Order Granting Conditional Substituted Compliance in Connection With Certain Requirements Applicable to Non-U.S. Security-Based Swap Dealers and Major Security-Based Swap Participants Subject to Regulation in the United Kingdom

Federal RegisterAug 6, 2021

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-92529; File No. S7-04-21]

Order Granting Conditional Substituted Compliance in Connection With Certain Requirements Applicable to Non-U.S. Security-Based Swap Dealers and Major Security-Based Swap Participants Subject to Regulation in the United Kingdom

July 30, 2021.

I. Overview

The United Kingdom Financial Conduct Authority (“FCA”) has submitted a “substituted compliance” application (“FCA Application”) requesting that the Securities and Exchange Commission determine, pursuant to the Securities Exchange Act of 1934 (“Exchange Act”) rule 3a71-6,

that security-based swap dealers and major-security based swap participants (“SBS Entities”) subject to regulation in the United Kingdom (“UK”) conditionally may satisfy requirements under the Exchange Act by complying with comparable UK requirements.

The FCA Application sought substituted compliance in connection with certain Exchange Act requirements related to risk control; capital and margin; internal supervision and compliance; counterparty protection; and record keeping, reporting, notification, and securities counts.

The FCA Application included comparability analyses between the relevant requirements in Exchange Act section 15F and the rules and regulations thereunder and applicable UK law,

as well as information regarding UK supervisory and enforcement frameworks.

17 CFR 240.3a71-6.

See

Letter from Nausicaa Delfas, Executive Director of International, FCA, dated March 19, 2021. The FCA Application is available on the Commission's website at:

https://www.sec.gov/files/uk-financial-conduct-authority-complete-application-substituted-compliance-031921.pdf.

“Risk control” includes requirements related to internal risk management, trade acknowledgment and verification, portfolio reconciliation and dispute resolution, portfolio compression, and trading relationship documentation; “capital and margin” includes requirements related to capital applicable to security-based swap dealers without a prudential regulator and to margin applicable to SBS Entities without a prudential regulator; “internal supervision and compliance” includes requirements related to diligent supervision, conflicts of interest, information gathering under Exchange Act section 15F(j), 15 U.S.C. 78

-10(j), and chief compliance officers; “counterparty protection” includes requirements related to disclosure of material risks and characteristics and material incentives or conflicts of interest, “know your counterparty,” suitability of recommendations, fair and balanced communications, disclosure of daily marks, and disclosure of clearing rights; and “record keeping, reporting, notification, and securities counts” includes requirements related to making and keeping current certain prescribed records, preservation of records, reporting, notification, and securities counts.

Though the UK ceased to be a member of the European Union (“EU”) on January 31, 2020, market participants in the UK remain subject to UK requirements implemented pursuant to EU directives, and to EU regulations that have been added to UK law. In adding EU regulations to UK law, the UK in some cases has adopted UK versions of these regulations that differ from the original EU versions “as necessary to account for the effects of Brexit.”

See

FCA Application Appendix A at 7. The Commission has reviewed the FCA Application in light of the UK versions of these regulations.

On April 5, 2021, the Commission issued a notice of the FCA Application, accompanied by a proposed order to grant substituted compliance with conditions in connection with the FCA Application (“proposed Order”).

The proposed Order incorporated a number of conditions to tailor the scope of substituted compliance consistent with the prerequisite that relevant UK requirements produce regulatory outcomes that are comparable to relevant requirements under the Exchange Act.

See

Exchange Act Release No. 91476 (Apr. 5, 2021), 86 FR 18378 (Apr. 8, 2021) (“UK Substituted Compliance Notice and Proposed Order”).

As discussed below, the Commission is adopting a final order (“Order”) that has been modified from the proposed Order in certain respects to address commenter concerns and to make clarifying changes.

II. Substituted Compliance Framework and Prerequisites

A. Substituted Compliance Availability and Purpose

As discussed in the UK Substituted Compliance Notice and Proposed Order, Exchange Act rule 3a71-6 provides a framework whereby non-U.S. SBS Entities may satisfy certain requirements under Exchange Act section 15F by complying with comparable regulatory requirements of a foreign jurisdiction.

Because substituted compliance does not constitute exemptive relief, but instead provides an alternative method by which non-U.S. SBS Entities may comply with applicable Exchange Act requirements, the non-U.S. SBS Entities would remain subject to the relevant requirements under section 15F. The Commission accordingly will retain the authority to inspect, examine, and supervise those SBS Entities' compliance and take enforcement action as appropriate. Under the substituted compliance framework, failure to comply with the applicable foreign requirements and other conditions to a substituted compliance order would lead to a violation of the applicable requirements under the Exchange Act and potential enforcement action by the Commission (as opposed to automatic revocation of the substituted compliance order).

See

UK Substituted Compliance Notice and Proposed Order, 86 FR at 18378;

see also

Exchange Act Release No. 90378 (Nov. 9, 2020), 85 FR 72726, 72727 (Nov. 13, 2020) (“German Substituted Compliance Notice and Proposed Order”); Exchange Act Release No. 90765 (Dec. 22, 2020), 85 FR 85686 (Dec. 29, 2020) (“German Substituted Compliance Order”); Exchange Act Release No. 90766 (Dec. 22, 2020), 85 FR 85720 (Dec. 29, 2020) (“French Substituted Compliance Notice and Proposed Order”); Exchange Act Release No. 91477 (Apr. 5, 2021), 86 FR 18341 (Apr. 8, 2021) (“French Substituted Compliance Re-Opening Release”); Exchange Act Release No. 92484 (Jul. 23, 2021) (“French Substituted Compliance Order”).

Under rule 3a71-6, substituted compliance potentially is available in connection with certain section 15F requirements,

but is not available in connection with antifraud prohibitions and certain other requirements under the Federal securities laws.

SBS Entities in the UK accordingly must comply directly with those requirements notwithstanding the availability of substituted compliance for other requirements.

See

Exchange Act rule 3a71-6(d);

see also

UK Substituted Compliance Notice and Proposed Order, 86 FR at 18378.

See

UK Substituted Compliance Notice and Proposed Order, 86 FR at 18378 n.5 (addressing unavailability of substituted compliance in connection with certain information-related requirements under section 15F, as well as provisions related to anti-fraud, transactions with counterparties that are not eligible contract participants, segregation of customer assets, required clearing upon counterparty election, regulatory reporting and public dissemination, SBS Entity registration, and registration of offerings).

The substituted compliance framework reflects the cross-border nature of the security-based swap market, and is intended to promote efficiency and competition by helping to address potential duplication and inconsistency between relevant U.S. and foreign requirements.

In practice, substituted compliance may be expected to help SBS Entities leverage their existing systems and practices to comply with relevant Exchange Act requirements in conjunction with their compliance with relevant foreign requirements. Market participants will begin to count security-based swap transactions toward the thresholds for registration with the Commission as an SBS Entity on August 6, 2021, and will be required to begin registering with the

Commission on November 1, 2021.

Substituted compliance should assist relevant non-U.S. security-based swap market participants in preparing for registration.

See generally

Exchange Act Release No. 77617 (Apr. 14, 2016), 81 FR 29960, 30073 (May 13, 2016) (“Business Conduct Adopting Release”) (stating that U.S. security-based swap regulation has “the potential to lead to requirements that are duplicative of or in conflict with applicable foreign business conduct requirements, even when the two sets of requirements implement similar goals and lead to similar results”).

See

“Key Dates for Registration of Security-Based Swap Dealers and Major Security-Based Swap Participants,” available at:

https://www.sec.gov/page/key-dates-registration-security-based-swap-dealers-and-major-security-based-swap-participants

B. Specific Prerequisites

1. Comparability of Regulatory Outcomes

Rule 3a71-6, adopted by the Commission in 2016, describes the requirements for the Commission to make a substituted compliance determination. Under that rule, the Commission must determine that the analogous foreign requirements are comparable to otherwise applicable requirements under the Exchange Act (

i.e.,

the relevant requirements in the Exchange Act and the rules and regulations thereunder), after accounting for factors such as “the scope and objectives of the relevant foreign regulatory requirements” and “the effectiveness of the supervisory compliance program administered, and the enforcement authority exercised” by the foreign authority.

The comparability assessments are to be based on a “holistic approach” that “will focus on the comparability of regulatory outcomes rather than predicating substituted compliance on requirement-by-requirement similarity.”

See

Exchange Act rule 3a71-6(a)(2).

See

UK Substituted Compliance Notice and Proposed Order, 86 FR at 18380;

see also

Business Conduct Adopting Release, 81 FR at 30078-79 (recognizing that “different regulatory systems may be able to achieve some or all of those regulatory outcomes by using more or fewer specific requirements than the Commission, and that in assessing comparability the Commission may need to take into account the manner in which other regulatory systems are informed by business and market practices in those jurisdictions”). The Commission's assessment of a foreign authority's supervisory and enforcement effectiveness—as part of the broader comparability analysis—would be expected to consider not only overall oversight activities, but also oversight specifically directed at conduct and activity relevant to the substituted compliance determination. “For example, it would be difficult for the Commission to make a comparability determination in support of substituted compliance if oversight is directed solely at the local activities of foreign security-based swap dealers, as opposed to the cross-border activities of such dealers.” Business Conduct Adopting Release, 81 FR at 30079 (footnote omitted). In the UK Substituted Compliance Notice and Proposed Order, the Commission preliminarily concluded that this comparability prerequisite was met in connection with a number of requirements under the Exchange Act, in some cases with the addition of conditions to help ensure the comparability of regulatory outcomes.

2. Memorandum of Understanding

Exchange Act rule 3a71-6(a)(2)(ii) further predicates the availability of substituted compliance on the Commission having entered into a memorandum of understanding and/or other arrangement with the relevant foreign financial regulatory authority or authorities “addressing supervisory and enforcement cooperation and other matters arising under the substituted compliance determination.”

The FCA Application asked the Commission to permit certain entities regulated and supervised by both the FCA and the UK's Prudential Regulation Authority (“PRA”) to use substituted compliance. Accordingly, the Commission recently entered into a memorandum of understanding with the FCA and the Bank of England (including in its capacity as the PRA), thus satisfying this prerequisite.

Exchange Act rule 3a71-6(a)(2)(ii).

The Commission expects to publish a copy of the memorandum of understanding on its website at

www.sec.gov

under the “Substituted Compliance” tab, which is located on the “Security-Based Swap Markets” page in the Division of Trading and Markets section of the site.

3. “Adequate Assurances”

A foreign financial regulatory authority may submit a substituted compliance application only if the authority provides “adequate assurances” that no law or policy would impede the ability of any entity that is directly supervised by the authority and that may register with the Commission “to provide prompt access to the Commission to such entity's books and records or to submit to onsite inspection or examination by the Commission.”

In the UK Substituted Compliance Notice and Proposed Order, the Commission stated that the FCA had satisfied this prerequisite in the Commission's preliminary view, taking into account information and representations that the FCA provided regarding certain UK requirements that are relevant to the Commission's ability to inspect, and access the books and records of, firms using substituted compliance pursuant to the Order.

The Commission received no comments on this preliminary view and has not changed its view.

See

Exchange Act rule 3a71-6(c)(3).

See

UK Substituted Compliance Notice and Proposed Order, 86 FR at 18379 n.8.

C. Commenter Views

1. Prerequisites to Substituted Compliance

One commenter stated that the Commission should make a positive substituted compliance determination only when the Commission determines that granting substituted compliance promotes the protection of the U.S. financial system.

The commenter also stated that grants of substituted compliance must be predicated on a “well-supported, evidence-based determination” that the relevant foreign requirements will produce “substantially similar” regulatory outcomes.

Congress gave the Commission authority in Title VII to implement a security-based swap framework to address the potential effects of security-based swap activity on U.S. market participants, the financial stability of the United States, the transparency of the U.S. financial system and the protection of counterparties.

When adopting rules regarding the application of Title VII's definitions of “security-based swap dealer” and “major security-based swap participant” in the cross-border context, the Commission was guided by the purposes of Title VII and the applicable requirements of the Exchange Act, which include consideration of not only risk to the U.S. financial system but also other factors such as counterparty protection, transparency, prevention of evasion, economic impacts and consultation and coordination with other U.S. financial regulatory authorities and foreign financial regulatory authorities.

In its

registration rules for these SBS Entities, the Commission determined that a foreign market participant whose U.S.-nexus security-based swap activity qualifies it as an SBS Entity would be required to register as such, without substituted compliance available for registration requirements.

The Commission concluded that obliging these foreign persons to register serves an important regulatory function that would be significantly impaired by permitting substituted compliance for registration requirements.

This registration requirement thus puts into practice the Commission's consideration of the purposes of Title VII and the applicable requirements of the Exchange Act in its adoption of the definitions of “security-based swap dealer” and “major security-based swap participant” in the cross-border context, and ensures that such firms will be subject to the jurisdiction of the Commission. Moreover, the rules applicable to these registered foreign SBS Entities reflect the Commission's best judgment for how to achieve the purposes of Title VII and satisfy the requirements of the Exchange Act, including the Commission's consideration of risk to the U.S. financial system.

The Commission's rules for registered foreign SBS Entities thus reflect the Commission's consistent consideration of all of the purposes of Title VII and relevant parts of the Exchange Act, first in the context of its adoption of the definitions of “security-based swap dealer” and “major security-based swap participant,” then in its decision to require foreign SBS Entities to register and finally in its adoption of cross-border rules for SBS Entities pursuant to Title VII.

See

Letter from Dennis M. Kelleher, President and CEO, Stephen Hall, Legal Director and Securities Specialist, and Jason Grimes, Senior Counsel, Better Markets, Inc. (May 3, 2021) (“Better Markets Letter”) at 3-4. Comments may be found on the Commission's website at:

https://www.sec.gov/comments/s7-04-21/s70421.htm

See

Better Markets Letter at 4.

See

Exchange Act Release No. 72472 (June 25, 2014), 79 FR 47278, 47286 (Aug. 12, 2014) (“Cross-Border Entity Definitions Adopting Release”) (citing Pub. L. 111-203, Preamble (stating that the Dodd-Frank Act was enacted “[t]o promote the financial stability of the United States by improving accountability and transparency in the financial system, to end `too big to fail', to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes”); Public Law 111-203, sections 701-774 (providing for, among other things, a comprehensive new regulatory framework for security-based swaps, including by: (i) Providing for the registration and comprehensive regulation of security-based swap dealers and major security-based swap participants; (ii) imposing clearing and trade execution requirements on security-based swaps, subject to certain exceptions; and (iii) creating real-time reporting and public dissemination regimes for security-based swaps)).

See

Cross-Border Entity Definitions Adopting Release, 79 FR at 47292 (purposes of Title VII include consideration of risk to the U.S. financial system and promotion of transparency in the U.S. financial system); Exchange Act section 30(c), 15 U.S.C. 78dd(c) (Commission rulemaking authority to prevent evasion of Title VII); Exchange Act section 3(f), 15 U.S.C. 78c(f) (requirement to consider whether certain Commission rulemaking

actions would promote efficiency, competition, and capital formation); Exchange Act section 23(a)(2), 15 U.S.C. 78w(a)(2) (requirement to consider the impact of Exchange Act rules and regulations on competition and prohibition on adopting rules or regulations that would impose a burden on competition not necessary or appropriate in furtherance of the purposes of the Exchange Act); Dodd-Frank Act section 712(a)(2), 15 U.S.C. 8302 (requirement to consult and coordinate with U.S. financial regulatory authorities on Title VII rulemaking); Dodd-Frank Act section 752(a), 15 U.S.C. 8325 (requirement to consult and coordinate, as appropriate, with foreign regulatory authorities on the establishment of consistent international standards with respect to the regulation of security-based swaps and security-based swap entities));

see also

Exchange Act Release No. 77104 (Feb. 10, 2016), 81 FR 8598, 8599 (Feb. 19, 2016) (“ANE Adopting Release”) (“A key part of [the Title VII] framework is the regulation of security-based swap dealers, which may transact extensively with counterparties established or located in other jurisdictions and, in doing so, may conduct sales and trading activity in one jurisdiction and book the resulting transactions in another. These market realities and the potential impact that these activities may have on U.S. persons and potentially the U.S. financial system have informed our consideration of these rules.”); Exchange Act Release No. 87780 (Dec. 18, 2019), 85 FR 6270, 6272 and n.26 (Feb. 4, 2020) (“Cross-Border Adopting Release”) (“[T]he Title VII SBS Entity requirements . . . serve a number of regulatory purposes apart from mitigating counterparty and operational risks, `including enhancing counterparty protections and market integrity, increasing transparency, and mitigating risk to participants in the financial markets and the U.S. financial system more broadly.' ” “The Commission's actions to mitigate the negative consequences potentially associated with the various uses of [the `arranged, negotiated, or executed' test] accordingly are designed to do so while preserving the important Title VII interests that the Commission advanced when it incorporated the test into the various cross-border rules.”) (internal citations omitted).

See

Exchange Act Release No. 75611 (Aug. 5, 2015), 80 FR 48964, 48972-73 (Aug. 14, 2015) (“Registration Adopting Release”).

See

Registration Adopting Release, 80 FR at 48972-73.

See

Cross-Border Entity Definitions Adopting Release, 79 FR at 47286 n.65 (“Future rulemakings that depend on [the definitions of `security-based swap dealer' and `major security-based swap participant'] are intended to address the transparency, risk, and customer protection goals of Title VII.”).

When making a substituted compliance determination, the Commission's task, as outlined in rule 3a71-6, is to evaluate whether the relevant foreign requirements are comparable to Title VII-based requirements and relevant provisions of the Exchange Act. The comparability assessments are to be based on a “holistic, outcomes-oriented framework,”

which in the Commission's view—consistent with the commenter's view—includes “inquiry regarding whether foreign requirements adequately reflect the interests and protections associated with the particular Title VII requirement.”

Also consistent with the commenter's view, the Commission's comparability assessments reflect a close reading of the relevant UK requirements. In addition, the Commission recognizes that “other regulatory regimes will have exclusions, exceptions, and exemptions that may not align perfectly with the corresponding requirements under the Exchange Act.”

Accordingly, where UK requirements produce comparable outcomes—with or without conditions as discussed in part III.B below—notwithstanding those particular differences, and taking into account the scope and objectives and the effectiveness of supervision and enforcement of those requirements, the Commission has determined that the relevant UK requirements are comparable and has made a positive substituted compliance determination. Conversely, where those exclusions, exemptions, and exceptions lead to outcomes that are not comparable—taking into account potential conditions—the Commission has not made a positive substituted compliance determination.

See

UK Substituted Compliance Notice and Proposed Order, 86 FR at 18380;

see also

Business Conduct Adopting Release, 81 FR at 30076, 30078-79.

See

Business Conduct Adopting Release, 81 FR at 30067.

See

UK Substituted Compliance Notice and Proposed Order, 86 FR at 18380;

see also

Business Conduct Adopting Release, 81 FR at 30076, 30078-79.

The Commission also is including certain conditions in the Order. The commenter stated that the inclusion of conditions should be viewed as an indication that the requirements of substituted compliance have not been met and as creating “ad hoc, custom-made rules to supplement inadequate rules of other jurisdictions.”

Pursuant to rule 3a71-6, the Commission may make a conditional or unconditional substituted compliance determination.

As described in greater detail in part III.B below, many of the conditions in the Order are designed to make substituted compliance available only when the relevant UK requirements in fact apply to the relevant security-based swap activity in a way that promotes comparable regulatory outcomes. The commenter correctly states that the Order also employs conditions to promote comparability. For example, substituted compliance in connection with Exchange Act rule 15Fi-3(c)

dispute reporting provisions is conditioned in part on the Covered Entity (as such term is defined in the Order) providing the Commission with the dispute reports required under UK law.

Consistent with rule 3a71-6, conditioning substituted compliance on the Commission receiving those reports helps to promote timely notice of disputes to support a comparable regulatory outcome.

See

Better Markets Letter at 4.

See

Exchange Act rule 3a71-6(a)(1).

17 CFR 240.15Fi-3(c).

See

para. (b)(3)(ii) of the Order.

2. Ensuring Ongoing Appropriateness of Substituted Compliance

One commenter stated that the Commission “must ensure, on an ongoing basis, that each grant of substituted compliance remains appropriate over time.” The commenter added that substituted compliance orders and memoranda of understanding should incorporate the obligation that the Commission be apprised of the activities and results of the jurisdiction's supervision and enforcement programs, and to immediately apprise the Commission of

material changes to the foreign regulatory regime.

See

Better Markets Letter at 5.

The Commission concurs that the ongoing availability of substituted compliance should account for relevant changes in the foreign jurisdiction's regulatory requirements and in the effectiveness of that jurisdiction's supervisory and enforcement program.

Accordingly, the Commission and the FCA and the Bank of England in its capacity as the PRA recently entered into a substituted compliance memorandum of understanding that addresses ongoing information regarding potential changes to substantive legal requirements and supervisory and enforcement effectiveness.

The Commission believes that these arrangements will provide timely information to ensure that the Commission is aware of material developments that may affect the comparability of the relevant UK requirements, including the scope and objectives of those requirements and the effectiveness of the FCA and the Bank of England's supervision and enforcement programs. In response to any such developments, the Commission may amend the Order as needed to ensure that it continues to require a Covered Entity to comply with comparable UK requirements, or may withdraw the Order if the relevant UK requirements are no longer comparable.

Moreover, substituted compliance under the Order is conditioned on the Commission having this memorandum of understanding, or another arrangement with the FCA and the Bank of England addressing cooperation with respect to the Order, at the time the Covered Entity makes use of substituted compliance.

If the arrangements in the memorandum of understanding prove in practice not to provide information about relevant developments, the Commission could terminate the memorandum of understanding in accordance with its terms and/or amend or withdraw the Order.

If the Commission, the FCA, or the Bank of England terminates the memorandum of understanding, Covered Entities would not be able to rely on substituted compliance under the Order to satisfy Exchange Act compliance obligations that arise after the termination takes effect. For these reasons, in the Commission's view, the Order's memorandum of understanding condition, coupled with the ongoing information sharing provisions in the memorandum of understanding with the FCA and the Bank of England, establishes the commenter's suggested mechanism to apprise the Commission of changes that may affect the ongoing appropriateness of substituted compliance.

See

Business Conduct Adopting Release, 81 FR at 30078-79 (stating that order conditions and memorandum of understanding were possible tools for providing that the Commission be notified of material changes).

The memorandum of understanding between the Commission and the FCA and the Bank of England in part provides that the FCA and the Bank of England will provide “ongoing information sharing” regarding Firm Information (incorporating supervisory and related information as to the Covered Entities using substituted compliance) and regarding Regulatory Change Information (incorporating information about any material publicly available draft, proposed, or final change in law, regulation, or order of the jurisdiction of the FCA or the Bank of England that may have a material impact on the firms at issue with respect to their relevant activities).

See supra

note 14 (information on publication of memorandum of understanding with the FCA and the Bank of England).

Any such amendment or withdrawal may be at the Commission's own initiative after appropriate notice and opportunity for comment.

See

Exchange Act rule 3a71-6(a)(3).

See supra

part II.B.2; para. (a)(15) of the Order.

See supra

note 14.

III. General Availability of Substituted Compliance Under the Order

A. Covered Entities

1. Proposed Approach

Under the proposed Order, the definition of “Covered Entity” specified which entities could make use of substituted compliance. Consistent with the availability of substituted compliance under Exchange Act rule 3a71-6, the proposed definition in part would limit the availability of substituted compliance to registered SBS Entities that are not U.S. persons. In addition, to help ensure that firms that rely on substituted compliance are subject to relevant UK requirements and oversight, the proposed definition would require that a Covered Entity is a “MiFID investment firm” or “third country investment firm,” as such terms are defined in the FCA Handbook Glossary, that (a) has permission from the FCA or PRA under Part 4A of the UK's Financial Services and Markets Act 2000 (“FSMA”) to carry on regulated activities relating to investment services and activities in the UK; (b) is supervised by the FCA under the fixed supervision model; and (c) if the firm is a PRA-authorized person, also is supervised by the PRA as a Category 1 firm.

See

UK Substituted Compliance Notice and Proposed Order, 86 FR at 18380.

2. Final Provisions

Commenters did not address the proposed “Covered Entity” definition, and the Commission is issuing the definition as proposed.

Substituted compliance accordingly is available only to non-U.S. SBS Entities that have the relevant UK regulatory permission and are subject to UK oversight.

See

para. (g)(1) of the Order.

B. Additional General Conditions and Other Prerequisites

1. Proposed Approach

The proposed Order incorporated a number of additional general conditions and other prerequisites, to help ensure that the relevant UK requirements that form the basis for substituted compliance in practice will apply to the Covered Entity's security-based swap business and activities, and to promote the Commission's oversight over entities that avail themselves of substituted compliance:

•

“Subject to and complies with” applicability condition

—For each relevant section of the proposed Order, a positive substituted compliance determination would be subject to the condition that the Covered Entity be subject to and comply with the applicable UK requirements needed to establish comparability.

The Commission stated, as an example, that this proposed condition would not be satisfied when the comparable UK requirements would not apply to the security-based swap activities of a non-UK branch of a MiFID investment firm or to a third country investment firm.

See

UK Substituted Compliance Notice and Proposed Order, 86 FR at 18380.

•

“Regulated activities”

—For each condition in the proposed Order that requires the application of, and compliance with, provisions of the Senior Management Arrangements, Systems and Controls Sourcebook of the FCA Handbook (“FCA SYSC”) 4, 5, 6, 7, 9, and/or 10, certain parts of the PRA Rulebook and/or MLR 2017, the Covered Entity's relevant security-based swap activities must constitute “regulated activities” as defined for purposes of the relevant UK provisions, must be carried on by the Covered Entity from an establishment in the UK and must fall within the scope of the Covered Entity's authorization from the FCA and/or PRA to conduct regulated activities in the UK.

See

UK Substituted Compliance Notice and Proposed Order, 86 FR at 18381.

•

UK MiFID “investment services or activities”

—For each condition in the proposed Order that requires the application of, and compliance with, provisions of the Product Intervention and Product Governance Sourcebook of the FCA Handbook (“FCA PROD”) 3 and/or the UK version of Commission Delegated Regulation (EU) 2017/565

(“UK MiFID Org Reg”), the Covered Entity's relevant security-based swap activities must constitute “investment services or activities,” as defined in the FCA Handbook Glossary, must be carried on by the Covered Entity from an establishment in the UK and must fall within the scope of the Covered Entity's authorization from the FCA and/or PRA to conduct regulated activities in the UK.

See

UK Substituted Compliance Notice and Proposed Order, 86 FR at 18381.

•

UK “MiFID or equivalent third country business”

—For each condition in the proposed Order that requires the application of, and compliance with, provisions of the Conduct of Business Sourcebook of the FCA Handbook (“FCA COBS”) 2, 4, 6, 8A, 9A, 14, and/or 14A, the Covered Entity's relevant security-based swap activities must constitute “MiFID or equivalent third country business,” as defined in the FCA Handbook Glossary, must be carried on by the Covered Entity from an establishment in the UK and must fall within the scope of the Covered Entity's authorization from the FCA and/or PRA to conduct regulated activities in the UK.

See

UK Substituted Compliance Notice and Proposed Order, 86 FR at 18381. In the final Order, the Commission has corrected the typographical error in paragraph (a)(3) by changing FCA COBS 14A to 16A.

See

para. (a)(3) of the Order.

•

UK “designated investment business”

—For each condition in the proposed Order that requires the application of, and compliance with, provisions of FCA COBS 11, the Covered Entity's relevant security-based swap activities must constitute “MiFID business” that is also “designated investment business,” each as defined in the FCA Handbook Glossary, must be carried on by the Covered Entity from an establishment in the UK and must fall within the scope of the Covered Entity's authorization from the FCA and/or PRA to conduct regulated activities in the UK.

See

UK Substituted Compliance Notice and Proposed Order, 86 FR at 18381.

•

UK “MiFID business”

—For each condition in the proposed Order that requires the application of, and compliance with, provisions of the Client Asset Sourcebook of the FCA Handbook (“FCA CASS”) 6 and/or 7, the Covered Entity must not be an “investment company with variable capital” as defined in the FCA Handbook Glossary,

the Covered Entity's relevant security-based swap activities must constitute “regulated activities” as defined for purposes of the relevant UK provisions and “MiFID business” as defined in the FCA Handbook Glossary, must be carried on by the Covered Entity from an establishment in the UK and must fall within the scope of the Covered Entity's authorization from the FCA and/or PRA to conduct regulated activities in the UK.

See

UK Substituted Compliance Notice and Proposed Order, 86 FR at 18381.

See

UK Substituted Compliance Notice and Proposed Order, 86 FR at 18381.

•

Activities covered by FCA SYSC 10A

—For each condition in the proposed Order that requires the application of, and compliance with, provisions of FCA SYSC 10A, the Covered Entity's relevant security-based swap activities must constitute activities described in FCA SYSC 10A.1.1(2)(a), (b) and/or (c), must be carried on by the Covered Entity from an establishment in the UK and must fall within the scope of the Covered Entity's authorization from the FCA and/or PRA to conduct regulated activities in the UK.

See

UK Substituted Compliance Notice and Proposed Order, 86 FR at 18381.

•

UK MiFID “clients”

—For each condition in the proposed Order that requires the application of, and compliance with, provisions of FCA CASS 6 and/or 7, FCA COBS 2, 4, 6, 8A, 9A, 11, 14, and/or 14A, FCA PROD 3, FCA SYSC 10.1.8, FCA SYSC 10A, and/or UK MiFID Org Reg, the Covered Entity's relevant counterparties (or potential counterparties) must be “clients” (or potential “clients”) as defined in FCA COBS 3.2.1R.

See

UK Substituted Compliance Notice and Proposed Order, 86 FR at 18381. In the final Order, the Commission has corrected the typographical error in paragraph (a)(7) by changing FCA COBS 14A to 16A.

See

para. (a)(7) of the Order.

•

UK MiFID “financial instruments”

—For each condition in the proposed Order that requires the application of, and compliance with, provisions of FCA CASS 6 and/or 7, FCA COBS 2, 4, 6, 8A, 9A, 11, 14, and/or 14A, FCA PROD 3, FCA SYSC 10A, the UK version of Market Abuse Regulation (EU) 596/2014 (“UK MAR”), the UK version of Commission Delegated Regulation (EU) 2016/958 (“UK MAR Investment Recommendations Regulation”), and/or UK MiFID Org Reg, the relevant security-based swap must be a “financial instrument” as defined in Part 1 of Schedule 2 of the UK Regulated Activities Order.

See

UK Substituted Compliance Notice and Proposed Order, 86 FR at 18381-82. In the final Order, the Commission has corrected the typographical error in paragraph (a)(8) by changing FCA COBS 14A to 16A.

See

para. (a)(8) of the Order.

•

UK CRD/CRR “institution”

—For each condition in the proposed Order that requires the application of, and compliance with, provisions of the UK version of the Capital Requirements Regulation, Regulation (EU) No 575/2013 (“UK CRR”), the Covered Entity must be an “institution” as defined in UK CRR article 4(1)(3).

See

UK Substituted Compliance Notice and Proposed Order, 86 FR at 18382.

•

“Common platform firm” or “third country firm”

—For each condition in the proposed Order that requires the application of, and compliance with, provisions of FCA SYSC 4, 5, 6, 7, 9, and/or 10, the Covered Entity must be either a “common platform firm” (other than a “UCITS investment firm”) or a “third country firm,” each as defined in the FCA Handbook Glossary.

See

UK Substituted Compliance Notice and Proposed Order, 86 FR at 18382.

•

“IFPRU investment firm”

—For each condition in the proposed Order that requires the application of, and compliance with, provisions of FCA SYSC 19A, the Prudential Sourcebook for Investment Firms of the FCA Handbook (“FCA IFPRU”), and/or the Prudential Sourcebook for Banks, Building Societies and Investment Firms of the FCA Handbook (“FCA BIPRU”), the Covered Entity must be an “IFPRU investment firm” as defined in the FCA Handbook Glossary.

See

UK Substituted Compliance Notice and Proposed Order, 86 FR at 18382.

• “

UK bank” or “UK designated investment firm”

—For each condition in the proposed Order that requires the application of, and compliance with, provisions of FCA SYSC 19D and/or certain parts of the PRA Rulebook, the Covered Entity must be a “UK bank” or “UK designated investment firm,” each as defined in the FCA Handbook Glossary (in the case of chapter 19D of FCA SYSC) or in the PRA Rulebook Glossary (in the case of a part of the PRA Rulebook).

See

UK Substituted Compliance Notice and Proposed Order, 86 FR at 18382.

•

Covered Entity's counterparties as UK EMIR “counterparties”

—For each condition in the proposed Order that requires the application of, and compliance with, provisions of the UK version of the European Market Infrastructure Regulation (“EMIR”), Regulation (EU) No 648/2012 (“UK EMIR”), the UK version of Commission Delegated Regulation (EU) No 149/2013 (“UK EMIR RTS”), and/or the UK version of Commission Delegated Regulation (EU) 2016/2251 (“UK EMIR Margin RTS”), if the counterparty to the Covered Entity is not a “financial counterparty” or “non-financial counterparty” as defined in UK EMIR articles 2(8) or 2(9), respectively, the

Covered Entity must comply with the applicable condition as if the counterparty were a financial counterparty or non-financial counterparty. If the Covered Entity reasonably determines that the counterparty conducts a financial business that would cause it to be a financial counterparty if it were UK-established and UK-authorized, then the proposed Order would require the Covered Entity to treat the counterparty as a financial counterparty; otherwise, the proposed Order would require the Covered Entity to treat the counterparty as a non-financial counterparty. In addition, the proposed Order would provide that a Covered Entity complying with UK EMIR could not apply substituted compliance by complying with third country requirements that UK authorities may determine to be equivalent to UK EMIR.

See

UK Substituted Compliance Notice and Proposed Order, 86 FR at 18382.

•

Security-based swap status under UK EMIR

—For each condition in the proposed Order that requires the application of, and compliance with, provisions of UK EMIR, UK EMIR RTS, and/or UK EMIR Margin RTS, either: (1) The relevant security-based swap must be an “OTC derivative” or “OTC derivative contract,” as defined in UK EMIR article 2(7), that has not been cleared by a central counterparty and otherwise is subject to the provisions of UK EMIR article 11, UK EMIR RTS articles 11 through 15, and UK EMIR Margin RTS article 2; or (2) the relevant security-based swap must have been cleared by a central counterparty that has been authorized or recognized to clear derivatives contracts in the UK.

See

UK Substituted Compliance Notice and Proposed Order, 86 FR at 18382.

•

Memorandum of understanding

—Consistent with the requirements of rule 3a71-6 and the Commission's need for access to information regarding registered entities, substituted compliance under the proposed Order would be conditioned on the Commission having an applicable memorandum of understanding or other arrangement with the FCA and the PRA addressing cooperation with respect to the Order at the time the Covered Entity makes use of substituted compliance.

See

UK Substituted Compliance Notice and Proposed Order, 86 FR at 18382. The Commission has entered into a memorandum of understanding with the FCA and the PRA to address substituted compliance cooperation.

See supra

note 14. Consistent with the final Order, Covered Entities must ensure that this memorandum of understanding remains in place at the time the Covered Entity relies on substituted compliance.

•

Notice of reliance on substituted compliance

—To assist the Commission's oversight of firms that avail themselves of substituted compliance, a Covered Entity relying on the Order would have to provide notice of its intent to rely on the Order by notifying the Commission in writing. In the notice, the Covered Entity would need to identify each specific substituted compliance determination in the Order for which the Covered Entity intends to apply substituted compliance. The Covered Entity would have to promptly update the notice if it intends to modify its reliance on substituted compliance.

See

UK Substituted Compliance Notice and Proposed Order, 86 FR at 18382.

2. Commenter Views and Final Provisions

One commenter expressed general support for several of the general conditions, subject to certain changes and clarifications.

Another commenter stated that, if the Commission makes a positive substituted compliance determination, it must ensure that the conditions in the proposed Order are applied “with full force and without exception or dilution.

The Commission is issuing the general conditions largely as proposed,

and details its responses to the requested changes and clarifications below. In the Commission's view, the conditions are structured appropriately to predicate a positive substituted compliance determination on the applicability of relevant UK requirements needed to establish comparability, as well as on the continued effectiveness of the requisite memorandum of understanding, and the provision of notice to the Commission regarding the Covered Entity's intent to rely on substituted compliance.

See

Letter from Kyle L. Brandon, Managing Director, Head of Derivatives Policy, SIFMA (May 3, 2021) (“SIFMA 5/3/2021 Letter”) at 3-9.

See

Better Markets Letter at 2.

See

paras. (a)(1) through (16) of the Order. The Commission is correcting typographical errors in paragraphs (a)(3), (a)(7), and (a)(8) of the Order by replacing references to FCA COBS 14A with references to FCA COBS 16A.

a. UK Territorial Condition

A commenter stated that the Commission should delete the requirement in paragraphs (a)(1) through (a)(6) of the Order that, for purposes of certain UK requirements, a Covered Entity's relevant security-based swap activities be “carried on . . . from an establishment in the United Kingdom.”

The commenter stated that this UK territorial aspect of the conditions was not necessary because some of the UK requirements listed in these conditions apply to a Covered Entity with respect to activities wherever they are carried on.

The commenter suggested that the Commission instead add a new general condition that would require a Covered Entity, when relying on a part of the Order that requires it to be subject to and comply with the UK requirements listed in paragraphs (a)(1) through (a)(6) of the Order, to carry on the relevant security-based swap activities from a UK establishment, but only to the extent that those UK requirements “are limited in their applicability to activity carried on from [a UK establishment].”

The commenter did not identify any specific instances in which it believes that a Covered Entity would carry on a particular security-based swap activity outside the United Kingdom and that activity would be subject to the UK requirements listed in paragraphs (a)(1) through (a)(6) of the Order.

See

SIFMA 5/3/2021 Letter at 3-4.

See

SIFMA 5/3/2021 Letter at 3.

See

SIFMA 5/3/2021 Letter at 3-4 and Appendix A. Together with its request to amend the UK territorial condition in paragraphs (a)(1) through (a)(6) of the Order, the commenter requested that the Commission delete, where feasible, references to compliance with territorially limited UK laws as conditions to substituted compliance.

See

SIFMA 5/3/2021 Letter at 4. The Commission addresses this additional request below in the relevant parts of this release.

Many, though not all, of these UK requirements contain clearly articulated scoping provisions that apply the requirements to Covered Entities only when the relevant activity is carried on from an establishment in the UK.

Other requirements contain more complex scoping provisions, and the Commission is aware that in limited cases it is possible for these requirements to apply to some aspects of a Covered Entity's activities carried on from an establishment outside the UK. For example, the FCA commented that certain organizational requirements generally apply in a prudential context to activities wherever they are carried on.

In addition, PRA General

Organisational Requirements, PRA Recordkeeping Rules, PRA Risk Control Rules, and PRA Remuneration Rules generally apply to a Covered Entity that is a “CRR firm” with respect to activities carried on from a UK establishment,

but also apply to activities anywhere in the world “in a prudential context,”

which the PRA defines to mean when the Covered Entity's activities have, or might reasonably be regarded as likely to have, a negative effect on the Covered Entity's safety and soundness or its ability to continue to meet certain other UK regulatory tests.

The Commission cannot, however, determine

ex ante

whether a Covered Entity's particular activity outside the UK would fall within these limited wider scope provisions. The commenter also did not identify any circumstances that would trigger the limited wider scope of these provisions. Moreover, it is unclear whether any such wider scope even would be relevant in the context of the Order or, if so, how that wider scope would impact the operation of the Order in practice. For these reasons, the Commission is retaining the requirement in paragraph (a)(1) of the Order for the Covered Entity to carry on the relevant activities from an establishment in the UK.

See

FCA SYSC 1 Annex 1 2.15R (The common platform requirements, which include FCA SYSC 4, 5, 6, 7, and 10, apply in relation to activities carried on from an establishment in the UK.); FCA SYSC 10A.1.1R(2) (FCA SYSC 10A applies only to activities carried on from an establishment in the UK.); Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (“MLR 2017”) Regulation 8 (The relevant requirements of MLR 2017 apply to persons acting in the course of business carried on by them in the UK.); FCA CASS 1.3.2R (FCA CASS 6 and 7 apply to regulated activities carried on from an establishment in the UK.).

See

comments from FCA (May 20, 2021) (“FCA Comments”) (noting that common platform organizational requirements, including FCA SYSC 4 to 9, and parallel PRA General Organisational Requirements, generally apply in a prudential context to activities wherever they are carried on).

See

PRA General Organisational Requirements Rule 1.1(1); PRA Recordkeeping Rule 1.1(1); PRA Risk Control Rule 1.1(1);

see also

PRA Remuneration Rule 1.1(1)(a) (PRA Remuneration Rules apply to a CRR firm in relation to its “UK activities.”).

See

PRA General Organisational Requirements Rule 1.1(3); PRA Recordkeeping Rule 1.1(3); PRA Risk Control Rule 1.1(3); PRA Remuneration Rule 1.1(c).

See

PRA Rulebook Glossary.

The Commission also is retaining the same requirement in paragraphs (a)(5) and (a)(6) of the Order, as the UK requirements referenced in those paragraphs apply only to activities carried on from an establishment in the UK.

Other UK requirements listed in paragraphs (a)(2) through (a)(4) of the Order apply to limited activities outside the UK for which a Covered Entity might apply substituted compliance. UK MiFID Org Reg generally applies to a Covered Entity that is a third country investment firm only when it carries on the relevant security-based swap activity from an establishment in the UK,

but provisions of UK MiFID Org Reg in some instances can apply to a broader range of activities if the Covered Entity is a MiFID investment firm. Similarly, FCA PROD 3 and FCA COBS generally apply to a Covered Entity with respect to activities carried on from an establishment in the UK,

but also apply to a Covered Entity with respect to certain activities with a client in the UK that are carried on from an establishment outside the UK.

The Commission is amending the general conditions in paragraphs (a)(2) through (a)(4) of the Order to provide that a Covered Entity's relevant security-based swap activities must be either carried on by the Covered Entity from an establishment in the UK or from any other place that would cause UK MiFID Org Reg, FCA PROD 3, and/or the relevant provision(s) of FCA COBS, as applicable, to apply to those activities.

See

General Provisions Sourcebook of the FCA Handbook (“FCA GEN”) 2.2.22AR.

See

FCA PROD 1.3.4R.

See

FCA PROD 1.3.5R(1) (general UK territorial rule for FCA PROD 3); FCA COBS 4.1.8R (general UK territorial rule for FCA COBS 4) (citing FCA COBS 1.1.1R);

but see

FCA PROD 1.3.5(2) (exclusions from FCA PROD 3 for activities from an establishment outside the UK); FCA COBS 1 Annex 1 Part 2 2.1R (exclusions from FCA COBS 4 for activities from an establishment outside the UK).

In applying these amended general conditions, a Covered Entity still must satisfy all of the applicable general conditions, as well as the other applicable provisions of the Order, relating to a particular Exchange Act requirement for which it applies substituted compliance. A Covered Entity will satisfy the conditions of the Order only when it is subject to and complies with all of the comparable UK requirements listed in the relevant provision(s) of the Order. If any one of these comparable UK requirements is subject to a general condition with a territorial limitation, the relevant security-based swap activity for which the Covered Entity applies substituted compliance would have to satisfy that territorial limitation, even if another of the comparable UK requirements applies to a wider scope of activities. As a result, in these instances a Covered Entity would be able to use substituted compliance only for security-based swap activities that satisfy the territorial limitation.

b. Scope of Substituted Compliance

The same commenter requested that the Commission delete, where feasible, references in the Order to territorially limited UK requirements.

Where these deletions are not feasible, the commenter requested that the Commission confirm that, in relation to entity-level Exchange Act requirements, a Covered Entity may (a) rely on substituted compliance for its relevant security-based swap activities carried on from an establishment in the UK and (b) comply with Exchange Act requirements or another applicable substituted compliance order for its relevant security-based swap activities carried on from an establishment outside the UK.

The Commission is addressing here the commenter's request for clarification of the availability of substituted compliance for entity-level Exchange Act requirements, and is addressing the commenter's various requested deletions below in the relevant parts of this release.

See

SIFMA 5/3/2021 Letter at 4.

See

SIFMA 5/3/2021 Letter at 4.

See infra

parts IV.B, V.B, VI.B, VII.B, and VIII.B.

In the proposed Order, the Commission stated that a Covered Entity applying substituted compliance for one or more entity-level Exchange Act requirements (including risk control, capital, margin, internal supervision and chief compliance officer requirements, as well as recordkeeping and reporting requirements other than those linked to counterparty protection requirements) would have to apply substituted compliance at an entity level,

i.e.,

to all of its activities subject to that particular Exchange Act requirement.

By contrast, the Commission stated that a Covered Entity applying substituted compliance for one or more transaction-level Exchange Act requirements (including counterparty protection requirements, as well as recordkeeping and reporting requirements linked to them) could choose to apply substituted compliance under the proposed Order for some activities and comply directly with Exchange Act requirements for other activities.

The proposed Order thus would provide substituted compliance for transaction-level Exchange Act requirements “in relation to [a specific security-based swap, counterparty, recommendation, or communication];” the proposed Order did not include this proviso in relation to substituted compliance for entity-level Exchange Act requirements.

The Commission proposed this approach in the context of assisting Covered Entities in choosing between applying substituted compliance pursuant to the Order or complying directly with relevant Exchange Act requirements. This approach did not address, and does not

apply to, security-based swap business for which a Covered Entity could not apply substituted compliance under the proposed Order because the Covered Entity is not subject to the relevant UK requirements listed in the Order with respect to that business.

See

UK Substituted Compliance Notice and Proposed Order, 86 FR at 18384 (risk control requirements), 18386-87 (capital and margin requirements), 18389-90 (internal supervision and chief compliance officer requirements), 18395-96 (recordkeeping, reporting, notification, and securities count requirements other than those linked to counterparty protection requirements).

See

UK Substituted Compliance Notice and Proposed Order, 86 FR at 18392 (counterparty protection requirements), 18396 (recordkeeping and reporting requirements linked to counterparty protection requirements).

See

UK Substituted Compliance Notice and Proposed Order, 86 FR at 18413-20.

For example, this approach did not address and would not apply to a Covered Entity's security-based swap business carried on from an establishment outside the UK, when the relevant part of the proposed Order would require the Covered Entity to comply with one or more UK requirements to which a UK territorial condition applies.

Consistent with the commenter's request, for any particular set of entity-level Exchange Act requirements,

a Covered Entity must choose either (1) to apply substituted compliance pursuant to the Order with respect to all security-based swap business that is subject to the relevant UK requirements listed in the Order and that can satisfy any general conditions related to those UK requirements (including any applicable UK territorial condition) (“UK business”), or (2) to comply directly with the Exchange Act with respect to all UK business. A Covered Entity may not choose to apply substituted compliance for those entity-level requirements in respect of some of its UK business and comply directly with the Exchange Act in respect of another part of its UK business. However, if the conditions in the relevant part of the Order require the Covered Entity to comply with UK requirements that are subject to a UK territorial condition, the Covered Entity's UK business would not include business carried on from an establishment outside the UK, as that business would not be subject to the relevant UK requirements and would not satisfy the applicable UK territorial condition. Rather, the Covered Entity could apply substituted compliance for the Exchange Act requirements in that part of the Order so long as it applies substituted compliance for all of its business that is subject to the relevant UK requirements and can satisfy any general conditions related to those UK requirements, which in this example would include only business that is carried on from an establishment in the UK and that otherwise is both subject to the relevant UK requirements and able to satisfy any other general conditions related to those requirements. Also consistent with the commenter's request, for any particular set of entity-level Exchange Act requirements, if the Covered Entity also has security-based swap business that is not subject to the relevant UK requirements

or that cannot satisfy an applicable general condition related to those UK requirements (including business carried on from an establishment outside the UK where the Order imposes a UK territorial condition) the Covered Entity must either comply directly with the Exchange Act for that business or comply with the terms of another applicable substituted compliance order.

Consistent with the proposed Order, for transaction-level Exchange Act requirements, a Covered Entity may decide to apply substituted compliance for some of its security-based swap business and to comply directly with the Exchange Act (or comply with another applicable substituted compliance order) for other parts of its security-based swap business.

The Commission believes that this scope of substituted compliance strikes the right balance to ensure that substituted compliance is consistent with Commission's classification of Exchange Act requirements as either entity-level or transaction-level requirements. The Commission has made no changes to the text of the Order in connection with these issues.

A Covered Entity may use substituted compliance consistent with the Order for any one or more sets of entity-level Exchange Act requirements specified in the Order.

See supra

note 74 and accompanying text. For example, a Covered Entity could use substituted compliance for internal risk management, trade acknowledgment and verification, internal supervision, and chief compliance officer requirements, but comply directly with Exchange Act portfolio reconciliation and dispute reporting, portfolio compression, trading relationship documentation, recordkeeping, reporting, notification, and securities count requirements.

In the context of the UK EMIR counterparties condition in paragraph (a)(13) of the Order, a Covered Entity must choose (1) to apply substituted compliance pursuant to the Order—including compliance with paragraph (a)(13) as applicable—for a particular set of entity-level requirements with respect to all of its business that would be subject to the relevant UK EMIR-based requirement if the counterparty were the relevant type of counterparty, or (2) to comply directly with the Exchange Act with respect to such business.

See infra

note 106 and accompanying text.

A third country investment firm regulated in the UK might be able to satisfy the definitions of “Covered Entity” in both this Order and the German Substituted Compliance Order, and thus may be eligible to apply substituted compliance under both orders. This Order defines Covered Entities to include both MiFID investment firms (

i.e.,

firms with a UK head office) and third country investment firms (

i.e.,

firms with a head office outside the UK). The German Substituted Compliance Order defines Covered Entities to include only investment firms and credit institutions “authorized by BaFin to provide investment services or perform investment activities in the Federal Republic of Germany.”

See

German Substituted Compliance Order, 85 FR at 85700. A non-EU firm (such as a UK firm) registered by the European Securities and Markets Authority (“ESMA”) to provide investment services and/or perform investment activities to certain counterparties in the EU pursuant to articles 46 through 48 of the Markets in Financial Instruments Regulation is not “authorized by BaFin” and thus does not satisfy the Covered Entity definition in the German Substituted Compliance Order. Accordingly, an investment firm or credit institution authorized by BaFin and regulated in the UK as a third country investment firm may, for example, be eligible for substituted compliance under both this Order and the German Substituted Compliance Order. If such a firm has security-based swap business that is not UK business, but is subject to the relevant German requirements under the German Substituted Compliance Order, it may choose to comply directly with the relevant Exchange Act requirements or to use substituted compliance pursuant to the terms of the German Substituted Compliance Order. If such a firm has security-based swap business that is both UK business and subject to the relevant German requirements under the German Substituted Compliance Order, it may choose to comply with the conditions to both orders or, alternatively, it may choose one order that it will comply with in respect of that business. For each set of entity-level Exchange Act requirements, such a firm must apply this choice to all such dually regulated security-based swap business. Such a firm must specify this choice in its notice to the Commission pursuant to para. (a)(16) of the Order. A firm's choice to comply with only one applicable substituted compliance order in respect of security-based swap business that is subject to the relevant foreign requirements listed in multiple substituted compliance orders will not affect the firm's ability to apply substituted compliance for Exchange Act entity-level requirements in respect of other, non-dually regulated security-based swap business under the other substituted compliance order(s).

For example, a Covered Entity may use substituted compliance consistent with the Order for fair and balanced communications requirements in respect of communications with UK counterparties that are subject to the Exchange Act and comply directly with Exchange Act fair and balanced communications requirements in respect of U.S. person counterparties. A Covered Entity also may use substituted compliance consistent with the Order for any one or more sets of transaction-level Exchange Act requirements specified in the Order.

See supra

note 76 and accompanying text. For example, a Covered Entity could use substituted compliance for fair and balanced communications requirements, but comply directly with Exchange Act requirements related to disclosure of information regarding material risks and characteristics, disclosure of information regarding material incentives or conflicts of interest, “know your counterparty,” suitability, and daily mark disclosure.

In the Covered Entity's notice to the Commission pursuant to paragraph (a)(16) of the Order, the Covered Entity must specify the parts of its security-based swap business for which it will apply substituted compliance consistent with the individual parts of the Order. Every SBS Entity registered with the Commission, whether complying directly with Exchange Act requirements or relying on substituted compliance as a means of complying with the Exchange Act, is required to satisfy the inspection and production requirements imposed on such entities under the Exchange Act,

and specificity as to the scope of the entity's reliance on substituted compliance is

necessary to facilitate the Commission's oversight under the Order.

See, e.g.,

Exchange Act section 15F(f); Exchange Act rule 18a-6(g).

c. Activities as UK “Designated Investment Business”

One commenter recommended deleting paragraph (a)(4) of the proposed Order because “MiFID business” is a subset of “designated investment business.”

The commenter instead suggested adding FCA COBS 11 to the general condition in paragraph (a)(3) of the proposed Order, which is identical to paragraph (a)(4) except for the reference to “designated investment business” in paragraph (a)(4).

See

SIFMA 5/3/2021 Letter Appendix A.

The only provision of FCA COBS 11 included in the Order is FCA COBS 11.7A.3R.

By its terms, FCA COBS 11.7A.3R applies to a firm's “designated investment business.” FCA COBS 11.7A.1R further states that FCA COBS 11.7A.3R applies, in relevant part, to a firm in relation to its “MiFID or equivalent third country business.” The condition as proposed thus accurately reflects the activities that FCA COBS describes as subject to FCA COBS 11.7A.3R. The Commission believes that deleting the reference to “designated investment business” would be inconsistent with the terms of the relevant provisions of FCA COBS 11. Moreover, the definitions of “designated investment business” and “MiFID or equivalent third country business” vary substantially. “Designated investment business” includes, among other things, dealing in investments as principal or agent, arranging deals in investments, making arrangements with a view to transactions in investments, managing investments, and advising on investments.

By contrast, “MiFID or equivalent third country business” includes, among other things, reception and transmission of orders in relation to one or more financial instruments, execution of orders on behalf of clients, dealing on own account, portfolio management, and the making of a personal recommendation.

Given the lack of overlap in terminology used in these two definitions, the Commission believes that deleting the reference to “designated investment business” could cause confusion among Covered Entities, while keeping the reference would not restrict a Covered Entity from being able to comply with the condition in respect of MiFID or equivalent third country business that is a subset of designated investment business. Accordingly the Commission has determined not to delete this paragraph.

See

para. (d)(3)(ii) of the Order.

See

FCA Handbook Glossary, definition of “designated investment business.”

See

FCA Handbook Glossary, definitions of “MiFID or equivalent third country business,” “MiFID business,” “equivalent third country business,” and “investment services and/or activities.”

d. Activities as UK “MiFID Business”

One commenter recommended deleting paragraph (a)(5) of the proposed Order to reflect its recommendations to delete any FCA CASS provisions elsewhere in the Order as conditions to substituted compliance.

The commenter believes that the FCA CASS rules, which address client asset requirements, expand the scope of applicable Exchange Act requirements and are inappropriate as conditions to substituted compliance.

As discussed below in the relevant parts of this release,

the Commission has determined to retain the citations to FCA CASS as conditions to substituted compliance and, accordingly, has not deleted this paragraph.

See

SIFMA 5/3/2021 Letter Appendix A.

See

SIFMA 5/3/2021 Letter Appendix A.

See infra

part VI.B.1.

e. Covered Entity as UK “IFPRU Investment Firm”

One commenter recommended deleting paragraph (a)(11) of the proposed Order because the UK requirements listed in that paragraph do not apply to UK banks or UK designated investment firms and the commenter expects only “banks and PRA-designated investment firms” to apply substituted compliance pursuant to the Order.

These requirements apply to IFPRU investment firms—that is, certain investment firms regulated by the FCA but not the PRA—and are nearly identical to requirements that apply to UK banks and UK designated investment firms. For the same reason, the commenter also recommended deleting the references to firms regulated only by the FCA from the general conditions in paragraphs (a)(1) through (a)(3) and (a)(6) of the proposed Order and the UK requirements in paragraphs (b), (d), and (e) of the proposed Order that apply only to IFPRU investment firms.

The proposed Order would not require a Covered Entity that is a UK bank or UK designated investment firm to be subject to and comply with these requirements. Rather, in each place that the proposed Order refers to these requirements that are unique to IFPRU investment firms, the proposed Order would require the Covered Entity to be subject to and comply with either the provisions that apply to IFPRU investment firms (in which case paragraph (a)(11) of the proposed Order would require the Covered Entity to be an IFPRU investment firm) or analogous provisions of the FCA Handbook and PRA Rulebook that apply to UK banks and UK designated investment firms (in which case paragraph (a)(12) of the proposed Order would require the Covered Entity to be a UK bank or UK designated investment firm). Moreover, the FCA Application requested substituted compliance for all investment firms, and was not limited to the entities described by the commenter. Accordingly, the Commission is retaining the references to these requirements in paragraph (a)(11) and in paragraphs (b), (d), and (e) of the Order and the references to firms regulated only by the FCA in paragraphs (a)(1) through (a)(6) of the Order.

See

SIFMA 5/3/2021 Letter Appendix A.

See

SIFMA 5/3/2021 Letter Appendix A parts (a), (b), (d), and (e).

f. Counterparties as UK MiFID “Clients”

A commenter requested that the Commission modify paragraph (a)(7) of the proposed Order to permit a Covered Entity to treat an agent, rather than the agent's principal, as the Covered Entity's client for purposes of the MiFID-based requirements listed in the Order.

The commenter stated that this modification would be consistent with the FCA's “agent as client” rule, which provides that a firm, if it is aware that a person with or for whom it is providing services is acting as agent for another person and satisfies certain other conditions, must treat the agent, and not the agent's principal, as the firm's client in respect of that business.

The firm may override the “agent as client” rule by agreeing in writing with the agent to treat the agent's principal as the firm's client instead.

See

SIFMA 5/3/2021 Letter at 4-6.

See

FCA COBS 2.4.3R.

See

FCA COBS 2.4.3R(2).

The proposed Order would require a Covered Entity to be “subject to and comply with” relevant MiFID-based requirements. The Commission proposed that requirement of the proposed Order to ensure that comparable MiFID-based requirements in practice would apply to a Covered Entity using substituted compliance. The condition in paragraph (a)(7) to the proposed Order would ensure that the Covered Entity's counterparty—

i.e.,

the entity to whom it owes its various duties under the Exchange Act—is the “client” to whom the Covered Entity owes its performance of the duties to which it is subject under the

comparable MiFID-based requirements.

The Commission believes that, in the case of an agent acting on behalf of a principal, if the principal is the counterparty for purposes of the relevant Exchange Act requirement, then this condition should require the principal, as the counterparty, to be the “client” for purposes of the relevant MiFID-based requirements. If the Covered Entity instead treats the agent as the “client,” then the Covered Entity would not be “subject to” UK requirements that are comparable to Exchange Act requirements related to counterparties. Accordingly, the Commission is not amending the condition in paragraph (a)(7) to permit a Covered Entity to treat an agent, rather than the agent's principal, as its client with regard to the relevant MiFID-based requirements. In taking this position, the Commission does not prohibit Covered Entities from working with agents or others acting on behalf of a counterparty. Rather, the Covered Entity must ensure that, in working with the agent, it fulfills any duties owed to a “client” (or potential “client”) in relation to the counterparty.

Some provisions of the MiFID-based requirements cited in the condition, such as certain organizational requirements, do not pertain to counterparties or clients. In those cases, there is no “relevant counterparty (or potential counterparty)” for purposes of the condition, and the condition would have no effect.

FCA COBS 2.4.4R permits firms to rely upon information about a client received from another UK-regulated firm. Under this provision, the other firm is legally responsible for the completeness and accuracy of any information about the client that the other firm receives from the first firm. The Commission believes that it is appropriate to permit a Covered Entity to rely on information about its client communicated by another UK-regulated firm on behalf of the client. Accordingly, the application of this provision would not cause the Covered Entity to be not “subject to” the relevant UK requirements listed in the Order, and thus would not impact the Covered Entity's ability to use substituted compliance in relation to those communications. On the other hand, FCA COBS 2.4.4R also provides that the other firm is legally responsible for the suitability of advice and recommendations provided to the client. The other firm, however, may not be a Covered Entity applying substituted compliance pursuant to the Order. Accordingly, the Commission believes that a Covered Entity relying on the suitability assessment of another firm pursuant to FCA COBS 2.4.4R is not “subject to” the relevant UK suitability requirements listed in the Order, and thus may not apply substituted compliance for those recommendations.

g. UK EMIR Counterparties

A commenter requested that the Commission clarify that the condition in paragraph (a)(13) of the proposed Order would not require a Covered Entity to treat as financial counterparties or non-financial counterparties certain public sector counterparties, such as multilateral development banks, that are exempt from UK EMIR or counterparties that are not “undertakings” for purposes of UK EMIR's definitions of “financial counterparty” and “non-financial counterparty.”

See

SIFMA 5/3/2021 Letter at 6 and Appendix A part (a) (recommending that the order text of paragraph (a)(13) of the Order require application of the condition “if the counterparty to the Covered Entity is not a “financial counterparty” or “non-financial counterparty” as defined in UK EMIR articles 2(8) or 2(9) respectively,

solely because the counterparty is not established in the United Kingdom”

This condition addresses the fact that some of the UK EMIR-based requirements

are expressed to apply only to transactions between specified types of counterparties, such as transactions between financial counterparties and non-financial counterparties, between financial counterparties and non-financial counterparties above the clearing threshold, and/or between counterparties that are not excluded from the application of UK EMIR. The definitions of “financial counterparty” and “non-financial counterparty” are predicated on the counterparty being an “undertaking” established in the UK.

100

In addition, UK EMIR does not apply to transactions with certain excluded counterparties.

101

The condition is not based upon the concern that some industry participants may not be able to take advantage of substituted compliance, but, rather, the condition is intended to help ensure that the relevant UK EMIR-based requirements will apply in practice regardless of the counterparty's location or status as “an undertaking.” The condition provides that the Covered Entity must comply with the applicable condition of this Order as if the counterparty were the type of counterparty that would trigger the application of the relevant UK EMIR-based requirements. If the Covered Entity reasonably determines that its counterparty would be a financial counterparty

102

if not for the counterparty's location and/or lack of regulatory authorization in the UK, the condition further requires the Covered Entity to treat the counterparty as if the counterparty were a financial counterparty, rather than as another type of counterparty to which the relevant UK EMIR-based requirements may apply.

103

By requiring a Covered Entity to treat its counterparty as a type of counterparty that would trigger the application of the relevant UK EMIR-based requirements, the condition will require the Covered Entity to perform the relevant obligations pursuant to those UK EMIR-based requirements and thus to act in a way that is comparable to Exchange Act requirements. Accordingly, the Commission is retaining this condition to ensure that a Covered Entity can apply substituted compliance only when it treats its counterparty as a type of counterparty that will trigger the Covered Entity's performance of obligations pursuant to those UK EMIR-based requirements.

104

Because each UK EMIR-based requirement applies to different types of counterparties, the Commission is amending the condition to make clear that a Covered Entity must treat its

counterparty as if the counterparty were the type of counterparty specified in the relevant UK EMIR-based requirement. The Commission also is amending the Order to clarify that the condition applies only if the relevant UK EMIR-based requirement applies solely to the Covered Entity's activities with specified types of counterparties. If the relevant UK EMIR-based requirement applies to a Covered Entity's activities without regard to the status of its counterparty,

105

the Covered Entity would not be required to treat its counterparty as any particular type of counterparty for purposes of that UK EMIR-based requirement.

See, e.g.,

UK EMIR RTS article 12 (timely confirmation requirements for OTC derivatives contracts concluded between financial counterparties and non-financial counterparties).

100

See

UK EMIR article 2(8) (financial counterparties include specified UK financial firms and generally exclude non-UK entities); UK EMIR article 2(9) (non-financial counterparties include UK undertakings that are not financial counterparties and generally exclude natural persons, central counterparties, and non-UK entities).

101

See

UK EMIR articles 1(4) and 1(5) (UK EMIR does not apply to certain public sector and multilateral entities). Several of the multilateral development banks that the commenter mentioned are exempt from the definition of “U.S. person” in Exchange Act rule 3a71-3, 17 CFR 240.3a71-3, and, as a result, transactions between a foreign SBS Entity and one of those banks (without being arranged, negotiated, or executed by U.S. personnel) are not subject to most Exchange Act business conduct requirements.

See

UK EMIR article 1(5)(a) (exempting from UK EMIR multilateral development banks listed in UK CRR article 117); UK CRR article 117 (listed multilateral development banks include, among others, the International Bank for Reconstruction and Development, the Inter-American Development Bank, the Asian Development Bank, and the African Development Bank); Exchange Act rules 3a71-3(a)(4)(iii), (a)(7), (a)(8)(i), (a)(9) and (c); Exchange Act rules 3a67-10(a)(4), (a)(6) and (d)(1), 17 CFR 240.3a67-10(a)(4), (a)(6) and (d)(1).

102

UK EMIR article 2(8) defines “financial counterparty” to encompass investment firms, credit institutions, insurers, and certain other types of businesses that have been authorized in accordance with UK law. Under UK EMIR, the distinction between financial counterparties and other types of counterparties such as non-financial counterparties is manifested,

inter alia,

in connection with confirmation timing standards.

See

UK EMIR RTS article 12.

103

See

para. (a)(13) of the Order. The condition will help clarify that the Covered Entity would be subject to the relevant UK EMIR-based requirements even if the counterparty is not an “undertaking” (such as by virtue of being a natural person), is not established in the EU (by virtue of being a U.S. person or otherwise being established outside the UK), or is excluded from the application of UK EMIR to its transactions (by virtue of being one of the public sector or multilateral entities identified in UK EMIR articles 1(4) and (5)).

104

See

para. (a)(13) of the Order. To correct a typographical error in the UK Substituted Compliance Notice and Proposed Order, in paragraph (a)(13) of the Order the Commission is changing the phrase “paragraphs (b) through (e) of this Order” to “paragraphs (b) through (f) of this Order.” This correction is consistent with the description of the proposed condition in the UK Substituted Compliance Notice and Proposed Order.

See

UK Substituted Compliance Notice and Proposed Order, 86 FR at 18382.

105

See, e.g.,

UK EMIR articles 39(4) and (5).

As discussed in part III.B.2.b above, for any particular set of entity-level Exchange Act requirements, a Covered Entity must choose either (1) to apply substituted compliance pursuant to the Order with respect to all UK business,

i.e.,

security-based swap business that is subject to the relevant UK requirements listed in the Order and that can satisfy any general conditions related to those UK requirements; or (2) to comply directly with the Exchange Act with respect to all UK business. In the context of the UK EMIR counterparties condition in paragraph (a)(13), this scoping means that a Covered Entity's UK business includes security-based swap business that, but for the counterparty's failure to qualify as a type of counterparty specified in the relevant UK EMIR-based requirement, would be subject to the relevant UK EMIR-based requirement, and otherwise is subject to all other relevant UK requirements listed in the Order and can satisfy any other applicable general conditions.

106

Accordingly, a Covered Entity must choose (1) to apply substituted compliance pursuant to the Order—including compliance with paragraph (a)(13) as applicable—for a particular set of entity-level requirements with respect to all UK business, including its business that would be subject to the relevant UK EMIR-based requirement if the counterparty were the relevant type of counterparty; or (2) to comply directly with the Exchange Act with respect to all UK business.

106

A Covered Entity's business that is not subject to other non-UK EMIR-based requirements listed in the Order or that does not satisfy any other applicable general condition would not form part of a Covered Entity's UK business for which the Covered Entity must make a single choice between using substituted compliance or complying directly with the Exchange Act. For example, for purposes of its choice to apply substituted compliance or comply directly with Exchange Act internal risk management requirements, a Covered Entity need not treat as UK business a transaction that is not subject to FCA SYSC 4.1.1R(1) or that cannot satisfy the general conditions in paragraphs (a)(1) and (a)(10) of the Order, even if the sole reason the transaction is not subject to UK EMIR Margin RTS article 2 is that the counterparty is not the type of counterparty to which that requirement applies.

H. Security-Based Swap Status Under UK EMIR

A commenter asked the Commission to amend the condition in paragraph (a)(14) of the proposed Order to permit a Covered Entity to apply substituted compliance for transactions cleared by a non-UK-regulated central counterparty.

107

As proposed, the condition helps to ensure that the relevant UK EMIR-based requirements will require the Covered Entity to treat its security-based swap in a manner comparable to Exchange Act requirements, while also clarifying that a Covered Entity still may apply substituted compliance in respect of transactions cleared by a UK-regulated central counterparty, even if the relevant UK EMIR-based requirements do not require the Covered Entity to take any action in respect of such a centrally cleared transaction. Many of the UK EMIR-based requirements cited in the Order relate to risk mitigation techniques for non-centrally cleared transactions and apply only to a non-centrally cleared OTC derivative,

108

consistent with analogous Exchange Act risk mitigation and margin requirements for non-centrally cleared security-based swaps.

109

However, transactions that have been cleared by any central counterparty, whether or not it is regulated by UK authorities, are exempt from these UK EMIR-based requirements, while only transactions that have been cleared by an SEC-registered or exempt clearing agency are exempt from their Exchange Act analogues. With respect to non-centrally cleared security-based swaps, the Commission believes that these UK requirements produce comparable outcomes to the analogous Exchange Act requirements, as both sets of requirements impose similar obligations on the Covered Entity. In addition, to the extent that these UK EMIR-based requirements do not require the Covered Entity to apply risk mitigation techniques to a security-based swap cleared by a UK-regulated central counterparty, the Commission also believes that these UK requirements produce comparable outcomes to the analogous Exchange Act requirements. The Commission reached this conclusion because neither set of requirements imposes risk mitigation techniques on transactions that have been cleared by central counterparties subject to regulation in the jurisdiction of the authority that supervises compliance with the risk mitigation requirements. However, to the extent that these UK EMIR-based requirements do not require the Covered Entity to apply risk mitigation techniques to the relevant security-based swap because it has been cleared by a non-UK-regulated central counterparty, the Commission does not believe that these UK requirements produce comparable outcomes to Exchange Act trade acknowledgment and verification, portfolio reconciliation and dispute reporting, portfolio compression, and trading relationship documentation requirements for non-centrally cleared security-based swaps. The Commission reached this conclusion because these Exchange Act requirements exempt centrally cleared security-based swaps only if they have been cleared by an SEC-registered clearing agency (or, in the case of portfolio reconciliation and dispute reporting, portfolio compression, and trading relationship documentation requirements, a clearing agency that the Commission has exempted from registration). Security-based swaps that have been cleared by a central counterparty that is not SEC-registered or exempt or UK-regulated are subject to those Exchange Act requirements, but are not subject to the UK EMIR-based risk mitigation requirements. Accordingly, the Commission is issuing the condition as proposed to require that the relevant security-based swap is either (a) an OTC derivative or OTC derivative contract that has not been cleared by any central counterparty and is otherwise subject to the relevant UK EMIR-based requirements or (b) cleared by a UK-regulated central counterparty.

110

107

See

SIFMA 5/3/2021 Letter at 6-7.

108

See, e.g.,

UK EMIR article 11.

109

See, e.g.,

Exchange Act rules 15Fi-2, 17 CFR 240.15Fi-2 through 15Fi-4, 17 CFR 240.15Fi-4; Exchange Act rule 18a-3, 17 CFR 240.18a-3.

110

See

para. (a)(14) of the Order. To correct a typographical error in the UK Substituted Compliance Notice and Proposed Order, in paragraph (a)(14) of the Order the Commission is changing the phrase “paragraphs (b) through (e) of this Order” to “paragraphs (b) through (f) of this Order.” This correction is consistent with the description of the proposed condition in the UK Substituted Compliance Notice and Proposed Order.

See

UK Substituted Compliance Notice and Proposed Order, 86 FR at 18382.

As an alternative to its suggested amendments to the condition, the commenter asked the Commission to permit the Covered Entity to comply directly with the Exchange Act (or with another applicable substituted compliance order) with respect to transactions cleared by a non-UK-

regulated central counterparty, and to do so without affecting the Covered Entity's ability to apply substituted compliance for entity-level requirements with respect to other security-based swap business that does satisfy the condition.

111

Consistent with the discussion of the scope of substituted compliance for entity-level requirements in part III.B.2.b above, for entity-level Exchange Act requirements, a Covered Entity must choose either (1) to apply substituted compliance pursuant to the Order with respect to all UK business (that is, security-based swap business that is both subject to the relevant UK requirements listed in the Order and that can satisfy any general conditions related to those UK requirements, including paragraph (a)(14)); or (2) to comply directly with the Exchange Act with respect to all UK business. A transaction cleared by a non-UK-regulated central counterparty does not satisfy the condition in paragraph (a)(14) of the Order. As a result, paragraph (a)(14) would not permit a Covered Entity to use substituted compliance for any Exchange Act requirements that apply to that transaction if the relevant conditions in parts (b) through (f) of the Order include a requirement for the Covered Entity to be subject to and comply with provisions of UK EMIR, UK EMIR RTS, UK EMIR Margin RTS, and/or other UK requirements adopted pursuant to those provisions. Instead, a Covered Entity must either comply directly with the Exchange Act for such a transaction or comply with the terms of another applicable substituted compliance order that the transaction is able to satisfy.

112

Such a transaction would not be included in the UK business for which a Covered Entity must elect a single choice—use substituted compliance under the Order or comply directly with the Exchange Act—when complying with entity-level Exchange Act requirements.

111

See

SIFMA 5/3/2021 Letter at 7.

112

See supra

note 80.

The commenter also requested that the Commission revise the condition's description of UK-regulated central counterparties to clarify that it includes UK-regulated third country central counterparties, which may have a domicile outside the UK and thus may not be viewed as “recognized to clear derivatives contracts

the UK.”

113

Similarly, the commenter asked the Commission to further revise the description to encompass the UK's temporary recognition regime for third country central counterparties implemented as a consequence of the UK's exit from the European Union.

114

The Commission intends the condition's description of UK-regulated central counterparties to include third country central counterparties that relevant UK authorities allow to provide clearing services to UK clearing members or trading venues.

115

These central counterparties include those “taken to be” recognized pursuant to the UK's temporary recognition regime for third country central counterparties.

116

Accordingly, the Commission is amending the condition's description of UK-regulated central counterparties so that it describes “a central counterparty that is authorized, recognized, or taken to be recognized by a relevant UK authority to provide clearing services to clearing members or trading venues established in the UK.”

117

113

See

SIFMA 5/3/2021 Letter at 7.

114

See

SIFMA 5/3/2021 Letter at 7.

115

See

UK EMIR article 25(1) (a third country central counterparty may provide clearing services to UK clearing members or trading venues only if it is recognized by the Bank of England);

see also

The Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2020 (2020/646), regulation 20(2).

116

See

The Central Counterparties (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018 (2018/1184), part 6.

117

See

para. (a)(14)(ii) of the Order. The Commission also is amending the condition so that it applies to conditions of the Order that require the application of, and the Covered Entity's compliance with, UK EMIR, UK EMIR RTS, UK EMIR Margin RTS, and/or other UK requirements adopted pursuant to those requirements.

Finally, the Commission is amending the condition to clarify that the condition applies only if the relevant UK EMIR-based requirement applies to OTC derivatives that have not been cleared by a central counterparty, as some provisions of UK EMIR cited in the Order, such as UK EMIR articles 39(4) and (5), are not limited in their application to non-centrally cleared OTC derivatives. Consistent with the condition in paragraph (a)(13) of the Order, the Commission also is adding references to UK EMIR RTS and UK EMIR Margin RTS.

i. Memorandum of Understanding

As proposed, the Commission would need to have a supervisory and enforcement memorandum of understanding and/or other arrangement with the FCA and the PRA addressing cooperation with respect to the Order at the time the Covered Entity makes use of substituted compliance.

118

This condition has been modified from the proposed Order to reflect that the executed version of the memorandum of understanding is between the Commission, on the one hand, and the FCA and the Bank of England (including in its capacity as the PRA), on the other hand.

118

See

UK Substituted Compliance Notice and Proposed Order, 86 FR at 18412.

j. Notice of Reliance on Substituted Compliance

Commenters did not address the requirement in paragraph (a)(16) of the proposed Order for the Covered Entity to notify the Commission in writing of its intent to rely on substituted compliance, and the Commission is adopting this requirement as proposed.

119

See

para. (a)(16) of the Order. If the Covered Entity intends to rely on all the substituted compliance determinations in a given paragraph of the Order, it can cite that paragraph in the notice. For example, if the Covered Entity intends to rely on the capital and margin determinations in paragraph (c) of the Order, it can indicate in the notice that it is relying on the determinations in paragraph (c). However, if the Covered Entity intends to rely on the margin determination but not the capital determination, it will need to indicate in the notice that it is relying on paragraph (c)(2) of the Order (the margin determination). In this case, paragraph (c)(1) of the Order (the capital determination) will be excluded from the notice and the Covered Entity will need to comply with the Exchange Act capital requirements. Further, as discussed below in part VIII.B.1, the recordkeeping and reporting determinations in the Order have been structured to provide Covered Entities with a high level of flexibility in selecting specific requirements within those rules for which they want to rely on substituted compliance. For example, paragraph (f)(1)(i) of the Order sets forth the Commission's substituted compliance determinations with respect to the requirements of Exchange Act rule 18a-5, 17 CFR 240.18a-5. These determinations are set forth in paragraphs (f)(1)(i)(A) through (O) of the Order. If a Covered Entity intends to rely on some but not all of the determinations, it will need to identify in the notice the specific determinations in this paragraph it intends to rely on (

e.g.,

paragraphs (f)(1)(i)(A), (B), (C), (D), (G), (H), (I), and (O)). For any determinations excluded from the notice, the Covered Entity will need to comply with the Exchange Act rule 18a-5 requirement. Finally, a Covered Entity is able to apply substituted compliance at the transaction level (rather than the entity level) for certain counterparty protection requirements and the recordkeeping requirements that are linked to them. In this case, the notice will need to indicate the class of transactions (

e.g.,

transactions with UK counterparties) for which the Covered Entity is applying substituted compliance with respect to the Exchange Act counterparty protection requirements and linked recordkeeping requirements. Similarly, as discussed above, a Covered Entity is able to apply substituted compliance for entity-level Exchange Act requirements to all of its security-based swap business that is eligible for substituted compliance under the Order, and may either comply directly with the Exchange Act or apply substituted compliance under another applicable order for its security-based swap business that is not eligible for substituted compliance under the Order. In this case, the notice will need to indicate the scope of security-based swap business (

e.g.,

security-based swap business carried on from an establishment in the UK) for which the Covered Entity is applying substituted compliance with respect to the relevant Exchange Act entity-level requirements. A Covered

Entity would modify its reliance on the positive substituted compliance determinations in the Order, and thereby trigger the requirement to update its notice, if it adds or subtracts determinations for which it is applying substituted compliance or completely discontinues its reliance on the Order.

k. Notification Requirements Related to Changes in Capital

In response to the French Substituted Compliance Notice and Proposed Order, a commenter requested that the Commission make more granular substituted compliance determinations with respect to the Exchange Act recordkeeping requirements.

120

The commenter stated that for “operational reasons” a Covered Entity may “prefer to comply directly with certain Exchange Act requirements (

i.e.,

not to rely on substituted compliance with those requirements).”

121

The Commission took this approach in the proposed Order with respect to the Exchange Act recordkeeping, reporting, and notification requirements.

122

As part of this approach, the Commission also conditioned substituted compliance with certain of the discrete recordkeeping, reporting, and notification requirements on the Covered Entity applying substituted compliance with respect to the substantive Exchange Act requirement to which they were linked.

123

This linked condition was designed to ensure that a Covered Entity consistently applies substituted compliance with respect to the substantive Exchange Act requirement and the Exchange Act recordkeeping, reporting, or notification requirement that complements the substantive requirement.

120

See

Letter from Kyle Brandon, Managing Director, Head of Derivative Policy, SIFMA (Jan. 25, 2021) (“SIFMA 1/25/2021 Letter”) at 8.

121

SIFMA 1/25/2021 Letter at 8.

122

See

UK Substituted Compliance Notice and Proposed Order, 86 FR 18394-403, 18415-420.

123

See

UK Substituted Compliance Notice and Proposed Order, 86 FR 18394-403, 18415-420.

On further consideration and in light of the more granular approach requested by the commenter, the Commission believes it necessary to do the reverse with respect to certain substantive financial responsibility requirements: Condition substituted compliance with respect to the substantive requirement on the Covered Entity applying substituted compliance with respect to the linked recordkeeping, reporting, or notification requirement. The Exchange Act financial responsibility requirements addressed in this Order (capital, margin, recordkeeping, reporting, notification, and securities count requirements) are highly integrated. Therefore, implementing the reverse conditional link is designed to ensure that the granular approach requested by the commenter results in comparable regulatory outcomes in terms of obligations to make and preserve records, and to submit reports and notifications to the Commission concerning the Covered Entity's compliance with the financial responsibility rules. It also is designed to provide clarity as to the obligations of a Covered Entity under this Order when using the granular approach to the Exchange Act recordkeeping, reporting, and notification requirements linked to the financial responsibility rules.

For example, because of the granular approach, a Covered Entity could elect to apply substituted compliance with respect to a substantive Exchange Act requirement such as the capital requirements of Exchange Act rule 18a-1 but elect not to apply substituted compliance with respect to a linked requirement under Exchange Act rule 18a-8 to provide the Commission notice of a capital deficiency under Exchange Act rule 18a-1. In this scenario, the Covered Entity would not be subject to the condition for applying substituted compliance with respect to Exchange Act rule 18a-8; namely, that the firm provide the Commission copies of notifications relating to UK capital requirements required under UK law. Consequently, as discussed below in this section and other sections of this release, the Commission is conditioning substituted compliance with respect to certain substantive Exchange Act requirements on the Covered Entity applying substituted compliance with respect to linked recordkeeping, reporting, or notification requirements.

Exchange Act Rule 18a-8(c)

Exchange Act rule 18a-8(c) generally requires every prudentially regulated security-based swap dealer that files a notice of adjustment of its reported capital category with the Federal Reserve Board, the Office of the Comptroller of the Currency, or the Federal Deposit Insurance Corporation to give notice of this fact that same day by transmitting a copy to the Commission of the notice of adjustment of reported capital category in accordance with Exchange Act rule 18a-8(h).

124

Exchange Act rule 18a-8(h) sets forth the manner in which every notice or report required to be given or transmitted pursuant to Exchange Act rule 18a-8 must be made.

125

While Exchange Act rule 18a-8(c) is not linked to a substantive Exchange Act requirement, it is linked to substantive capital requirements applicable to prudentially regulated SBS Entities in the U.S. (

i.e.,

capital requirements of the Federal Reserve Board, the Office of the Comptroller of the Currency, or the Federal Deposit Insurance Corporation). Therefore, to implement the granular approach requested by the commenter, the Commission is adding a general condition that Covered Entities with a prudential regulator relying on the final Order for substituted compliance must apply substituted compliance with respect to the requirements of Exchange Act rule 18a-8(c) and the requirements of Exchange Act rule 18a-8(h) as applied to Exchange Act rule (c).

126

124

See

17 CFR 240.18a-8(c).

125

See

17 CFR 240.18a-8(h).

126

Better Markets Letter at 2-3.

In its application, the FCA cited several UK provisions as providing similar outcomes to the notification requirements of Exchange Act rule 18a-8.

127

This general condition is necessary

in order to clarify that a prudentially regulated Covered Entity must provide the Commission with copies of any notifications regarding changes in the Covered Entity's capital situation required by UK law. In particular, a prudentially regulated Covered Entity could elect not to apply substituted compliance with respect to Exchange Act rule 18a-8(c). However, because the Covered Entity is not required to provide any notifications to the Federal Reserve Board, the Office of the Comptroller of the Currency, or the Federal Deposit Insurance Corporation, “compliance” with the provisions of Exchange Act rule 18a-8(c) raises a question as to the Covered Entity's obligations under this Order to provide the Commission with notification of changes in capital.

127

These UK provisions include: (1) FCA PRIN 2.1.1R (Principle 11) and PRA Fundamental Rule 7 requiring firms to deal with regulators in an open and cooperative way, and to disclose to regulators anything relating to the firm of which the regulator would reasonably expect notice; (2) Supervision Sourcebook of the FCA Handbook (“FCA SUP”) 15.3.1R and PRA Notification Rule 2.1, which require immediate notification if a firm becomes aware that certain events have occurred or may occur in the foreseeable future, including the failure of the firm to satisfy certain threshold conditions, any matter which could have a significant adverse impact on the firm's reputation or that could affect the firm's ability to continue to provide adequate services to its customers or result in serious detriment to its customers, or any matter which could result in serious financial consequences to the UK financial system or other firms; (3) FCA SUP 15.3.11R and PRA Notification Rule 2.4, which generally require, among other things, notification of a significant breach of a rule or certain specified provisions or regulations, or the bringing of a prosecution related to certain offenses; (4) FCA SUP 15.3.15R and PRA Notification Rule 2.6, which require a firm to provide immediate notification in the event that civil proceedings or other specified actions are brought against the firm, if disciplinary measures or sanctions are imposed on the firm, if the firm is prosecuted for, or convicted of, any offense involving fraud, or it is removed as a trustee of an occupational pension scheme by a court order; (5) FCA SUP 15.17R and PRA Notification Rule 2.8, which require a firm to provide notification in the event that, among other things, the firm becomes aware that an employee, or another person whether or not employed by the firm, may have committed a fraud against a customer, or the firm identifies irregularities in its accounting or other records; (6) FCA SUP 15.3.21R and PRA Notification Rule 2.9, which require a firm to provide immediate notification upon the calling of a meeting to consider a resolution, or the presentation of a petition, for winding up the firm, an application to dissolve the firm, or other similar matters; (7) FCA CASS 6.6.57R and 7.15.33R, which require, among other things, notification if a firm's internal records and accounts related to client assets and money are materially out of date, inaccurate, or invalid, the firm fails or is unable to respond to shortfalls as required, or the firm fails or is unable to conduct an internal asset reconciliation, external custody reconciliation, or internal and external client money reconciliations; and (8) FCA SYSC 18.6.1R and PRA Organisational Requirements 2A.1(2), 2A.2, and 2A.3 through 2A.6, which require firms

to have arrangements or procedures in place for employees to report potential or actual breaches or reportable concerns.

Moreover, a commenter stated that foreign financial services firms were among the entities that used emergency lending facilities in the U.S. along with other U.S. measures to address the 2008 financial crisis.

128

The Commission adopted Exchange Act rule 18a-8(c) to require SBS Entities with a prudential regulator to give notice to the Commission when filing an adjustment of reported capital category because such notices may indicate that the entity is in or is approaching financial difficulty.

129

The Commission has a regulatory interest in being notified of changes in the capital of a prudentially regulated Covered Entity, as it could signal the firm is in or approaching financial difficulty and presents a risk to U.S. security-based swap markets and participants. For the foregoing reasons, the Commission is conditioning applying substituted compliance pursuant to the Order on the general condition that a prudentially regulated Covered Entity apply substituted compliance with respect to Exchange Act rule 18a-8(c) and the requirements of Exchange Act rule 18a-8(h) as applied to Exchange Act rule 18a-8(c).

128

Better Markets Letter at 2.

129

See

Exchange Act Release No. 71958 (September 19, 2019), 84 FR 68550, 68589-90 (Dec. 16, 2019) (“Recordkeeping and Reporting Adopting Release”) (citing Exchange Act Release No. 71958 (Aug. 17, 2014) 79 FR 25193 (May 2, 2014) at 25249).

IV. Substituted Compliance for Risk Control Requirements

A. Proposed Approach

The FCA Application in part requested substituted compliance in connection with risk control requirements relating to:

• Internal risk management—Internal risk management system requirements that address the obligation of registered entities to follow policies and procedures reasonably designed to help manage the risks associated with their business activities.

• Trade acknowledgment and verification—Trade acknowledgment and verification requirements intended to help avoid legal and operational risks by requiring definitive written records of transactions and procedures to avoid disagreements regarding the meaning of transaction terms.

• Portfolio reconciliation and dispute reporting—Portfolio reconciliation and dispute reporting provisions that require that counterparties engage in portfolio reconciliation and resolve discrepancies in connection with uncleared security-based swaps, and to provide prompt notification to the Commission and applicable prudential regulators regarding certain valuation disputes.

• Portfolio compression—Portfolio compression provisions that require that SBS Entities have procedures addressing bilateral offset, bilateral compression, and multilateral compression in connection with uncleared security-based swaps.

• Trading relationship documentation—Trading relationship documentation provisions that require SBS Entities to have procedures to execute written security-based swap trading relationship documentation with their counterparties prior to, or contemporaneously with, executing certain security-based swaps.

130

See

UK Substituted Compliance Notice and Proposed Order, 86 FR at 18383.

Taken as a whole, these risk control requirements help to promote market stability by mandating that registered entities follow practices that are appropriate to manage the market, counterparty, operational, and legal risks associated with their security-based swap businesses.

In proposing to provide conditional substituted compliance in connection with this part of the FCA Application, the Commission preliminarily concluded that the relevant UK requirements in general would help to produce regulatory outcomes that are comparable to those associated with Exchange Act risk control requirements, by subjecting Covered Entities to risk mitigation and documentation practices that are appropriate to the risks associated with their security-based swap businesses.

131

Substituted compliance under the proposed Order was to be conditioned in part on Covered Entities being subject to and complying with the specified UK provisions that in the aggregate help to produce outcomes that are comparable to those associated with the risk control requirements under the Exchange Act.

132

131

See

UK Substituted Compliance Notice and Proposed Order, 86 FR at 18383.

132

See

UK Substituted Compliance Notice and Proposed Order, 86 FR at 18383 and n.61. Each of the comparable UK requirements listed in the proposed Order applies to a uniquely defined set of UK-authorized firms.

See

UK Substituted Compliance Notice and Proposed Order, 86 FR at 18384-85 and n.70. To assist UK firms in determining whether they are subject to these requirements, the Commission preliminarily determined that any Covered Entity that is an “IFPRU investment firm,” “UK bank” or “UK designated investment firm,” each as defined for purposes of UK law, would be subject to all of the required UK requirements related to internal risk management requirements and thus eligible to apply substituted compliance for internal risk management requirements. The Commission also preliminarily determined that a Covered Entity that is a “financial counterparty” would be subject to the required UK requirements related to trade acknowledgment and verification, portfolio reconciliation and dispute reporting, portfolio compression, and trading relationship documentation and thus eligible to apply substituted compliance in these areas.

See

UK Substituted Compliance Notice and Proposed Order, 86 FR at 18384-85.

Substituted compliance under the proposed Order further would be subject to certain additional conditions to help ensure the comparability of outcomes. First, substituted compliance for Exchange Act trading relationship documentation requirements would not extend to certain disclosures regarding legal and bankruptcy status.

133

Second, substituted compliance for portfolio reconciliation and dispute reporting requirements would be conditioned on the Covered Entity having to provide the Commission with reports regarding disputes between counterparties on the same basis as the Covered Entity provides those reports to the FCA pursuant to UK law.

134

133

See

UK Substituted Compliance Notice and Proposed Order, 86 FR at 18383. The trading relationship documentation provisions of rule 15Fi-5(b)(5), 17 CFR 240.15Fi-5(b)(5), require certain disclosures regarding the status of the SBS Entity or its counterparty as an insured depository institution or financial counterparty, and regarding the possible application of the insolvency regime set forth under Title II of the Dodd-Frank Act or the Federal Deposit Insurance Act. Documentation requirements under applicable UK law would not be expected to address the disclosure of information related to insolvency procedures under U.S. law.

134

See

UK Substituted Compliance Notice and Proposed Order, 86 FR at 18383. Under the Exchange Act requirement, SBS Entities must promptly report, to the Commission, valuation disputes in excess of $20 million that have been outstanding for three or five business days (depending on counterparty types). UK requirements provide that firms must report at least monthly, to the FCA, disputes between counterparties in excess of €15 million and outstanding for at least 15 business days.

B. Commenter Views and Final Provisions

After considering commenters' recommendations regarding the risk control requirements, the Commission is making positive substituted compliance determinations in connection with internal risk management, trade acknowledgment and verification, portfolio reconciliation and dispute reporting, portfolio compression, and trading relationship documentation requirements. As discussed below, the final Order has been changed from the proposed Order in certain respects in response to comments.

135

See

para. (b) of the Order.

One commenter expressed general support for the proposed approach toward substituted compliance for the risk control provisions.

136

Another commenter stated that UK requirements are not sufficiently comparable to Exchange Act requirements.

137

The Commission continues to conclude that, taken as a whole, applicable requirements under UK law subject Covered Entities to risk mitigation and documentation practices that are appropriate to the risks associated with their security-based swap businesses, and thus help to produce regulatory outcomes that are comparable to the outcomes associated with the relevant risk control requirements under the Exchange Act. Although the Commission recognizes that there are differences between the approaches taken by the relevant risk control requirements under the Exchange Act and relevant UK requirements, the Commission continues to believe that those differences on balance should not preclude substituted compliance for these requirements, as the relevant UK requirements taken as a whole help to produce comparable regulatory outcomes.

136

See

SIFMA 5/3/2021 Letter at 9. The commenter also requested that the Commission not require a Covered Entity to be subject to and comply with some of the UK risk control requirements listed in the proposed Order.

See

SIFMA 5/3/2021 Letter at 9 and Appendix A part (b). The Commission addresses those requests in the relevant sections of this part IV below.

137

See

Better Markets Letter at 2. The commenter also stated that, if the Commission nevertheless makes a positive substituted compliance determination, it must at a minimum ensure that the conditions in the proposed Order “are applied with full force and without exceptions or dilution.” The Commission addresses that comment in the relevant sections of this part IV below.

To help ensure the comparability of outcomes, substituted compliance for risk control requirements is subject to certain conditions. Substituted compliance for internal risk management, trade acknowledgment and verification, portfolio reconciliation and dispute reporting, portfolio compression, and trading relationship documentation requirements is conditioned on the Covered Entity being subject to, and complying with, relevant UK requirements.

138

In addition, consistent with the proposed Order, substituted compliance for portfolio reconciliation and dispute reporting requirements is conditioned on the Covered Entity providing the Commission with reports regarding disputes between counterparties on the same basis as the Covered Entity provides those reports to the FCA pursuant to UK law.

139

Finally, consistent with the proposed Order, substituted compliance for trading relationship documentation does not extend to disclosures regarding legal and bankruptcy status that are required by Exchange Act rule 15Fi-5(b)(5) when the counterparty is a U.S. person.

140

A Covered Entity that is unable to comply with an applicable condition—and thus is not eligible to use substituted compliance for the particular set of Exchange Act risk control requirements related to that condition—nevertheless may use substituted compliance for another set of Exchange Act requirements addressed in the Order if it complies with the conditions to the relevant parts of the Order.

138

See

paras. (b)(1) through (b)(5) of the Order.

139

See

paras. (b)(3)(ii) of the Order. This condition promotes comparability with the Exchange Act rule requiring reports to the Commission regarding significant valuation disputes, while leveraging UK reporting provisions to avoid the need for Covered Entities to create additional reporting frameworks. When it proposed the condition to report valuation disputes, the Commission recognized that valuation inaccuracies may lead to uncollateralized credit exposure and the potential for loss in the event of default.

See

Exchange Act Release No. 84861 (Dec. 19, 2018), 84 FR 4614, 4621 (Feb. 15, 2019). It thus is important that the Commission be informed regarding valuation disputes affecting SBS Entities. The principal difference between the Exchange Act and UK valuation dispute reporting requirements concerns the timing of notices. Exchange Act rule 15Fi-3 requires SBS Entities to report promptly to the Commission valuation disputes in excess of $20 million that have been outstanding for three or five business days (depending on the counterparty type). UK EMIR RTS article 15(2) requires financial counterparties to report to the FCA at least monthly any disputes between counterparties in excess of €15 million and outstanding for at least 15 business days. The Commission is mindful that the UK provision does not provide for notice as quickly as rule 15Fi-3, but in the Commission's view on balance this difference would not be inconsistent with the conclusion that the two sets of requirements, taken as a whole, promote comparable regulatory outcomes.

140

See

para. (b)(5) of the Order. The Exchange Act rule 15Fi-5 disclosures address information regarding (1) the status of the SBS Entity or its counterparty as an insured depository institution or financial counterparty and (2) the possibility that in certain circumstances the SBS Entity or its counterparty may be subject to the insolvency regime set forth in Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act or the Federal Deposit Insurance Act, which may affect rights to terminate, liquidate, or net security-based swaps.

See

Exchange Act Release No. 87782 (Dec. 18, 2019), 85 FR 6359, 6374 (Feb. 4, 2020) (“Risk Mitigation Adopting Release”). Documentation requirements under applicable UK law do not address the disclosure of information related to insolvency procedures under U.S. law. However, the absence of such disclosures would not appear to preclude a comparable regulatory outcome when the counterparty is not a U.S. person, as the insolvency-related consequences that are the subject of the disclosure would not apply to non-U.S. counterparties in most cases. Moreover, UK EMIR Margin RTS article 2 requires counterparties to establish, apply, and document risk management procedures providing for or specifying the terms of agreements entered into by the counterparties, including applicable governing law for non-centrally cleared derivatives. When counterparties enter into a netting or collateral exchange agreement, they also must perform an independent legal review of the enforceability of those agreements.

Under the Order, substituted compliance for risk control requirements (relating to internal risk management, trade acknowledgment and verification, portfolio reconciliation and dispute reporting, portfolio compression, and trading relationship documentation) is not subject to a condition that the Covered Entity apply substituted compliance for related recordkeeping requirements in Exchange Act rules 18a-5 and 18a-6. A Covered Entity that applies substituted compliance for one or more risk control requirements, but does not apply substituted compliance for the related recordkeeping requirements in Exchange Act rules 18a-5 and 18a-6, will remain subject to the relevant provisions of Exchange Act rules 18a-5 and 18a-6. Those rules require the Covered Entity to make and preserve records of its compliance with Exchange Act risk control requirements and of its security-based swap activities required or governed by those requirements. A Covered Entity that applies substituted compliance for a risk control requirement, but complies directly with related recordkeeping requirements in rules 18a-5 and 18a-6, therefore must make and preserve records of its compliance with the relevant conditions to the Order and of its security-based swap activities required or governed by those conditions and/or referenced in the relevant parts of rules 18a-5 and 18a-6.

The Commission details below its consideration of comments on the proposed Order.

1. Internal Risk Management

Exchange Act section 15F(j)(2) requires a registered SBS Entity to establish robust and professional risk

management systems adequate for managing its day-to-day business. In addition, Exchange Act rule 15Fh-3(h)(2)(iii)(I)

141

requires an SBS Entity to establish and maintain a system to supervise, and to diligently supervise, its business and the activities of its associated persons. This system of internal supervision must include, in relevant part, the establishment, maintenance, and enforcement of written policies and procedures reasonably designed, taking into consideration the nature of the SBS Entity's business, to comply with its duty under Exchange Act section 15F(j)(2) to establish an internal risk management system.

141

17 CFR 240.15Fh-3(h)(2)(iii)(I).

The Commission continues to believe that UK internal risk management requirements promote regulatory outcomes comparable to Exchange Act requirements, and is making a positive substituted compliance determination for internal risk management requirements that is consistent with the proposed Order except for the addition of certain risk management requirements. A commenter requested that the Commission not require a Covered Entity to be subject to and comply with certain of the UK requirements specified in the proposed Order.

142

By contrast, another commenter stated that, if the Commission makes a positive substituted compliance determination, it must at a minimum ensure that the conditions in the proposed Order “are applied with full force and without exceptions or dilution.”

143

The Commission details below its consideration of comments received.

142

See

SIFMA 5/3/2021 Letter at 20-21 and Appendix A part (d)(3).

143

See

Better Markets Letter at 2.

A commenter stated that the Commission should delete from the Order the provisions of FCA IFPRU, FCA BIPRU, and FCA SYSC 19A listed in paragraphs (b)(1)(i) and (b)(1)(iv) of the proposed Order. These provisions apply only to IFPRU investment firms, and the commenter stated that it expects only “banks and PRA-designated investment firms” will register as SBS Entities.

144

For the reasons described in part III.B.2.e above, the Commission is retaining the references to these provisions.

144

See

SIFMA 5/3/2021 Letter Appendix A part (b)(1).

Similarly, the commenter stated that the Commission should delete from the Order the provisions of FSMA and FCA COND listed in paragraph (b)(1)(v) of the proposed Order that apply to firms regulated only by the FCA, rather than to firms dually regulated by both the FCA and the PRA.

145

The commenter again stated that it expects only dually regulated “banks and PRA-designated investment firms” will register as SBS Entities.

146

The proposed Order would not require a Covered Entity that is a dually regulated firm to be subject to and comply with these provisions. Rather, paragraph (b)(1)(v) of the proposed Order would require the Covered Entity to be subject to and comply with either the provisions of FSMA and FCA COND that apply to solo-regulated firms or analogous provisions that apply to dually regulated firms. Accordingly, the Commission is retaining the references to these provisions.

145

See

SIFMA 5/3/2021 Letter Appendix A part (b)(1).

146

See

SIFMA 5/3/2021 Letter Appendix A part (b)(1) n.2.

The commenter also recommended that the Commission delete from the Order the following provisions because they do not correspond to and go beyond Exchange Act internal risk management requirements:

147

See

SIFMA 5/3/2021 Letter Appendix A part (b)(1).

• PRA Internal Capital Adequacy Assessment Rules 4.1 through 4.4, which implement CRD article 79, address a Covered Entity's management of credit and counterparty risk. PRA Internal Capital Adequacy Assessment Rule 5.1, which implements CRD article 80, addresses a Covered Entity's management of residual risk. PRA Internal Capital Adequacy Assessment Rule 6.1, which implements CRD article 81, addresses a Covered Entity's management of concentration risk. PRA Internal Capital Adequacy Assessment Rules 7.1 and 7.2, which implement CRD article 82, address a Covered Entity's management of securitization risk. PRA Internal Capital Adequacy Assessment Rules 8.1 through 8.5, which implement CRD article 83, address a Covered Entity's management of market risk. PRA Internal Capital Adequacy Assessment Rule 9.1, which implements CRD article 84, addresses a Covered Entity's management of interest rate risk. PRA Internal Capital Adequacy Assessment Rules 10.1 and 10.2, which implement CRD article 85, address a Covered Entity's management of operational risk. PRA Internal Liquidity Adequacy Assessment Rules 3.1 through 3.3, 4.1, 7.2, 8.1, 9.2, 11.1, 11.2, 11.4, 12.1, 12.3, and 12.4, which implement CRD article 86, address a Covered Entity's management of liquidity risk and funding risk. PRA Internal Capital Adequacy Assessment Rules 11.1 through 11.3, which implement CRD article 87, address a Covered Entity's management of risk from excessive leverage.

• FCA SYSC 4.1.1R, which implements a portion of CRD article 74(1), requires a Covered Entity to have robust governance arrangements, including effective processes to identify, manage, monitor, and report the risks it is or might be exposed to. FCA SYSC 4.1.2R and PRA General Organisational Requirement Rule 2.2, which implement CRD article 74(2), requires these arrangements and processes to be comprehensive and proportionate to the nature, scale, and complexity of the risks of the Covered Entity's business and activities. FCA SYSC 7.1.4R, 7.1.17R, 7.1.18R, 7.1.18BR, 7.1.19R, 7.1.20R, 7.1.21R, and 7.1.22R and PRA Risk Control Rules 2.3, 2.7, and 3.1 through 3.5, which implement CRD article 76, address the Covered Entity's internal governance structures for risk management.

• FCA SYSC 19D.2.1R and PRA Remuneration Rule 6.2 require a Covered Entity to establish and maintain a remuneration policy, practices, and procedures that are consistent with and that promote sound and effective risk management.

148

The FCA also recommended that the Commission delete from the Order the requirement for a Covered Entity to be subject to and comply with provisions of FCA SYSC 19D and PRA Remuneration Rule 6.2 (along with corollary provisions of FCA SYSC 19A applicable to IFPRU firms) as a condition to substituted compliance for internal risk management requirements.

See

FCA Comments (stating that “these provisions appear in excess of what is strictly required for substituted compliance with the US provision”).

• FSMA schedule 6 part 3C and FCA COND 2.4.1C, which address issues similar to MiFID articles 16(4) and (5), require the Covered Entity's non-financial resources to be appropriate in relation to its regulated activities, taking into account factors such as the nature and scale of the business, the risks to the continuity of the Covered Entity's services, the Covered Entity's membership in a group or any effect that membership may have, the skills and experience of those managing the Covered Entity's affairs, and whether the Covered Entity's non-financial resources are sufficient to enable it to comply with applicable requirements of the FCA. FSMA schedule 6 part 5D, which also addresses issues similar to MiFID articles 16(4) and (5), requires the Covered Entity's business to be conducted in a prudent manner, which requires the Covered Entity to have appropriate financial and non-financial resources, taking into account factors such as the nature and complexity of the

Covered Entity's regulated activities, the nature and scale of the business, and the risks to the continuity of the Covered Entity's services. To have appropriate non-financial resources, the Covered Entity in particular must have resources to identify, monitor, measure, and take action to remove or reduce risks to the accuracy of the Covered Entity's valuation of its assets and liabilities, be managed to a reasonable standard of effectiveness and have non-financial resources sufficient to enable it to comply with applicable requirements of the PRA. PRA Fundamental Rules 3 through 6 similarly require the Covered Entity to act in a prudent manner, maintain adequate financial resources at all times, have effective risk strategies and risk management systems and organize and control its affairs responsibly and effectively.

• UK CRR article 286 requires a Covered Entity to establish and maintain a counterparty credit risk management framework, including policies, processes, and systems to ensure the identification, measurement, approval, and internal reporting of counterparty credit risk and procedures for ensuring that those policies, processes, and systems are complied with. UK CRR article 287 addresses the internal governance of risk control and collateral management functions for Covered Entities that use internal models to calculate capital requirements. UK CRR article 288 requires the Covered Entity to conduct regular, independent reviews of its counterparty credit risk management systems and any risk control and collateral management functions required by UK CRR article 287. UK CRR article 293 addresses internal governance of the Covered Entity's internal risk management systems and validation of risk models that the Covered Entity uses.

• UK EMIR Margin RTS article 2 requires counterparties to non-centrally cleared OTC derivative contracts to establish, apply, and document risk management procedures for the exchange of collateral.

• UK MiFID Org Reg article 21

149

addresses a Covered Entity's systems, internal controls, and arrangements for management of a variety of risk areas, including internal decision-making, allocation, proper discharge of responsibilities, compliance with decisions and internal procedures, employment of personnel able to discharge their responsibilities, internal reporting and communication of information, adequate and orderly recordkeeping, safeguarding information, business continuity, and accounting policies and procedures, as well as regular evaluation of the adequacy and effectiveness of those systems, internal controls, and arrangements. UK MiFID Org Reg article 22 addresses a Covered Entity's policies and procedures for detecting and minimizing risk of failure to comply with its obligations under UK provisions that implement MiFID, as well as the Covered Entity's independent compliance function that monitors and assesses the adequacy and effectiveness of those policies and procedures. UK MiFID Org Reg article 24 addresses a Covered Entity's internal audit function that evaluates the adequacy and effectiveness of the Covered Entity's systems, internal controls, and arrangements.

149

The commenter stated that these requirements are more appropriately addressed in connection with substituted compliance for internal supervision and chief compliance officer requirements. As discussed below, the Commission believes that these UK requirements are relevant to substituted compliance for Exchange Act internal risk management requirements.

Taken as a whole, these UK requirements help to produce regulatory outcomes comparable to Exchange Act requirements to establish robust and professional internal risk management systems adequate for managing the Covered Entity's day-to-day business. The comparability analysis requires consideration of Exchange Act requirements as a whole against analogous UK requirements as a whole, recognizing that U.S. and non-U.S. regimes may follow materially different approaches in terms of specificity and technical content. This “as a whole” approach—which the Commission is following in lieu of requiring requirement-by-requirement similarity—further means that the conditions to substituted compliance should encompass all UK requirements that establish comparability with the applicable regulatory outcome, and helps to avoid ambiguity in the application of substituted compliance. It would be inconsistent with the holistic approach to excise relevant requirements and leave only the residual UK provisions that most closely resemble the analogous Exchange Act requirements.

150

Moreover, because Exchange Act internal risk management requirements serve the purpose of establishing internal systems to manage the Covered Entity's risks, including risks of non-compliance with applicable laws, it would be paradoxical to conclude that an SBS Entity that fails to implement requisite internal supervision practices nonetheless may be considered to be following internal risk management standards that are sufficient to meet the regulatory outcomes required under the Exchange Act; an internal supervision-related failure necessarily also constitutes a risk management failure. For these reasons, the Commission concludes that these UK provisions appropriately constitute part of the substituted compliance conditions for internal risk management requirements and is retaining the references to these provisions. In reaching this conclusion, the Commission emphasizes the importance of ensuring that substituted compliance is grounded on the comparability of regulatory outcomes. Retaining the conditions of the Order related to these UK provisions also should address another commenter's concern that any substituted compliance determination not weaken the internal risk management conditions in the proposed Order.

151

150

The Commission further believes that those conditions to substituted compliance do not expand the scope of Exchange Act requirements because substituted compliance is an option available to non-U.S. person SBS Entities—not a mandate.

151

See

Better Markets Letter at 2.

In addition, the Commission is adding a requirement for a Covered Entity using substituted compliance for internal risk management requirements to be subject to and comply with provisions that implement MiFID articles 16 and 23, provisions of UK MiFID Org Reg related to MiFID articles 16 and 23, and provisions that implement CRD articles 88(1), 91(1), (2), and (7) through (9), 92, 94, and 95.

152

These provisions address additional aspects of a Covered Entity's management of the risks posed by internal governance and organization, business operations, conflicts of interest with and between clients, and senior staff remuneration policies. In deciding to make a positive substituted compliance determination for UK internal risk management requirements, the Commission considers that the Order's condition requiring a Covered Entity to be subject to and comply with all of the UK internal risk management requirements listed in paragraph (b)(1) of the Order help to produce regulatory outcomes comparable to Exchange Act internal risk management requirements. In deciding to make a positive substituted compliance determination for UK internal risk management requirements, the Commission considers that the Order's condition requiring a Covered Entity to be subject to and comply with all of the UK requirements listed in paragraph (b)(1)

of the Order help to produce regulatory outcomes comparable to Exchange Act internal risk management requirements. The Commission recognizes that some of the UK requirements related to internal risk management follow a more granular approach than the high-level approach of Exchange Act internal risk management requirements, but these UK requirements, taken as a whole, are crafted to promote a Covered Entity's risk management. Within the requisite outcomes-oriented approach for analyzing comparability, the Commission concludes that a Covered Entity's failure to comply with any of those UK internal risk management requirements would be inconsistent with a Covered Entity's obligations under Exchange Act internal risk management requirements and that compliance with the full set of UK internal risk management requirements listed in paragraph (b)(1) of the Order would promote comparable regulatory outcomes.

152

See

para. (b)(1) of the Order.

2. Trade Acknowledgement and Verification

The Commission continues to believe that UK trade acknowledgment and verification requirements promote regulatory outcomes comparable to Exchange Act requirements, and is making a positive substituted compliance determination for trade acknowledgment and verification requirements consistent with the proposed Order. The Commission details below its consideration of comments received.

One commenter stated that the Commission inappropriately attempted to compensate for inadequate UK trade acknowledgment and verification requirements by relying on guidance.

153

The same commenter stated that, if the Commission nevertheless makes a positive substituted compliance determination, it must at a minimum ensure that the conditions in the proposed Order “are applied with full force and without exceptions or dilution.”

154

The commenter misinterpreted the role of guidance in the Commission's comparability analysis.

153

See

Better Markets Letter at 5-6 (arguing that the Commission's reliance “on multiple layers of non-binding guidance, one of which is issued by a jurisdiction the UK does not belong to, one of which is so vague as to border on useless, would be an abdication of the SEC's responsibility to protect the U.S. financial system”).

154

See

Better Markets Letter at 2.

UK EMIR article 11 requires “financial counterparties” and “non-financial counterparties” to ensure appropriate procedures and arrangements are in place to achieve timely confirmation of the terms of an OTC derivative contract.

155

Similarly, UK EMIR RTS article 12 requires non-centrally cleared OTC derivative contracts between “financial counterparties” and “non-financial counterparties” to be confirmed.

156

These counterparty categories do not include entities organized outside the UK, such as U.S. persons.

157

Confirmation means the documentation of the agreement of the counterparties to all the terms of the OTC derivative contract.

158

The UK requirements as a whole thus require a Covered Entity

159

to provide a confirmation that serves as a trade acknowledgment, without regard to where its counterparty is organized, and also require the Covered Entity's counterparty, when it is a financial counterparty or non-financial counterparty, to provide a confirmation that serves as the trade verification, and the Commission considers these requirements to promote regulatory outcomes comparable to Exchange Act trade acknowledgment and verification requirements for those counterparties. The UK requirements in most instances do not require a Covered Entity's counterparty that is organized outside the UK to provide a confirmation that serves as the Exchange Act trade verification,

160

though they do require the Covered Entity to confirm the transaction.

161

Confirmation is defined as documenting the agreement of the Covered Entity and its counterparty to all the terms of the OTC derivative contract.

162

155

See

UK EMIR article 11(1)(a).

156

See

UK EMIR RTS articles 12(1) and (2).

157

See

UK EMIR article 2(8) (definition of “financial counterparty”); UK EMIR article 2(9) (definition of “non-financial counterparty”).

158

See

UK EMIR RTS article 1(c).

159

The Order defines a Covered Entity to include a MiFID investment or a third country investment firm. A MiFID investment firm is included in the definition of “financial counterparty,” so a Covered Entity that is a MiFID investment firm is also a financial counterparty and thus is “subject to” UK EMIR article 11 and related provisions of UK EMIR RTS and UK EMIR Margin RTS for purposes of the Order. A third country investment firm is not included in the definitions of “financial counterparty” or “non-financial counterparty,” but may nevertheless be “subject to” UK EMIR article 11 and related provisions of UK EMIR RTS and UK EMIR Margin RTS for purposes of the Order if its OTC derivative contract would be subject to those obligations if it were established in the UK and either the contract has a direct, substantial, and foreseeable effect within the UK or applying UK EMIR article 11 is necessary or appropriate to prevent evasion of UK EMIR.

See

UK EMIR article 11(12).

160

See

UK EMIR article 2(8) (definition of “financial counterparty” limited to entities defined or authorized in a manner that in most instances is reserved for UK-established entities); UK EMIR article 2(9) (definition of “non-financial counterparty” limited to UK-established entities); UK EMIR article 11(1)(a), 11(12) (confirmation requirement applies to financial counterparties, non-financial counterparties, and third-country entities that would be subject to the confirmation requirement if established in the UK and either the relevant contract has a direct, substantial, and foreseeable effect in the UK or the obligation is necessary or appropriate to prevent the evasion of any provision of UK EMIR).

161

Paragraph (b)(2) of the Order requires the Covered Entity to be subject to and comply with UK EMIR-based trade acknowledgment and verification requirements. A Covered Entity will be subject to those requirements only if it is a financial counterparty, non-financial counterparty, or third-country entity that would be subject to the confirmation requirement if established in the UK and either the relevant contract has a direct, substantial, and foreseeable effect in the UK or the obligation is necessary or appropriate to prevent the evasion of any provision of UK EMIR.

See

UK EMIR article 11(1)(a), 11(12).

162

See

UK EMIR RTS article 1(c).

To confirm that the Commission's analysis of the UK requirements for OTC derivatives contracts with non-UK-organized counterparties is consistent with the FCA's view of these requirements, the Commission considered the requirements together with guidance on this exact point from the FCA and ESMA.

163

In interpreting EU confirmation requirements that are identical to the relevant UK requirements, ESMA's guidance provides that “when an EU counterparty is transacting with a third country entity, the EU counterparty would be required to ensure that the requirements for . . . timely confirmation . . . are met for the relevant . . . transactions even though the third country entity would not itself be subject to EMIR.”

164

That guidance also provides that compliance with the EMIR confirmation requirements means “reach[ing] a legally binding agreement to all the terms of an OTC derivative contract.”

165

The FCA has published guidance indicating that ESMA's guidance “will remain relevant [after the UK's exit from the EU] to the FCA and market participants in their compliance with regulatory requirements.”

166

This

guidance thus is consistent with the Commission's analysis of the legally binding UK requirements discussed above, and provides the Commission additional comfort that its analysis of complex UK requirements is consistent with the FCA's view of those requirements. For these reasons, the Commission disagrees with the commenter and believes that the UK trade acknowledgment and verification requirements promote regulatory outcomes comparable to Exchange Act requirements.

163

See

European Securities and Markets Authority, Questions and Answers: Implementation of the Regulation (EU) No 648/2012 on OTC Derivatives, Central Counterparties and Trade Repositories (EMIR), available at:

https://www.esma.europa.eu/sites/default/files/library/esma70-1861941480-52_qa_on_emir_implementation.pdf

(“ESMA EMIR Q&A”).

164

See

ESMA EMIR Q&A, OTC Answer 12(b).

165

See

ESMA EMIR Q&A, OTC Answer 5(a).

166

See

Financial Conduct Authority, “Brexit: our approach to EU non-legislative materials,” para. 9, available at:

https://www.fca.org.uk/publication/corporate/brexit-our-approach-to-eu-non-legislative-materials.pdf

(“FCA Brexit Guidance”);

see also

FCA Brexit Guidance at para. 12 (“We will continue to have regard to other EU non-legislative material where and if they are relevant, taking account of Brexit and ongoing domestic legislation. Firms, market participants and stakeholders should also continue to do so.”).

The Commission agrees with the comments in the Better Markets Letter that the proposed conditions to substituted compliance for trade acknowledgment and verification requirements should be retained. To further ensure that a Covered Entity using substituted compliance for trade acknowledgment and verification requirements will be required to document the agreement of the counterparties to all the terms of the relevant transaction, the Commission is issuing the Order as proposed with general conditions that will require the Covered Entity to treat its counterparty as a counterparty with whom UK trade acknowledgment and verification requirements require the Covered Entity to reach an agreement to all the terms of the OTC derivative contract and to ensure that the relevant security-based swap is either non-centrally cleared and subject to UK EMIR or centrally cleared by a UK central counterparty.

167

See

paras. (a)(13) and (a)(14) of the Order.

Another commenter expressed general support for the proposed approach toward substituted compliance for the risk control provisions, but requested that the Commission not require a Covered Entity to be subject to and comply with UK EMIR RTS article 12(4) because it does not relate to and goes beyond Exchange Act trade acknowledgment and verification requirements.

168

As part of the UK's framework for trade acknowledgment and verification, UK EMIR RTS article 12(4) requires a Covered Entity to have the necessary procedure to report on a monthly basis to the FCA the number of unconfirmed, non-centrally cleared OTC derivative transactions that have been outstanding for more than five business days. Though Exchange Act rule 15Fi-2 does not have a similar requirement to report unconfirmed trades, the Commission considers that UK EMIR RTS article 12(4)'s requirement to report unconfirmed trades to the FCA is an inseparable part of the UK's framework for trade acknowledgment and verification, as those reports support the UK framework's mandate to confirm transactions. Requiring a Covered Entity to be subject to and comply with UK EMIR RTS article 12(4) thus is consistent with a holistic approach for comparing regulatory outcomes that reflects the whole of a jurisdiction's relevant requirements. Accordingly, the Order retains as a condition to substituted compliance for trade acknowledgment and verification requirements the requirement that the Covered Entity be subject to and comply with the entirety of UK EMIR RTS article 12.

168

See

SIFMA 5/3/2021 Letter at 9 and Appendix A part (b)(2).

In summary, the Commission continues to believe that UK requirements promote the goal of avoiding legal and operational risks through requirements for written records of transactions and procedures to avoid disagreements regarding the meaning of transaction terms, in a manner that is comparable to the purpose of Exchange Act rule 15Fi-2. The Commission is retaining the proposed conditions to substituted compliance for trade acknowledgment and verification, consistent with the approach advocated by a commenter.

169

While the Commission recognizes the differences between UK requirements and Exchange Act trade acknowledgment and verification requirements, in the Commission's view those differences on balance would not preclude substituted compliance, particularly as requirement-by-requirement similarity is not needed for substituted compliance. The commenter's request for a “well-supported, evidence-based determination” has been met here in the context of the requisite holistic analysis,

170

and the commenter's suggestion that there is a need for analysis regarding protection of the American financial system has been addressed above.

171

169

See

Better Markets Letter at 2.

170

See

Better Markets Letter at 4 (requesting the Commission make a “well-supported, evidence-based determination”). As discussed in part II.C.1 above, the Commission believes that the present approach toward comparability analyses—which are based on a close reading of relevant foreign requirements and careful consideration of regulatory outcomes—appropriately reflects the holistic comparability approach and the rejection of requirement-by-requirement similarity.

171

See

Better Markets Letter at 3-4 (stating that the Commission must provide analysis that the substituted compliance determination would protect the American financial system). As discussed in part II.C.1 above, the Commission believes that additional conditions related to protection of the American financial system would not be useful.

3. Portfolio Reconciliation and Dispute Reporting

One commenter expressed general support for the proposed approach toward substituted compliance for the risk control provisions.

172

Another commenter stated that, if the Commission makes a positive substituted compliance determination, it must at a minimum ensure that the conditions in the proposed Order “are applied with full force and without exceptions or dilution.”

173

The Commission continues to believes that UK portfolio reconciliation and dispute reporting requirements promote regulatory outcomes comparable to Exchange Act requirements, by subjecting Covered Entities to risk mitigation practices that are appropriate to the risks associated with their security-based swap businesses, and is making a positive substituted compliance determination for portfolio reconciliation and dispute reporting requirements consistent with the proposed Order.

174

Substituted compliance in connection with the dispute reporting requirements is conditioned in part on the Covered Entities providing the Commission with reports regarding disputes between counterparties on the same basis as the entities provide those reports to competent authorities pursuant to UK law, to allow the Commission to obtain notice regarding key information in a manner that makes use of existing obligations under UK law.

175

172

See

SIFMA 5/3/2021 Letter at 9.

173

See

Better Markets Letter at 2.

174

See

para. (b)(3) of the Order.

175

See

para. (b)(3)(ii) of the Order. The Commission recognizes the differences between the two sets of requirements—under which Exchange Act rule 15Fi-3 requires SBS Entities to report valuation disputes in excess of $20 million that have been outstanding for three or five business days (depending on counterparty types), while UK EMIR RTS article 15(2) requires firms to report disputes between counterparties in excess of €15 million and outstanding for at least 15 business days. In the Commission's view, the two requirements produce comparable regulatory outcomes notwithstanding those differences.

4. Portfolio Compression

One commenter expressed general support for the proposed approach toward substituted compliance for the risk control provisions.

176

177

The

Commission continues to believe that UK portfolio compression requirements promote regulatory outcomes comparable to Exchange Act requirements, by subjecting Covered Entities to risk mitigation practices that are appropriate to the risks associated with their security-based swap businesses, and is making a positive substituted compliance determination for portfolio compression requirements consistent with the proposed Order.

178

176

See

SIFMA 5/3/2021 Letter at 9.

177

See

Better Markets Letter at 2.

178

See

para. (b)(4) of the Order.

5. Trading Relationship Documentation

The Commission continues to believe that UK trading relationship documentation requirements promote regulatory outcomes comparable to Exchange Act requirements, and is making a positive substituted compliance det

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