need to incorporate new language into their existing trading
documentation with U.S. counterparties. Disclosure of the potential
treatment of segregated assets in insolvency proceedings under U.S.
bankruptcy law and foreign insolvency laws pursuant to paragraph (e)(3)
of Rule 18a-4 will likely vary depending on the counterparty's
jurisdiction. Accordingly, the Commission expects that these
disclosures often may need to be tailored to address the particular
circumstances of each trading relationship. However, in some cases,
trade associations or industry working groups may be able to develop
standard disclosure forms that can be adopted by foreign SBSDs with
little or no modification. In either case, the paperwork burden
associated with developing new disclosure language and incorporating
this language into a registered foreign SBSD's trading documentation
will vary depending on: (1) The number of non-U.S. counterparties with
whom the registered foreign SBSD trades; (2) the number of
jurisdictions represented by the foreign SBSD's counterparties; and (3)
the availability of standardized disclosure language. To the extent
standardized disclosures become available, the paperwork burden on
foreign SBSDs will be limited to amending existing trading
documentation to incorporate the standardized disclosures. Conversely,
more time will be necessary where a greater degree of customization is
required to develop the required disclosures and incorporate this
language into existing documentation.
---------------------------------------------------------------------------

    \903\ See Business Conduct Standards for Security-Based Swap
Dealers and Major Security-Based Swap Participants, 81 FR 29960.
---------------------------------------------------------------------------

    The Commission estimates the maximum total paperwork burden
associated with developing new disclosure language will require each of
the 22 foreign SBSDs to spend 5 hours of in-house counsel time on 30
jurisdictions.\904\ This will create a total one-time industry burden
of 3,300 hours.\905\ This estimate assumes little or no reliance on
standardized disclosure language. In addition, the Commission estimates
the total paperwork burden associated with incorporating new disclosure
language into each foreign SBSD's trading documentation will be
approximately 11,000 hours for all 22 foreign SBSDs.\906\
---------------------------------------------------------------------------

    \904\ The Commission staff estimates the total paperwork burden
associated with developing new disclosure language for each foreign
SBSD would be 5 hours spent on disclosure agreements relating to 30
potential jurisdictions. See Cross-Border Proposing Release, 78 FR
at 31107 (providing similar estimates).
    \905\ 22 foreign SBSDs x 5 in-house counsel hours x 30 potential
jurisdictions = 3,300 hours.
    \906\ The Commission staff estimates that the average foreign
SBSD will have 50 active non-U.S. counterparties. Accordingly, the
Commission staff estimates the cost of incorporating new disclosure
language into the trading documentation of an average foreign SBSD
would be 500 hours per foreign SBSD (based on 10 hours of in-house
counsel time x 50 active non-U.S. counterparties).
---------------------------------------------------------------------------

    The Commission expects that the majority of the paperwork burden
associated with the new disclosure requirements will be experienced
during the first year as language is developed, whether by individual
foreign SBSDs or through collaborative efforts, and trading
documentation is amended. After the new disclosure language is
developed and incorporated into trading documentation, the Commission
believes that the ongoing burden associated with paragraph (e) of Rule
18a-4, as adopted, will be limited to periodically updating the
disclosures to reflect changes in the applicable law or to incorporate
new jurisdictions with security-based swap counterparties. The
Commission estimates that this ongoing paperwork burden will not exceed
110 hours per year for all 22 foreign SBSDs (approximately 5 hours per
foreign SBSD per year).
    Paragraph (f) of Rule 18a-4 provides an exemption from the rule's
requirements if certain conditions are met. These conditions include a
requirement in paragraph (f)(3) of the rule that the stand-alone or
bank SBSD must provide notice to a counterparty regarding the right to
segregate initial margin at an independent third-party custodian, and
make certain disclosures in writing regarding collateral received by
the SBSD.\907\
---------------------------------------------------------------------------

    \907\ The PRA estimates for paragraph (f)(2) of Rule 18a-4 are
discussed above with the notice provisions of paragraph (d)(2) to
Rule 18a-4.
---------------------------------------------------------------------------

    Paragraph (f)(3) of Rule 18a-4 requires disclosure that margin
collateral received and held by the firm will not be subject to a
segregation requirement and of how a claim of a counterparty for the
collateral would be treated in a bankruptcy or other formal liquidation
proceeding of the firm. The Commission estimates the maximum total
paperwork burden associated with developing new disclosure language for
the purposes of this provision will require each of the 31 SBSDs (25
bank SBSDs and 6 stand-alone SBSDs) to spend 5 hours of in-house
counsel time. This will create a total one-time industry burden of 155
hours.\908\ This estimate assumes little or no reliance on standardized
disclosure language. In addition, the Commission estimates the total
paperwork burden associated with incorporating new disclosure language
into each SBSD's trading documentation will be approximately 310,000
hours for all 31 SBSDs.\909\ The Commission expects that the majority
of the paperwork burden associated with the new disclosure requirements
under paragraph (f)(3) of Rule 18a-4, as adopted will be experienced
during the first year as language is developed. After the new
disclosure language is developed and incorporated into trading
documentation, the Commission believes that the ongoing burden
associated with paragraph (f)(3) of Rule 18a-4, as adopted, will be
limited to periodically updating the disclosures. The Commission
estimates that this ongoing paperwork burden will not exceed 155 hours
per year for all 31

SBSDs (approximately 5 hours per SBSD per year).\910\
---------------------------------------------------------------------------

    \908\ 31 SBSDs (25 bank SBSDs + 6 stand-alone SBSDs) x 5 in-
house counsel hours = 155 hours.
    \909\ The Commission staff estimates that the average SBSD will
have approximately 1,000 counterparties at any given time.
Accordingly, the Commission staff estimates the cost of
incorporating new disclosure language into the trading documentation
of an average SBSD would be 10,000 hours per SBSD (based on 10 hours
of in-house counsel time x 1,000 counterparties).
    \910\ 31 SBSDs (25 bank SBSDs + 6 stand-alone SBSDs) x 5 hours
per SBSD = 155 hours.
---------------------------------------------------------------------------

5. Rule 18a-10
    In response to comments urging the Commission to harmonize
requirements with the CFTC, as well as specific comments requesting
that the Commission defer to the CFTC's rules if a nonbank SBSD is
registered as a swap dealer and conducts only a limited amount of
security-based swaps business, the Commission is adopting new Rule 18a-
10. Rule 18a-10 contains an alternative compliance mechanism pursuant
to which a stand-alone SBSD that is registered as a swap dealer and
predominantly engages in a swaps business may elect to comply with the
capital, margin, and segregation requirements of the CEA and the CFTC's
rules in lieu of complying with Rules 18a-1, 18a-3, and 18a-4. As
discussed above, the Commission estimates that 3 stand-alone SBSDs will
elect to operate under Rule 18a-10. These respondents were included in
the proposing release in other collections of information (Rule 18a-1
and Rule 18a-3, as proposed), and have been moved to the information
collection for new Rule 18a-10.\911\
---------------------------------------------------------------------------

    \911\ As a result, the total respondents for Rules 18a-1 and
18a-3 have been reduced by three. In addition, these respondents
will be exempt from Rule 18a-4 under the conditions of paragraph (f)
of the rule if they meet certain conditions, but will continue to be
included in the collection of information for the rule because the
conditions in paragraph (f) contain a collection of information
under the PRA. Finally, the collections of information for Rule 18a-
10 will be included with the collections of information with Rule
18a-3 for purposes of submission to OMB.
---------------------------------------------------------------------------

    The Commission estimates paperwork burden associated with
developing new disclosure language under paragraph (b)(2) of Rule 18a-
10 will require each of the 3 stand-alone SBSDs to spend 5 hours of in-
house counsel time. This would create a total one-time industry burden
of 15 hours.\912\ This estimate assumes little or no reliance on
standardized disclosure language. In addition, the Commission estimates
the total paperwork burden associated with incorporating new disclosure
language into each stand-alone SBSD's trading documentation will be
approximately 30,000 hours for all 3 stand-alone SBSDs.\913\ The
Commission expects that the majority of the paperwork burden associated
with the new disclosure requirements under paragraph (b)(2) of Rule
18a-10, as adopted, will be experienced during the first year as
language is developed. After the new disclosure language is developed
and incorporated into trading documentation, the Commission believes
that the ongoing burden associated with paragraph (b)(2) of Rule 18a-10
will be limited to periodically updating the disclosures. The
Commission estimates that this ongoing paperwork burden will not exceed
15 hours per year for all 3 stand-alone SBSDs.\914\
---------------------------------------------------------------------------

    \912\ 3 stand-alone SBSDs x 5 in-house counsel hours = 15 hours.
    \913\ The Commission staff estimates that the average SBSD will
have approximately 1,000 counterparties at any given time.
Accordingly, the Commission staff estimates the cost of
incorporating new disclosure language into the trading documentation
of an average SBSD would be 10,000 hours per stand-alone SBSD (based
on 10 hours of in-house counsel time x 1,000 counterparties).
    \914\ 3 stand-alone SBSDs x 5 hours per SBSD = 15 hours.
---------------------------------------------------------------------------

    Based on the number of notices currently filed by broker-dealers,
the Commission staff estimates that the notice requirement of paragraph
(b)(3) of Rule 18a-10 will result in annual hour burdens to stand-alone
SBSDs. The Commission staff estimates that 1 stand-alone SBSD will file
1 notice annually with the Commission. In addition, the Commission
staff estimates that it will take a stand-alone SBSD approximately 30
minutes to file this notice, resulting in an industry-wide annual hour
burden of 30 minutes.\915\
---------------------------------------------------------------------------

    \915\ 1 stand-alone SBSD x 1 notice x 30 minutes = 30 minutes.
This estimate is based on the 30 minutes it is estimated a stand-
alone broker-dealer spends filing a notice under Rule 15c3-1. See
Supporting Statement for the Paperwork Reduction Act Information
Collection Submission for Rule 15c3-1. This work will likely be
performed by an internal compliance attorney. Therefore, the
estimated internal cost for this hour burden is calculated as
follows: Internal compliance attorney for 30 minutes at $371 per
hour = $185.50.
---------------------------------------------------------------------------

    Finally, under paragraphs (d)(1) and (d)(2) of Rule 18a-10,
respectively, a stand-alone SBSD can make an election to operate under
the alternative compliance mechanism, during the registration process
or after the firm registers as an SBSD, by providing written notice to
the Commission and the CFTC of its intent to operate pursuant to the
rule. The Commission believes that in the first 3 years of the
effective date of the rule that the 3 nonbank SBSDs that elect to
operate under Rule 18a-10 will file the notice as part of their
application process. Therefore, the Commission believes that the time
it would take an entity to file a notice as part of the application
process would be de minimis and, therefore, would not result in an hour
burden for this collection of information or any collection of
information associated with registering with the Commission as an
SBSD.\916\ Finally, since the Commission believes that the 3 nonbank
SBSDs will elect to operate under the rule as part of their
registration process, the Commission believes that there will be no
respondents, and no paperwork hour or cost burden under the PRA
associated with paragraph (d)(2) of Rule 18a-10, as adopted.
---------------------------------------------------------------------------

    \916\ See also Registration Process for Security-Based Swap
Dealers and Major Security-Based Swap Participants, Exchange Act
Release No. 75611 (Aug. 5, 2015), 80 FR 48964, 48989 (Aug. 14,
2015).
---------------------------------------------------------------------------

6. Rule 3a71-6
    Rule 3a71-6, as amended, will require submission of certain
information to the Commission to the extent person request a
substituted compliance determination with respect to the Title VII
capital and margin requirements. The Commission expects that foreign
SBSDs and MSBSPs will seek to rely on substituted compliance upon
registration, and that it is likely that the majority of such requests
will be made during the first year following the effective date of this
amendment. Requests would not be necessary with regard to applicable
rules and regulations of a foreign jurisdiction that have previously
been the subject of a substituted compliance determination in
connection with the applicable rules.
    The Commission expects that the majority of substituted compliance
applications will be submitted by foreign authorities, and that very
few substituted compliance requests will come from SBSDs or MSBSPs. For
purposes of this assessment, the Commission estimates that 3 SBSDs or
MSBSPs will submit such applications in connection with the
Commission's capital and margin requirements.\917\ After consideration
of the release adopting Rule 3a71-6, the Commission estimates that the
total paperwork burden incurred by such entities associated with
preparing and submitting a request for a substituted compliance
determination in connection with the capital and margin requirements
will be approximately 240 hours, plus $240,000 for the services of
outside professionals for all 3 requests.\918\
---------------------------------------------------------------------------

    \917\ See Business Conduct Standards for Security-Based Swap
Dealers and Major Security-Based Swap Participants, 81 FR at 30097.
See also Trade Acknowledgment and Verification of Security-Based
Swap Transactions, 81 FR at 39382.
    \918\ See Business Conduct Standards for Security-Based Swap
Dealers and Major Security-Based Swap Participants, 81 FR at 30097
(``The Commission estimates that the total one-time paperwork burden
incurred by such entities associated with preparing and submitting a
request for a substituted compliance determination in connection
with the business conduct requirements will be approximately 240
hours, plus $240,000 for the services of outside professionals for
all three requests''). The Commission further stated that in
practice those amounts may overestimate the costs of requests
pursuant to Rule 3a71-6 as adopted, as such requests would solely
address the business conduct requirements, rather than the broader
proposed scope of substituted compliance set forth in the cross-
border proposing release. 81 FR at 30097 n. 1583. To the extent that
an SBSD submits substituted compliance requests in connection with
the business conduct requirements, the trade acknowledgment and
verification requirements, and the capital and margin requirements,
the Commission believes that the paperwork burden associated with
the requests would be greater than that associated with a narrower
request, given the need for more information regarding the
comparability of the relevant rules and the adequacy of the
associated supervision and enforcement practices. In the
Commission's view, however, the burden associated with such a
combined request would not exceed the prior estimate. See Trade
Acknowledgment and Verification of Security-Based Swap Transactions,
81 FR at 39833 n. 258.

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E. Collection of Information is Mandatory

    The collections of information pursuant to the amendments and new
rules are mandatory, as applicable, for ANC broker-dealers, broker-
dealers, SBSDs, and MSBSPs. Compliance with the collection of
information requirements associated with Rule 3a71-6, regarding the
availability of substituted compliance, is mandatory for all foreign
financial authorities, foreign SBSDs, or foreign MSBSPs that seek a
substituted compliance determination. Compliance with the collection of
information requirements associated with Rule 18a-10 regarding the
availability of an alternative compliance mechanism is mandatory for
all stand-alone SBSDs that elect to operate under the conditions of the
rule.

F. Confidentiality

    The Commission expects to receive confidential information in
connection with the collections of information. To the extent that the
Commission receives confidential information pursuant to these
collections of information, such information will be kept confidential,
subject to the provisions of applicable law.\919\
---------------------------------------------------------------------------

    \919\ See, e.g., 15 U.S.C. 78x (governing the public
availability of information obtained by the Commission); 5 U.S.C.
552 et seq. (Freedom of Information Act or ``FOIA''). See also
paragraph (d)(1) of Rule 18a-1. FOIA provides at least two pertinent
exemptions under which the Commission has authority to withhold
certain information. FOIA Exemption 4 provides an exemption for
matters that are ``trade secrets and commercial or financial
information obtained from a person and privileged or confidential.''
5 U.S.C. 552(b)(4). FOIA Exemption 8 provides an exemption for
matters that are ``contained in or related to examination,
operating, or condition reports prepared by, on behalf of, or for
the use of an agency responsible for the regulation or supervision
of financial institutions.'' 5 U.S.C. 552(b)(8).
---------------------------------------------------------------------------

G. Retention Period for Recordkeeping Requirements

    Under Rule 17a-4, ANC broker-dealers are required to preserve for a
period of not less than 3 years, the first 2 years in an easily
accessible place, certain records required under Rule 15c3-4 and
certain records under Rule 15c3-1e. Rule 17a-4 specifies the required
retention periods for a broker-dealer. Many of a broker-dealer's
records must be retained for 3 years; certain other records must be
retained for longer periods.

V. Other Matters

    Pursuant to the Congressional Review Act,\920\ the Office of
Information and Regulatory Affairs has designated these rules as a
``major rule,'' as defined by 5 U.S.C. 804(2).
---------------------------------------------------------------------------

    \920\ 5 U.S.C. 801 et seq.
---------------------------------------------------------------------------

VI. Economic Analysis

    The Commission is adopting: (1) Rules 18a-1 and 18a-2, and
amendments to Rule 15c3-1, to establish capital requirements for
nonbank SBSDs and MSBSPs; (2) Rule 18a-3 to establish margin
requirements for non-cleared security-based swaps applicable to nonbank
SBSDs and MSBSPs; and (3) Rule 18a-4, and amendments to Rule 15c3-3, to
establish segregation requirements for SBSDs and notification
requirements with respect to segregation for SBSDs and MSBSPs.\921\
Some of the amendments to Rules 15c3-1 and 15c3-3 will apply to stand-
alone broker-dealers to the extent that they engage in security-based
swap or swap activities.\922\ The Commission also is amending Rule
15c3-1 to increase the minimum net capital requirements for ANC broker-
dealers and amending Rule 3a71-6 to address the potential availability
of substituted compliance in connection with the Commission's capital
and margin requirements for foreign SBSDs and MSBSPs. Further, the
Commission is adopting an alternative compliance mechanism in Rule 18a-
10 pursuant to which a stand-alone SBSD that is registered as a swap
dealer and predominantly engages in a swaps business may elect to
comply with the capital, margin, and segregation requirements of the
CEA and the CFTC's rules in lieu of complying with the capital, margin,
and segregation requirements being adopted today. Finally, the
Commission is adopting a rule that specifies when a foreign non-broker-
dealer SBSD or MSBSP need not comply with the segregation requirements
of Section 3E of the Exchange Act and the rules thereunder.
---------------------------------------------------------------------------

    \921\ See section II of this release.
    \922\ For example, the standardized haircuts for security-based
swaps and swaps will apply to stand-alone broker-dealers as will the
segregation requirements for security-based swaps.
---------------------------------------------------------------------------

    The Commission is sensitive to the economic impacts of the rules it
is adopting. Some of the costs and benefits stem from statutory
mandates, while others are affected by the discretion exercised in
implementing the mandates. The following economic analysis seeks to
identify and consider the economic effects--including the benefits,
costs, and effects on efficiency, competition, and capital formation--
that will result from the adoption of Rules 18a-1, 18a-2, 18a-3, 18a-4,
and Rule 18a-10, and from the adoption of the amendments to Rules 15c3-
1, 15c3-3, and 3a71-6. The economic effects considered in adopting
these new rules and amendments are discussed below and have informed
the policy choices described throughout this release.
    The discussion below provides a baseline against which the rules
may be evaluated. For the purposes of this economic analysis, the
baseline incorporates the state of the security-based swap and swap
markets as they exist today and does not include any of the regulatory
provisions that have not yet been adopted. However, to the extent that
such provisions have been anticipated by and therefore affected the
behavior of market participants those practices will be considered part
of the baseline.
    The Commission does not currently have comprehensive data on the
state of the U.S. security-based swap and swap markets. Consequently,
the Commission is using the limited data currently available to develop
the baseline and to inform the following analysis of the anticipated
costs and benefits resulting from the rules and amendments being
adopted today.\923\ These rules and amendments have the potential to
significantly affect efficiency, competition, and capital formation in
the security-based swap and swap markets, with the impact not being
limited to the specific entities that fall within the meaning of the
terms ``security-based swap dealer'' and ``major security-based swap

participant.'' The following analysis will also consider these effects.
---------------------------------------------------------------------------

    \923\ In the proposing release, the Commission requested data
and information from commenters to assist it in analyzing the
economic consequences of the proposed rules. See Capital, Margin,
and Segregation Proposing Release, 77 FR at 70300. See also Capital,
Margin, and Segregation Comment Reopening, 83 FR at 53019-20
(similarly requesting data).
---------------------------------------------------------------------------

A. Baseline

    To assess the economic impact of the capital, margin, and
segregation rules being adopted today, the Commission is using as its
baseline the state of the security-based swap and swap markets as they
exist at the time of this release, including applicable rules the
Commission has already adopted, but excluding rules the Commission has
proposed but not finalized.\924\ The analysis includes the statutory
provisions that currently govern the security-based swap market
pursuant to the Dodd-Frank Act, and rules adopted by the Commission
regarding: (1) Entity definitions; \925\ (2) cross-border activities;
\926\ (3) registration of security-based swap data repositories; \927\
(4) registration of SBSDs and MSBSPs; \928\ (5) reporting and
dissemination of security-based swap information; \929\ (6) dealing
activity of non-U.S. persons with a U.S. connection; \930\ (7) business
conduct standards; \931\ (8) trade acknowledgments; \932\ and (9)
applications with respect to statutory disqualifications.\933\ These
statutes and final rules--even if compliance is not yet required--are
part of the existing regulatory landscape that market participants
expect to govern their security-based swap activity. There are
limitations in the degree to which the Commission can quantitatively
characterize the current state of the security-based swap market. As
described in more detail below, because the available data on security-
based swap transactions do not cover the entire market, the Commission
has developed its understanding of market activity using a sample that
includes only certain portions of the market.
---------------------------------------------------------------------------

    \924\ The Commission also considered, where appropriate, the
impact of rules and technical standards promulgated by other
regulators, such as the CFTC, the prudential regulators, and the
European Securities and Markets Authority, on practices in the
security-based swap and swap markets.
    \925\ See Entity Definitions Adopting Release, 77 FR 30596.
    \926\ See Application of ``Security-Based Swap Dealer'' and
``Major Security-Based Swap Participant'' Definitions to Cross-
Border Security-Based Swap Activities, Exchange Act Release No.
72472 (June 25, 2014, 79 FR 47278 (Aug. 12, 2014).
    \927\ See Security-Based Swap Data Repository Registration,
Duties, and Core Principles, Exchange Act Release No. 74246 (Feb.
11, 2015), 80 FR 14438 (Mar. 19, 2015).
    \928\ See Registration Process for Security-Based Swap Dealers
and Major Security-Based Swap Participants, 80 FR 48964.
    \929\ See Regulation SBSR--Reporting and Dissemination of
Security-Based Swap Information, Exchange Act Release No. 74244
(Feb. 11, 2015), 80 FR 14563 (Mar. 19, 2015). See also Regulation
SBSR--Reporting and Dissemination of Security-Based Swap
Information, Exchange Act Release No. 78321 (July 14, 2016), 81 FR
53546 (Aug. 12, 2016).
    \930\ See Security-Based Swap Transactions Connected With a Non-
U.S. Person's Dealing Activity That Are Arranged, Negotiated, or
Executed by Personnel Located in a U.S. Branch or Office of an
Agent; Security-Based Swap Dealer De Minimis Exception, Exchange Act
Release No. 77104 (Feb. 10, 2016), 81 FR 8598 (Feb. 19, 2016).
    \931\ See Business Conduct Standards for Security-Based Swap
Dealers and Major Security-Based Swap Participants, 81 FR 29960;
Commission Statement on Certain Provisions of Business Conduct
Standards for Security-Based Swap Dealers and Major Security-Based
Swap Participants, Exchange Act Release No. 84511 (Oct. 31, 2018),
83 FR 55486 (Nov. 6, 2018).
    \932\ See Trade Acknowledgment and Verification of Security-
Based Swap Transactions, 81 FR 39808.
    \933\ See Applications by Security-Based Swap Dealers or Major
Security-Based Swap Participants for Statutorily Disqualified
Associated Persons to Effect or Be Involved in Effecting Security-
Based Swaps, 84 FR 4906.
---------------------------------------------------------------------------

    Under the baseline, the security-based swap and swap markets are
dominated, both globally and domestically, by a small number of firms,
generally entities that are, or are affiliated with, large commercial
banks.\934\ The economic impacts of the rules and amendments being
adopted here are expected to primarily stem from their effect on the
relatively small number of entities that act as dealers and major
participants in this market. These firms will become subject to the
segregation requirements of Rule 15c3-3, as amended, or Rule 18a-4 with
respect to security-based swap transactions. These firms--if they are a
stand-alone broker-dealer, nonbank SBSD, or nonbank MSBSP--will also
become subject to the capital requirements of Rules 15c3-1, 18a-1, and/
or 18a-2, as applicable, and--if they are a nonbank SBSD and MSBSP--
will also become subject to the margin requirements of Rule 18a-3.\935\
Many of the directly affected entities--including nonbank entities--are
currently part of a bank holding company. Therefore, certain Federal
Reserve regulations applicable to these entities (at the bank-holding
company level) enter into the baseline and otherwise impact the
analysis of the costs and benefits. Moreover, participants in the
security-based swap and swap markets can fall under a number of other
regulatory regimes, including those of: the prudential regulators, the
CFTC, or numerous international regulatory authorities.\936\
---------------------------------------------------------------------------

    \934\ See, e.g., ISDA Margin Survey 2012 (May 2012).
    \935\ A bank SBSD or MSBSP will be subject to the capital and
margin requirements of its prudential regulator. See Prudential
Regulator Margin and Capital Adopting Release, 80 FR 74840.
    \936\ See, e.g., Regulation (EU) No. 648/2012 of the European
Parliament and of the Council on OTC derivatives, central
counterparties and trade repositories (July 4, 2012).
---------------------------------------------------------------------------

    Prior to the Dodd-Frank Act, many participants in the security-
based swap and swap markets generally were not directly supervised by
the Commission.\937\ The Commission does not possess regulatory reports
from many of these entities that can be used to determine the nature
and extent of their participation in these markets. Consequently, in
the Commission's analysis, the nature of an entity's participation in
these markets will generally be inferred from transaction data. Market
participants meeting the registration thresholds outlined in the
Commission's intermediary definitions \938\ and cross-border rules are
expected to register with the Commission.\939\ As discussed elsewhere,
the Commission expects that up to 50 entities may register as SBSDs,
and that up to an additional five entities may register as MSBSPs.\940\
In addition, the Commission estimates that, of the 50 entities expected
to register as SBSDs, 16 are registered with the Commission as broker-
dealers.\941\ Of the 50 entities expected to register as SBSDs, 22 are
expected to be non-U.S. persons.\942\
---------------------------------------------------------------------------

    \937\ See section VI.A.1. of this release.
    \938\ See Entity Definitions Adopting Release, 77 FR 30596;
Application of ``Security-Based Swap Dealer'' and ``Major Security-
Based Swap Participant'' Definitions to Cross-Border Security-Based
Swap Activities, 79 FR 47278.
    \939\ Though the Commission's SBSD and MSBSP registration rules
are effective, compliance will not be required until the Commission
has adopted other rules applicable to these entities. See section
III of this release discussing effective and compliance dates.
    \940\ See Applications by Security-Based Swap Dealers or Major
Security-Based Swap Participants for Statutorily Disqualified
Associated Persons to Effect or Be Involved in Effecting Security-
Based Swaps, 84 FR 4906; see also section VI.B.1.b. of this release.
The Commission's estimate of the number of SBSDs is based on data
obtained from the Depository Trust & Clearing Corporation
Derivatives Repository Limited Trade Information Warehouse (``DTCC-
TIW''), which consists of data regarding the activity of market
participants in the single-name CDS market during 2017.
    \941\ See Applications by Security-Based Swap Dealers or Major
Security-Based Swap Participants for Statutorily Disqualified
Associated Persons to Effect or Be Involved in Effecting Security-
Based Swaps, 84 FR 4906.
    \942\ See Security-Based Swap Transactions Connected With a Non-
U.S. Person's Dealing Activity That Are Arranged, Negotiated, or
Executed by Personnel Located in a U.S. Branch or Office of an
Agent; Security-Based Swap Dealer De Minimis Exception, 81 FR at
8605.
---------------------------------------------------------------------------

    Certain provisions in the amendments and the rules being adopted
today affect broker-dealers. Thus, the baseline incorporates the
current capital and segregation requirements for broker-dealers under
Rules 15c3-1 and 15c3-3 as well as the current state of the

broker-dealer industry.\943\ However, because the Exchange Act's
definition of ``security'' did not include security-based swaps until
the definition was amended by the Dodd-Frank Act, dealing activity in
security-based swaps did not require registration with the Commission
as a broker-dealer. Therefore, these entities were not subject to the
broker-dealer capital and segregation requirements of the Commission or
the margin requirements of the Federal Reserve and the SROs. Moreover,
existing broker-dealer capital and segregation requirements made it
relatively costly for broker-dealers to trade security-based
swaps.\944\ As a result, security-based swap transactions have often
been effected via entities that are affiliated with broker-dealers, but
not via broker-dealers themselves.
---------------------------------------------------------------------------

    \943\ The current state of the broker-dealer industry is
affected by, among other things, market practice and relevant SRO
regulations, as well as margin rules set by the Federal Reserve
(i.e., Regulation T).
    \944\ For example, because the segregation rules in the United
States were stricter than those in the United Kingdom, prime-
brokerage services were often provided through London-based broker-
dealer affiliates. See Kenneth R. French et. al., The Squam Lake
Report: Fixing the Financial System (2010).
---------------------------------------------------------------------------

    The Commission is adopting requirements that apply to MSBSPs. An
entity is an MSBSP if it is not an SBSD but nonetheless either: (1)
Maintains a ``substantial position'' in security-based swaps for any of
the major security-based swap categories; (2) has outstanding security-
based swaps that create substantial counterparty exposure that could
have serious adverse effects on the financial stability of the U.S.
banking system or financial markets; or (3) is a ``financial entity''
that is ``highly leveraged'' relative to the amount of capital it holds
(and that is not subject to capital requirements established by an
appropriate federal banking agency) and maintains a ``substantial
position'' in outstanding swaps or security-based swaps in any major
category.\945\ As with SBSDs, such entities have previously operated
without the Commission's direct supervision (unless separately required
to register as a broker-dealer). Based on available transaction data,
the Commission has previously estimated that five or fewer entities
currently active in the security-based swap market may ultimately
register as MSBSPs.\946\
---------------------------------------------------------------------------

    \945\ See 17 CFR. 240.3a67-1.
    \946\ See Applications by Security-Based Swap Dealers or Major
Security-Based Swap Participants for Statutorily Disqualified
Associated Persons to Effect or Be Involved in Effecting Security-
Based Swaps, 84 FR at 4925.
---------------------------------------------------------------------------

    Because many of the entities that may register as SBSDs or MSBSPs
are subsidiaries of U.S. and international bank holding companies, the
baseline is affected by the relevant Federal Reserve regulations
currently applicable at the consolidated bank holding company
level,\947\ as well as current foreign regulations of security-based
swaps.
---------------------------------------------------------------------------

    \947\ See 12 CFR 225, Appendix A.
---------------------------------------------------------------------------

    The amendments and rules being adopted today are primarily focused
on security-based swap activities of stand-alone broker-dealers and
nonbank SBSDs and MSBSPs. However, certain aspects of the amendments
and rules being adopted will also affect the treatment of swaps such as
interest rate swaps or CDS on broad-based security indices. For
example, entities that are registered with the Commission as nonbank
SBSDs but who also participate in the swap market will account for the
swap positions in their capital calculations under the requirements
being adopted today. Therefore, the Commission's analysis (and the
baseline thereto) focuses on security-based swaps, but considers the
broader swap market where appropriate.
    The Commission's analysis of the state of the current security-
based swap market is based on data obtained from the DTCC-TIW,
particularly data regarding the activity of market participants in the
single-name CDS market during the period from 2008 to 2017.\948\
Although the capital, segregation, and margin rules being adopted today
apply to all security-based swaps, not just single-name CDS, single-
name CDS represent a significant portion of the security-based swap
market.\949\
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    \948\ See Applications by Security-Based Swap Dealers or Major
Security-Based Swap Participants for Statutorily Disqualified
Associated Persons to Effect or Be Involved in Effecting Security-
Based Swaps, 84 FR at 4924-25 (describing the features of the DTCC-
TIW, including CDS transactions that are not part of the data).
    \949\ See Applications by Security-Based Swap Dealers or Major
Security-Based Swap Participants for Statutorily Disqualified
Associated Persons to Effect or Be Involved in Effecting Security-
Based Swaps, 84 FR at 4924 n. 245 (providing a breakdown of the
global security-based swap market and indicating that single-name
CDSs represent approximately 59% of this market in terms of gross
notional outstanding at the end of 2017).
---------------------------------------------------------------------------

    Although the Commission believes the DTCC-TIW data to be sufficient
for characterizing the baseline state of the security-based swap
market, the complexity of the U.S. regulatory structure presents
difficulties in drawing inferences from this baseline. The security-
based swap market is dominated by a small number of global financial
firms.\950\ These firms typically have considerable flexibility in
structuring their activities. Such firms may choose to house their
security-based swap dealing activities in one of several affiliated
entities; the degree to which the rules and amendments being adopted
today will apply will depend on these choices. If such activities are
placed in a bank SBSD or MSBSP, such as a federally insured depository
institution, the capital and margin rules being adopted today will not
apply.\951\ Conversely, if these activities are instead housed in an
affiliated (U.S.) nonbank SBSD, the requirements being adopted today
will apply in full. Thus, the requirements' impact will depend on
firms' choice of organizational structure, which, in turn, will depend,
in part, on the requirements' relative attractiveness compared to those
of other regulators.
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    \950\ See, e.g., ISDA Margin Survey 2012.
    \951\ The capital and margin requirements adopted today apply to
nonbank SBSDs and MSBSPs, but the segregation requirements adopted
today apply to both bank and nonbank SBSDs and MSBSPs. Bank SBSDs
are subject to the prudential regulators' capital and margin
requirements. See Prudential Regulator Margin and Capital Adopting
Release, 80 FR 74840.
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    Available information about the global OTC derivatives market
suggests that swap transactions, in contrast to security-based swap
transactions, dominate trading activities, notional amounts, and market
values.\952\ The BIS estimates that the total notional amounts
outstanding and gross market value of global OTC derivatives were $532
trillion and $11.0 trillion, respectively, as of the end of 2017. Of
these totals, the BIS estimates that foreign exchange contracts,
interest rate contracts, and commodity contracts comprised 97% of the
total notional amount and 92% of the gross market value. CDS, including
index CDS, comprised 1.8% of the total notional amount and 2.9% of the
gross market value. Equity-linked contracts, including forwards, swaps
and options, comprised an additional 1.2% of the total notional amount
and 5.3% of the gross market value. Because the capital, margin, and
segregation rules being adopted today for SBSDs and MSBSPs would apply
to dealers and participants in the security-based swap market, they are
expected to affect a substantially smaller portion of the U.S. OTC
derivatives market than the capital, margin, and segregation rules of
the CFTC and the prudential regulators for swap dealers and major swap
participants.\953\ Moreover, many of the

participants in these markets may choose to engage in security-based
swap transactions through their banking subsidiaries, further reducing
the impact of the Commission's requirements.\954\
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    \952\ See BIS, OTC derivatives statistics at end-December 2017
(May 2018).
    \953\ See Prudential Regulator Margin and Capital Adopting
Release, 80 FR 74840; CFTC Margin Adopting Release, 81 FR 636; CFTC
Capital Proposing Release, 81 FR 91252. The effect of the
Commission's capital rules on the U.S. OTC derivatives markets
potentially will be more significant depending on the number of
CFTC-registered dealers that also register as nonbank SBSDs, given
the application of the capital requirements to the entire business
of such dually-registered firms.
    \954\ Section 716 of the Dodd-Frank Act significantly limited
the security-based swap activities of insured depository
institutions, effectively requiring that such activities be pushed
out into affiliated nonbank SBSDs registered with the Commission.
Section 630 of the Consolidated and Further Continuing
Appropriations Act of 2015 eliminated most of Section 716's
limitations; excepting structured financed swaps, insured depository
institutions may directly engage in security-based swap activity.
See Public Law 113-235 Sec.  630.
---------------------------------------------------------------------------

1. Market Participants
    Transaction data from the DTCC-TIW indicates that security-based
swap dealing activity is concentrated among a few dozen entities. In
addition to these entities, thousands of other participants appear as
counterparties to security-based swaps in the Commission's sample, and
include, but are not limited to, investment companies, pension funds,
private hedge funds, sovereign entities, and industrial companies. A
detailed discussion of security-based swap market participants can be
found in the Commission's release regarding applications with respect
to statutory disqualifications.\955\
---------------------------------------------------------------------------

    \955\ See Applications by Security-Based Swap Dealers or Major
Security-Based Swap Participants for Statutorily Disqualified
Associated Persons to Effect or Be Involved in Effecting Security-
Based Swaps, 84 FR at 4925-26.
---------------------------------------------------------------------------

a. Dealing Structures
    SBSDs use a variety of business models and legal structures to
engage in dealing business for a variety of legal, tax, strategic, and
business reasons.\956\ Dealers may use a variety of structures in part
to reduce risk and enhance credit protection based on the particular
characteristics of each entity's business.
---------------------------------------------------------------------------

    \956\ See Application of ``Security-Based Swap Dealer'' and
``Major Security-Based Swap Participant'' Definitions to Cross-
Border Security-Based Swap Activities; Republication, 79 FR at
47283.
---------------------------------------------------------------------------

    Bank and nonbank holding companies may use subsidiaries to deal
with counterparties. Further, dealers may rely on multiple sales forces
to originate security-based swap transactions. For example, a U.S. bank
dealer may use a sales force in its U.S. home office to originate
security-based swap transactions in the United States and use separate
sales forces spread across foreign branches to originate security-based
swap transactions with counterparties in foreign markets.
    In some situations, an entity's performance under a security-based
swap transaction may be supported by a guarantee provided by an
affiliate. More generally, guarantees may take the form of a blanket
guarantee of an affiliate's performance on all security-based swap
contracts, or a guarantee may apply only to a specific transaction or
counterparty. Guarantees may give counterparties to the dealer direct
recourse to the holding company or another affiliate for its dealer-
affiliate's obligations under security-based swap transactions for
which that dealer-affiliate acts as counterparty.

[GRAPHIC] [TIFF OMITTED] TR22AU19.000

b. Security-Based Swap Market Participant Domiciles
    As depicted in Figure 1, domiciles of new accounts participating in
the market have shifted over time. It is unclear whether these shifts
represent changes in the types of participants active in this market,
changes in reporting, or changes in transaction volumes in particular
underliers. For example, the percentage of new entrants that are
foreign accounts increased from 24.4% in the first quarter of 2008 to
32.3% in the last quarter of 2017, which may reflect an increase in
participation by foreign account holders in the security-based swap
market, though the total number of new entrants that are foreign
accounts decreased from 112 in the first quarter of 2008 to 48 in the
last quarter of 2017.\958\ Additionally, the percentage of the subset
of new entrants that are foreign accounts managed by U.S. persons
increased from 4.6% in the first quarter of 2008 to 16.8% in the last
quarter of 2017, and the absolute number rose from 21 to 25, which also
may reflect more specifically the flexibility with which market
participants can restructure their market participation in response to
regulatory intervention, competitive pressures, and other stimuli.\959\
At the same time, apparent changes in the percentage of new accounts
with foreign domiciles may also reflect improvements in reporting to
the DTCC-TIW by market participants, an increase in the percentage of
transactions between U.S. and non-U.S. counterparties, and/or increased
transactions in single-name CDS on U.S. reference entities by foreign
persons.\960\
---------------------------------------------------------------------------

    \957\ Following publication of the Warehouse Trust Guidance on
CDS data access, the DTCC-TIW surveyed market participants, asking
for the physical address associated with each of their accounts
(i.e., where the account is organized as a legal entity). This
address is designated the registered office location by the DTCC-
TIW. When an account does not report a registered office location,
the Commission has assumed that the settlement country reported by
the investment adviser or parent entity to the fund or account is
the place of domicile. This treatment assumes that the registered
office location reflects the place of domicile for the fund or
account.
    \958\ These estimates were calculated by Commission staff using
DTCC-TIW data.
    \959\ See Charles Levinson, U.S. banks moved billions in trades
beyond the CFTC's reach, Reuters, Aug. 21, 2015, available at http://www.reuters.com/article/2015/08/21/usa-banks-swaps-idUSL3N10S57R20150821. The estimates of 21 and 25 were calculated by
Commission staff using DTCC-TIW data.
    \960\ The available data do not include all security-based swap
transactions but only transactions in single name CDS that involve
either: (1) At least one account domiciled in the United States
(regardless of the reference entity); or (2) single-name CDS on a
U.S. reference entity (regardless of the domicile of the
counterparties).

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

[GRAPHIC] [TIFF OMITTED] TR22AU19.001

c. Security-Based Swap Market: Levels of Security-Based Swap Trading
Activity
    As noted above, firms that act as dealers play a central role in
the security-based swap market. Based on an analysis of 2017 single-
name CDS data from the DTCC-TIW, accounts of those firms that are
likely to exceed the security-based swap dealer de minimis thresholds
and trigger registration requirements intermediated transactions with a
gross notional amount of approximately $2.9 trillion, approximately 55%
of which was intermediated by the top five dealer accounts.\961\ A
commenter stated that security-based swap dealing activity is largely
concentrated in U.S. and foreign banks, foreign dealers, OTC
derivatives dealers, and ``stand-alone SBSDs,'' and that stand-alone
broker-dealers are not significant participants.\962\
---------------------------------------------------------------------------

    \961\ The Commission staff analysis of DTCC-TIW transaction
records indicates that approximately 99% of single-name CDS price-
forming transactions in 2017 involved an ISDA-recognized dealer.
    \962\ See SIFMA 11/19/2018 Letter.
---------------------------------------------------------------------------

    These dealers transact with hundreds or thousands of
counterparties. Approximately 21% of accounts of firms expected to
register as SBSDs and observable in the DTCC-TIW have entered into
security-based swaps with over 1,000 unique counterparty accounts as of
year-end 2017.\963\ Another 25% of these accounts transacted with 500
to 1,000 unique counterparty accounts; 29% transacted with 100 to 500
unique accounts; and 25% of these accounts intermediated security-based
swaps with fewer than 100 unique counterparties in 2017. The median
dealer account transacted with 495 unique accounts (with an average of
approximately 570 unique accounts). Non-dealer counterparties
transacted almost exclusively with these dealers. The median non-dealer
counterparty transacted with two dealer accounts (with an average of
approximately 3 dealer accounts) in 2017.
---------------------------------------------------------------------------

    \963\ Many dealer entities and financial groups transact through
numerous accounts. Given that individual accounts may transact with
hundreds of counterparties, the Commission infers that entities and
financial groups may transact with at least as many counterparties
as the largest of their accounts.
---------------------------------------------------------------------------

    Figure 2 describes the percentage of global, notional transaction
volume in North American corporate single-name CDS reported to the
DTCC-TIW from January 2008 through December 2017, separated by whether
transactions are between two ISDA-recognized dealers (interdealer
transactions) or whether a transaction has at least one non-dealer
counterparty.
    Figure 2 also shows that the portion of the notional volume of
North American corporate single-name CDS represented by interdealer
transactions has remained fairly constant through 2015 before falling
from approximately 72% in 2015 to approximately 40% in 2017. This fall
corresponds to the availability of clearing to non-dealers. Interdealer
transactions continue to represent a significant portion of trading
activity even as notional volume has declined over the past 10
years,\964\ from

more than $6 trillion in 2008 to less than $700 billion in 2017.\965\
---------------------------------------------------------------------------

    \964\ The start of this decline predates the enactment of the
Dodd-Frank Act and the proposal of security-based swap rules
thereunder.
    \965\ This estimate is lower than the gross notional amount of
$7.2 trillion noted above as it includes only the subset of single-
name CDS referencing North American corporate documentation, as
discussed above.
---------------------------------------------------------------------------

    Against this backdrop of declining North American corporate single-
name CDS activity, about half of the trading activity in North American
corporate single-name CDS reflected in the analyzed dataset was between
counterparties domiciled in the United States and counterparties
domiciled abroad, as shown in Figure 3 below. Using the self-reported
registered office location of the DTCC-TIW accounts as a proxy for
domicile, Commission staff estimates that only 12% of the global
transaction volume by notional volume between 2008 and 2017 was between
two U.S.-domiciled counterparties, compared to 49% entered into between
one U.S.-domiciled counterparty and a foreign-domiciled counterparty
and 39% entered into between two foreign-domiciled counterparties.\966\
---------------------------------------------------------------------------

    \966\ For purposes of this discussion, Commission staff has
assumed that the registered office location reflects the place of
domicile for the fund or account, but it is possible that this
domicile does not necessarily correspond to the location of an
entity's sales or trading desk. See Application of Certain Title VII
Requirements to Security-Based Swap Transactions Connected With a
Non-U.S. Person's Dealing Activity That Are Arranged, Negotiated, or
Executed by Personnel Located in a U.S. Branch or Office or in a
U.S. Branch or Office of an Agent, Exchange Act Release No. 74834
(Apr. 29, 2015), 80 FR 27452 (May 13, 2015).
---------------------------------------------------------------------------

    If one considers the number of cross-border transactions instead
from the perspective of the domicile of the corporate group (e.g., by
classifying a foreign bank branch or foreign subsidiary of a U.S.
entity as domiciled in the United States), the percentages shift
significantly. Under this approach, the fraction of transactions
entered into between two U.S.-domiciled counterparties increases to
34%, and to 51% for transactions entered into between a U.S.-domiciled
counterparty and a foreign-domiciled counterparty.
    By contrast, the proportion of activity between two foreign-
domiciled counterparties drops from 39% to 15%. This change in
respective shares based on different classifications suggests that the
activity of foreign subsidiaries of U.S. firms and foreign branches of
U.S. banks accounts for a higher percentage of security-based swap
activity than the activity of U.S. subsidiaries of foreign firms and
U.S. branches of foreign banks. It also demonstrates that financial
groups based in the United States are involved in an overwhelming
majority (approximately 85%) of all reported transactions in North
American corporate single-name CDS.
    Financial groups based in the United States are also involved in a
majority of interdealer transactions in North American corporate
single-name CDS. Of the 2017 transactions in North American corporate
single-name CDS between two ISDA-recognized dealers and their branches
or affiliates, 94% of transaction notional volume involved at least one
account of an entity with a U.S. parent.
    In addition, a majority of North American corporate single-name CDS
transactions occur in the interdealer market or between dealers and
foreign non-dealers, with the remaining portion of the market
consisting of transactions between dealers and U.S.-person non-dealers.
Specifically, 60% of North American corporate single-name CDS
transactions involved either two ISDA-recognized dealers or an ISDA-
recognized dealer and a foreign non-dealer. Approximately 39% of such
transactions involved an ISDA-recognized dealer and a U.S.-person non-
dealer.

[GRAPHIC] [TIFF OMITTED] TR22AU19.002

d. Open Positions
    Based on analysis of data from the DTCC-TIW, Table 1 describes the
gross notional amount of open positions in non-cleared single-name CDS
between different types of market participants (i.e., ``accounts'') at
the end of 2017. Gross notional amount of open positions between two
types of market participants is the sum of the notional amounts in U.S.
dollars of all outstanding CDS contracts between the two types of
market participants.
    At the end of 2017, the gross notional amount of open positions
between ISDA-recognized dealers far exceeded the gross notional amount
of open positions between all other types of market participants. In
particular, the gross notional amount of open positions between ISDA-
recognized dealers (``interdealer'') was approximatively $1.25 trillion
in non-cleared single-name CDS contracts and $557 billion in non-
cleared index CDS contracts. The gross notional amount of open
positions other than interdealer was approximatively $525 billion in
non-cleared single-name CDS contracts and just over $1 trillion in non-
cleared index CDS contracts.
    Banks and private funds were among the most active market
participants that were not ISDA-recognized dealers. The gross notional
amount of open positions between ISDA-recognized dealers and banks was
approximatively $184 billion in non-cleared single-name CDS contracts
and $113 billion in non-cleared index CDS contracts. Similarly, the
gross notional amount of open positions between ISDA-recognized dealers
and private funds was approximatively $176 billion in non-cleared
single-name CDS contracts and $410 billion in non-cleared index CDS
contracts.

Table 1--Gross Notional Amount of Dealer-Intermediated Open Positions in
                   Non-Cleared CDs at the End of 2017
                       [Billions of U.S. dollars]
------------------------------------------------------------------------
                                            Single-name
                                                CDS          Index CDS
------------------------------------------------------------------------
ISDA-Recognized Dealers.................           1,252             557
Banks...................................             184             113
Insurance Companies.....................              20              30
Private Funds...........................             176             410
Registered Investment Companies.........              24              62
Non-financial Corporations..............              <1              <1
DFA Special Entities....................               4               4
Foreign Sovereign.......................               6              18
Finance Companies.......................               1              <1
Others..................................             100             187

Others/Unclassified.....................              <1          188.57
------------------------------------------------------------------------

    Dealing entities that are likely to register as SBSDs generally
have significant open positions in the single-name CDS market. For each
dealing entity that is expected to register as an SBSD and for which
DTCC-TIW positions data are available as of the end of September 2017,
the Commission identifies the cleared and non-cleared single-name CDS