Reopening of Comment Period for Order Proposing 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 French Republic, 18341-18349 [2021-07254]

Download as PDF Federal Register / Vol. 86, No. 66 / Thursday, April 8, 2021 / Notices SECURITIES AND EXCHANGE COMMISSION [Release No. 34–91477; File No. S7–22–20] Reopening of Comment Period for Order Proposing 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 French Republic Securities and Exchange Commission. ACTION: Reopening of comment period. AGENCY: The Securities and Exchange Commission (‘‘Commission’’) is reopening the comment period for its proposed conditional substituted compliance order, published in the Federal Register on December 29, 2020, 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 French Republic (‘‘Proposed Order’’). The reopening of the comment period is intended to allow interested persons time to analyze and comment upon potential changes to the Proposed Order and additional questions related to the Proposed Order. DATES: The comment period is reopened until May 3, 2021. ADDRESSES: Comments may be submitted by any of the following methods: SUMMARY: Electronic Comments • Use the Commission’s internet comment form (https://www.sec.gov/ rules/submitcomments.htm); • Send an email to rule-comments@ sec.gov. Please include File Number S7– 22–20; or • Use the Federal Rulemaking portal (https://www.regulations.gov). Follow the instructions for submitting comments. khammond on DSKJM1Z7X2PROD with NOTICES Paper Comments • Send paper comments to Vanessa A. Countryman, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090. All submissions should refer to File Number S7–22–20. This file number should be included on the subject line if email is used. To help us process and review your comments more efficiently, please use only one method. We will post all comments on the Commission’s internet website (https://www.sec.gov/ rules/other.shtml). Typically, comments are also available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street NE, VerDate Sep<11>2014 16:53 Apr 07, 2021 Jkt 253001 Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Due to pandemic conditions, however, access to the Commission’s public reference room is not permitted at this time. All comments received will be posted without change; we do not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. FOR FURTHER INFORMATION CONTACT: Carol M. McGee, Assistant Director Office of Derivatives Policy, Division of Trading and Markets, at (202) 551–5870, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549. SUPPLEMENTARY INFORMATION: I. Background The French Autorite´ des Marche´s Financiers (‘‘AMF’’) and the Autorite´ de Controˆle Prudentiel et de Re´solution (‘‘ACPR’’), the French financial authorities, have submitted a ‘‘substituted compliance’’ application requesting that the 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 France conditionally may satisfy requirements under the Exchange Act by complying with comparable French and European Union (‘‘EU’’) requirements.1 In their application, the AMF and the ACPR (‘‘French Authorities’’) sought substituted compliance in connection with certain Exchange Act requirements related to risk control, capital and margin, internal supervision and compliance, counterparty protection, recordkeeping, reporting and notification. The application incorporated comparability analyses regarding applicable French and EU law, as well as information regarding French supervisory and enforcement frameworks. On December 22, 2020, the Commission published a notice of the French Authorities’ completed application, accompanied by a Proposed Order to conditionally grant substituted compliance in connection with the application.2 The Proposed Order incorporated a number of conditions to 1 See Letter from Robert Ophe ` le, Chairman, AMF, and Denis Beau, Chairman, ACPR, to Vanessa Countryman, Secretary, Commission, dated Nov. 6, 2020 (‘‘French Authorities’ Application’’). The application is available on the Commission’s website at: https://www.sec.gov/files/full-frenchapplication.pdf. 2 Exchange Act Release No. 90766 (Dec. 22, 2020), 85 FR 85720 (Dec. 29, 2020) (‘‘French Substituted Compliance Notice and Proposed Order’’). PO 00000 Frm 00098 Fmt 4703 Sfmt 4703 18341 tailor the scope of substituted compliance consistent with the prerequisite that relevant French and EU requirements produce regulatory outcomes that are comparable to relevant requirements under the Exchange Act. II. Reopening of Comment Period As a result of comments received 3 and upon further reflection, the Commission is reopening the comment period for the Proposed Order until May 3, 2021. Commenters may submit, and the Commission will consider, comments on any aspect of the Proposed Order. In addition to the questions raised in the Proposed Order, the Commission specifically seeks comments on the issues below and potential changes to the Proposed Order (defined terms can be found in the Proposed Order). Commenters should also consider the approaches taken in connection with the application and proposed order for substituted compliance for the United Kingdom 4 when answering these questions. A. EMIR-Related General Conditions Commenters raised concerns regarding the proposed conditions associated with substituted compliance for trade acknowledgement and verification requirements and trading relationship documentation requirements.5 They particularly requested that those parts of the final Order not incorporate proposed conditions requiring compliance with certain provisions under MiFID, arguing that those MiFID-related conditions in practice would prevent SBS Entities with branches in other EU countries from relying on substituted compliance for those requirements, and that compliance with proposed EMIR conditions would be sufficient to 3 See Letter from Kyle Brandon, Managing Director, Head of Derivative Policy, SIFMA (Jan. 25, 2021) (‘‘SIFMA Letter’’), letter from Wim Mijs, Chief Executive Officer, European Banking Federation (Jan. 25, 2021) (‘‘EBF Letter’’) (generally supporting the SIFMA letter), and Letter from Etienne Barel, Deputy Chief Executive Officer, French Banking Federation (Jan. 25, 2021) (‘‘FBF Letter’’). Comments may be found on the Commission’s website at: https://www.sec.gov/comments/s7-2220/s72220.htm. 4 See Notice of Substituted Compliance Application Submitted by the United Kingdom Financial Conduct Authority in Connection with Certain Requirements Applicable to Security-Based Swap Dealers and Major Security-Based Swap Participants Subject to Regulation in the United Kingdom; Proposed Order, Exchange Act Release No. 91476 (Apr. 5, 2021) (‘‘Proposed UK Order’’). 5 See SIFMA Letter at 3–6, FBF Letter at 2. E:\FR\FM\08APN1.SGM 08APN1 18342 Federal Register / Vol. 86, No. 66 / Thursday, April 8, 2021 / Notices produce the requisite regulatory outcomes.6 As discussed below, the Commission believes that based on the issues raised by those commenters, it may be appropriate for the portions of the final Order related to trade acknowledgment and verification and to trading relationship documentation not to include the MiFID-related conditions and instead to rely solely on EMIR conditions. Any such heightened reliance on EMIR, however, highlights the need for safeguards to ensure that there will be no opportunity for gaps that may prevent the EMIR provisions in practice from producing regulatory outcomes consistent with those of the Exchange Act rules. Accordingly, upon further consideration, the Commission believes that it may be useful for the final Order to incorporate two additional general conditions to promote certainty that EMIR will apply and help preclude gaps between the regulatory outcomes associated with Exchange Act requirements and those associated with the relevant EMIR provisions.7 Potential counterparty-related EMIR condition. First, it may be useful for the final Order to incorporate a new general condition to address the fact that the ‘‘financial counterparty’’ and ‘‘nonfinancial counterparty’’ definitions that trigger the application of the relevant EMIR provisions in part are predicated on the Covered Entity and its counterparty being either subject to certain authorizations consistent with its activities or a legal entity established in the EU.8 To help ensure that the relevant EMIR requirements would khammond on DSKJM1Z7X2PROD with NOTICES 6 Id. Under the proposal, substituted compliance for trade acknowledgment and for trading relationship documentation in part would require that relevant SBS Entities (‘‘Covered Entities’’ as defined in the proposed Order) comply with certain requirements under MiFID (‘‘Markets in Financial Instruments Directive,’’ Directive 2014/65/EU) and the French implementation of MiFID, and also comply with certain requirements under EMIR (‘‘European Market Infrastructure Regulation,’’ Regulation (EU) 648/2012). See paras. (a)(2) and (a)(5) to the proposed Order. 7 Addition of two new EMIR-related general conditions potentially would necessitate renumbering of certain of the extant proposed general conditions, and the addition of technical clarifying language to the captions for certain of the other proposed general conditions (e.g., recaptioning proposed general conditions (a)(1) through (a)(3) to the Proposed Order so they specifically refer to MiFID, and recaptioning of proposed general condition (a)(4) so it specifically refers to CRD/CRR). 8 See EMIR art. 2(8) (defining ‘‘financial counterparty’’ by reference to certain investment firms, insurers and other types of institutions authorized pursuant to various EU directives), 2(9) (defining ‘‘non-financial counterparty’’ as an ‘‘undertaking’’ established in the EU that is not a financial counterparty). VerDate Sep<11>2014 16:53 Apr 07, 2021 Jkt 253001 produce the requisite regulatory outcomes regardless of a counterparty’s status under those definitions, the Commission is considering adding a general condition to provide that, for each part of the final Order that requires compliance with EMIR-related requirements, if the Covered Entity’s relevant security-based swap counterparty does not fall within the relevant ‘‘financial counterparty’’ or ‘‘non-financial counterparty’’ definitions, the Covered Entity must comply with the applicable condition as if the counterparty were a ‘‘financial counterparty’’ or ‘‘non-financial counterparty’’ consistent with the counterparty’s business.9 Potential product-related conditions. It may also be useful for the final Order to account for the facts that the relevant trade acknowledgement and verification and trading relationship documentation rules under the Exchange Act do not apply to security-based swaps cleared by a clearing agency registered with the Commission (or exempt from registration), while the analogous EMIR provisions exclude instruments that are cleared by a central counterparty that has been authorized or recognized to clear derivatives contracts in the EU. As a result, instruments that have been cleared at an EU-authorized or EUrecognized central counterparty neither would be excluded from the application of those Exchange Act rules nor would be subject to the EMIR requirements that 9 In other words, the Covered Entity would be subject to the relevant requirements under EMIR even if the counterparty is not authorized pursuant to EU law as anticipated by the EMIR art. 2(8) ‘‘financial counterparty’’ definition, or if the counterparty is not an ‘‘undertaking’’ (such as by virtue of being a natural person), or is not established in the EU (by virtue of being a U.S. person or otherwise being established in some nonEU jurisdiction), as anticipated by the EMIR art. 2(9) ‘‘non-financial counterparty’’ definition. This approach appears to be consistent with European guidance. 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)’’ (https:// www.esma.europa.eu/sites/default/files/library/ esma70-1861941480-52_qa_on_emir_ implementation.pdf) answer 5(a) (stating that compliance with the EMIR confirmation requirement necessitates that the counterparties must reach a legally binding agreement to all terms of the OTC derivative contract, and that the EMIR RTS ‘‘implies’’ that both parties must comply and agree in advance to a specific process to do so); answer 12(b) (stating that where an EU counterparty transacts with a third country entity, the EU counterparty generally must ensure that the EMIR requirements for portfolio reconciliation, dispute resolution, timely confirmation and portfolio compression are met for the relevant portfolio and/ or transactions even though the third country entity would not itself be subject to EMIR; this is subject to special processes when the European Commission has declared the third country requirements to be comparable to EU requirements). PO 00000 Frm 00099 Fmt 4703 Sfmt 4703 otherwise would underpin substituted compliance—making direct compliance problematic but compliance with the conditions of a positive substituted compliance order unworkable. To bridge that gap and help ensure that substituted compliance is not precluded in connection with instruments that have been cleared in the EU, the Commission is considering adding a new general condition that, for each part of the final Order that requires compliance with EMIR-related conditions: (i) The relevant securitybased swap must either be an ‘‘OTC derivative’’ or ‘‘OTC derivative contract’’ for purposes of EMIR 10 that has not been cleared and otherwise is subject to the provisions of the relevant requirements under EMIR, or (ii) the relevant security-based swap has been cleared by a central counterparty that has been authorized or recognized to clear derivatives contracts in the EU.11 Commenters are invited to address whether additional general conditions of this nature are appropriate to help ensure that EMIR-related conditions to the final Order will apply in an appropriate scope, particularly in connection with trade acknowledgment and verification requirements and trading relationship documentation requirements. Would general conditions of the type discussed above be appropriate to help foreclose substituted compliance when there are gaps inconsistent with the comparability of regulatory outcomes? Would different approaches be more effective at achieving that goal? If so, please describe. B. Risk Control Requirements The proposal in part would condition substituted compliance for Exchange Act rule 15Fi–2 trade acknowledgment and verification requirements and rule 15Fi–5 trading relationship documentation requirements on firms complying with certain requirements under MiFID article 25 (including the French implementation of those MiFID requirements) and under EMIR. Commenters expressed the view that the EMIR-based requirements standing 10 See EMIR art. 2(7) (defining those terms by reference to ‘‘a derivative contract the execution of which’’ does not take place on a regulated market or certain third-party market as defined in the 2004 iteration of MiFID). 11 Prong (i) to this potential new condition would require uncleared instruments to fall within the ambit of the EMIR requirements at issue. The alternative prong (ii) would be satisfied when cleared instruments fall outside the ambit of those EMIR requirements by virtue of being cleared in the EU, akin to the Exchange Act rules’ exclusion for security-based swaps cleared by clearing agencies registered with the Commission. E:\FR\FM\08APN1.SGM 08APN1 Federal Register / Vol. 86, No. 66 / Thursday, April 8, 2021 / Notices khammond on DSKJM1Z7X2PROD with NOTICES alone would be sufficient to produce regulatory outcomes that are comparable to those associated with the Exchange Act rules, and that the conditions should not incorporate references to MiFID provisions.12 The commenter concern regarding the application of MiFID arises from application of a proposed cross-border condition providing that if responsibility for ensuring compliance with any provision of MiFID (or EU or French implementing requirement) that is listed as a condition for substituted compliance is allocated to an authority in a member state of the EU in whose territory a Covered Entity provides a service, the AMF or ACPR must be the authority responsible for supervision and enforcement of that provision.13 In the commenter’s view, this EU crossborder condition means that conditioning substituted compliance on Covered Entities also having to comply with MiFID confirmation and documentation requirements in practice would undermine the availability of substituted compliance for Covered Entities that have branches in EU Member States for which the Commission has not entered into an applicable substituted compliance memorandum of understanding.14 12 See SIFMA Letter at 2–6, FBF Letter at 2. Under the Proposed Order, substituted compliance in connection with trade acknowledgment and verification requirements in part would be conditioned on an entity’s compliance with EMIR article 11(1)(a) and EMIR RTS article 12, which jointly set forth a bilateral confirmation requirement. Substituted compliance in connection with trading relationship requirements in part would be conditioned on compliance with EMIR Margin RTS article 2, which addresses risk management procedures related to the exchange of collateral, including procedures related to the terms of all necessary agreements to be entered into by counterparties (e.g., payment obligations, netting conditions, events of default, calculation methods, transfers of rights and obligations upon termination, and governing law). 13 See paragraph (a)(8) to the proposed Order (‘‘EU cross-border condition’’). In practice (pursuant to MiFID article 35), this allocation of oversight applies to requirements pursuant to MiFID article 25 (‘‘assessment of suitability and appropriateness and reporting to clients’’) as well as certain other MiFID provisions not relevant here. 14 See SIFMA Letter at 2–6. In the commenter’s view, application of those MiFID article 25 conditions in connection with trade acknowledgment and verification requirements and trading relationship documentation requirements would ‘‘in practice lead to an untenable patchwork of substituted compliance.’’ See SIFMA letter at 3. The commenter further explained that SBS Entities ‘‘operating branches throughout the EU’’ would not be able to avail themselves of substituted compliance in connection with these requirements ‘‘unless authorities or regulated SBS Entities in every or nearly every one of the 27 EU Member States submit their own substituted compliance applications covering local branches of SBS Entities, and the Commission reviews and responds to those applications and enters into memoranda of understanding [ ] in each of these Member States.’’ VerDate Sep<11>2014 16:53 Apr 07, 2021 Jkt 253001 In light of those commenters’ concerns that substituted compliance for trade acknowledgment and verification and for trading relationship documentation as proposed would be curtailed as a result of the interplay between the MiFID provisions and the EU cross-border condition, the Commission is considering whether the EMIR requirements standing alone produce comparable results such that the Commission appropriately may remove those MiFID provisions as prerequisites to substituted compliance in connection with the trade acknowledgment and verification and trading relationship documentation requirements under the Exchange Act.15 Under such an approach, substituted compliance in connection with Exchange Act rule 15Fi–2 trade acknowledgment and verification requirements would be conditioned solely on compliance with the confirmation provisions of EMIR article 11(1)(a) and EMIR RTS article 12. Moreover, under such an approach, substituted compliance in connection with Exchange Act rule 15Fi–5 trading relationship documentation requirements in part would be conditioned on compliance with the collateral-related risk management procedure provisions of EMIR Margin RTS article 2 (as proposed). In addition, to further promote comparability with the rule 15Fi–5(b)(2) provisions requiring that trading relationship documentation incorporate trade acknowledgements and verification, substituted compliance under such an approach also may be conditioned on compliance with the confirmation provisions of EMIR article 11(1)(a) and EMIR RTS article 12. The same problem does not arise in connection with requirements under EMIR, which would not allocate oversight of a French entity’s compliance to authorities in other EU Member States. 15 For trade acknowledgment and verification, proposed paragraph (b)(2) in part particularly would require compliance with MiFID article 25(6) (requiring that investment firms provide certain reports to clients), and MiFID Org Reg articles 59– 61 (addressing contents of reports with specificity). EMIR article 11(1)(a) and EMIR RTS article 12, in contrast, specify more general conformation requirements applicable to both counterparties to a transaction. For trading relationship documentation requirements, proposed paragraph (b)(5) in part particularly would require compliance with MiFID Org Reg article 25(5) (requiring investment firms to establish a record regarding the rights and obligations of parties and other terms of service), and MiFID Org Reg articles 24, 58, 73 and applicable parts of Annex I (addressing internal audit, client agreements and recordkeeping). EMIR Martin RTS article 2, in contrast, encompasses collateral-related risk management procedures that in part require counterparties to specify the terms of all necessary agreements to be entered into by counterparties. PO 00000 Frm 00100 Fmt 4703 Sfmt 4703 18343 Commenters are invited to address whether MiFID requirements should be removed from the conditions for substituted compliance in connection with trade acknowledgment and verification requirements and trading relationship documentation requirements. Would the proposed EMIR conditions (and the potential additional EMIR condition related to trading relationship documentation) be sufficient to produce regulatory outcomes that are comparable to those associated with the Exchange Act rules, particularly if the new general conditions addressed in part II.A above also are incorporated as part of the final Order? If so, please explain. If not, please explain. C. Capital The Proposed Order did not contain any proposed conditions for substituted compliance with respect to the capital requirements of Exchange Act section 15F(e) and Exchange Act rule 18a–1 and its appendices (collectively ‘‘Exchange Act rule 18a–1’’).16 In the Proposed Order, the Commission, however, requested comment on whether there are any conditions that should be applied to substituted compliance for these capital requirements to promote comparable regulatory outcomes.17 The Commission also requested comment on whether it should consider conditions related to: (1) Maintaining a minimum amount of liquid assets; (2) imposing a specific liquidity requirement; and (3) maintaining minimum equity capital at least equal to the minimum fixed-dollar capital requirements under Exchange Act rule 18a–1.18 In addition, the Commission requested comment on the types of firms in France that would be relying on substituted compliance for capital, and whether the balance sheets of these entities were primarily composed of liquid or illiquid assets.19 Commenters supported the proposed approach of making a positive substituted compliance determination with respect to Exchange Act rule 18a– 1. Commenters, however, stated that imposing any conditions on applying substituted compliance to Exchange Act rule 18a–1 was neither necessary nor appropriate.20 For example, one commenter expressed concern that requiring a Covered Entity to maintain a minimum amount of liquid assets 16 See 17 See Proposed Order, 85 FR at 85726. Proposed Order, 85 FR at 85737. 18 Id. 19 Id. 20 See SIFMA Letter at 11; EBF Letter at 4; FBF Letter at 4. E:\FR\FM\08APN1.SGM 08APN1 khammond on DSKJM1Z7X2PROD with NOTICES 18344 Federal Register / Vol. 86, No. 66 / Thursday, April 8, 2021 / Notices would impose unnecessary burdens.21 This commenter believed that imposing additional liquidity conditions would be duplicative of, and (depending on their design) inconsistent with applicable EU and French capital requirements, since these Covered Entities are already subject to the liquidity coverage ratio (‘‘LCR’’), the net stable funding ratio (‘‘NSFR’’), and an internal liquidity adequacy assessment process (‘‘liquidity assessment process’’).22 This commenter also noted that Covered Entities are subject to bank-style resolution regimes, which the commenter believed makes their liquidity risks less significant than other SBS Entities.23 This commenter also noted that certain Covered Entities will have access to short-term liquidity through relevant EU Member State central banks.24 This commenter also expressed concern, that absent an additional comment period, any definitions contained in a final substituted compliance determination would be adopted without the benefit of public comment.25 Finally, this commenter also stated that imposing a liquidity condition would be similar to the Commission imposing a net liquid assets test on Covered Entities, in contrast to EU policy makers applying a risk-based approach to capital. The commenter believed this would potentially change the ways these entities conduct business in a manner that may be inconsistent with their home country regulation.26 The Commission continues to consider whether it would be appropriate to impose additional conditions with respect to applying substituted compliance to Exchange Act rule 18a–1. In this regard, the Commission is seeking further comment about the concerns raised by the commenters and potential capital conditions. The reasons why the Commission continues to consider additional capital conditions are discussed below. As a commenter noted, the capital standard of Exchange Act rule 18a–1 is the net liquid assets test. This is the same capital standard that applies to broker-dealers under Exchange Act rule 15c3–1. The net liquid assets test is designed to promote liquidity. In particular, Exchange Act rule 18a–1 allows an SBS Entity to engage in activities that are part of conducting a 21 See SIFMA Letter at 11. SIFMA Letter at 12. 23 See SIFMA Letter at 12. 24 See SIFMA Letter at 12. 25 Id. 26 See SIFMA Letter at 12–13. 22 See VerDate Sep<11>2014 16:53 Apr 07, 2021 Jkt 253001 securities business (e.g., taking securities into inventory) but in a manner that places the firm in the position of holding at all times more than one dollar of highly liquid assets for each dollar of unsubordinated liabilities (e.g., money owed to customers, counterparties, and creditors).27 For example, Exchange Act rule 18a–1 allows securities positions to count as allowable net capital, subject to standardized or internal model-based haircuts. The rule, however, does not permit most unsecured receivables to count as allowable net capital. This aspect of the rule severely limits the ability of SBS Entities to engage in activities, such as uncollateralized lending, that generate unsecured receivables. The rule also does not permit fixed assets or other illiquid assets to count as allowable net capital, which creates disincentives for SBS Entities to own real estate and other fixed assets that cannot be readily converted into cash. For these reasons, Exchange Act rule 18a–1 incentivizes SBS Entities to confine their business activities and devote capital to securitybased swap activities. The net liquid assets test is imposed through the mechanics of how an SBS Entity is required to compute net capital pursuant to Exchange Act rule 18a–1. The first step is to compute the SBS Entity’s net worth under generally accepted accounting principles. Next, 27 See, e.g., Exchange Act Release No. 8024 (Jan. 18, 1967), 32 FR 856 (Jan. 25, 1967) (‘‘Rule 15c3– 1 (17 CFR 240.15c3–1) was adopted to provide safeguards for public investors by setting standards of financial responsibility to be met by brokers and dealers. The basic concept of the rule is liquidity; its object being to require a broker-dealer to have at all times sufficient liquid assets to cover his current indebtedness.’’) (footnotes omitted); Exchange Act Release No. 10209 (June 8, 1973), 38 FR 16774 (June 26, 1973) (Commission release of a letter from the Division of Market Regulation) (‘‘The purpose of the net capital rule is to require a broker or dealer to have at all times sufficient liquid assets to cover its current indebtedness. The need for liquidity has long been recognized as vital to the public interest and for the protection of investors and is predicated on the belief that accounts are not opened and maintained with broker-dealers in anticipation of relying upon suit, judgment and execution to collect claims but rather on a reasonable demand one can liquidate his cash or securities positions.’’); Exchange Act Release No. 15426 (Dec. 21, 1978), 44 FR 1754 (Jan. 8, 1979) (‘‘The rule requires brokers or dealers to have sufficient cash or liquid assets to protect the cash or securities positions carried in their customers’ accounts. The thrust of the rule is to insure that a broker or dealer has sufficient liquid assets to cover current indebtedness.’’); Exchange Act Release No. 26402 (Dec. 28, 1989), 54 FR 315 (Jan. 5, 1989) (‘‘The rule’s design is that broker-dealers maintain liquid assets in sufficient amounts to enable them to satisfy promptly their liabilities. The rule accomplishes this by requiring broker-dealers to maintain liquid assets in excess of their liabilities to protect against potential market and credit risks.’’) (footnote omitted). PO 00000 Frm 00101 Fmt 4703 Sfmt 4703 the SBS Entity must make certain adjustments to its net worth to calculate net capital, such as deducting illiquid assets and taking other capital charges and adding qualifying subordinated loans.28 The amount remaining after these deductions is defined as ‘‘tentative net capital.’’ Exchange Act rule 18a–1 prescribes a minimum tentative net capital requirement of $100 million for SBS Entities approved to use models to calculate net capital. The final step in computing net capital is to take prescribed percentage deductions (standardized haircuts) or model-based deductions from the mark-to-market value of the SBS Entity’s proprietary positions (e.g., securities, money market instruments, and commodities) that are included in its tentative net capital. The amount remaining is the firm’s net capital, which must exceed the greater of $20 million or a ratio amount. An SBS Entity that is meeting its minimum net capital requirement will be in the position where each dollar of unsubordinated liabilities is matched by more than a dollar of highly liquid assets. In comparison, Covered Entities in France are subject to capital requirements applicable to prudentially regulated entities based on the international capital standard for banks (the ‘‘Basel capital standard’’).29 The Basel capital standard counts as capital assets that Exchange Act rule 18a–1 would exclude (e.g., loans and most other types of uncollateralized receivables, furniture and fixtures, real estate). The Basel capital standard accommodates the business of banking: Making loans (including extending unsecured credit) and taking deposits. While the Covered Entities that will apply substituted compliance with respect to Exchange Act rule 18a–1 will not be banks, the Basel capital standard allows them to count illiquid assets such as real estate and fixtures as capital. It also allows them to treat unsecured receivables related to activities beyond dealing in securitybased swaps as capital notwithstanding the illiquidity of these assets. Further, one critical example of the difference between the requirements of Exchange Act rule 18a–1 and the Basel capital standard relates to the treatment of initial margin with respect to security-based swaps and swaps. Under French margin requirements, Covered Entities will be required to post initial margin to counterparties unless an 28 See 17 CFR 240.15c3–1(c)(2). BCBS, The Basel Framework, available at: https://www.bis.org/basel_framework/. 29 See E:\FR\FM\08APN1.SGM 08APN1 khammond on DSKJM1Z7X2PROD with NOTICES Federal Register / Vol. 86, No. 66 / Thursday, April 8, 2021 / Notices exception applies.30 Under Exchange Act rule 18a–1, an SBS Entity cannot count as capital the amount of initial margin posted to a counterparty unless it enters into a special loan agreement with an affiliate.31 The special loan agreement requires the affiliate to fund the initial margin amount and the agreement must be structured so that the affiliate—rather than the SBS Entity— bears the risk that the counterparty may default on the obligation to return the initial margin. The reason for this restrictive approach to initial margin posted away is that it ‘‘would not be available [to the SBS Entity] for other purposes, and, therefore, the firm’s liquidity would be reduced.’’ 32 Under the Basel capital standard, a Covered Entity can count initial margin posted away as capital without the need to enter into a special loan arrangement with an affiliate. Consequently, because of the ability to include illiquid assets and margin posted away as capital, Covered Entities subject to the Basel capital standard may have less balance sheet liquidity than SBS Entities subject to Exchange Act rule 18a–1. To address this potential liquidity difference, the Commission is seeking comment on whether substituted compliance with respect to Exchange Act rule 18a–1 should be subject to the conditions that a Covered Entity: (1) Maintains an amount of assets that are allowable under Exchange Act rule 18a– 1, after applying applicable haircuts under the Basel capital standard, that equals or exceeds the Covered Entity’s current liabilities coming due in the next 365 days; (2) makes a quarterly record listing: (a) The assets maintained pursuant to the first condition, their value, and the amount of their applicable haircuts; and (b) the aggregate amount of the liabilities coming due in the next 365 days; (3) maintains at least $100 million of equity capital composed of highly liquid assets, as defined in the Basel capital standard; and (4) includes its most recent statement of financial condition (i.e., balance sheet) filed with its local supervisor whether audited or unaudited with its written notice to the Commission of its intent to rely on substituted compliance. This potential approach to substituted compliance is illustrated in the Proposed UK Order.33 The purpose of the potential conditions would be to address the 30 Exchange Act rule 18a–3 does not require SBS Entities to post initial margin (though it does not prohibit the practice). 31 See 84 FR at 43887–88. 32 See id. at 43887. 33 See para. (c)(1)(ii) of the Proposed UK Order. VerDate Sep<11>2014 16:53 Apr 07, 2021 Jkt 253001 concern that, while the Basel capital standard may contain requirements designed to address liquidity such as the LCR and NSFR, the Basel capital standard does not impose a net liquid assets test that requires a Covered Entity to maintain more than one dollar of highly liquid assets for each dollar of unsubordinated liabilities. The Commission requests comment on how the liquidity provisions in the Basel capital standard (the LCR, NSFR, and liquidity assessment process) impact the liquidity of Covered Entities that would apply substituted compliance with respect to Exchange Act rule 18a–1 (i.e., nonbanks). Do these requirements in practice result in Covered Entities maintaining more than one dollar of highly liquid assets for each dollar of unsubordinated liabilities? If so, explain why. If not, explain why not. A commenter stated that certain nonbank entities in the European Union have access to short-term liquidity through relevant Central Banks.34 The Commission requests comment on whether Covered Entities that are not banks have access to short-term liquidity through Central Bank facilities in France or Europe that are available to banks. Please identify and describe each facility that is available to nonbank Covered Entities, including any limitations on their ability to access the facility. The Commission also requests comment on how the potential additional capital conditions compare to any existing capital requirements under the Basel capital standards. For example, are there differences in the frequency or nature of calculations under the Basel capital standards? The Commission continues to request comment on and seek information about the assets, liabilities, and capital of the Covered Entities that would apply substituted compliance with respect to Exchange Act rule 18a–1. What are the primary business lines engaged in by these entities and what types of assets and liabilities do they typically carry on their balance sheets? Are the balance sheets of these entities primarily composed of liquid or illiquid assets? The Commission would use this information to analyze the liquidity of these entities in the context of considering the potential additional capital conditions. For example, do the Covered Entities that would apply substituted compliance with respect to Exchange rule 18a–1 engage primarily in a securities business? If so, are their balance sheets similar to those of U.S. broker-dealers that deal in securities in 34 See PO 00000 terms of holding highly liquid assets? If their balance sheets are similar to U.S. broker-dealers, are the additional capital conditions discussed above necessary? Alternatively, would the additional capital conditions serve to ensure that these firms do not engage in nonsecurities business activities that could impair their liquidity? Should the Commission consider the relevance of a Covered Entity’s business model in determining whether to impose any potential capital conditions? For example, should the Commission take into account the fact that a Covered Entity does not engage in unsecured lending and other activities more typical of banks? The first potential additional capital condition would require a Covered Entity to maintain an amount of assets that are allowable under Exchange Act rule 18a–1, after applying applicable haircuts under the Basel capital standard 35 that equals or exceeds the Covered Entity’s current liabilities coming due in the next 365 days. The objective of this condition is to require a Covered Entity to maintain sufficient liquidity to meet near-term liabilities through a simple computation, as compared to the net capital computation required by Exchange Act rule 18a–1. Generally, current liabilities are understood to mean those liabilities coming due within one year as distinct from long-term liabilities that mature in more than a year. The potential 365-day period is designed to align with that distinction between short-term and long-term liabilities to facilitate compliance with the condition. Because the condition does not address longterm liabilities, it would not necessarily leave the Covered Entity in position where each dollar of unsubordinated liabilities is matched by more than a dollar of highly liquid assets (as is the case with the net liquid assets test of Exchange Act rule 18a–1). However, it would provide a pool of highly liquid assets that can be used by the Covered Entity to avoid a near-term liquidity strain that could imperil its ability to remain a going concern.36 The 35 See standard supervisory haircuts under the Basel capital standards. BCBS, The Basel Framework, available at: https://www.bis.org/basel_ framework/. 36 See Exchange Act Release No. 86175 (Jun. 21, 2019), 84 FR 43872, 43881 (Aug. 22, 2019) (‘‘The Commission believes that the broker-dealer capital standard is the most appropriate alternative for nonbank SBSDs, given the nature of their business activities and the Commission’s experience administering the standard with respect to brokerdealers. The objective of the broker-dealer capital standard is to protect customers and counterparties and to mitigate the consequences of a firm’s failure SIFMA Letter at 12. Frm 00102 Fmt 4703 Sfmt 4703 18345 Continued E:\FR\FM\08APN1.SGM 08APN1 khammond on DSKJM1Z7X2PROD with NOTICES 18346 Federal Register / Vol. 86, No. 66 / Thursday, April 8, 2021 / Notices condition’s use of the Basel capital standard haircuts (as opposed to Exchange Act rule 18a–1 haircuts) is designed to tailor the condition to the Basel capital standard consistent with substituted compliance. The second potential additional capital condition would require that a Covered Entity make a quarterly record listing: (1) The assets maintained pursuant to the first potential additional capital condition, their value, and the amount of their applicable haircuts; and (2) the aggregate amount of the liabilities coming due in the next 365 days. The requirement to create this record would enable the Commission or Commission staff to monitor compliance with the potential condition and facilitate examination of the Covered Entity with regard to substituted compliance. The quarterly interval between making this record (as opposed to a daily, weekly, or monthly interval) is designed to facilitate exams while minimizing the burden of the condition. Should the Commission require a shorter interval such as daily, weekly, or monthly or a longer one such as semiannually or annually? Please explain. In considering these two potential conditions, the Commission recognizes that the LCR requires Covered Entities to maintain an amount of high quality liquid assets equal to or greater than their projected total net cash outflows over a prospective 30 calendar-day period. As discussed above, the first potential additional condition requires sufficient liquidity to address liabilities coming due over the next 365 days. The longer period in the condition is designed to cover a greater amount of liabilities in order to further enhance the Covered Entity’s liquidity to achieve an outcome more in line with the liquidity that results from the net liquid assets test of Exchange Act rule 18a–1. The Commission requests comment on how these conditions would compare to the LCR. The Commission requests comment and supporting data on the potential first two capital conditions. Is the term ‘‘current liabilities’’ understood by market participants? If not, please explain why and suggest alternative language. Is 365 days an appropriate number of days to use in connection with covering ‘‘current liabilities’’? If not, please explain why and suggest an alternative number of days. For example, would a period of 60, 90, 120, 150, 180, 210, 240, 270, 300, 330, 420, 510 days or some other period of days by promoting the ability of these entities to absorb financial shocks and, if necessary, to self-liquidate in an orderly manner.’’). VerDate Sep<11>2014 16:53 Apr 07, 2021 Jkt 253001 be more appropriate in terms of enhancing the liquidity of Covered Entities applying substituted compliance to Exchange Act rule 18a– 1? If so, explain why. If the Commission determines to use a number of days that is less than 365, should the Commission use a term other than ‘‘current liabilities’’ such as ‘‘short-term liabilities’’? If so, explain why. The Commission requests comment on whether the haircuts under the Basel capital standard are the appropriate haircuts to apply under the proposed capital condition. If so, please explain why. Are they comparable to the haircuts under Exchange Act rule 18a– 1? Would it impose a significant burden on Covered Entities to apply the haircuts under Exchange Act rule 18a– 1 rather than under the Basel capital standard? If so, please explain why. Please identify any regulatory or operational issues in connection with these proposed capital conditions, including with maintaining a quarterly record. The third potential additional capital condition is that the Covered Entity maintain at least $100 million of equity capital composed of highly liquid assets as defined in the Basel capital standard. This potential condition is based on the $100 million tentative net capital requirement of Exchange Act rule 18a– 1 for SBS Entities authorized to use models. The condition would be designed to ensure that Covered Entities applying substituted compliance with respect to Exchange Act rule 18a–1 have a minimum level of capital to absorb financial losses. Further, the LCR defines ‘‘highly liquid assets’’ and the use of that definition is designed to tailor the condition to the Basel capital standard consistent with the substituted compliance. The Commission requests comment and supporting data on the third potential additional capital condition. How would this potential minimum capital amount compare with the amounts of equity capital currently maintained by Covered Entities that would apply substituted compliance to Exchange Act rule 18a–1? Should the condition require a different amount of equity capital? For example, should the amount be $50, $75, $125, or $150 million or some other amount? If so, explain why. Are the terms ‘‘highly liquid assets’’ and ‘‘equity capital’’ understood by market participants? If not, please explain why and suggest alternative terms. The fourth potential additional capital condition is that the Covered Entity include its most recently filed statement of financial condition whether audited PO 00000 Frm 00103 Fmt 4703 Sfmt 4703 or unaudited with its initial notice to the Commission of its intent to rely on substituted compliance. This one-time obligation would provide the Commission with information about the assets, liabilities, and capital of Covered Entities applying substituted compliance with respect to Exchange Act rule 18a–1. The Commission would use the statement of financial condition and the periodic audited and unaudited reports Covered Entities will file with the Commission to monitor the appropriateness of the capital condition if it is included in the final Order. The Commission expects that most Covered Entities will file their initial notice of intent to apply substituted compliance with respect to Exchange Act rule 18a– 1 at or around the time they file their registration applications with the Commission. Therefore, receipt of the statement of financial condition at that time would allow the Commission to begin this monitoring process before Covered Entities begin filing audited and unaudited reports with the Commission pursuant to Exchange Act rule 18a–7. The Commission requests comment on the fourth potential additional capital condition. Are there other means for the Commission to efficiently obtain this information? If so, explain how. Is the information presented in these reports prepared in accordance with the GAAP that the firm uses to prepare publicly available or available to be issued general purpose financial statements in its home jurisdiction? The Commission requests comment on the potential benefits and costs of the potential capital conditions? Would the conditions promote comparable regulatory outcomes between the capital requirements applied to Covered Entities in France and capital requirements under Exchange Act rule 18a–1? If so, explain why. If not, explain why not. The Commission is mindful that compliance with these capital conditions would require Covered Entities applying substituted compliance to Exchange Act rule 18a– 1 to supplement their existing capital calculations and practices, as well as to incur additional time and cost burdens to implement the potential conditions and integrate them into existing business operations.37 The Commission 37 Additional time and costs burdens may include employee costs and time to program software and computer systems to add an additional capital calculation into an existing system and firm processes and procedures, as well as ongoing time and expenses to monitor the calculations on an ongoing basis. Further, additional time and expense may be incurred with respect to any additional controls implemented to ensure compliance with the potential additional capital conditions. E:\FR\FM\08APN1.SGM 08APN1 khammond on DSKJM1Z7X2PROD with NOTICES Federal Register / Vol. 86, No. 66 / Thursday, April 8, 2021 / Notices requests comment and supporting data on these potential time and cost burdens, including quantitative information about the amount of the burdens. The Commission also requests comment on any potential operational or regulatory issues or burdens associated with adhering to the potential additional capital conditions. The Commission requests comment on the potential impacts the capital conditions would have on competition. For example, how would they impact competition between Covered Entities applying substituted compliance with respect to Exchange Act rule 18a–1 and SBS Entities that will comply with Exchange Act rule 18a–1? Would the conditions eliminate or mitigate potential competitive advantages that Covered Entities adhering to the Basel capital standard might have over SBS Entities adhering to the more stringent net liquid assets test standard of Exchange Act rule 18a–1? Alternatively, would the conditions create competitive disadvantages for Covered Entities applying substituted compliance with respect to Exchange Act rule 18a–1 as compared to SBS Entities complying with Exchange Act rule 18a–1? Please describe and explain. The Commission also requests comment on how the potential additional capital conditions compare to any existing capital requirements under the Basel capital standards (e.g., LCR, NSFR). For example, are there differences in the frequency or nature of calculations under the Basel capital standards? Please identify and describe any potential impacts on the way Covered Entities currently conduct their business with respect to implementing the potential additional capital conditions. The Commission further requests comment on whether the Commission should consider other potential conditions with respect to applying substituted compliance to Exchange Act rule 18a–1. Should the Commission consider imposing a potential capital condition that is more consistent with Exchange Act rule 18a–1? Please explain why or why not. Should the Commission consider a capital condition that includes higher requirements for a Covered Entity that holds a significant amount of illiquid assets? For example, if 20%, 30%, 40%, 50%, or some other percent of the Covered Entity’s assets would not be allowable under Exchange Act rule 18a– 1, should the firm be required to hold an amount of allowable assets to cover liabilities coming due over a longer period of time than a firm that does not exceed the percent threshold? If so, VerDate Sep<11>2014 16:53 Apr 07, 2021 Jkt 253001 explain why and identify the appropriate percent threshold. Should the Commission consider including a condition prescribing a percent threshold of non-allowable assets under Exchange Act rule 18a–1 held by the Covered Entity over which substituted compliance with respect to capital would not be permitted? If so, explain why and identify the appropriate percent threshold. The Commission requests comment on whether the Commission should consider imposing other potential capital conditions (or no conditions) if a Covered Entity’s business with U.S. persons falls below a certain notional threshold, such as $8 billion, $20 billion, $50 billion, or some other threshold. Please explain which threshold may be appropriate or suggest an alternative. D. Recordkeeping, Reporting, Notification, and Securities Count The Commission received comment asking it to eliminate conditions requiring a Covered Entity to be subject to and comply with EU or French requirements that either do not apply to the Covered Entity on an entity-wide basis or are not supervised by the Covered Entity’s home regulator.38 The same commenter suggested as a possible solution that SBS Entities be permitted to elect to comply directly with U.S. law instead of EU or French requirements with respect to distinct requirements of the recordkeeping and reporting rules. Would it be appropriate to structure the Commission’s substituted compliance determinations in the Order with respect to the recordkeeping and reporting rules to provide Covered Entities with greater flexibility to select which distinct requirements within the broader recordkeeping, reporting, notification, and securities count rules for which they want to apply substituted compliance? This approach of making substituted compliance determinations with respect to certain distinct requirements within the recordkeeping and reporting rules is illustrated in the proposed UK Order.39 As applied to Exchange Act rules 18a–5 and 18a–6, this approach of providing greater flexibility would result in substituted compliance determinations with respect to the different categories of records these rules require SBS Entities to make, keep current, and/or preserve. Each requirement with respect to a specific category of records (e.g., paragraph (a)(2) 38 SIFMA 39 See Letter at 2–4. paras. (f)(1) through (3) of the Proposed UK Order. PO 00000 Frm 00104 Fmt 4703 Sfmt 4703 18347 of Exchange Act rule 18a–5 addressing ledgers (or other records) reflecting all assets and liabilities, income and expense and capital accounts) would be viewed in isolation as a distinct recordkeeping rule. This approach is illustrated in the Proposed UK Order.40 Would permitting Covered Entities to take a more granular approach to the requirements within these recordkeeping rules be appropriate for the final French Order? For example, would this approach make it more difficult for the Commission to get a comprehensive understanding of the Covered Entity’s security-based swap activities and financial condition? Explain why or why not. Would it be overly complex for the Covered Entity to administer a firm-wide recordkeeping system under this approach? Explain why or why not. Would this approach address commenters’ concerns with respect to the proposed French Order? If so, explain why. If not, explain why not. The EU cross-border condition was intended to address concerns that are relevant not only to certain requirements under MiFID and MAR as noted in the Proposed Order, but also to certain requirements under MiFIR (and other EU and French requirements adopted pursuant to MiFIR). Just as is true for certain requirements under MiFID and MAR, EU law allocates the responsibility for supervising and enforcing certain MiFIR requirements to authorities of the Member State where a Covered Entity provides certain services. If the Commission adopts the granular approach to recordkeeping, reporting, notification and securities count requirements suggested above, should it expand the EU cross-border condition described above in Section B to apply to the relevant requirements under MiFIR? Explain why or why not. Commenters suggested that the Commission distinguish between EU and French laws that are conditions to substituted compliance for nonprudentially regulated SBS Entities versus prudentially regulated SBS Entities.41 Would this request be addressed if the Commission granted substituted compliance on a more granular level as described above and illustrated in the Proposed UK Order? If so, explain why. If not, explain why not. Certain of the Commission’s recordkeeping, reporting, and notification requirements are fully or partially linked to substantive Exchange Act requirements for which a positive 40 See paras. (f)(1) and (2) of the Proposed UK Order. 41 See SIFMA Letter at 8; FBF Letter at 2. E:\FR\FM\08APN1.SGM 08APN1 khammond on DSKJM1Z7X2PROD with NOTICES 18348 Federal Register / Vol. 86, No. 66 / Thursday, April 8, 2021 / Notices substituted compliance determination is preliminarily not being made under the proposed Order. In these cases, should the Commission not make a positive substituted compliance determination for the fully linked requirement in the recordkeeping or reporting rules or to the portion of the requirement that is linked to substantive Exchange Act requirements? In particular, should the Commission not make a positive substituted compliance determination for recordkeeping, reporting, or notification requirements linked to the following Exchange Act rules for which a positive substituted compliance determination is preliminarily not being made: (1) Exchange Act rule 10b–10; (2) Exchange Act rule 15Fh–4; (3) Exchange Act rule 15Fh–5; (4) Exchange Act rule 15Fh–6; (5) Exchange Act rule 18a–2; (6) Exchange Act rule 18a–4; and (7) Regulation SBSR? This approach is illustrated in the Proposed UK Order.42 Is this approach appropriate for the final French Order? If not, explain why. Certain of the requirements in the Commission’s recordkeeping, reporting, and notification rules are linked to substantive Exchange Act requirements where a positive substituted compliance determination is being made under the proposed Order. In these cases, should a positive substituted compliance determination for the linked requirement in the recordkeeping, reporting, or notification rule be conditioned on the Covered Entity applying substituted compliance to the linked substantive Exchange Act requirement? If not, explain why. Should this be the case regardless of whether the requirement is fully or partially linked to the substantive Exchange Act requirement? If not, explain why. In particular, should substituted compliance for recordkeeping, reporting, and notification requirements linked to the following Exchange Act rules be conditioned on the SBS Entity applying substituted compliance to the linked substantive Exchange Act rule: (1) Exchange Act rule 15Fh–3; (2) Exchange Act rule 15Fi–2; (3) Exchange Act rule 15Fi–3; (4) Exchange Act rule 15Fi–4; (5) Exchange Act rule 15Fi–5; (6) Exchange Act rule 15Fk–1; (7) Exchange Act rule 18a–1; (8) Exchange Act rule 18a–3; (8) Exchange Act rule 18a–5; and (9) Exchange Act rule 18a–7? This approach is illustrated in the Proposed UK Order.43 Is this approach 42 See paras. (f)(1) through (4) of the Proposed UK Order. 43 See paras. (f)(1) through (4) of the Proposed UK Order. VerDate Sep<11>2014 16:53 Apr 07, 2021 Jkt 253001 appropriate for the final French Order? If not, explain why. While certain recordkeeping and reporting requirements are not expressly linked to Exchange Act rule 18a–1, they would be important to the Commission’s ability to monitor or examine for compliance with the capital requirements under this rule. The records also will assist the firm in monitoring its net capital position and, therefore, in complying with Exchange rule 18a–1 and its appendices. Should a positive substituted compliance determination with respect to these recordkeeping and reporting requirements be subject to the condition that the Covered Entity applies substituted compliance with respect to Exchange Act rule 18a–1 and its appendices? If not, explain why. This approach is illustrated in the Proposed UK Order.44 Is this approach appropriate for the final French Order? If not, explain why. French credit institutions and finance companies are generally required to close their financial year on December 31.45 Moreover, the French substituted compliance application does not identify French laws that are comparable to Exchange Act rule 18a– 7(i) (notice of change of fiscal year end). Consequently, is there a basis and a need for the Commission to make a positive substituted compliance determination with respect to the requirements in Exchange Act rule 18a– 7(i)? If so, explain why? Should the Commission condition a positive substituted compliance determination with respect to Exchange Act rule 18a– 7(i) on the Covered Entity simultaneously transmitting to the Commission a copy of any comparable notice required to be sent by applicable French law, and including with the transmission the contact information of an individual who can provide further information about the matter that is the subject of the notice. If so, explain why. If not, explain why not. E. Covered Entity Definition As discussed in the Proposed Order, Exchange Act rule 3a71–6 provides that the Commission’s assessment of the comparability of the requirements of the foreign financial regulatory system must account for the effectiveness of foreign authority’s supervisory and enforcement frameworks.46 This prerequisite 44 See paras. (f)(1) through (5) of the Proposed UK Order. 45 See French Monetary and Financial Code article R. 511–6. 46 See French Substituted Compliance Notice and Proposed Order, 85 FR at 85721 (citing Exchange Act rule 3a71–6(a)(2)(i)). PO 00000 Frm 00105 Fmt 4703 Sfmt 4703 accounts for the understanding that substituted compliance determinations should reflect the reality of the foreign regulatory framework, in that rules that appear high-quality on paper nonetheless should not form the basis for substituted compliance if—in practice—market participants are permitted to fall short of their regulatory obligations. The French Authorities’ Application provided information about the AMF’s and ACPR’s supervisory framework. With respect to the AMF’s supervision, the information related to Tier 1 firms. The Commission is therefore considering revising the definition of Covered Entity to be limited to credit institutions and investment firms that are supervised by the AMF under the Tier 1 framework through the single supervisory mechanism. Commenters are invited to address whether the change in the definition of Covered Entity is appropriate. Would the change result in the exclusion of any entities likely to register as SBS Entities in France from reliance on the substituted compliance order? F. Internal Supervision and Compliance Finally, the Commission is considering revising paragraph (d)(3) to the proposal, which sets forth conditions to substituted compliance in connection with internal supervision and compliance. Under the potential revision, substituted compliance for internal supervision and compliance would encompass two additional sets of prerequisites (in addition to the other provisions identified in proposed paragraph (d)(3)): CRR articles 286–88 and 293, which address counterparty credit risk and risk management generally; and EMIR Margin RTS article 2, which addresses collateral-related risk management procedures. Those provisions, which also are incorporated within the proposed prerequisites to substituted compliance for internal risk management (proposed paragraph (b)(1)), promote analogous compliance goals as the other requirements identified within proposed paragraph (d)(3).47 Commenters are invited to address the appropriateness of this potential revision, particularly with regard to the goal of promoting regulatory outcomes that are comparable to those associated with the internal supervision and compliance requirements under the Exchange Act. 47 The Proposed UK Order similarly encompasses those provisions as part of the proposed prerequisites to substituted compliance for internal supervision and compliance requirements. E:\FR\FM\08APN1.SGM 08APN1 Federal Register / Vol. 86, No. 66 / Thursday, April 8, 2021 / Notices All comments received to date on the Proposed Order will be considered and need not be resubmitted. By the Commission. Dated: April 5, 2021. Vanessa A. Countryman, Secretary. BILLING CODE 8011–01–P A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change SECURITIES AND EXCHANGE COMMISSION 1. Purpose [FR Doc. 2021–07254 Filed 4–7–21; 8:45 am] [Release No. 34–91460; File No. SR– EMERALD–2021–11] Self-Regulatory Organizations; MIAX Emerald, LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Its Fee Schedule To Adopt Port Fees, Increase Certain Network Connectivity Fees, and Increase the Number of Additional Limited Service MIAX Emerald Express Interface Ports Available to Market Makers April 2, 2021. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on March 24, 2021, MIAX Emerald, LLC (‘‘MIAX Emerald’’ or ‘‘Exchange’’), filed with the Securities and Exchange Commission (‘‘Commission’’) a proposed rule change as described in Items I, II, and III below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange is filing a proposal to amend the MIAX Emerald Fee Schedule (the ‘‘Fee Schedule’’). The text of the proposed rule change is available on the Exchange’s website at https://www.miaxoptions.com/rulefilings/emerald, at MIAX’s principal office, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change khammond on DSKJM1Z7X2PROD with NOTICES proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the 1 15 2 17 U.S.C. 78s(b)(1). CFR 240.19b–4. VerDate Sep<11>2014 16:53 Apr 07, 2021 Jkt 253001 The Exchange proposes to amend the Fee Schedule to: (1) Adopt Port fees; (2) increase the Exchange’s network connectivity fees for its 10 gigabit (‘‘Gb’’) ultra-low latency (‘‘ULL’’) fiber connection for Members 3 and nonMembers (collectively, the ‘‘Proposed Access Fees’’); and (3) increase the number of Additional Limited Service MIAX Emerald Express Interface (‘‘MEI’’) 4 Ports available to Market Makers.5 On September 15, 2020, the Exchange issued a Regulatory Circular, which announced, among other things, that the Exchange would adopt Port fees, thereby terminating the Waiver Period 6 for such fees, and increase the fees for its 10Gb ULL connection for Members and non-Members, beginning October 1, 3 The term ‘‘Member’’ means an individual or organization approved to exercise the trading rights associated with a Trading Permit. Members are deemed ‘‘members’’ under the Exchange Act. See Exchange Rule 100. 4 MIAX Emerald Express Interface is a connection to the MIAX Emerald System that enables Market Makers to submit simple and complex electronic quotes to MIAX Emerald. ‘‘Full Service MEI Ports’’ means a port which provides Market Makers with the ability to send Market Maker simple and complex quotes, eQuotes, and quote purge messages to the MIAX Emerald System. Full Service MEI Ports are also capable of receiving administrative information. Market Makers are limited to two Full Service MEI Ports per Matching Engine. ‘‘Limited Service MEI Ports’’ means a port which provides Market Makers with the ability to send simple and complex eQuotes and quote purge messages only, but not Market Maker Quotes, to the MIAX Emerald System. Limited Service MEI Ports are also capable of receiving administrative information. Market Makers initially receive two Limited Service MEI Ports per Matching Engine. See the Definitions Section of the Fee Schedule. 5 ‘‘Market Maker’’ refers to ‘‘Lead Market Maker’’ (‘‘LMM’’), ‘‘Primary Lead Market Maker’’ (‘‘PLMM’’) and ‘‘Registered Market Maker’’ (‘‘RMM’’), collectively. See Exchange Rule 100 and the Definitions Section of the Fee Schedule. 6 ‘‘Waiver Period’’ means, for each applicable fee, the period of time from the initial effective date of the MIAX Emerald Fee Schedule until such time that the Exchange has an effective fee filing establishing the applicable fee. The Exchange will issue a Regulatory Circular announcing the establishment of an applicable fee that was subject to a Waiver Period at least fifteen (15) days prior to the termination of the Waiver Period and effective date of any such applicable fee. See the Definitions Section of the Fee Schedule. PO 00000 Frm 00106 Fmt 4703 Sfmt 4703 18349 2020.7 On January 14, 2021, the Exchange announced that it would offer Market Makers the ability to purchase an additional six Limited Service MEI Ports,8 without changing the Limited Service MEI Port fee amount. The Exchange initially filed its proposal to adopt certain Port fees and increase the fees for its 10Gb ULL connection on October 1, 2020.9 The First Proposed Rule Change was published for comment in the Federal Register on October 20, 2020.10 The Exchange notes that the First Proposed Rule Change did not receive any comment letters. Nonetheless, the Exchange withdrew the First Proposed Rule Change on November 25, 2020 11 and resubmitted a replacement proposal.12 The Second Proposed Rule Change was published for comment in the Federal Register on December 14, 2020.13 The Exchange notes that the Second Proposed Rule Change did not receive any comment letters. Nonetheless, the Exchange withdrew the Second Proposed Rule Change on January 22, 2021 14 and resubmitted a replacement proposal.15 The Third Proposed Rule Change was published for comment in the Federal Register on February 5, 2021.16 The Exchange withdrew the Third Proposed Rule Change on February 16, 2021 17 and 7 See MIAX Emerald Regulatory Circular 2020–41 available at https://www.miaxoptions.com/sites/ default/files/circular-files/MIAX_Emerald_RC_ 2020_41.pdf. 8 See https://www.miaxoptions.com/alerts/2021/ 01/14/miax-emerald-options-announce-supportadditional-mei-limited-service-ports. In a subsequent alert, the Exchange announced that the six Additional Limited Service MEI Ports would be available beginning February 16, 2021, pending filing with the Commission. 9 See Securities Exchange Act Release No. 90184 (October 14, 2020), 85 FR 66636 (October 20, 2020) (SR–EMERALD–2020–12) (the ‘‘First Proposed Rule Change’’). 10 See id. 11 See Comment Letter from Joseph Ferraro, SVP, Deputy General Counsel, the Exchange, dated November 20, 2020, notifying the Commission that the Exchange would withdraw the First Proposed Rule Change. 12 See Securities Exchange Act Release No. 90600 (December 8, 2020), 85 FR 80831 (December 14, 2020) (SR–EMERALD–2020–17) (the ‘‘Second Proposed Rule Change’’). 13 See id. 14 See Comment Letter from Joseph Ferraro, SVP, Deputy General Counsel, the Exchange, dated January 15, 2021, notifying the Commission that the Exchange would withdraw the Second Proposed Rule Change. 15 See Securities Exchange Act Release No. 91032 (February 1, 2021), 86 FR 8428 (February 5, 2021) (SR–EMERALD–2021–02) (the ‘‘Third Proposed Rule Change’’). 16 See id. 17 See Comment Letter from Joseph Ferraro, SVP, Deputy General Counsel, the Exchange, dated February 16, 2021, notifying the Commission that E:\FR\FM\08APN1.SGM Continued 08APN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 86, Number 66 (Thursday, April 8, 2021)]
[Notices]
[Pages 18341-18349]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-07254]



[[Page 18341]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91477; File No. S7-22-20]


Reopening of Comment Period for Order Proposing 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 French Republic

AGENCY: Securities and Exchange Commission.

ACTION: Reopening of comment period.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
reopening the comment period for its proposed conditional substituted 
compliance order, published in the Federal Register on December 29, 
2020, 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 French Republic (``Proposed Order''). The 
reopening of the comment period is intended to allow interested persons 
time to analyze and comment upon potential changes to the Proposed 
Order and additional questions related to the Proposed Order.

DATES: The comment period is re-opened until May 3, 2021.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/submitcomments.htm);
     Send an email to [email protected]. Please include 
File Number S7-22-20; or
     Use the Federal Rulemaking portal (https://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments to Vanessa A. Countryman, Secretary, 
Securities and Exchange Commission, 100 F Street NE, Washington, DC 
20549-1090.

All submissions should refer to File Number S7-22-20. This file number 
should be included on the subject line if email is used. To help us 
process and review your comments more efficiently, please use only one 
method. We will post all comments on the Commission's internet website 
(https://www.sec.gov/rules/other.shtml). Typically, comments are also 
available for website viewing and printing in the Commission's Public 
Reference Room, 100 F Street NE, Washington, DC 20549, on official 
business days between the hours of 10 a.m. and 3 p.m. Due to pandemic 
conditions, however, access to the Commission's public reference room 
is not permitted at this time. All comments received will be posted 
without change; we do not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly.

FOR FURTHER INFORMATION CONTACT: Carol M. McGee, Assistant Director 
Office of Derivatives Policy, Division of Trading and Markets, at (202) 
551-5870, Securities and Exchange Commission, 100 F Street NE, 
Washington, DC 20549.

SUPPLEMENTARY INFORMATION:

I. Background

    The French Autorit[eacute] des March[eacute]s Financiers (``AMF'') 
and the Autorit[eacute] de Contr[ocirc]le Prudentiel et de 
R[eacute]solution (``ACPR''), the French financial authorities, have 
submitted a ``substituted compliance'' application requesting that the 
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 France conditionally may satisfy requirements under the 
Exchange Act by complying with comparable French and European Union 
(``EU'') requirements.\1\ In their application, the AMF and the ACPR 
(``French Authorities'') sought substituted compliance in connection 
with certain Exchange Act requirements related to risk control, capital 
and margin, internal supervision and compliance, counterparty 
protection, recordkeeping, reporting and notification. The application 
incorporated comparability analyses regarding applicable French and EU 
law, as well as information regarding French supervisory and 
enforcement frameworks.
---------------------------------------------------------------------------

    \1\ See Letter from Robert Oph[egrave]le, Chairman, AMF, and 
Denis Beau, Chairman, ACPR, to Vanessa Countryman, Secretary, 
Commission, dated Nov. 6, 2020 (``French Authorities' 
Application''). The application is available on the Commission's 
website at: https://www.sec.gov/files/full-french-application.pdf.
---------------------------------------------------------------------------

    On December 22, 2020, the Commission published a notice of the 
French Authorities' completed application, accompanied by a Proposed 
Order to conditionally grant substituted compliance in connection with 
the application.\2\ The Proposed Order incorporated a number of 
conditions to tailor the scope of substituted compliance consistent 
with the prerequisite that relevant French and EU requirements produce 
regulatory outcomes that are comparable to relevant requirements under 
the Exchange Act.
---------------------------------------------------------------------------

    \2\ Exchange Act Release No. 90766 (Dec. 22, 2020), 85 FR 85720 
(Dec. 29, 2020) (``French Substituted Compliance Notice and Proposed 
Order'').
---------------------------------------------------------------------------

II. Reopening of Comment Period

    As a result of comments received \3\ and upon further reflection, 
the Commission is reopening the comment period for the Proposed Order 
until May 3, 2021. Commenters may submit, and the Commission will 
consider, comments on any aspect of the Proposed Order. In addition to 
the questions raised in the Proposed Order, the Commission specifically 
seeks comments on the issues below and potential changes to the 
Proposed Order (defined terms can be found in the Proposed Order). 
Commenters should also consider the approaches taken in connection with 
the application and proposed order for substituted compliance for the 
United Kingdom \4\ when answering these questions.
---------------------------------------------------------------------------

    \3\ See Letter from Kyle Brandon, Managing Director, Head of 
Derivative Policy, SIFMA (Jan. 25, 2021) (``SIFMA Letter''), letter 
from Wim Mijs, Chief Executive Officer, European Banking Federation 
(Jan. 25, 2021) (``EBF Letter'') (generally supporting the SIFMA 
letter), and Letter from Etienne Barel, Deputy Chief Executive 
Officer, French Banking Federation (Jan. 25, 2021) (``FBF Letter''). 
Comments may be found on the Commission's website at: https://www.sec.gov/comments/s7-22-20/s72220.htm.
    \4\ See Notice of Substituted Compliance Application Submitted 
by the United Kingdom Financial Conduct Authority in Connection with 
Certain Requirements Applicable to Security-Based Swap Dealers and 
Major Security-Based Swap Participants Subject to Regulation in the 
United Kingdom; Proposed Order, Exchange Act Release No. 91476 (Apr. 
5, 2021) (``Proposed UK Order'').
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A. EMIR-Related General Conditions

    Commenters raised concerns regarding the proposed conditions 
associated with substituted compliance for trade acknowledgement and 
verification requirements and trading relationship documentation 
requirements.\5\ They particularly requested that those parts of the 
final Order not incorporate proposed conditions requiring compliance 
with certain provisions under MiFID, arguing that those MiFID-related 
conditions in practice would prevent SBS Entities with branches in 
other EU countries from relying on substituted compliance for those 
requirements, and that compliance with proposed EMIR conditions would 
be sufficient to

[[Page 18342]]

produce the requisite regulatory outcomes.\6\
---------------------------------------------------------------------------

    \5\ See SIFMA Letter at 3-6, FBF Letter at 2.
    \6\ Id. Under the proposal, substituted compliance for trade 
acknowledgment and for trading relationship documentation in part 
would require that relevant SBS Entities (``Covered Entities'' as 
defined in the proposed Order) comply with certain requirements 
under MiFID (``Markets in Financial Instruments Directive,'' 
Directive 2014/65/EU) and the French implementation of MiFID, and 
also comply with certain requirements under EMIR (``European Market 
Infrastructure Regulation,'' Regulation (EU) 648/2012). See paras. 
(a)(2) and (a)(5) to the proposed Order.
---------------------------------------------------------------------------

    As discussed below, the Commission believes that based on the 
issues raised by those commenters, it may be appropriate for the 
portions of the final Order related to trade acknowledgment and 
verification and to trading relationship documentation not to include 
the MiFID-related conditions and instead to rely solely on EMIR 
conditions. Any such heightened reliance on EMIR, however, highlights 
the need for safeguards to ensure that there will be no opportunity for 
gaps that may prevent the EMIR provisions in practice from producing 
regulatory outcomes consistent with those of the Exchange Act rules.
    Accordingly, upon further consideration, the Commission believes 
that it may be useful for the final Order to incorporate two additional 
general conditions to promote certainty that EMIR will apply and help 
preclude gaps between the regulatory outcomes associated with Exchange 
Act requirements and those associated with the relevant EMIR 
provisions.\7\
---------------------------------------------------------------------------

    \7\ Addition of two new EMIR-related general conditions 
potentially would necessitate renumbering of certain of the extant 
proposed general conditions, and the addition of technical 
clarifying language to the captions for certain of the other 
proposed general conditions (e.g., recaptioning proposed general 
conditions (a)(1) through (a)(3) to the Proposed Order so they 
specifically refer to MiFID, and recaptioning of proposed general 
condition (a)(4) so it specifically refers to CRD/CRR).
---------------------------------------------------------------------------

    Potential counterparty-related EMIR condition. First, it may be 
useful for the final Order to incorporate a new general condition to 
address the fact that the ``financial counterparty'' and ``non-
financial counterparty'' definitions that trigger the application of 
the relevant EMIR provisions in part are predicated on the Covered 
Entity and its counterparty being either subject to certain 
authorizations consistent with its activities or a legal entity 
established in the EU.\8\ To help ensure that the relevant EMIR 
requirements would produce the requisite regulatory outcomes regardless 
of a counterparty's status under those definitions, the Commission is 
considering adding a general condition to provide that, for each part 
of the final Order that requires compliance with EMIR-related 
requirements, if the Covered Entity's relevant security-based swap 
counterparty does not fall within the relevant ``financial 
counterparty'' or ``non-financial counterparty'' definitions, the 
Covered Entity must comply with the applicable condition as if the 
counterparty were a ``financial counterparty'' or ``non-financial 
counterparty'' consistent with the counterparty's business.\9\
---------------------------------------------------------------------------

    \8\ See EMIR art. 2(8) (defining ``financial counterparty'' by 
reference to certain investment firms, insurers and other types of 
institutions authorized pursuant to various EU directives), 2(9) 
(defining ``non-financial counterparty'' as an ``undertaking'' 
established in the EU that is not a financial counterparty).
    \9\ In other words, the Covered Entity would be subject to the 
relevant requirements under EMIR even if the counterparty is not 
authorized pursuant to EU law as anticipated by the EMIR art. 2(8) 
``financial counterparty'' definition, or if the counterparty is not 
an ``undertaking'' (such as by virtue of being a natural person), or 
is not established in the EU (by virtue of being a U.S. person or 
otherwise being established in some non-EU jurisdiction), as 
anticipated by the EMIR art. 2(9) ``non-financial counterparty'' 
definition. This approach appears to be consistent with European 
guidance. 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)'' (https://www.esma.europa.eu/sites/default/files/library/esma70-1861941480-52_qa_on_emir_implementation.pdf) answer 5(a) 
(stating that compliance with the EMIR confirmation requirement 
necessitates that the counterparties must reach a legally binding 
agreement to all terms of the OTC derivative contract, and that the 
EMIR RTS ``implies'' that both parties must comply and agree in 
advance to a specific process to do so); answer 12(b) (stating that 
where an EU counterparty transacts with a third country entity, the 
EU counterparty generally must ensure that the EMIR requirements for 
portfolio reconciliation, dispute resolution, timely confirmation 
and portfolio compression are met for the relevant portfolio and/or 
transactions even though the third country entity would not itself 
be subject to EMIR; this is subject to special processes when the 
European Commission has declared the third country requirements to 
be comparable to EU requirements).
---------------------------------------------------------------------------

    Potential product-related conditions. It may also be useful for the 
final Order to account for the facts that the relevant trade 
acknowledgement and verification and trading relationship documentation 
rules under the Exchange Act do not apply to security-based swaps 
cleared by a clearing agency registered with the Commission (or exempt 
from registration), while the analogous EMIR provisions exclude 
instruments that are cleared by a central counterparty that has been 
authorized or recognized to clear derivatives contracts in the EU. As a 
result, instruments that have been cleared at an EU-authorized or EU-
recognized central counterparty neither would be excluded from the 
application of those Exchange Act rules nor would be subject to the 
EMIR requirements that otherwise would underpin substituted 
compliance--making direct compliance problematic but compliance with 
the conditions of a positive substituted compliance order unworkable. 
To bridge that gap and help ensure that substituted compliance is not 
precluded in connection with instruments that have been cleared in the 
EU, the Commission is considering adding a new general condition that, 
for each part of the final Order that requires compliance with EMIR-
related conditions: (i) The relevant security-based swap must either be 
an ``OTC derivative'' or ``OTC derivative contract'' for purposes of 
EMIR \10\ that has not been cleared and otherwise is subject to the 
provisions of the relevant requirements under EMIR, or (ii) the 
relevant security-based swap has been cleared by a central counterparty 
that has been authorized or recognized to clear derivatives contracts 
in the EU.\11\
---------------------------------------------------------------------------

    \10\ See EMIR art. 2(7) (defining those terms by reference to 
``a derivative contract the execution of which'' does not take place 
on a regulated market or certain third-party market as defined in 
the 2004 iteration of MiFID).
    \11\ Prong (i) to this potential new condition would require 
uncleared instruments to fall within the ambit of the EMIR 
requirements at issue. The alternative prong (ii) would be satisfied 
when cleared instruments fall outside the ambit of those EMIR 
requirements by virtue of being cleared in the EU, akin to the 
Exchange Act rules' exclusion for security-based swaps cleared by 
clearing agencies registered with the Commission.
---------------------------------------------------------------------------

    Commenters are invited to address whether additional general 
conditions of this nature are appropriate to help ensure that EMIR-
related conditions to the final Order will apply in an appropriate 
scope, particularly in connection with trade acknowledgment and 
verification requirements and trading relationship documentation 
requirements. Would general conditions of the type discussed above be 
appropriate to help foreclose substituted compliance when there are 
gaps inconsistent with the comparability of regulatory outcomes? Would 
different approaches be more effective at achieving that goal? If so, 
please describe.

B. Risk Control Requirements

    The proposal in part would condition substituted compliance for 
Exchange Act rule 15Fi-2 trade acknowledgment and verification 
requirements and rule 15Fi-5 trading relationship documentation 
requirements on firms complying with certain requirements under MiFID 
article 25 (including the French implementation of those MiFID 
requirements) and under EMIR. Commenters expressed the view that the 
EMIR-based requirements standing

[[Page 18343]]

alone would be sufficient to produce regulatory outcomes that are 
comparable to those associated with the Exchange Act rules, and that 
the conditions should not incorporate references to MiFID 
provisions.\12\
---------------------------------------------------------------------------

    \12\ See SIFMA Letter at 2-6, FBF Letter at 2. Under the 
Proposed Order, substituted compliance in connection with trade 
acknowledgment and verification requirements in part would be 
conditioned on an entity's compliance with EMIR article 11(1)(a) and 
EMIR RTS article 12, which jointly set forth a bilateral 
confirmation requirement. Substituted compliance in connection with 
trading relationship requirements in part would be conditioned on 
compliance with EMIR Margin RTS article 2, which addresses risk 
management procedures related to the exchange of collateral, 
including procedures related to the terms of all necessary 
agreements to be entered into by counterparties (e.g., payment 
obligations, netting conditions, events of default, calculation 
methods, transfers of rights and obligations upon termination, and 
governing law).
---------------------------------------------------------------------------

    The commenter concern regarding the application of MiFID arises 
from application of a proposed cross-border condition providing that if 
responsibility for ensuring compliance with any provision of MiFID (or 
EU or French implementing requirement) that is listed as a condition 
for substituted compliance is allocated to an authority in a member 
state of the EU in whose territory a Covered Entity provides a service, 
the AMF or ACPR must be the authority responsible for supervision and 
enforcement of that provision.\13\ In the commenter's view, this EU 
cross-border condition means that conditioning substituted compliance 
on Covered Entities also having to comply with MiFID confirmation and 
documentation requirements in practice would undermine the availability 
of substituted compliance for Covered Entities that have branches in EU 
Member States for which the Commission has not entered into an 
applicable substituted compliance memorandum of understanding.\14\
---------------------------------------------------------------------------

    \13\ See paragraph (a)(8) to the proposed Order (``EU cross-
border condition''). In practice (pursuant to MiFID article 35), 
this allocation of oversight applies to requirements pursuant to 
MiFID article 25 (``assessment of suitability and appropriateness 
and reporting to clients'') as well as certain other MiFID 
provisions not relevant here.
    \14\ See SIFMA Letter at 2-6. In the commenter's view, 
application of those MiFID article 25 conditions in connection with 
trade acknowledgment and verification requirements and trading 
relationship documentation requirements would ``in practice lead to 
an untenable patchwork of substituted compliance.'' See SIFMA letter 
at 3. The commenter further explained that SBS Entities ``operating 
branches throughout the EU'' would not be able to avail themselves 
of substituted compliance in connection with these requirements 
``unless authorities or regulated SBS Entities in every or nearly 
every one of the 27 EU Member States submit their own substituted 
compliance applications covering local branches of SBS Entities, and 
the Commission reviews and responds to those applications and enters 
into memoranda of understanding [ ] in each of these Member 
States.'' The same problem does not arise in connection with 
requirements under EMIR, which would not allocate oversight of a 
French entity's compliance to authorities in other EU Member States.
---------------------------------------------------------------------------

    In light of those commenters' concerns that substituted compliance 
for trade acknowledgment and verification and for trading relationship 
documentation as proposed would be curtailed as a result of the 
interplay between the MiFID provisions and the EU cross-border 
condition, the Commission is considering whether the EMIR requirements 
standing alone produce comparable results such that the Commission 
appropriately may remove those MiFID provisions as prerequisites to 
substituted compliance in connection with the trade acknowledgment and 
verification and trading relationship documentation requirements under 
the Exchange Act.\15\
---------------------------------------------------------------------------

    \15\ For trade acknowledgment and verification, proposed 
paragraph (b)(2) in part particularly would require compliance with 
MiFID article 25(6) (requiring that investment firms provide certain 
reports to clients), and MiFID Org Reg articles 59-61 (addressing 
contents of reports with specificity). EMIR article 11(1)(a) and 
EMIR RTS article 12, in contrast, specify more general conformation 
requirements applicable to both counterparties to a transaction. For 
trading relationship documentation requirements, proposed paragraph 
(b)(5) in part particularly would require compliance with MiFID Org 
Reg article 25(5) (requiring investment firms to establish a record 
regarding the rights and obligations of parties and other terms of 
service), and MiFID Org Reg articles 24, 58, 73 and applicable parts 
of Annex I (addressing internal audit, client agreements and 
recordkeeping). EMIR Martin RTS article 2, in contrast, encompasses 
collateral-related risk management procedures that in part require 
counterparties to specify the terms of all necessary agreements to 
be entered into by counterparties.
---------------------------------------------------------------------------

    Under such an approach, substituted compliance in connection with 
Exchange Act rule 15Fi-2 trade acknowledgment and verification 
requirements would be conditioned solely on compliance with the 
confirmation provisions of EMIR article 11(1)(a) and EMIR RTS article 
12.
    Moreover, under such an approach, substituted compliance in 
connection with Exchange Act rule 15Fi-5 trading relationship 
documentation requirements in part would be conditioned on compliance 
with the collateral-related risk management procedure provisions of 
EMIR Margin RTS article 2 (as proposed). In addition, to further 
promote comparability with the rule 15Fi-5(b)(2) provisions requiring 
that trading relationship documentation incorporate trade 
acknowledgements and verification, substituted compliance under such an 
approach also may be conditioned on compliance with the confirmation 
provisions of EMIR article 11(1)(a) and EMIR RTS article 12.
    Commenters are invited to address whether MiFID requirements should 
be removed from the conditions for substituted compliance in connection 
with trade acknowledgment and verification requirements and trading 
relationship documentation requirements. Would the proposed EMIR 
conditions (and the potential additional EMIR condition related to 
trading relationship documentation) be sufficient to produce regulatory 
outcomes that are comparable to those associated with the Exchange Act 
rules, particularly if the new general conditions addressed in part 
II.A above also are incorporated as part of the final Order? If so, 
please explain. If not, please explain.

C. Capital

    The Proposed Order did not contain any proposed conditions for 
substituted compliance with respect to the capital requirements of 
Exchange Act section 15F(e) and Exchange Act rule 18a-1 and its 
appendices (collectively ``Exchange Act rule 18a-1'').\16\ In the 
Proposed Order, the Commission, however, requested comment on whether 
there are any conditions that should be applied to substituted 
compliance for these capital requirements to promote comparable 
regulatory outcomes.\17\ The Commission also requested comment on 
whether it should consider conditions related to: (1) Maintaining a 
minimum amount of liquid assets; (2) imposing a specific liquidity 
requirement; and (3) maintaining minimum equity capital at least equal 
to the minimum fixed-dollar capital requirements under Exchange Act 
rule 18a-1.\18\ In addition, the Commission requested comment on the 
types of firms in France that would be relying on substituted 
compliance for capital, and whether the balance sheets of these 
entities were primarily composed of liquid or illiquid assets.\19\
---------------------------------------------------------------------------

    \16\ See Proposed Order, 85 FR at 85726.
    \17\ See Proposed Order, 85 FR at 85737.
    \18\ Id.
    \19\ Id.
---------------------------------------------------------------------------

    Commenters supported the proposed approach of making a positive 
substituted compliance determination with respect to Exchange Act rule 
18a-1. Commenters, however, stated that imposing any conditions on 
applying substituted compliance to Exchange Act rule 18a-1 was neither 
necessary nor appropriate.\20\ For example, one commenter expressed 
concern that requiring a Covered Entity to maintain a minimum amount of 
liquid assets

[[Page 18344]]

would impose unnecessary burdens.\21\ This commenter believed that 
imposing additional liquidity conditions would be duplicative of, and 
(depending on their design) inconsistent with applicable EU and French 
capital requirements, since these Covered Entities are already subject 
to the liquidity coverage ratio (``LCR''), the net stable funding ratio 
(``NSFR''), and an internal liquidity adequacy assessment process 
(``liquidity assessment process'').\22\ This commenter also noted that 
Covered Entities are subject to bank-style resolution regimes, which 
the commenter believed makes their liquidity risks less significant 
than other SBS Entities.\23\ This commenter also noted that certain 
Covered Entities will have access to short-term liquidity through 
relevant EU Member State central banks.\24\ This commenter also 
expressed concern, that absent an additional comment period, any 
definitions contained in a final substituted compliance determination 
would be adopted without the benefit of public comment.\25\ Finally, 
this commenter also stated that imposing a liquidity condition would be 
similar to the Commission imposing a net liquid assets test on Covered 
Entities, in contrast to EU policy makers applying a risk-based 
approach to capital. The commenter believed this would potentially 
change the ways these entities conduct business in a manner that may be 
inconsistent with their home country regulation.\26\
---------------------------------------------------------------------------

    \20\ See SIFMA Letter at 11; EBF Letter at 4; FBF Letter at 4.
    \21\ See SIFMA Letter at 11.
    \22\ See SIFMA Letter at 12.
    \23\ See SIFMA Letter at 12.
    \24\ See SIFMA Letter at 12.
    \25\ Id.
    \26\ See SIFMA Letter at 12-13.
---------------------------------------------------------------------------

    The Commission continues to consider whether it would be 
appropriate to impose additional conditions with respect to applying 
substituted compliance to Exchange Act rule 18a-1. In this regard, the 
Commission is seeking further comment about the concerns raised by the 
commenters and potential capital conditions. The reasons why the 
Commission continues to consider additional capital conditions are 
discussed below.
    As a commenter noted, the capital standard of Exchange Act rule 
18a-1 is the net liquid assets test. This is the same capital standard 
that applies to broker-dealers under Exchange Act rule 15c3-1. The net 
liquid assets test is designed to promote liquidity. In particular, 
Exchange Act rule 18a-1 allows an SBS Entity to engage in activities 
that are part of conducting a securities business (e.g., taking 
securities into inventory) but in a manner that places the firm in the 
position of holding at all times more than one dollar of highly liquid 
assets for each dollar of unsubordinated liabilities (e.g., money owed 
to customers, counterparties, and creditors).\27\ For example, Exchange 
Act rule 18a-1 allows securities positions to count as allowable net 
capital, subject to standardized or internal model-based haircuts. The 
rule, however, does not permit most unsecured receivables to count as 
allowable net capital. This aspect of the rule severely limits the 
ability of SBS Entities to engage in activities, such as 
uncollateralized lending, that generate unsecured receivables. The rule 
also does not permit fixed assets or other illiquid assets to count as 
allowable net capital, which creates disincentives for SBS Entities to 
own real estate and other fixed assets that cannot be readily converted 
into cash. For these reasons, Exchange Act rule 18a-1 incentivizes SBS 
Entities to confine their business activities and devote capital to 
security-based swap activities.
---------------------------------------------------------------------------

    \27\ See, e.g., Exchange Act Release No. 8024 (Jan. 18, 1967), 
32 FR 856 (Jan. 25, 1967) (``Rule 15c3-1 (17 CFR 240.15c3-1) was 
adopted to provide safeguards for public investors by setting 
standards of financial responsibility to be met by brokers and 
dealers. The basic concept of the rule is liquidity; its object 
being to require a broker-dealer to have at all times sufficient 
liquid assets to cover his current indebtedness.'') (footnotes 
omitted); Exchange Act Release No. 10209 (June 8, 1973), 38 FR 16774 
(June 26, 1973) (Commission release of a letter from the Division of 
Market Regulation) (``The purpose of the net capital rule is to 
require a broker or dealer to have at all times sufficient liquid 
assets to cover its current indebtedness. The need for liquidity has 
long been recognized as vital to the public interest and for the 
protection of investors and is predicated on the belief that 
accounts are not opened and maintained with broker-dealers in 
anticipation of relying upon suit, judgment and execution to collect 
claims but rather on a reasonable demand one can liquidate his cash 
or securities positions.''); Exchange Act Release No. 15426 (Dec. 
21, 1978), 44 FR 1754 (Jan. 8, 1979) (``The rule requires brokers or 
dealers to have sufficient cash or liquid assets to protect the cash 
or securities positions carried in their customers' accounts. The 
thrust of the rule is to insure that a broker or dealer has 
sufficient liquid assets to cover current indebtedness.''); Exchange 
Act Release No. 26402 (Dec. 28, 1989), 54 FR 315 (Jan. 5, 1989) 
(``The rule's design is that broker-dealers maintain liquid assets 
in sufficient amounts to enable them to satisfy promptly their 
liabilities. The rule accomplishes this by requiring broker-dealers 
to maintain liquid assets in excess of their liabilities to protect 
against potential market and credit risks.'') (footnote omitted).
---------------------------------------------------------------------------

    The net liquid assets test is imposed through the mechanics of how 
an SBS Entity is required to compute net capital pursuant to Exchange 
Act rule 18a-1. The first step is to compute the SBS Entity's net worth 
under generally accepted accounting principles. Next, the SBS Entity 
must make certain adjustments to its net worth to calculate net 
capital, such as deducting illiquid assets and taking other capital 
charges and adding qualifying subordinated loans.\28\ The amount 
remaining after these deductions is defined as ``tentative net 
capital.'' Exchange Act rule 18a-1 prescribes a minimum tentative net 
capital requirement of $100 million for SBS Entities approved to use 
models to calculate net capital. The final step in computing net 
capital is to take prescribed percentage deductions (standardized 
haircuts) or model-based deductions from the mark-to-market value of 
the SBS Entity's proprietary positions (e.g., securities, money market 
instruments, and commodities) that are included in its tentative net 
capital. The amount remaining is the firm's net capital, which must 
exceed the greater of $20 million or a ratio amount. An SBS Entity that 
is meeting its minimum net capital requirement will be in the position 
where each dollar of unsubordinated liabilities is matched by more than 
a dollar of highly liquid assets.
---------------------------------------------------------------------------

    \28\ See 17 CFR 240.15c3-1(c)(2).
---------------------------------------------------------------------------

    In comparison, Covered Entities in France are subject to capital 
requirements applicable to prudentially regulated entities based on the 
international capital standard for banks (the ``Basel capital 
standard'').\29\ The Basel capital standard counts as capital assets 
that Exchange Act rule 18a-1 would exclude (e.g., loans and most other 
types of uncollateralized receivables, furniture and fixtures, real 
estate). The Basel capital standard accommodates the business of 
banking: Making loans (including extending unsecured credit) and taking 
deposits. While the Covered Entities that will apply substituted 
compliance with respect to Exchange Act rule 18a-1 will not be banks, 
the Basel capital standard allows them to count illiquid assets such as 
real estate and fixtures as capital. It also allows them to treat 
unsecured receivables related to activities beyond dealing in security-
based swaps as capital notwithstanding the illiquidity of these assets.
---------------------------------------------------------------------------

    \29\ See BCBS, The Basel Framework, available at: https://www.bis.org/basel_framework/.
---------------------------------------------------------------------------

    Further, one critical example of the difference between the 
requirements of Exchange Act rule 18a-1 and the Basel capital standard 
relates to the treatment of initial margin with respect to security-
based swaps and swaps. Under French margin requirements, Covered 
Entities will be required to post initial margin to counterparties 
unless an

[[Page 18345]]

exception applies.\30\ Under Exchange Act rule 18a-1, an SBS Entity 
cannot count as capital the amount of initial margin posted to a 
counterparty unless it enters into a special loan agreement with an 
affiliate.\31\ The special loan agreement requires the affiliate to 
fund the initial margin amount and the agreement must be structured so 
that the affiliate--rather than the SBS Entity--bears the risk that the 
counterparty may default on the obligation to return the initial 
margin. The reason for this restrictive approach to initial margin 
posted away is that it ``would not be available [to the SBS Entity] for 
other purposes, and, therefore, the firm's liquidity would be 
reduced.'' \32\ Under the Basel capital standard, a Covered Entity can 
count initial margin posted away as capital without the need to enter 
into a special loan arrangement with an affiliate. Consequently, 
because of the ability to include illiquid assets and margin posted 
away as capital, Covered Entities subject to the Basel capital standard 
may have less balance sheet liquidity than SBS Entities subject to 
Exchange Act rule 18a-1.
---------------------------------------------------------------------------

    \30\ Exchange Act rule 18a-3 does not require SBS Entities to 
post initial margin (though it does not prohibit the practice).
    \31\ See 84 FR at 43887-88.
    \32\ See id. at 43887.
---------------------------------------------------------------------------

    To address this potential liquidity difference, the Commission is 
seeking comment on whether substituted compliance with respect to 
Exchange Act rule 18a-1 should be subject to the conditions that a 
Covered Entity: (1) Maintains an amount of assets that are allowable 
under Exchange Act rule 18a-1, after applying applicable haircuts under 
the Basel capital standard, that equals or exceeds the Covered Entity's 
current liabilities coming due in the next 365 days; (2) makes a 
quarterly record listing: (a) The assets maintained pursuant to the 
first condition, their value, and the amount of their applicable 
haircuts; and (b) the aggregate amount of the liabilities coming due in 
the next 365 days; (3) maintains at least $100 million of equity 
capital composed of highly liquid assets, as defined in the Basel 
capital standard; and (4) includes its most recent statement of 
financial condition (i.e., balance sheet) filed with its local 
supervisor whether audited or unaudited with its written notice to the 
Commission of its intent to rely on substituted compliance. This 
potential approach to substituted compliance is illustrated in the 
Proposed UK Order.\33\
---------------------------------------------------------------------------

    \33\ See para. (c)(1)(ii) of the Proposed UK Order.
---------------------------------------------------------------------------

    The purpose of the potential conditions would be to address the 
concern that, while the Basel capital standard may contain requirements 
designed to address liquidity such as the LCR and NSFR, the Basel 
capital standard does not impose a net liquid assets test that requires 
a Covered Entity to maintain more than one dollar of highly liquid 
assets for each dollar of unsubordinated liabilities. The Commission 
requests comment on how the liquidity provisions in the Basel capital 
standard (the LCR, NSFR, and liquidity assessment process) impact the 
liquidity of Covered Entities that would apply substituted compliance 
with respect to Exchange Act rule 18a-1 (i.e., nonbanks). Do these 
requirements in practice result in Covered Entities maintaining more 
than one dollar of highly liquid assets for each dollar of 
unsubordinated liabilities? If so, explain why. If not, explain why 
not.
    A commenter stated that certain non-bank entities in the European 
Union have access to short-term liquidity through relevant Central 
Banks.\34\ The Commission requests comment on whether Covered Entities 
that are not banks have access to short-term liquidity through Central 
Bank facilities in France or Europe that are available to banks. Please 
identify and describe each facility that is available to nonbank 
Covered Entities, including any limitations on their ability to access 
the facility.
---------------------------------------------------------------------------

    \34\ See SIFMA Letter at 12.
---------------------------------------------------------------------------

    The Commission also requests comment on how the potential 
additional capital conditions compare to any existing capital 
requirements under the Basel capital standards. For example, are there 
differences in the frequency or nature of calculations under the Basel 
capital standards?
    The Commission continues to request comment on and seek information 
about the assets, liabilities, and capital of the Covered Entities that 
would apply substituted compliance with respect to Exchange Act rule 
18a-1. What are the primary business lines engaged in by these entities 
and what types of assets and liabilities do they typically carry on 
their balance sheets? Are the balance sheets of these entities 
primarily composed of liquid or illiquid assets? The Commission would 
use this information to analyze the liquidity of these entities in the 
context of considering the potential additional capital conditions. For 
example, do the Covered Entities that would apply substituted 
compliance with respect to Exchange rule 18a-1 engage primarily in a 
securities business? If so, are their balance sheets similar to those 
of U.S. broker-dealers that deal in securities in terms of holding 
highly liquid assets? If their balance sheets are similar to U.S. 
broker-dealers, are the additional capital conditions discussed above 
necessary? Alternatively, would the additional capital conditions serve 
to ensure that these firms do not engage in non-securities business 
activities that could impair their liquidity? Should the Commission 
consider the relevance of a Covered Entity's business model in 
determining whether to impose any potential capital conditions? For 
example, should the Commission take into account the fact that a 
Covered Entity does not engage in unsecured lending and other 
activities more typical of banks?
    The first potential additional capital condition would require a 
Covered Entity to maintain an amount of assets that are allowable under 
Exchange Act rule 18a-1, after applying applicable haircuts under the 
Basel capital standard \35\ that equals or exceeds the Covered Entity's 
current liabilities coming due in the next 365 days. The objective of 
this condition is to require a Covered Entity to maintain sufficient 
liquidity to meet near-term liabilities through a simple computation, 
as compared to the net capital computation required by Exchange Act 
rule 18a-1. Generally, current liabilities are understood to mean those 
liabilities coming due within one year as distinct from long-term 
liabilities that mature in more than a year. The potential 365-day 
period is designed to align with that distinction between short-term 
and long-term liabilities to facilitate compliance with the condition. 
Because the condition does not address long-term liabilities, it would 
not necessarily leave the Covered Entity in position where each dollar 
of unsubordinated liabilities is matched by more than a dollar of 
highly liquid assets (as is the case with the net liquid assets test of 
Exchange Act rule 18a-1). However, it would provide a pool of highly 
liquid assets that can be used by the Covered Entity to avoid a near-
term liquidity strain that could imperil its ability to remain a going 
concern.\36\ The

[[Page 18346]]

condition's use of the Basel capital standard haircuts (as opposed to 
Exchange Act rule 18a-1 haircuts) is designed to tailor the condition 
to the Basel capital standard consistent with substituted compliance.
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    \35\ See standard supervisory haircuts under the Basel capital 
standards. BCBS, The Basel Framework, available at: https://www.bis.org/basel_framework/.
    \36\ See Exchange Act Release No. 86175 (Jun. 21, 2019), 84 FR 
43872, 43881 (Aug. 22, 2019) (``The Commission believes that the 
broker-dealer capital standard is the most appropriate alternative 
for nonbank SBSDs, given the nature of their business activities and 
the Commission's experience administering the standard with respect 
to broker-dealers. The objective of the broker-dealer capital 
standard is to protect customers and counterparties and to mitigate 
the consequences of a firm's failure by promoting the ability of 
these entities to absorb financial shocks and, if necessary, to 
self-liquidate in an orderly manner.'').
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    The second potential additional capital condition would require 
that a Covered Entity make a quarterly record listing: (1) The assets 
maintained pursuant to the first potential additional capital 
condition, their value, and the amount of their applicable haircuts; 
and (2) the aggregate amount of the liabilities coming due in the next 
365 days. The requirement to create this record would enable the 
Commission or Commission staff to monitor compliance with the potential 
condition and facilitate examination of the Covered Entity with regard 
to substituted compliance. The quarterly interval between making this 
record (as opposed to a daily, weekly, or monthly interval) is designed 
to facilitate exams while minimizing the burden of the condition. 
Should the Commission require a shorter interval such as daily, weekly, 
or monthly or a longer one such as semi-annually or annually? Please 
explain.
    In considering these two potential conditions, the Commission 
recognizes that the LCR requires Covered Entities to maintain an amount 
of high quality liquid assets equal to or greater than their projected 
total net cash outflows over a prospective 30 calendar-day period. As 
discussed above, the first potential additional condition requires 
sufficient liquidity to address liabilities coming due over the next 
365 days. The longer period in the condition is designed to cover a 
greater amount of liabilities in order to further enhance the Covered 
Entity's liquidity to achieve an outcome more in line with the 
liquidity that results from the net liquid assets test of Exchange Act 
rule 18a-1. The Commission requests comment on how these conditions 
would compare to the LCR.
    The Commission requests comment and supporting data on the 
potential first two capital conditions. Is the term ``current 
liabilities'' understood by market participants? If not, please explain 
why and suggest alternative language. Is 365 days an appropriate number 
of days to use in connection with covering ``current liabilities''? If 
not, please explain why and suggest an alternative number of days. For 
example, would a period of 60, 90, 120, 150, 180, 210, 240, 270, 300, 
330, 420, 510 days or some other period of days be more appropriate in 
terms of enhancing the liquidity of Covered Entities applying 
substituted compliance to Exchange Act rule 18a-1? If so, explain why. 
If the Commission determines to use a number of days that is less than 
365, should the Commission use a term other than ``current 
liabilities'' such as ``short-term liabilities''? If so, explain why. 
The Commission requests comment on whether the haircuts under the Basel 
capital standard are the appropriate haircuts to apply under the 
proposed capital condition. If so, please explain why. Are they 
comparable to the haircuts under Exchange Act rule 18a-1? Would it 
impose a significant burden on Covered Entities to apply the haircuts 
under Exchange Act rule 18a-1 rather than under the Basel capital 
standard? If so, please explain why. Please identify any regulatory or 
operational issues in connection with these proposed capital 
conditions, including with maintaining a quarterly record.
    The third potential additional capital condition is that the 
Covered Entity maintain at least $100 million of equity capital 
composed of highly liquid assets as defined in the Basel capital 
standard. This potential condition is based on the $100 million 
tentative net capital requirement of Exchange Act rule 18a-1 for SBS 
Entities authorized to use models. The condition would be designed to 
ensure that Covered Entities applying substituted compliance with 
respect to Exchange Act rule 18a-1 have a minimum level of capital to 
absorb financial losses. Further, the LCR defines ``highly liquid 
assets'' and the use of that definition is designed to tailor the 
condition to the Basel capital standard consistent with the substituted 
compliance.
    The Commission requests comment and supporting data on the third 
potential additional capital condition. How would this potential 
minimum capital amount compare with the amounts of equity capital 
currently maintained by Covered Entities that would apply substituted 
compliance to Exchange Act rule 18a-1? Should the condition require a 
different amount of equity capital? For example, should the amount be 
$50, $75, $125, or $150 million or some other amount? If so, explain 
why. Are the terms ``highly liquid assets'' and ``equity capital'' 
understood by market participants? If not, please explain why and 
suggest alternative terms.
    The fourth potential additional capital condition is that the 
Covered Entity include its most recently filed statement of financial 
condition whether audited or unaudited with its initial notice to the 
Commission of its intent to rely on substituted compliance. This one-
time obligation would provide the Commission with information about the 
assets, liabilities, and capital of Covered Entities applying 
substituted compliance with respect to Exchange Act rule 18a-1. The 
Commission would use the statement of financial condition and the 
periodic audited and unaudited reports Covered Entities will file with 
the Commission to monitor the appropriateness of the capital condition 
if it is included in the final Order. The Commission expects that most 
Covered Entities will file their initial notice of intent to apply 
substituted compliance with respect to Exchange Act rule 18a-1 at or 
around the time they file their registration applications with the 
Commission. Therefore, receipt of the statement of financial condition 
at that time would allow the Commission to begin this monitoring 
process before Covered Entities begin filing audited and unaudited 
reports with the Commission pursuant to Exchange Act rule 18a-7.
    The Commission requests comment on the fourth potential additional 
capital condition. Are there other means for the Commission to 
efficiently obtain this information? If so, explain how. Is the 
information presented in these reports prepared in accordance with the 
GAAP that the firm uses to prepare publicly available or available to 
be issued general purpose financial statements in its home 
jurisdiction?
    The Commission requests comment on the potential benefits and costs 
of the potential capital conditions? Would the conditions promote 
comparable regulatory outcomes between the capital requirements applied 
to Covered Entities in France and capital requirements under Exchange 
Act rule 18a-1? If so, explain why. If not, explain why not. The 
Commission is mindful that compliance with these capital conditions 
would require Covered Entities applying substituted compliance to 
Exchange Act rule 18a-1 to supplement their existing capital 
calculations and practices, as well as to incur additional time and 
cost burdens to implement the potential conditions and integrate them 
into existing business operations.\37\ The Commission

[[Page 18347]]

requests comment and supporting data on these potential time and cost 
burdens, including quantitative information about the amount of the 
burdens. The Commission also requests comment on any potential 
operational or regulatory issues or burdens associated with adhering to 
the potential additional capital conditions.
---------------------------------------------------------------------------

    \37\ Additional time and costs burdens may include employee 
costs and time to program software and computer systems to add an 
additional capital calculation into an existing system and firm 
processes and procedures, as well as ongoing time and expenses to 
monitor the calculations on an ongoing basis. Further, additional 
time and expense may be incurred with respect to any additional 
controls implemented to ensure compliance with the potential 
additional capital conditions.
---------------------------------------------------------------------------

    The Commission requests comment on the potential impacts the 
capital conditions would have on competition. For example, how would 
they impact competition between Covered Entities applying substituted 
compliance with respect to Exchange Act rule 18a-1 and SBS Entities 
that will comply with Exchange Act rule 18a-1? Would the conditions 
eliminate or mitigate potential competitive advantages that Covered 
Entities adhering to the Basel capital standard might have over SBS 
Entities adhering to the more stringent net liquid assets test standard 
of Exchange Act rule 18a-1? Alternatively, would the conditions create 
competitive disadvantages for Covered Entities applying substituted 
compliance with respect to Exchange Act rule 18a-1 as compared to SBS 
Entities complying with Exchange Act rule 18a-1? Please describe and 
explain.
    The Commission also requests comment on how the potential 
additional capital conditions compare to any existing capital 
requirements under the Basel capital standards (e.g., LCR, NSFR). For 
example, are there differences in the frequency or nature of 
calculations under the Basel capital standards?
    Please identify and describe any potential impacts on the way 
Covered Entities currently conduct their business with respect to 
implementing the potential additional capital conditions.
    The Commission further requests comment on whether the Commission 
should consider other potential conditions with respect to applying 
substituted compliance to Exchange Act rule 18a-1. Should the 
Commission consider imposing a potential capital condition that is more 
consistent with Exchange Act rule 18a-1? Please explain why or why not. 
Should the Commission consider a capital condition that includes higher 
requirements for a Covered Entity that holds a significant amount of 
illiquid assets? For example, if 20%, 30%, 40%, 50%, or some other 
percent of the Covered Entity's assets would not be allowable under 
Exchange Act rule 18a-1, should the firm be required to hold an amount 
of allowable assets to cover liabilities coming due over a longer 
period of time than a firm that does not exceed the percent threshold? 
If so, explain why and identify the appropriate percent threshold. 
Should the Commission consider including a condition prescribing a 
percent threshold of non-allowable assets under Exchange Act rule 18a-1 
held by the Covered Entity over which substituted compliance with 
respect to capital would not be permitted? If so, explain why and 
identify the appropriate percent threshold.
    The Commission requests comment on whether the Commission should 
consider imposing other potential capital conditions (or no conditions) 
if a Covered Entity's business with U.S. persons falls below a certain 
notional threshold, such as $8 billion, $20 billion, $50 billion, or 
some other threshold. Please explain which threshold may be appropriate 
or suggest an alternative.

D. Recordkeeping, Reporting, Notification, and Securities Count

    The Commission received comment asking it to eliminate conditions 
requiring a Covered Entity to be subject to and comply with EU or 
French requirements that either do not apply to the Covered Entity on 
an entity-wide basis or are not supervised by the Covered Entity's home 
regulator.\38\ The same commenter suggested as a possible solution that 
SBS Entities be permitted to elect to comply directly with U.S. law 
instead of EU or French requirements with respect to distinct 
requirements of the recordkeeping and reporting rules.
---------------------------------------------------------------------------

    \38\ SIFMA Letter at 2-4.
---------------------------------------------------------------------------

    Would it be appropriate to structure the Commission's substituted 
compliance determinations in the Order with respect to the 
recordkeeping and reporting rules to provide Covered Entities with 
greater flexibility to select which distinct requirements within the 
broader recordkeeping, reporting, notification, and securities count 
rules for which they want to apply substituted compliance? This 
approach of making substituted compliance determinations with respect 
to certain distinct requirements within the recordkeeping and reporting 
rules is illustrated in the proposed UK Order.\39\
---------------------------------------------------------------------------

    \39\ See paras. (f)(1) through (3) of the Proposed UK Order.
---------------------------------------------------------------------------

    As applied to Exchange Act rules 18a-5 and 18a-6, this approach of 
providing greater flexibility would result in substituted compliance 
determinations with respect to the different categories of records 
these rules require SBS Entities to make, keep current, and/or 
preserve. Each requirement with respect to a specific category of 
records (e.g., paragraph (a)(2) of Exchange Act rule 18a-5 addressing 
ledgers (or other records) reflecting all assets and liabilities, 
income and expense and capital accounts) would be viewed in isolation 
as a distinct recordkeeping rule. This approach is illustrated in the 
Proposed UK Order.\40\ Would permitting Covered Entities to take a more 
granular approach to the requirements within these recordkeeping rules 
be appropriate for the final French Order? For example, would this 
approach make it more difficult for the Commission to get a 
comprehensive understanding of the Covered Entity's security-based swap 
activities and financial condition? Explain why or why not. Would it be 
overly complex for the Covered Entity to administer a firm-wide 
recordkeeping system under this approach? Explain why or why not. Would 
this approach address commenters' concerns with respect to the proposed 
French Order? If so, explain why. If not, explain why not.
---------------------------------------------------------------------------

    \40\ See paras. (f)(1) and (2) of the Proposed UK Order.
---------------------------------------------------------------------------

    The EU cross-border condition was intended to address concerns that 
are relevant not only to certain requirements under MiFID and MAR as 
noted in the Proposed Order, but also to certain requirements under 
MiFIR (and other EU and French requirements adopted pursuant to MiFIR). 
Just as is true for certain requirements under MiFID and MAR, EU law 
allocates the responsibility for supervising and enforcing certain 
MiFIR requirements to authorities of the Member State where a Covered 
Entity provides certain services. If the Commission adopts the granular 
approach to recordkeeping, reporting, notification and securities count 
requirements suggested above, should it expand the EU cross-border 
condition described above in Section B to apply to the relevant 
requirements under MiFIR? Explain why or why not.
    Commenters suggested that the Commission distinguish between EU and 
French laws that are conditions to substituted compliance for non-
prudentially regulated SBS Entities versus prudentially regulated SBS 
Entities.\41\ Would this request be addressed if the Commission granted 
substituted compliance on a more granular level as described above and 
illustrated in the Proposed UK Order? If so, explain why. If not, 
explain why not.
---------------------------------------------------------------------------

    \41\ See SIFMA Letter at 8; FBF Letter at 2.
---------------------------------------------------------------------------

    Certain of the Commission's recordkeeping, reporting, and 
notification requirements are fully or partially linked to substantive 
Exchange Act requirements for which a positive

[[Page 18348]]

substituted compliance determination is preliminarily not being made 
under the proposed Order. In these cases, should the Commission not 
make a positive substituted compliance determination for the fully 
linked requirement in the recordkeeping or reporting rules or to the 
portion of the requirement that is linked to substantive Exchange Act 
requirements? In particular, should the Commission not make a positive 
substituted compliance determination for recordkeeping, reporting, or 
notification requirements linked to the following Exchange Act rules 
for which a positive substituted compliance determination is 
preliminarily not being made: (1) Exchange Act rule 10b-10; (2) 
Exchange Act rule 15Fh-4; (3) Exchange Act rule 15Fh-5; (4) Exchange 
Act rule 15Fh-6; (5) Exchange Act rule 18a-2; (6) Exchange Act rule 
18a-4; and (7) Regulation SBSR? This approach is illustrated in the 
Proposed UK Order.\42\ Is this approach appropriate for the final 
French Order? If not, explain why.
---------------------------------------------------------------------------

    \42\ See paras. (f)(1) through (4) of the Proposed UK Order.
---------------------------------------------------------------------------

    Certain of the requirements in the Commission's recordkeeping, 
reporting, and notification rules are linked to substantive Exchange 
Act requirements where a positive substituted compliance determination 
is being made under the proposed Order. In these cases, should a 
positive substituted compliance determination for the linked 
requirement in the recordkeeping, reporting, or notification rule be 
conditioned on the Covered Entity applying substituted compliance to 
the linked substantive Exchange Act requirement? If not, explain why. 
Should this be the case regardless of whether the requirement is fully 
or partially linked to the substantive Exchange Act requirement? If 
not, explain why. In particular, should substituted compliance for 
recordkeeping, reporting, and notification requirements linked to the 
following Exchange Act rules be conditioned on the SBS Entity applying 
substituted compliance to the linked substantive Exchange Act rule: (1) 
Exchange Act rule 15Fh-3; (2) Exchange Act rule 15Fi-2; (3) Exchange 
Act rule 15Fi-3; (4) Exchange Act rule 15Fi-4; (5) Exchange Act rule 
15Fi-5; (6) Exchange Act rule 15Fk-1; (7) Exchange Act rule 18a-1; (8) 
Exchange Act rule 18a-3; (8) Exchange Act rule 18a-5; and (9) Exchange 
Act rule 18a-7? This approach is illustrated in the Proposed UK 
Order.\43\ Is this approach appropriate for the final French Order? If 
not, explain why.
---------------------------------------------------------------------------

    \43\ See paras. (f)(1) through (4) of the Proposed UK Order.
---------------------------------------------------------------------------

    While certain recordkeeping and reporting requirements are not 
expressly linked to Exchange Act rule 18a-1, they would be important to 
the Commission's ability to monitor or examine for compliance with the 
capital requirements under this rule. The records also will assist the 
firm in monitoring its net capital position and, therefore, in 
complying with Exchange rule 18a-1 and its appendices. Should a 
positive substituted compliance determination with respect to these 
recordkeeping and reporting requirements be subject to the condition 
that the Covered Entity applies substituted compliance with respect to 
Exchange Act rule 18a-1 and its appendices? If not, explain why. This 
approach is illustrated in the Proposed UK Order.\44\ Is this approach 
appropriate for the final French Order? If not, explain why.
---------------------------------------------------------------------------

    \44\ See paras. (f)(1) through (5) of the Proposed UK Order.
---------------------------------------------------------------------------

    French credit institutions and finance companies are generally 
required to close their financial year on December 31.\45\ Moreover, 
the French substituted compliance application does not identify French 
laws that are comparable to Exchange Act rule 18a-7(i) (notice of 
change of fiscal year end). Consequently, is there a basis and a need 
for the Commission to make a positive substituted compliance 
determination with respect to the requirements in Exchange Act rule 
18a-7(i)? If so, explain why? Should the Commission condition a 
positive substituted compliance determination with respect to Exchange 
Act rule 18a-7(i) on the Covered Entity simultaneously transmitting to 
the Commission a copy of any comparable notice required to be sent by 
applicable French law, and including with the transmission the contact 
information of an individual who can provide further information about 
the matter that is the subject of the notice. If so, explain why. If 
not, explain why not.
---------------------------------------------------------------------------

    \45\ See French Monetary and Financial Code article R. 511-6.
---------------------------------------------------------------------------

E. Covered Entity Definition

    As discussed in the Proposed Order, Exchange Act rule 3a71-6 
provides that the Commission's assessment of the comparability of the 
requirements of the foreign financial regulatory system must account 
for the effectiveness of foreign authority's supervisory and 
enforcement frameworks.\46\ This prerequisite accounts for the 
understanding that substituted compliance determinations should reflect 
the reality of the foreign regulatory framework, in that rules that 
appear high-quality on paper nonetheless should not form the basis for 
substituted compliance if--in practice--market participants are 
permitted to fall short of their regulatory obligations.
---------------------------------------------------------------------------

    \46\ See French Substituted Compliance Notice and Proposed 
Order, 85 FR at 85721 (citing Exchange Act rule 3a71-6(a)(2)(i)).
---------------------------------------------------------------------------

    The French Authorities' Application provided information about the 
AMF's and ACPR's supervisory framework. With respect to the AMF's 
supervision, the information related to Tier 1 firms. The Commission is 
therefore considering revising the definition of Covered Entity to be 
limited to credit institutions and investment firms that are supervised 
by the AMF under the Tier 1 framework through the single supervisory 
mechanism.
    Commenters are invited to address whether the change in the 
definition of Covered Entity is appropriate. Would the change result in 
the exclusion of any entities likely to register as SBS Entities in 
France from reliance on the substituted compliance order?

F. Internal Supervision and Compliance

    Finally, the Commission is considering revising paragraph (d)(3) to 
the proposal, which sets forth conditions to substituted compliance in 
connection with internal supervision and compliance. Under the 
potential revision, substituted compliance for internal supervision and 
compliance would encompass two additional sets of prerequisites (in 
addition to the other provisions identified in proposed paragraph 
(d)(3)): CRR articles 286-88 and 293, which address counterparty credit 
risk and risk management generally; and EMIR Margin RTS article 2, 
which addresses collateral-related risk management procedures. Those 
provisions, which also are incorporated within the proposed 
prerequisites to substituted compliance for internal risk management 
(proposed paragraph (b)(1)), promote analogous compliance goals as the 
other requirements identified within proposed paragraph (d)(3).\47\ 
Commenters are invited to address the appropriateness of this potential 
revision, particularly with regard to the goal of promoting regulatory 
outcomes that are comparable to those associated with the internal 
supervision and compliance requirements under the Exchange Act.
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    \47\ The Proposed UK Order similarly encompasses those 
provisions as part of the proposed prerequisites to substituted 
compliance for internal supervision and compliance requirements.

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[[Page 18349]]

    All comments received to date on the Proposed Order will be 
---------------------------------------------------------------------------
considered and need not be resubmitted.

    By the Commission.

    Dated: April 5, 2021.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2021-07254 Filed 4-7-21; 8:45 am]
BILLING CODE 8011-01-P

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