3235-0701 Supporting Statement (2025 Extension)

3235-0701 Supporting Statement (2025 Extension).pdf

Rule 18a-1, Net Capital Requirements For Security-Based Swap Dealers For Which There Is Not a Prudential Regulator

OMB: 3235-0701

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SUPPORTING STATEMENT for the Paperwork Reduction Act Information Collection
Submission for Rule 18a-1 – Net capital requirements for security-based swap dealers for
which there is not a prudential regulator
3235-0701
This submission is being made pursuant to the Paperwork Reduction Act of 1995, 44
U.S.C. Section 3501 et seq.
A.

JUSTIFICATION
1.

Information Collection Necessity

On June 21, 2019, in accordance with Section 764 of the Dodd-Frank Wall Street Reform
and Consumer Protection Act of 2010 (the “Dodd-Frank Act”),1 which added section 15F to the
Securities Exchange Act of 1934 (the “Exchange Act”),2 the Securities and Exchange
Commission (the “Commission”) adopted Rule 18a-1 (17 CFR 240.18a-1) to establish net capital
requirements for nonbank security-based swap dealers that are not also broker-dealers registered
with the Commission (“stand-alone SBSDs”).3 The rule includes several collection of
information requirements.
First, under paragraphs (a)(2) and (d) of Rule 18a-1, a stand-alone SBSD may apply to
the Commission to be authorized to use internal models to compute net capital. As part of the
application process, a stand-alone SBSD is required to provide the Commission staff with,
among other things: (1) a comprehensive description of the firm’s internal risk management
control system; (2) a description of the value-at-risk (“VaR”) models the firm will use to price
positions and compute deductions for market risk; (3) a description of the firm’s internal risk
management controls over the VaR models, including a description of each category of person
who may input data into the models; and (4) a description of the back-testing procedures that that
firm will use to review the accuracy of the VaR models. In addition, under Rule 18a-1, a standalone SBSD authorized to use internal models must review and update the models it uses to
compute market and credit risk, as well as back-test the models.
Second, under paragraph (f) of Rule 18a-1, a stand-alone SBSD is required to comply
with certain requirements of Exchange Act Rule 15c3-4 (17 CFR 240.15c3-4). Rule 15c3-4
requires OTC derivatives dealers and firms subject to its provisions to establish, document, and
maintain a system of internal risk management controls to assist the firm in managing the risks
associated with business activities, including market, credit, leverage, liquidity, legal, and
operational risks.
Third, for purposes of calculating “haircuts” on credit default swaps, paragraph
(c)(1)(vi)(B)(1)(iii) of Rule 18a-1 requires stand-alone SBSDs that are not using internal models
1

See Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Public Law 111-203, 124 Stat.
1376 (2010).

See 15 U.S.C. 78o-10(e)(2)(B).

See Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major SecurityBased Swap Participants and Capital Requirements for Broker-Dealers, Exchange Act Release No. 86175.

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.
Fourth, under paragraph (h) of Rule 18a-1, stand-alone SBSDs are required to provide the
Commission with certain written notices with respect to equity withdrawals.
Fifth, under paragraph (c)(5) of Appendix D to Rule 18a-1 (17 CFR 240.18a-1d), standalone SBSDs are required to file with the Commission two copies of any proposed subordinated
loan agreement (including nonconforming subordinated loan agreements) at least 30 days prior
to the proposed execution date of the agreement. The rule also requires an SBSD to file with the
Commission a statement setting forth the name and address of the lender, the business
relationship of the lender to the SBSD, and whether the SBSD carried an account for the lender
effecting transactions in security-based swaps at or about the time the proposed agreement was
filed.
Finally, under paragraph (c)(1)(ix)(C) of Rule 18a-1, a stand-alone SBSD may treat
collateral held by a third-party custodian to meet an initial margin requirement of a securitybased swap or swap customer as being held by the SBSD for purposes of the capital in lieu of
margin charge provisions of the rule if certain conditions are met. The conditions include: (1)
the execution of an account control agreement governing the terms under which the custodian
holds and releases collateral pledged by the counterparty as initial margin that is a legal, valid,
binding, and enforceable agreement under the laws of all relevant jurisdictions, including in the
event of bankruptcy, insolvency, or a similar proceeding of any of the parties to the agreement,
and that provides the security-based swap dealer with the right to access the collateral to satisfy
the counterparty's obligations to the security-based swap dealer arising from transactions in the
account of the counterparty; and (2) the SBSD maintains written documentation of its analysis
that in the event of a legal challenge the relevant court or administrative authorities would find
the account control agreement to be legal, valid, binding, and enforceable under the applicable
law, including in the event of the receivership, conservatorship, insolvency, liquidation, or a
similar proceeding of any of the parties to the agreement.4
2.

Information Collection Purpose and Use

The requirements in Rule 18a-1 are an integral part of the Commission’s financial
responsibility program for stand-alone SBSDs. The program is designed to ensure that standalone SBSDs maintain sufficient liquidity at all times to meet all unsubordinated obligations of
their customers and counterparties and, should a nonbank SBSD fail, that there are sufficient
resources for an orderly liquidation. These information collections facilitate the monitoring of
the financial condition of nonbank SBSDs by the Commission.
Furthermore, the program is designed to protect the financial stability of the U.S.
financial and banking system from the failure of a given stand-alone SBSD. The information
collections under Rule 18a-1 provide the Commission with visibility into the liquidity and
market risk profiles of stand-alone SBSDs, as well as meaningful plans on how stand-alone
SBSDs intend to manage risks.
4

The record preservation requirements for the information collections are in Rule 18a-6, 17 CFR 240.18a-6.

Consideration Given to Information Technology

The information collections do not require that respondents use any specific information
technology system. The other information collections involve written notices, agreements, plans,
and procedures, and do not benefit from specialized information technology.
4.

Duplication

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

Effect on Small Entities

The information collections required under Rule 18a-1 do not place burdens on small
entities. The stand-alone SBSDs subject to the information collections under the rule are not
small entities.
6.

Consequences of Not Conducting Collection

If the required information collections are not conducted or are conducted less frequently,
the protection afforded to investors and the U.S. financial system would be diminished.
7.

Inconsistencies with Guidelines in 5 CFR 1320.5(d)(2)

There are no special circumstances. This collection is consistent with the guidelines in 5
CFR 1320.5(d)(2).
8.

Consultations Outside the Agency

The required Federal Register notice with a 60-day comment period soliciting comments
on this collection of information was published. No public comments were received.
9.

Payment or Gift

No payment or gift is provided to respondents.
10.

Confidentiality

The information collected by the Commission under Rule 18a-1, as adopted, is kept
confidential to the extent permitted by the Freedom of Information Act (5 U.S.C. § 552 et seq).
11.

Sensitive Questions

The Information Collection does not collect information about individuals; therefore, a
PIA, SORN, and PAS are not required.

12.

Information Collection Burden

There are currently 10 firms subject to Rule 18a-1. Of these firms, 4 firms use internal
models to compute net capital, and the remaining 6 firms do not use internal models. The
Commission expects that approximately two new firms may be subject to Rule 18a-1 in the next
three years, for a total of 12 potential firms subject to Rule 18a-1. Of the 2 new firms expected
to register with the Commission in the next three years, 1 firm is expected to use internal models
to compute net capital, and the other firm is not expected to use internal models to compute net
capital.5
VaR Models (Rule 18a-1(a)(2) and (d))
There are 4 stand-alone SBSDs that use internal models to compute net capital under
paragraphs (a)(2) and (d) of Rule 18a-1. The staff also expects one new firm to apply to use
models. Based on past experience with broker-dealers that applied to use internal models to
compute net capital under Exchange Act Rule 15c3-1 and related Appendix E to that rule, the
Commission staff estimates that a stand-alone SBSD will spend approximately 750 hours to
create its model and risk control systems, as well as compiling its application for approval to use
the model. The Commission initially estimated that 4 stand-alone SBSDs would apply to use
internal models. As four firms now use internal models, and a new firm is expected to apply to
use models, there is only one new respondent. Therefore, the burden for an SBSD to create its
model and risk control systems, as well as compile its application for approval to use the model,
will result in a one-time hour burden of 750 recordkeeping hours per stand-alone SBSD and an
industry wide one-time burden of 750 hours, for an annualized burden of 250 hours.6
In addition, the staff estimates that these firms will then spend 4,200 hours per year
reviewing and updating their VaR models, and also 480 hours per year backtesting those models
against available data. That results in a total annual industry-wide ongoing recordkeeping
burden of 23,400 hours.7
Risk Management Control System (Rule 18a-1(f))
Paragraph (f) of Rule 18a-1 requires that firms subject to the rule comply with certain
provisions of Exchange Act Rule 15c3-4. There are 10 firms that are subject to Rule 18a-1, and
the Commission expects two additional firms to register in the next three years that would also
5

In the 2022 supporting statement, there were: 4 stand-alone SBSDS that used internal models to compute
net capital, and 1 firm that did not use internal models to compute net capital. Further, at the time, the staff
did not expect any new stand-alone SBSDs in the following three years. This yielded a total of 5 standalone SBSDs that were accounted for in the 2022 supporting statement.

750 hours x 1 expected new stand-alone SBSD = 750 hours. These one-time costs are annualized over
three years resulting in 250 recordkeeping hours per respondent (750 hours/3 = 250). The Commission
staff estimates that the hours will be used to: (1) develop and submit models and the description of risk
management control systems to the Commission; (2) to create and compile the various documents to be
included with the application; and (3) to work with the Commission staff through the application process.
The hours burden also includes approximately 100 hours for an in-house attorney to complete a review of
the application.

(4,200 hours + 480 hours) x 5 stand-alone SBSDs = 23,400 hours.

be subject to Rule 18a-1. (Certain other stand-alone SBSDs elect the alternative compliance
mechanism under Exchange Act Rule 18a-10.) The Commission initially estimated that there
would be 6 firms that would be subject to Rule 18a-1, but as stated above, there are currently 10
firms subject to Rule 18a-1, and the Commission expects that 2 additional firms may be subject
to Rule 18a-1 in the next three years. The Commission staff estimates that these additional 6
firms will bear a one-time burden of 2,000 hours to initially set up risk management control
systems.8 This will result in an estimated industry-wide one-time internal hour burden of
approximately 12,000 recordkeeping hours, for an annualized burden of 4,000 hours,9
Firms subject to Rule 18a-1 would also bear an annual burden of 250 hours per year.10
This will result in an estimated industry-wide annual hour burden of approximately 3,000
recordkeeping hours per year.11
Industry Sector Classification
Paragraph (c)(1)(vi)(B)(1)(iii) of Rule 18a-1 requires stand-alone SBSDs that are not
using internal models 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.
There are currently 6 stand-alone SBSDs that do not use internal models and are not
subject to this requirement. In addition, the Commission estimates that an additional stand-alone
SBSD will register within the next three years that will also not use internal models and be
subject to this requirement. The Commission expects that these stand-alone SBSDs will use
external classifications 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 each firm will spend approximately 1 hour per year
documenting the industry sectors. This results in an estimated industry-wide annual internal
hour burden of approximately 7 recordkeeping hour per year.12
Commission Notices (Rule 18a-1(h))
Paragraph (h)(1) of Rule 18a-1 requires that stand-alone SBSDs file written notices with
the Commission when certain amounts of equity are withdrawn from the firm. Based on the
staff’s experience with similar withdrawal notices filed by broker-dealers under Rule 15c3-1, the
staff estimates that the 12 stand-alone SBSDs will file an average of 2 notices per year. It
8

The one-time estimate of 2,000 hours and the annual estimate of 250 hours, immediately below, is based on
the estimates for OTC derivatives dealer burdens to implement the same controls under Rule 15c3-1. See
OTC Derivatives Dealers, 62 FR 67940.

6 stand-alone SBSDs x 2,000 hours = 12,000 hours. This results in an annualized burden of approximately
667 hours (2,000 hours/3 = 666.67).

The one-time estimate of 2,000 hours and the annual estimate of 250 hours are based on the estimates for
OTC derivatives dealer burdens to implement the same controls under Rule 15c3-1. See OTC Derivatives
Dealers, 62 FR 67940.

12 stand-alone SBSDs x 250 hours/year = 3,000 hours/year.

7 non-model stand-alone SBSDs x 1 hour/year =7 hour/year.

requires an estimated 30 minutes to file these notices, for an annual industry-wide reporting
burden of 6 hours.13
Subordinated Loan Agreements
Under paragraph (c)(5) of Appendix D to Rule 18a-1, stand-alone SBSDs are required to
file with the Commission two copies of any proposed subordinated loan agreement (including
nonconforming subordinated loan agreements) at least 30 days prior to the proposed execution
date of the agreement. The rule also requires an SBSD to file with the Commission a statement
setting forth the name and address of the lender, the business relationship of the lender to the
SBSD, and whether the SBSD carried an account for the lender effecting transactions in securitybased swaps at or about the time the proposed agreement was filed. There are currently 10
stand-alone SBSDs. The Commission also expects 2 additional firms to register within the next
three years to be subject to this requirement. The Commission also previously estimated that 6
stand-alone SBSDs would be subject to this requirement. The staff now estimates that the
additional 6 stand-alone SBSDs will spend 20 hours of internal employee resources drafting or
updating its agreement templates, resulting in a one-time industry-wide hour burden of 120
reporting hours, for an annualized burden of 40 hours.14
Based on its experience with broker-dealers submitting such loan agreements under a
similar requirement under Rule 15c3-1, the staff estimates that each firm will file 1 subordinated
loan agreement per year and that it will take approximately 10 hours to prepare and file the
agreement, resulting in an annual industry-wide hour burden of 120 reporting hours.15
Account Control Agreements
Under paragraph (c)(1)(ix)(C) of Rule 18a-1, a nonbank SBSD may 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 nonbank SBSD if certain conditions are met. In particular, the
rule requires the execution of an account control agreement governing the terms under which the
custodian holds and releases collateral pledged by the counterparty as initial margin. There are
currently 10 stand-alone SBSDs. The Commission also expects 2 additional firms to register
within the next three years to be subject to this requirement. Based on staff experience with the
net capital and customer protection rules, the Commission estimates that the 12 stand-alone
SBSDs will enter into approximately 100 account control agreements per year with securitybased swap customers and that it will take approximately 2 hours to execute each account control
agreement, resulting in an annual industry-wide third-party hour burden of 2,400 hours.16
The rule also requires SBSDs to maintain written documentation of their legal analysis of
the account control agreement. Based on staff experience, the Commission estimates that stand13

12 stand-alone SBSDs x 30 minutes/year = 6 hours/year.

6 stand-alone SBSDs x 20 hours = 120 hours. This amount annualized on an industry-wide basis is 40
hours (120 hours/3 = 40) and is approximately 7 hours per respondent (40 hours/6 stand-alone SBSDs =
6.67 hours).

12 stand-alone SBSDs x 10 hours/year = 120 hours/year.

12 stand-alone SBSDSs x 100 account control agreements x 2 hours = 2,400 hours.

alone SBSDs will meet this requirement either by obtaining a written opinion of outside legal
counsel or through the firm’s own “in house” analysis. The Commission estimates that
approximately half of the firms will elect to conduct an “in house” analysis. Therefore, the
Commission estimates that 5 of the existing firms will elect to conduct an “in house” analysis
that will take approximately 20 hours to complete. The Commission initially estimated that 3
firms would do so. With respect to the 2 additional firms that the Commission expects to
register in the next three years, the Commission expects 1 of the firms to conduct a written “in
house” analysis that will take approximately 20 hours to do so.17 This would result in an
industry-wide one-time burden of 60 hours, for an annualized burden of 20 hours.18
13.

Costs to Respondents

VaR Models (Rule 18a-1(a)(2) and (d))19
There are 4 stand-alone SBSDs that use internal models to compute net capital under
paragraphs (a)(2) and (d) of Rule 18a-1. The staff also expects one new firm to apply to use
models, and this new firm will incur external costs associated with developing VaR models and
applying to the Commission for approval to use them to calculate net capital. The staff estimates
that, based upon previous experience with broker-dealers that developed internal models, 25% of
these tasks will be handled by outside consultants. This results in 250 hours per respondent. The
outside consultants are estimated to charge $596 per hour. The Commission initially estimated
that 4 stand-alone SBSDs would apply to use internal models. As four firms now use internal
models, but there is an expected 1 additional firm that may register in the next three years that is
expected to use internal models, the industry-wide one-time burden associated with these
provisions is $149,000, for an annualized burden of $49,666.67.20
With respect to the external costs associated with annually reviewing, backtesting, and
updating VaR models, the staff estimates that, based on previous experience with broker-dealers
that developed internal models, 25% of these tasks will be handled by outside consultants. The
outside consultants are estimated to charge $596 per hour resulting in an annual recordkeeping
cost of $687,320 per respondent.21 This will result in an annual industry-wide external cost
of $3,486,600.22
As stated above, there are 4 stand-alone SBSDs that use internal models to compute net
capital under paragraphs (a)(2) and (d) of Rule 18a-1, and the staff expects 1 additional firm to
17

See cost burden below for SBSDs that elect to hire outside counsel.

3 stand-alone SBSDs x 20 hours = 60 hours. On an annualized basis, this would amount to approximately
7 hours per respondent (20 hours/3 = 6.67 hours) and 20 hours for all respondents.

Note that the two cost burdens for VaR Models (Rule 18a-1(a) and Rule 18a-1(d) were previously
contained in one cost burden in ROCIS but have been separated for clarity.

1 stand-alone SBSD x 240 hours x $596/hour = $149,000. On an annualized basis, this cost would amount
to $49,667 per respondent ($149,000/3 = $49,666,67).

(4,200 hours reviewing models + 480 hours backtesting models) = 4,680 hours. 25% x 4,680 hours = 1,170
hours. 1,170 hours x $596 = $697,320.

The total industry-wide recordkeeping cost is $3,486,600 (5 stand-alone SBSDs x $697,320).

apply to use models in the next three years. Any new firm will incur electing to file an
application with the Commission to use a VaR model will incur start-up costs, including
information technology costs, to comply with Rule 18a-1. Based on past experience with brokerdealers that applied to use internal models under Rule 15c3-1 and related Appendix E, 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 VaR requirements of Rule 18a-1. The
Commission previously initially that 4 stand-alone SBSDs would apply to use internal models.
As four firms now use internal models, but there is 1 new respondent expected to register in the
next three years that will use internal models, the industry-wide one-time burden associated with
these provisions is $8.0 million, for an annualized burden of $2,666,666.67.23
Risk Control Management System (Rule 18a-1(f))
There are currently 10 stand-alone SBSDs, and the Commission estimates there will be 2
new stand-alone SBSDs that will register in the next three years. The Commission initially
estimated that there would be 6 stand-alone SBSDs. Any new firm would incur start-up
information technology external costs with respect to setting up a risk control management
system. Based on the estimates for similar collections of information, it is expected that a standalone SBSD will incur an average cost of approximately $16,000 for initial hardware and
software expenses. Therefore, the industry-wide one-time burden associated with this
requirement is $96,000, for an annualized burden of $32,000.24
In addition, the Commission estimates that the average ongoing cost will be
approximately $20,500 per stand-alone SBSD per year. This will result in an ongoing
industry-wide external cost of $246,000 per year.25
Account Control Agreement
Under paragraph (c)(1)(ix)(C) of Rule 18a-1, a nonbank SBSD may 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 nonbank SBSD if certain conditions are met. In particular, the
rule requires the execution of an account control agreement governing the terms under which the
custodian holds and releases collateral pledged by the counterparty as initial margin that is a
legal, valid, binding, and enforceable agreement under the laws of all relevant jurisdictions. In
addition, the SBSD must maintain written documentation of its analysis that in the event of a
legal challenge the relevant court or administrative authorities would find the account control
agreement to be legal, valid, binding, and enforceable under the applicable law.
There are 10 stand-alone SBSDs currently, and the Commission estimates that another 2
stand-alone SBSDs may register in the next three years. The Commission initially estimated that
there would be 6 stand-alone SBSDs. Any new firm would engage outside counsel to draft and
23

1 SBSD x $8.0 million/3 = $2,666,666.67.

6 SBSDs x $16,000 = $96,000. On an annualized basis, this would amount to approximately $5,333 per
respondent ($16,000/3 = $5,333.33) and $32,000 for all respondents.

12 SBSDs x $20,500/year = $246,000.

review the account control agreement at a cost of $400 per hour for an average of 20 hours per
respondent. As such, there is an industry-wide one-time burden of $48,000 associated with this
requirement, for an annualized burden of $16,000.26
As discussed above, the Commission estimates that 5 SBSDs will obtain a written
opinion of outside legal counsel instead of conducting the firm’s own “in-house” analysis. The
Commission initially estimated that 3 SBSDs would do so. In addition, the Commission expects
that there will be 2 additional stand-alone SBSDs that will register in the next three years, and
the Commission estimates that 1 of these two new firms may use outside legal counsel and
would incur a cost of approximately $8,000. As such, there is an industry-wide one-time burden
of $24,000 associated with this requirement, for an annualized burden of $8,000.27
This chart summarizes the annual hour and cost burdens associated with Rule 18a-1:
Title of Collection

Responses

Hours

Dollars

Rule 18a-1(a) VaR Models
Initial Burden

250

$49,667

Rule 18a-1(a) VaR Models
Ongoing Burden

23,400

3,486,600

18a-1(f) Risk Management
Control System
Initial Burden

4,000

$32,000

18a-1(f) Risk Management
Control System
Ongoing Burden

3,000

$246,000

18a-1(c) Industry Sector
Classification

Ongoing Burden
Rule 18a-1(h) Commission
Notices
Ongoing Burden

6 stand-alone SBSDs x $400/hour for outside counsel x 20 hours = $48,000. On an annualized basis, this
would amount to approximately $2,667 per respondent ($8,000/3 = $2,666.67).

3 stand-alone SBSDs x $8,000 = $24,000. On an annualized basis, this would amount to approximately
$2,667 per respondent ($8,000/3 = $2,666.67) and $8,000 for all respondents.

Rule 18a-1 Subordinated
Loan Agreements

120

2,400

Initial Burden
Rule 18a-1 Subordinated
Loan Agreements
Ongoing Burden
Rule 18a-1(c) Account
Control Agreement Opinion
of Counsel
Ongoing Burden
Rule 18a-1(c) Account
Control Agreement Legal
Analysis (In-house counsel)
Initial Burden
Rule 18a-1(c) Account
Control Agreement Opinion
of Counsel

$16,000

$8,000

$2,666,667

Initial Burden
Rule 18a-1(c) Account
Control Agreement Legal
Analysis (outside counsel)
Initial Burden
Rule 18a-1(d) (VaR Models
– IT)
Initial Burden

14.

Cost to Federal Government

The SEC is in the process of revising its methodologies to estimate annualized costs to
the Federal government for all its relevant collections of information. The SEC anticipates that
future extensions of this collection of information will reflect the revised methodologies.

15.

Changes in Burden

The increase in burdens can be attributed to an increase in respondents since the last
submission, as well as an increase in the estimated cost of an outside consultant.
Title of Collection

Change in
Responses

Change in
Hours

Change in
Dollars

Reason